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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-18690
DIGITAL ORIGIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
460 E MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 404-6300
(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
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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANTS 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. ( )
AS OF NOVEMBER 30, 1999
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AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT BASED ON THE CLOSING
BID PRICE OF SUCH STOCK: $51,154,558
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING: 5,605,979
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD FEBRUARY 23, 2000 ARE INCORPORATED BY REFERENCE INTO
PART III (ITEMS 10, 11, 12, AND 13) HEREOF.
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DIGITAL ORIGIN, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
----
ITEM 1. Business.................................................................................... 2
ITEM 2. Properties.................................................................................. 5
ITEM 3. Legal Proceedings........................................................................... 5
ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 6
ITEM 4A. Executive Officers of Registrant............................................................ 6
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters....................... 7
ITEM 6. Selected Financial Data..................................................................... 8
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk.................................. 16
ITEM 8. Financial Statements and Supplementary Data................................................. 16
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........ 16
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......................................... 17
ITEM 11. Executive Compensation...................................................................... 17
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............................. 17
ITEM 13. Certain Relationships and Related Transactions.............................................. 17
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 18
SIGNATURES ............................................................................................ 22
Digital Origin, the Digital Origin logo, EditDV, MotoDV, PhotoDV, IntroDV and
RotoDV, among others, are trademarks and/or service marks of Digital Origin,
Inc. Other brands and names referred to may be trademarks or service marks of
others.
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PART I
ITEM 1. BUSINESS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: The following discussion
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 that are subject to risks and uncertainties.
Statements indicating that we "intend", "plan", "expect," "estimate" or
"believe" are forward-looking, as are all other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors that could cause actual results or events to
differ materially from those anticipated by the forward-looking statements
contained in this discussion and other sections of this Form 10-K.
OVERVIEW
We design, develop, assemble, market and support digital video computer
products for creative professionals and consumers who use digital camcorders.
Our current product line consists of multimedia authoring and nonlinear editing
video software and related hardware that can manipulate video and audio
information in conjunction with desktop computers and digital camcorders. Our
primary target markets are video editors, video producers, and creators of
multimedia with an increasing emphasis on consumers. Prior to 1999,
substantially all of our products have been designed for and sold to users of
Macintosh computer products manufactured by Apple Computer, Inc. During 1999, we
focused on the Windows market. As a result: 25% of unit sales were made to
Macintosh only users, 29% were made to Windows only users, and 46% were made to
cross-platform users. We distribute our products directly through our web site
and through various distributors and resellers. Prior to 1999, our business
included a number of other hardware product lines, including computer monitors,
which were divested. Fiscal 1999 revenues were predominantly related to software
products. As a result, comparisons to prior period results are not meaningful,
since prior periods include these divested product lines.
Our executive offices are located at 460 E. Middlefield Road, Mountain
View, CA 94043, and our telephone number is (650) 404-6300.
PRODUCTS AND APPLICATIONS
Here is a summary of some of our principal products and their typical
applications:
Software Products that include IEEE 1394 Firewire Card Suggested Retail Price
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IntroDV $249
PhotoDV $299
MotoDV $399
MotoDV Studio $899
MotoDV Mobile $499
EditDV $999
Software Products without the IEEE 1394 Firewire Card
PhotoDV $199
MotoDV $299
EditDV $899
EditDV Unplugged $149
RotoDV $399
RotoWeb $ 99
These prices listed are suggested retail prices. Actual prices may vary based on
purchase volumes, competition, seasonality and promotions or other sales
incentives.
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DIGITAL VIDEO SYSTEMS AND SOFTWARE
We offer a number of products for both the multimedia authoring and the
non-linear digital video editing and production market. Non-linear digital
editing enables video editors to manipulate pictures and sound in a faster,
easier and more cost effective manner than traditional analog tape-based
systems. Editors can randomly access and digitally "cut and paste" images,
videos and sound clips, avoiding the tedious process of winding and rewinding
linear tape and the subsequent physical cutting and splicing of film segments.
INTRODV, introduced in September 1999, is an entry-level video editing
solution targeted at new owners of DV camcorders. Declining prices of digital
camcorders has created increased demand for value-priced DV "FireWire" video
capture and editing solution. IntroDV includes our own video editing software, a
still photo capture and touch-up software application as well as a PCI FireWire
card. Designed for the Windows 95/98 platform, IntroDV features a simple
interface that facilitates step-by-step movie production. As an entry-level
video editing solution, IntroDV provides fewer features than our higher-end
editing products. IntroDV is currently not available for Macintosh operating
systems.
PHOTODV is a software tool used as an Adobe PhotoShop-Registered
Trademark- import plug-in. It is available with or without our FireWire card.
PhotoDV enables a DV camcorder to perform as a still image camera, in addition
to being used to record video. Pictures are acquired digitally over the FireWire
card and can be used for Web sites, picture databases, printed pages, and
QuickTime VR scenes. PhotoDV is available for both the Macintosh and Windows
operating systems.
MOTODV is an input/output software utility for moving DV camcorder
footage from the camcorder to a personal computer for the purpose of editing.
MotoDV is targeted at video designers and other creative professionals who
produce video and multimedia content for tape, CD-ROM, and Web delivery. The
MotoDV application remotely controls the DV camcorder or DV video tape recorder
over FireWire and captures DV clips, in real-time or time-lapse mode. As clips
are being captured, MotoDV converts the integrated DV data stream into QuickTime
movies with separate video and audio tracks. These clips can then be imported
into any QuickTime-compliant editing or special effects application, including
our own EditDV, Adobe Premiere, and Adobe After Effects. MotoDV is available for
both the Macintosh and Windows operating systems. MotoDV Studio builds on MotoDV
by including Adobe Premiere for Windows and a set of custom developed plug-ins
and is targeted towards the large installed base for Premiere. MotoDV Mobile is
a version of MotoDV Studio tailored for users of Apple G4-based laptops. These
laptop users can capture and edit DV footage away from their offices.
EDITDV is a digital non-linear editing software system which operates
on both the Macintosh and Windows operating systems in conjunction with digital
camcorders, Apple's QuickTime (an industry standard architecture of digital
media) and FireWire connections. Users can create digital video with multiple
video and effects tracks, rubber-band audio, and traditional wipes and fades for
fast interactive editing, color modification and keying. EditDV also provides
QuickTime-compliant digital video non-linear editing, compositing and animation
capability that facilitates the creation and editing of digital video content.
EditDV is targeted to professional users and features an intuitive user
interface, FX templates, built-in titling, multiple key frames, batch digitizing
and picture-in-picture capabilities. It also offers a variety of high-quality
special effects, including pan-zoom-rotating, chroma keying and compositing.
EditDV Unplugged is an entry level version of EditDV targeted to the beginning
non-linear editor, and is available for both the Macintosh and Windows operating
systems.
ROTODV is a painting and special effects software application for
digital video, which provides an assortment of familiar yet powerful graphics
tools for enhancing video productions. RotoDV is particularly useful for
performing touch-ups such as removing unwanted objects from scenes, which can
save the user the time and expense of re-shooting. Users can also brush animated
digital "paint" directly onto moving images, to produce creative effects like
those seen in music videos. In addition, by combining multiple layers of paint
and video, RotoDV can be used to add Hollywood-style effects to a digital video
production. RotoDV is currently available only for the Macintosh operating
system.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Our current research and development focus is on developing digital video
acquisition products and editing tools for the Windows and Macintosh operating
systems for customers who create, review, approve and utilize moving video.
Current research and development efforts include: (i) performance improvements
and cost reductions of current products and (ii) development of application
software to facilitate the creation and manipulation of video and high
resolution still and full motion images for use on the Internet. We believe that
the competitive nature of the computer industry, along with the rapid pace of
technological evolution, require that we continue to introduce innovative
products on a timely basis to compete effectively. During fiscal 1999, 1998 and
1997, our expenditures for research and development totaled $2.6 million, $2.8
million and $5.0 million, respectively. Of these expenditures 100.00%, 68.98%
and 28.95%, respectively, were allocated to
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the digital video product line. To date, all of our research and development
expenditures have been charged to operations as incurred. Because of our smaller
size and narrowing product focus, we do not anticipate having research and
development expenditures equal to earlier levels and there can be no assurance
we will be able to successfully develop new or enhanced products, commercially
successful products, or products that will not be rendered obsolete by changing
technology or new products introduced by others. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Our Future Results of Operations -- Technological Change;
Continuing Need to Develop New Products."
MARKETING, SALES AND DISTRIBUTION
We employ a two-tiered distribution model through which we sell
products primarily through a limited number of distributors that in turn
distribute our products to a variety of resellers including e-tailers,
superstores, independent dealers, educational resellers, systems integrators,
value added resellers and mail order resellers, both domestically and
internationally. Our distributors purchase products at discounts from suggested
retail prices. We also sell directly using our web site and toll-free call
center. Our domestic distributors include: Canon USA, Inc., Ingram Micro, Inc.,
Broadfield Distributing, Inc., Micro-Pace, and Wynit. Our European and Japanese
distributors include: Canon Europa, Computers Unlimited, Scribona, Towa and
Orbit. Our business and financial results are highly dependent on the success of
these distributors. To assist distributors and to provide marketing, training
and technical support, we provide sales representatives in a number of locations
in the United States. In Europe, we have a local sales and marketing
representative to assist European distribution. In Japan, a local firm provides
localized marketing and support. We also provide market development funds to
give distributors incentives to increase sales, improve reporting and achieve a
product mix favoring higher margin products.
For fiscal years ended September 30, 1999, 1998 and 1997, our export
sales accounted for approximately 31.6%, 23.4%, and 15.7% respectively, of our
net sales. See Note 6 of Notes to Consolidated Financial Statements. Our export
sales are subject to certain risks common to international operations, such as
currency fluctuations and governmental regulation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
That May Affect Our Future Results of Operations -- International Sales."
Many of our distributors have the limited right to return products
purchased from us. While we reasonably allow for estimated product returns, if
we were to experience returns from customers significantly in excess of this
estimate, such returns could have a material adverse effect on our results of
operations.
Our marketing programs support worldwide sales and distribution of our
products. Our principal marketing activities include active use of our web site
and other web sites, frequent participation in industry trade shows and
seminars, advertising in major trade publications worldwide, public relations
activities with the trade and business press, publication of technical articles,
distribution of sales literature and product specifications and communications
with its installed base of end users. Our marketing programs are designed to
generate sales leads for both direct sales and our distributors as well as to
enhance our brand name recognition.
MANUFACTURING AND SUPPLIERS
Substantially all of our assembly, quality control testing, packaging
and other manufacturing operations are performed by our suppliers, contract
manufacturers, and other subcontractors pursuant to customary quality assurance
programs. We attempt to utilize standard parts and components available from
multiple vendors. However, certain components used are available only from sole
or limited suppliers. Although we have been able to obtain an adequate supply of
these components in the past, there can be no assurance that we will always be
able to do so.
COMPETITION
All markets in which we compete are expected to remain highly
competitive. Our principal competitors in the digital video market include
Apple, Adobe, MGI, Ulead, Pinnacle Systems and Canopus. It is difficult to
predict all future sources of competition. For example, Apple has introduced a
non-linear digital video editing products called iMovie and Final Cut for use on
Apple computers in fiscal 1999. Therefore, we will face significant competition
in the future from Apple. There may be other new competitors or newly
competitive products, including from Microsoft. Apple and Microsoft also could
add functionality to their computer systems that is similar to that provided by
certain of our products, or alter their systems' architecture in a manner that
could adversely affect our ability to compete. We believe that the principal
competitive factors for our product line are product performance, breadth of
distribution, brand name recognition, price and customer support. There can be
no assurance that we will be able to compete successfully with respect to these
factors. In addition, many of our
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current and prospective competitors have significantly greater financial,
technical and marketing resources. As a result, there can be no assurance that
we will compete effectively with current or future competitors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Factors That May Affect Our Future Results of Operations
- -- Competition."
EMPLOYEES
As of October 31, 1999, we had approximately 49 full time employees, 25
of which are in sales and marketing functions, 11 of which are in research and
development, and the balance are in administration (finance, operations, and
senior management). Our success will depend, in large measure, on our ability to
attract, motivate and retain highly qualified technical, marketing, engineering
and management personnel, who are in great demand. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe that our employee relations are good.
RECENT DEVELOPMENTS -AGREEMENT TO MERGE WITH MEDIA 100, INC.
We entered into a definitive agreement on December 28, 1999 to be
acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ:MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of our common stock. The transaction is subject to the
approval of our shareholders and the stockholders of Media 100 and other
customary closing conditions. The merger is expected to be complete in 90-120
days. The combined company will target Internet desktops with low-cost
applications that allow personal computer users to capture, edit, and stream
video on the Internet using a single, integrated, and easy-to-use
application. We also have entered into a non-exclusive, four-year OEM
development and license agreement with Media 100 by which Media 100 will use
our consumer level video editing and effects software with Media 100's
Internet streaming media software in exchange for certain royalty payments.
ITEM 2. PROPERTIES
We are located in Mountain View, California in a leased building with
approximately 19,000 square feet of space. Our lease began on April 15, 1999 and
has a three year term with an option to extend for an additional two years. Our
current facility is sufficient for our current needs.
ITEM 3. LEGAL PROCEEDINGS
(a) On January 13, 1999 and January 28, 1999, we and one of our former
directors, Charles Berger, were named as defendants in two shareholder class
action lawsuits against Splash Technology Holdings, Inc. ("Splash"), various
directors and executives of Splash and certain selling shareholders of Splash.
The suits were filed in the United States District Court in Northern District of
California and have been consolidated and captioned IN RE SPLASH TECHNOLOGY
HOLDINGS INC. SECURITIES LITIGATION (Master File No. C99-0109 SBA). The law firm
of Milberg Weiss Bershad Hynes & Lerach LLP has been designated lead counsel for
the eight lead plaintiffs. The lawsuit alleges, among other things, that the
defendants made or were responsible for material misstatements, and failed to
disclose information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common stock. The
complaint does not identify any statements alleged to have been made by Charles
Berger or us. The complaint further alleges that we engaged in a scheme to
artificially inflate the price of Splash common stock to reap an artificially
large return on the sale of the common stock in order to pay off our debt. We
and the former director vigorously deny all allegations of wrongdoing and intend
to aggressively defend ourselves in these matters. Defendants initial motion to
dismiss the action was granted with leave to amend and an amended complaint has
been filed by plaintiffs.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates
filed a suit in the United States District Court for the District of Colorado
alleging a breach of contract and related claims in the approximate amount of
$800,000, maintaining that we failed to comply with various return, price
protection, inventory balancing and marketing development funding undertakings.
In 1997, we filed an answer to the complaint and cross-claimed against the
plaintiffs, and in October 1997 additionally cross claimed against Deutsche
Financial, Inc., a factor in the account relationship between us and the
plaintiffs, seeking the recovery of approximately $2 million. We continue to
investigate these claims as well as cross claims and expect to vigorously defend
and prosecute them as applicable. This case is scheduled for trial in April
2000.
(c) We are involved in a number of other judicial and administrative
proceedings incidental to our business. We intend to defend these matters
vigorously and although adverse decisions (or settlements) may occur, the final
resolution of
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these lawsuits is not expected to have a material adverse effect on our
financial position. However, an adverse resolution and the costs of defense,
regardless of the outcome, could have a material adverse effect on our results
of operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
Our executive officers are:
NAME AGE POSITION
---- --- --------
Mark Housley 43 Chairman of the Board of Directors, Chief Executive
Officer (CEO) and President
Mary F. Bobel 50 Vice-President & Chief Financial Officer
MARK HOUSLEY has been our President since January 1997, CEO since
August 1997 and Chairman since December 1997. From March 1995 until October
1996, Mr. Housley was founder and Vice President of Marketing of Spectrum
Wireless, Inc., a manufacturer of wireless infrastructure products. From May
1992 until March 1995, Mr. Housley held various positions of responsibility for
us and our predecessor SuperMac Technologies, Inc., including Vice President and
General Manager of our Color Publishing Division. From October 1990 until May
1992, Mr. Housley was a Vice President for Siemens AG in Santa Clara, a
multinational manufacturer of electronic equipment, directing product marketing
and planning.
MARY BOBEL has been our Vice-President & Chief Financial Officer since
May 1999. Ms. Bobel served as the Executive Vice-President and Chief Financial
Officer of Genus, Inc., a publicly traded manufacturer of semiconductor
equipment from March 1997 through August 1998. Prior to Genus, she was
Vice-President and Chief Financial Officer of Educational Publishing
Corporation, a privately held supplier of educational materials from September
1994 until September 1996. From March 1990 through September 1994 she was
Vice-President and Corporate Controller for Adobe Systems, a publicly traded
software company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Our common stock was quoted on the Nasdaq National Market from August
21, 1991 until July 1, 1996 and on the Nasdaq SmallCap Market from July 2, 1996
until February 28, 1999 under the symbol "RDUS." On March 1, 1999, we changed
our name from Radius Inc. to Digital Origin, Inc. and our common stock is now
quoted on the Nasdaq SmallCap Market under the symbol "DODV." The high and low
sales prices for the common stock are indicated below, adjusted to reflect the
one-for-ten reverse split effective March 9, 1998.
Year Ended September 30, 1998 Low High
- ----------------------------- --- ----
First Quarter $2.81 $7.19
Second Quarter 2.25 4.37
Third Quarter 2.37 5.87
Fourth Quarter 0.94 2.94
Year Ending September 30, 1999
- ------------------------------
First Quarter $0.78 $2.56
Second Quarter 1.34 4.25
Third Quarter 2.37 4.50
Fourth Quarter 3.25 6.13
On September 30, 1999, there were approximately 3,169 holders of record
of our common stock.
The price of our common stock has fluctuated widely in the past. We
believe that such fluctuations may have been caused by announcements of new
products, quarterly fluctuations in the results of operations and other factors,
including changes in conditions of the personal computer industry in general and
of Apple Computer in particular, changes in our results of operations and
financial condition, among other factors. Stock markets, and stocks of
technology companies in particular, have experienced extreme price volatility in
recent years. This volatility has had a substantial effect on the market prices
of our securities and those of other high technology companies, often for
reasons unrelated to the operating performance of the specific companies. Due to
these factors, the dynamic nature of the our industry, and general economic
conditions, our future operating results and stock prices may be subject to
significant volatility. Such stock price volatility for the common stock has in
the past provoked securities litigation, and future volatility could provoke new
litigation that could divert substantial management resources and have an
adverse effect on our results of operations.
We have never declared or paid any cash dividends on our common stock.
We anticipate that we will retain any future earnings for use in its business
and do not anticipate paying any cash dividends .
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30, (1)
----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total net sales $ 13,353 $ 15,668 $ 31,150 $ 90,290 $ 308,133
Cost of sales 4,750 9,921 31,032 77,382 302,937
--------- ---------- ---------- ---------- ---------
Gross profit 8,603 5,747 118 12,908 5,196
Operating expenses:
Research and development 2,649 2,801 5,002 7,478 19,310
Selling, general and administrative 7,154 7,107 21,355 25,886 90,068
--------- ---------- ---------- ---------- ---------
Total operating expenses 9,803 9,908 26,357 33,364 109,378
--------- ---------- ---------- ---------- ---------
Loss from operations (1,200) (4,161) (26,239) (20,456) (104,182)
Other income (expense), net 7,104 12,353 30,600 24,032 (3,045)
Interest expense (55) (459) (2,777) (3,736) (3,023)
Litigation settlement - - - - (12,422)
--------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 5,849 7,733 1,584 (160) (122,672)
Provision (benefit) for income taxes - (1,000) 316 815 9,070
--------- ----------- ---------- ---------- ---------
Net income (loss) $ 5,849 $ 8,733 $ 1,268 $ (975) $(131,742)
========= ========== ========== =========== ==========
Preferred stock dividend - - 272 - -
--------- ---------- ------------ ---------- ---------
Net income (loss) applicable to
common shareholders $ 5,849 $ 8,733 $ 996 $ (975) $(131,742)
========= ========== ========== =========== ==========
Net income (loss) per common share:
Basic net income (loss) per share applicable
to common shareholders $ 1.06 $ 1.58 $ 0.18 $ (0.46) $ (87.54)
======== ========== ========== ============ ===========
Diluted net income (loss) per share applicable
to common shareholders $ 1.02 $ 1.57 $ 0.18 $ (0.46) $ (87.54)
======== ========== ========== ============ ===========
Shares used in per share computations:
Shares used in computing basic net income
(loss) per share 5,535 5,522 5,389 2,125 1,505
========= ========== ======== ========== ==========
Shares used in computing diluted net income
(loss) per share 5,747 5,557 5,522 2,125 1,505
========= ========== ======== ========== ==========
YEARS ENDED SEPTEMBER 30, (1)
----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
Working capital (deficiency) $ 980 $ (5,216) $ 7,909 $ 8,476 $ (59,334)
Total assets 6,895 6,556 26,272 45,526 87,878
Long-term debt - noncurrent portion - - - 22,213 1,331
Convertible preferred stock - - - 3,000 -
Shareholders' equity (Net capital deficiency) $ 1,081 $ (5,083) $ 8,158 $ 3,960 $ (57,117)
-8-
(1) Our fiscal year ends on the Saturday closest to September 30 and includes
53 weeks in fiscal year 1998. All other fiscal years presented are 52 weeks. For
consistency of presentation, all fiscal periods in this Form 10-K are reported
as ending on a calendar month end.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: Our discussion contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are subject to risks and uncertainties. Statements
indicating that we "intend", "plan", "expect," "estimate" or "believe" are
forward-looking, as are all other statements concerning future financial
results, product offerings or other events that have not yet occurred. There are
several important factors that could cause actual results or events to differ
materially from those anticipated by our forward-looking statements. Such
factors include, but are not limited to: our ability to achieve and maintain
profitability; the success of our digital video software products; our ability
to compete successfully with Apple in the digital video software market; the
success of Apple's QuickTime technology for Windows; continued favorable
licensing terms for QuickTime from Apple; our ability to successfully develop,
introduce and market new software products, including products for the Windows
operating system, to keep pace with technological innovation, particularly in
light of its limited financial resources; the ability of our manufacturers and
suppliers to deliver components and manufacture the our products; our reliance
on international sales and its key distributor arrangements; and our ability to
attract and retain its key personnel.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain
operational data as a percentage of net sales (may not add due to rounding).
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1999 1998 1997
---- ---- ----
Total net sales 100.0% 100.0% 100.0%
Cost of sales 35.6 63.3 99.6
----- ------ -----
Gross profit 64.4 36.7 0.4
Operating Expenses:
Research and development 19.8 17.9 16.1
Selling, general, and administrative 53.6 45.3 68.5
----- ------ -----
Total operating expenses 73.4 63.2 84.6
----- ------ -----
Loss from operations (9.0) (26.5) (84.2)
Other income, net 53.2 78.8 98.2
Interest expense (0.4) (2.9) (8.9)
------ ------- -------
Income before income taxes 43.8 49.4 5.1
Provision (benefit) for income taxes 0.0 (6.3) 1.0
----- ------- -----
Net income 43.8% 55.7% 4.1%
===== ====== =====
FISCAL 1999 TO FISCAL 1998
NET SALES. Our net sales for fiscal 1999 decreased 15% to $13.4 million from
$15.7 million for fiscal 1998. In 1998, we entered into an agreement for the
license of significant assets of our monitor business to Korea Data Systems
America, Inc. ("KDS") and concluded this transaction in 1999. These monitor
products accounted for $8.7 million in sales for fiscal 1998. Consequently,
sales revenues for fiscal 1999 declined from the previous year as revenues for
fiscal 1999 are almost entirely attributable to video software, which accounted
for approximately $4.6 million in fiscal 1998.
The Company follows Statement of Position (SOP) 97-2, "Software
Revenue Recognition." Revenue from the sale of software, net of estimated
returns, is recognized upon either shipment of the physical product or delivery
of electronic product, at which time, collection is determined to be probable
and the Company has no remaining obligations. Sales to certain resellers are
subject to agreements allowing certain rights of return and price protection on
unsold merchandise held by these resellers. The Company provides for estimated
returns at the time of shipment and for price
-9-
protection following price declines. Revenue earned under royalty or commission
agreements is recognized in the period in which it is earned.
During 1999, sales of previously introduced software products for
digital video camcorders including PhotoDV, MotoDV, and EditDV increased over
fiscal 1998. In addition during 1999, we introduced several new products
including EditDV-Windows, MotoDV Studio, MotoDV Mobile, RotoDV, RotoWeb and
IntroDV. Localized versions of several of the products were introduced to the
European and Japanese markets contributing to growth in international software
revenues. Related revenue grew sequentially each quarter of fiscal 1999.
However, while we plan to introduce revisions of current products and increase
localized versions, there can be no assurance that sales of these software
products will continue to increase.
Two customers accounted for 20.7% and 18.4% of our net sales for fiscal
1999. For fiscal 1998 the same distributors accounted for 53.5% and 0.0% of our
net sales, respectively.
GROSS PROFIT. Our gross profit margin was 64.4% for fiscal 1999, as
compared with 36.7% for fiscal 1998 as a result of increased sales of higher
margin digital video software products and the discontinuation of lower margin
monitors and other hardware product lines.
Our digital video products have varying gross margins. In addition,
margins vary according to the method of distribution. Accordingly, in any future
period, the product and channel mix will affect the gross margin. While we
expect the gross profit margins to remain at similar levels in the future, there
can be no assurance that our gross margins will improve or remain at current
levels, particularly if the volume of our consumer oriented products grows
significantly in relation to our professional products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $2.8 million or 17.9% of net sales for fiscal 1998 to $2.6
million or 19.8% of net sales for fiscal 1999. The decrease in research and
development expenses is primarily due to headcount reductions resulting from our
departure from the monitor and other hardware businesses. The increase in
research and development expenses expressed as a percentage of net sales for
fiscal 1999 was primarily attributable to the decrease in net sales as we
refocused on higher margin software products, rather than high volume, lower
margin hardware products. We expect to increase our research and development
expenses in fiscal 2000 in absolute dollars.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal 1999 increased slightly to $7.2 million or
53.6% of net sales compared to $7.1 million or 45.3% of net sales for fiscal
1998. Increases in sales and marketing efforts in Japan and Europe offset
decreased expenses from reductions in headcount from fiscal 1998. During the
last quarter of fiscal 1999, we installed both new telephone and computer
systems and expect increased depreciation expense in fiscal 2000.
OTHER INCOME (EXPENSE), NET. Other income was $7.1 million for fiscal
1999 compared to $12.4 million for fiscal 1998. The other income for fiscal 1999
includes $4.5 million from the KDS license, $2.5 million from the sale of the
Color Server Group and other assets to Splash, and $0.1 million in miscellaneous
other income. Fiscal 1998 included $1.6 million related to the KDS license,
$10.0 million from the sale of Splash Common Stock, $0.5 million from the sale
of Umax Common Stock and $0.3 in miscellaneous other income.
INTEREST EXPENSE. Interest expense was $55,000 for fiscal 1999 as
compared to $.5 million for fiscal 1998. This decrease was due to lower average
borrowings primarily as a result of the repayment of the working capital line of
credit, which was secured by the note receivable from KDS.
PROVISION FOR INCOME TAXES. No provision for income taxes was recorded
in fiscal 1999 due to the benefit of previously unutilized net operating losses
and timing differences. For fiscal 1998 we recorded a reversal of accrual for
income taxes of $1.0 million. The reversal reflects the fact that exposure in
certain foreign jurisdictions, as a result of the passage of time, had become
remote.
FASB Statement 109, Accounting for Income Taxes, provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Our valuation allowance reduced the deferred tax asset to the amount
realizable. We have provided a full valuation allowance against our net deferred
tax assets due to uncertainties surrounding their realization. Due to the net
cumulative losses reported, predictability of earnings in future periods is
uncertain. We will evaluate the realizability of the deferred tax assets on a
quarterly basis.
As a result of our issuance of common stock and Series A Convertible
Preferred Stock in exchange for the release of certain liabilities in September
1996, we experienced a "change in ownership" as defined under Section 382 of the
Internal Revenue Code. Accordingly, utilization of substantial net operating
losses and tax credit carryforwards will be subject to an approximate $2.0
million annual limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986 (and similar state provisions), except under
limited circumstances. This limitation will result in the expiration of all of
the tax credit carryforwards and a substantial portion of the net operating loss
carryforwards without full utilization. See Note 4 of Notes to Consolidated
Financial Statements.
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NET INCOME (LOSS). As a result of the above factors, we had net income
of $ 5.8 million in fiscal 1999 compared to a net income of $8.7 million for
fiscal 1998.
FISCAL 1998 TO FISCAL 1997
NET SALES. Our net sales for fiscal 1998 decreased 50% to $15.7 million
from $31.2 million for fiscal 1997. The decline is due primarily to the
following factors: our efforts to refocus on the digital video software product
lines while discontinuing the development of our monitor, accelerated color
graphics products and the DOS on Mac products; and a decline in fourth quarter
sales of our monitor products due to the agreement for the license of
significant assets of our monitor business to KDS. The monitor products had $8.7
million in sales for fiscal 1998 as compared to $16.6 million for fiscal 1997.
As a result of these factors, product sales decreased 45.9% in fiscal 1998 from
fiscal 1997. Commissions and royalties decreased in fiscal 1998 by 77.3% to $1.1
million from $4.9 million in fiscal 1997 due to the termination of our exclusive
distributor relationships in Europe and Japan and due to the expiration of the
royalty agreement with Umax Computer Corporation in March 1998. Also as a result
of the distributor relationships in Japan and Europe, our export sales for
fiscal 1998 declined to $3.7 million as compared to $4.9 million for fiscal
1997. Sales growth in the Asia market has been impacted by certain factors
including weaker economic conditions and stronger dollar versus the local
currencies and the restructuring of various distributor relationships.
Revenue is recognized when products are shipped. Sales to certain
distributors are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these distributors. We provide
for estimated returns at the time of shipment and for price protection following
price declines. Revenue earned under royalty or commission agreements is
recognized in the period in which it is earned.
The sale of the software products for digital video camcorders (PhotoDV
introduced in April 1997, MotoDV introduced in September 1997 and EditDV
introduced in November 1997) increased during 1998.
Effective January 1, 1998, we modified our relationships with
distributors in Japan and Europe for our digital video software products. Rather
than paying commissions to us for products sold, they purchase products from us
at a discount from the price list. Commissions were paid on the sales of our
other products sold through these distributors, however.
One customer accounted for 53.5% of our net sales for fiscal 1998. For
fiscal 1997 the same distributor accounted for 66.1% of our net sales.
GROSS PROFIT. Our gross profit margin was 36.7% for fiscal 1998, as
compared with 0.4% for fiscal 1997. This increase was a result of our decision
to refocus our business on higher margin digital video software products.
Included in fiscal 1997 cost of sales are one-time charges of $9.7 million
consisting principally of inventory write downs of $7.7 million and reserves for
excess purchase order commitments of $2.0 million for inventory in excess of
anticipated demand. These charges reflect decreases in demand and were
consistent with our decision to refocus our business. Excluding these one-time
charges, gross profit margin in fiscal 1997 was 31.5%.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from $5.0 million or 16.1% of net sales for fiscal 1997 to $2.8
million or 17.9% of net sales for fiscal 1998. We decreased our research and
development expenses primarily by reducing expenses related to discontinued
product lines in connection with our efforts to refocus our business. The
increase in research and development expenses expressed as a percentage of net
sales for fiscal 1998 was primarily attributable to the decrease in net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased from $21.4 million or 68.6% of net sales for
fiscal 1997 to $7.1 million or 45.4% of net sales for fiscal 1998. Included in
these expenses for fiscal 1997 is a $2.6 million charge to increase the
allowance for doubtful accounts due to accounts which we determined were
unlikely to be collected in full. Adjusting for these charges and reductions,
selling, general and administrative expenses would have been $18.8 million or
60.3% of net sales in fiscal 1997. We decreased fiscal 1998 selling, general and
administrative expenses in absolute and percentage terms primarily by reducing
expenses related to headcount.
OTHER INCOME (EXPENSE), NET. Other income was $12.4 million for fiscal
1998 compared to $30.6 million for fiscal 1997. The other income for fiscal 1998
was due to the sale of 570,139 shares of Splash common stock compared to 996,875
shares of Splash common stock in fiscal 1997. Fiscal 1998 also includes $1.6
million related to the KDS license.
INTEREST EXPENSE. Interest expense was $0.5 million for fiscal 1998 as
compared to $2.8 million for fiscal 1997. This decrease was due to lower average
borrowings primarily as a result of the repayment of the working capital line of
credit to IBM Credit.
PROVISION FOR INCOME TAXES. We recorded a reversal of accrual for
income taxes of $1.0 million for fiscal 1998 compared to a provision of $0.3
million for fiscal 1997. The reversal reflects the fact that exposure in certain
foreign jurisdictions, as a result of the passage of time, has become remote.
-11-
As a result of our issuance of common stock and Series A Convertible
Preferred Stock in exchange for the release of certain liabilities in September
1996, we experienced a "change in ownership" as defined under Section 382 of the
Internal Revenue Code. Accordingly, utilization of substantial net operating
losses and tax credit carryforwards will be subject to an approximate $2.0
million annual limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986 (and similar state provisions), except under
limited circumstances. This limitation will result in the expiration of all of
the tax credit carryforwards and a substantial portion of the net operating loss
carryforwards without full utilization. See Note 4 of Notes to Consolidated
Financial Statements.
NET INCOME (LOSS). As a result of the above factors, we had net income
of $ 8.7 million in fiscal 1998 compared to a net income of $1.0 million for
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased from $.0.6 million at the end
of fiscal 1998 to $3.6 million at the end of fiscal 1999. Approximately $0.1
million of the $3.6 million of cash and cash equivalents available at September
30, 1999 was restricted under a letter of credit. The increase in our cash and
cash equivalents during fiscal 1999 was primarily attributable to remaining
funds received from the Splash escrow, and receipt of the licensing fees from
KDS, offset by funding of operating losses during the first half of the year.
Working capital was $980,000 at September 30, 1999.
In fiscal 1998, under the license and asset transfer agreement with
KDS, we transferred our Radius, Supermac, PressView and certain other trademarks
to KDS and licensed certain intellectual property pertaining to PressView and
PrecisionView monitors. The value of the transaction was $6.2 million payable in
installments. The asset transfer agreement was completed on May 17, 1999, and we
received the final installment payment on the note in July 1999.
We believe that our cash and cash equivalents, cash flow from
operations, and other available sources of financing, will be sufficient to fund
operations for the next fiscal year. However, there can be no assurances that
the sale of software products will continue to increase to a sufficient extent
to fund our operating plan for fiscal 2000. We may need to reduce our operating
expenses or seek additional sources of working capital.
Capital expenditures were approximately $0.7 million during fiscal
1999, primarily attributable to the upgrade of our telephone and computer
systems and leasehold improvements. As a result of these significant
expenditures in 1999, such capital expenditures for fiscal 2000 are expected to
decrease.
At September 30, 1999, our principal commitments consisted of our
obligation under a building lease. See Note 2 to the Consolidated Financial
Statements. We are also a party to various litigation proceedings, the costs of
defending or the outcome of which could adversely affect the Company's
liquidity. See "Business -- Legal Proceedings."
-12-
CERTAIN FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OF OPERATIONS
Our future operating results could be affected by a number of
uncertainties, including:
OPERATING LOSSES
While we have achieved profitability on the operating level during the
last two quarters of 1999, we have experienced operating losses in each of its
prior five fiscal years. Our ability to sustain profitable operations will
depend upon a number of factors, including our ability to control costs; our
ability to generate sufficient cash from operations or obtain additional funds
to fund our operating expenses; our ability to successfully market our software
products; our ability to develop innovative and cost-competitive new products
and to bring those products to market in a timely manner; and competitive
factors such as new product introductions, product enhancements and aggressive
marketing and pricing practices; general economic conditions; and other factors.
For these and other reasons, there can be no assurance that we will be able to
maintain profitability.
FLUCTUATIONS IN OPERATING RESULTS
We have experienced substantial fluctuations in operating results. Our
customers generally order on an as-needed basis, and we have historically
operated with relatively small backlogs. Quarterly sales and operating results
depend heavily on the volume and timing of bookings received during the quarter,
which are difficult to forecast. A substantial portion of our revenues are
derived from sales made late in each quarter, which increases the difficulty in
forecasting sales accurately. We recognize sales upon shipment of product, and
allowances are recorded for estimated uncollectible amounts, returns, credits
and similar costs, including product warranties and price protection. Due to the
inherent uncertainty of such estimates, there can be no assurance that our
forecasts regarding bookings, collections, returns, credits and related matters
will be accurate. A significant portion of our operating expenses are relatively
fixed in nature, and planned expenditures are based primarily on sales forecasts
which, as indicated above, are uncertain. Any inability on the part to adjust
spending quickly enough to compensate for any failure to meet sales forecasts or
to receive anticipated collections, or any unexpected increase in product
returns or other costs, could also have an adverse impact on our operating
results. As a strategic response to a changing competitive environment, we have
elected, and, in the future, may elect from time to time, to make certain
pricing, service or marketing decisions or acquisitions that could have a
material adverse effect on the our business. As a result, we believe that
period-to-period comparisons of our results of operations will not necessarily
be meaningful and should not be relied upon as any indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarter, our operating results will be below the expectations of public
market analysts and investors. In such event, the price of our common stock
would be likely to be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON AND COMPETITION WITH APPLE
Although most of our current products are cross platform and are
targeted at the Windows environment, it is expected that sales of products for
Apple computers will continue to represent a portion of our sales for fiscal
2000. While Apple has introduced new products which have been well received in
the marketplace this year, Apple had lost significant market share over recent
years. Our operating results would be adversely affected if other developments
were to adversely affect Apple's business. Furthermore, any continued difficulty
that may be experienced by Apple in the development, manufacturing, marketing or
sale of its computers, or other disruptions to, or uncertainty in the market
regarding Apple's business, resulting from these or other factors, could result
in further reduced demand for Apple computers, which in turn could materially
and adversely affect sales of our products. A number of our products compete
with products marketed by Apple, e.g. Final Cut and iMovie. As a competitor,
Apple could in the future take steps to hinder our development and to slow sales
of our products. New products anticipated from and introduced by Apple could
cause customers to defer or alter buying decisions due to uncertainty in the
marketplace, as well as presenting additional direct competition. In order to
develop products for the Macintosh on a timely basis, we depend upon access to
advance information concerning new Macintosh products. A decision by Apple to
cease sharing advance product information with us would adversely affect out
business. We also license certain technology from Apple to use on both the
Macintosh and Windows platform. Favorable licensing terms cannot be assured in
the future. If Apple ceases to support this technology for the Windows platform
this would adversely affect our business.
-13-
DEPENDENCE ON AND COMPETITION WITH MICROSOFT
As a competitor, Microsoft could in the future take steps to hinder our
development and to slow sales of our products. New products anticipated from and
introduced by Microsoft could cause customers to defer or alter buying decisions
due to uncertainty in the marketplace, as well as presenting additional direct
competition. In order to develop products for Windows on a timely basis, we
depend upon access to advance information concerning new Microsoft operating
systems and their digital video software architecture. A decision by Microsoft
to cease sharing advance product information with us would adversely affect our
business.
COMPETITION
The markets for our products are highly competitive, and we expect
competition to intensify. Many of our current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources, particularly Adobe Systems. We believe that our ability to compete
will depend on a number of factors, including the amount of financial resources
available, success and timing of new product developments and its competitors,
product performance, price and quality, breadth of distribution and customer
support. There can be no assurance that we will be able to compete successfully
with respect to these factors. In addition, the introduction of lower priced
competitive products could result in price reductions. See "Business --
Competition."
DEPENDENCE ON LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS
We are dependent on sole or limited source suppliers for certain key
components used in the Firewire card. We purchase these sole or limited source
components primarily pursuant to purchase orders placed from time to time in the
ordinary course of business and have no guaranteed supply arrangements with sole
or limited source suppliers. Therefore, these suppliers are not necessarily
obligated to supply products to us for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Although we expect that these suppliers will continue to meet
our requirements for the components, there can be no assurance that they will do
so. Our reliance on a limited number of suppliers involves a number of risks,
including the absence of adequate capacity, the unavailability or interruption
in the supply of key components and reduced control over delivery schedules and
costs. We expect to continue to rely on a limited number of suppliers for the
foreseeable future. If these suppliers became unwilling or unable to continue to
provide these components, we would have to develop alternative sources for these
components which could result in delays or reductions in product shipments. The
introduction of new products presents additional difficulties in obtaining
timely shipments from suppliers. Additional time may be needed to identify and
qualify suppliers of the new products.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The digital video software applications industry is characterized by
rapidly changing technology, often resulting in short product life cycles and
rapid price declines. We believe that our success will be highly dependent on
our ability to develop innovative and cost-competitive new products and to bring
them to the marketplace in a timely manner. If we fail to introduce new products
on a timely basis, our operating results could be adversely affected. A
reduction in available cash resources could also result in the interruption or
cancellation of research and product development efforts which would have a
material adverse effect on the business. We anticipate that the digital video
software industry will follow the pattern of the professional publishing
industry in which desktop publishing products, including those produced by our
predecessor, replaced more expensive, proprietary products, and we also
anticipate that this evolution will lead to an increase in the purchase and use
of digital video editing products for use with digital video camcorders. As a
result, we have devoted significant resources to this product line. There can be
no assurance that this evolution will occur in the digital video editing
industry as expected, or that even if it does occur that it will not occur at a
slower pace than anticipated. There can also be no assurance that any digital
video editing products developed by us will achieve consumer acceptance or broad
commercial success. In the event that the increased use of such video editing
products does not occur or in the event that we are unable to successfully
develop and market such products, our business, operating results and financial
condition would be materially adversely affected, particularly in light of the
fact that we have licensed or sold its remaining hardware product lines over the
last four years.
DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS
Our primary means of distribution is through a limited number of
third-party distributors that are not under our direct control. Furthermore, we
continue to build a new distribution network in Europe and in Japan. We maintain
only a small direct sales force. As a result, our business and financial results
are highly dependent on the amount of products ordered by these distributors.
Such orders are in turn dependent upon the continued viability and financial
condition of these distributors as well as on their ability to resell such
products and maintain appropriate inventory levels. These distributors generally
carry the product lines of a number of companies, are not subject to minimum
order requirements and can discontinue marketing
-14-
our products at any time. We must compete for the focus and sales efforts of
these third parties. In addition, due in part to the historical volatility of
the personal computer industry, some distributors have from time to time
experienced declining profit margins, cash flow shortages and other financial
difficulties. Our future growth and success will continue to depend in large
part upon indirect distribution channels. If our distributors were to experience
financial difficulties, our results of operations could be adversely affected.
INTERNATIONAL SALES
We expect that international sales, primarily in Europe, will represent
a significant portion of our business activity and will be subject to the normal
risks of international sales such as currency fluctuations, longer payment
cycles, export controls and other governmental regulations and, in some
countries, a lesser degree of intellectual property protection as compared to
that provided under the laws of the United States. Sales in Japan could be
affected by the economic conditions in that region, which have been unfavorable.
Furthermore, a reduction in sales efforts or financial viability of our
international distributors could adversely affect our net sales and our ability
to provide service and support to Japanese and European customers. Additionally,
if for any reason exchange or price controls or other restrictions on foreign
currencies are imposed, our business, operating results and financial condition
could be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant degree upon the continued
contributions of key management, marketing, product development and operational
personnel and our ability to retain and continue to attract highly skilled
personnel. We currently have only two executive officers. We do not carry any
key person life insurance with respect to any of its personnel. Competition for
employees in the computer industry is intense, and there can be no assurance
that we will be able to attract and retain qualified employees. Because of the
very tight labor market for technical personnel, it has become increasingly
difficult for us to hire new employees and retain key management and current
employees. The failure to attract and retain key personnel would have a material
adverse effect on our business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trademark and trade
secret protection, nondisclosure agreements and licensing arrangements to
establish and protect our proprietary rights. Although we intend to defend our
proprietary rights, policing unauthorized use of proprietary technology or
products and defending patents, copyrights and trademarks are difficult, and
there can be no assurance that our efforts will be successful. Moreover, the
laws of certain foreign countries may not protect our proprietary rights to the
same extent as do the laws of the United States. We have also received, and
expect to receive in the future, communications asserting that our products may
infringe the proprietary rights of third parties. As a result of such claims or
potential litigation, it may become necessary or desirable in the future for us
to obtain licenses relating to one or more of its products or relating to
current or future technologies, and there can be no assurance that we would be
able to do so on commercially reasonable terms.
IMPACT OF YEAR 2000
The year 2000 Issue ("Y2K Issue") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of our computer programs or hardware that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on prior assessments of our information management and accounting systems,
we determined that it was necessary to replace significant portions of this
software and certain hardware, which was completed during fiscal 1999. We have
spent approximately $700,000 on our new information technology and accounting
systems and anticipate spending an additional $300,000 in fiscal 2000. We paid
for this investment from internally generated funds. The upgrade of those
systems represents over 90% of the information technology budget for the year
and was our major project. In addition to Y2K readiness, these systems provide
additional functionality in streamlining and automating many business processes
and increasing operating efficiencies. No major information technology projects
were deferred as a result. Based on a review of our product line, we have
concluded that none of our products require remediation to be Year 2000
compliant, as primarily all operate in conjunction with the MacOS or the Windows
operating system. We therefore do not believe that the Y2K Issue presents a
material risk with respect to our current products. In addition, we have
received assurances from our key suppliers and distributors that they are fully
compliant. However, we have no means of ensuring that such suppliers and
distributors will be Year 2000 ready. The inability of suppliers and
distributors to complete their Year 2000 resolution process in a timely fashion
could materially
-15-
impact us. Our contingency plans, should our suppliers and distributors fail to
be Year 2000 compliant, would primarily involve manual processes and
workarounds, which could result in delays in obtaining components for our
products, in shipping product, in collecting receivables, and also increased
administrative expense. To date, we believe that we have adequately addressed
the Y2K Issue, but there can be no assurance that Y2K problems will not
adversely affect our business.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Company's Financial Statements, Financial Schedules,
and the Report of the Independent Auditors appears in Part IV of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
-16-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning our directors required by Item 10 is
incorporated by reference herein to section entitled "Proposal No. 1 - Election
of Directors" of the Proxy Statement for its 2000 Annual Meeting of Shareholders
(the "Proxy Statement"). The information concerning our executive officers
required by Item 10 is incorporated by reference to Item 4A in Part 1 hereof
entitled "Executive Officers of Registrant."
With the exception of the information specifically stated as being
incorporated by reference from the Company's Proxy Statement in Part III of this
Annual Report on Form 10-K, our Proxy Statement is not to be deemed as filed as
part of this report. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days of the Company's fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Proposal No. 1 - Election
of Directors--Compensation of Directors" of the Proxy Statement.
With the exception of the information specifically stated as being
incorporated by reference from the Proxy Statement in Part III of this Annual
Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of
this report. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
With the exception of the information specifically stated as being
incorporated by reference from the Proxy Statement in Part III of this Annual
Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of
this report. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Transactions" of the Proxy Statement.
With the exception of the information specifically stated as being
incorporated by reference from the Proxy Statement in Part III of this Annual
Report on Form 10-K, our Proxy Statement is not to be deemed as filed as part of
this report. The Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days of the Company's fiscal year end.
-17-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS.
Page
----
Report of Ernst & Young LLP, Independent Auditors 24
Consolidated Balance Sheets at September 30, 1999 and 1998 25
Consolidated Statements of Income for the Years Ended September 30,
1999, 1998 and 1997 26
Consolidated Statements of Convertible Preferred Stock and Shareholders'
Equity for the Years Ended September 30, 1999, 1998, and 1997 27
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998, and 1997 28
Notes to Consolidated Financial Statements 29
(a) (2) FINANCIAL STATEMENT SCHEDULES. The Company's financial statement schedule filed
herewith is as follows:
Schedule II: Valuation and Qualifying Accounts 41
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to
require submission of the schedules or because the information
required is shown either in the financial statements or the notes
thereto.
(a) (3) The following exhibits are filed herewith or incorporated by
reference herein:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
2.07 -- Merger Agreement (the "Merger Agreement") dated as of December 21, 1995 among Radius Inc.,
Splash Technology, Inc., Summit Subordinated Debt Fund, L.P., Summit Ventures IV, L.P., Summit
Investors II, L.P., Splash Technology Holdings, Inc. and Splash Merger Company, Inc. (2)
2.08 -- Amendment No. 1 to Merger Agreement dated as of January 30, 1996. (2)
2.09 -- Agreement and Plan of Reorganization dated December 28, 1999 with Media 100, Inc.
3.01 A Registrant's Sixth Amended and Restated Articles of Incorporation. (3)
B Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (1)
C Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation. (15)
-18-
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
4.01 -- Specimen Certificate for shares of Common Stock of the Registrant. (5)
4.03 A Warrant dated September 13, 1995 between IBM Credit Corporation and the Registrant. (8)
B Warrant dated October 13, 1996, between Mitsubishi Electronics America, Inc. and the Registrant. (9)
4.04 -- Form of Registration Rights Agreement between the Registrant and certain shareholders. (8)
A Certificate of Amendment of Registrant's Sixth Amended and Restated Articles of Incorporation.
(See exhibit 3.01)
4.05 -- The Registrant's Bylaws. (4)
10.01 A *Registrant's 401(k) Savings and Investment Plan. (6)
B *Amendment to Registrant's 401(k) Savings and Investment Plan. (1)
C *Registrant's 401(k) Savings and Investment Plan Loan Policy. (1)
10.02 -- *Registrant's 1995 Stock Option Plan. (1)
10.03 -- *Form of Stock Option Agreement and Exercise Request as currently in effect under 1995 Stock
Option Plan. (1)
10.04 -- *Registrant's 1994 Directors' Stock Option Plan. (1)
10.05 -- Form of Indemnity Agreement with Directors. (5)
10.06 -- *Employment Agreement by and between Registrant and Mark Housley dated December 20, 1996.
(10)
10.07 Asset Purchase Agreement dated as of August 7, 1998 between Korea Data Systems America, Inc. and
the Registrant. (11)
10.08 -- Amended and Restated License Agreement dated as of August 7, 1998 between Korea Data Systems
America, Inc. and the Registrant. (11)
10.09 -- Asset Purchase Agreement dated as of November 23, 1998 between Post Digital Software, Inc. and the
Registrant. (12)
10.10 -- Asset Sale Agreement dated as of December 4, 1998 between Splash Technology Holdings, Inc. and
the Registrant. (12)
10.11 -- Supplement to the License and Asset Purchase Agreement dated December 4, 1998 between Korea
Data Systems America, Inc. and the Registrant. (12)
-19-
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.12 -- Lease agreement by and between Registrant and Eliane Ortuno, Trustee, Donald T. Kitts Trust dated
January 8, 1999. (460 East Middlefield Road, Mountain View, California offices). (13)
10.13 -- Registrant's 1999 Employee Stock Purchase Plan and related documents. (14)
10.14 -- OEM and license agreement between Media 100, Inc. and the registrant.
- -------------
21.01 -- List of Registrant's subsidiaries.
23.01 -- Consent of Ernst & Young LLP, Independent Auditors.
27.01 -- Financial Data Schedule (EDGAR version only)
(1) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 15, 1995.
(2) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 13, 1996
(3) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 24, 1990.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on April 29, 1992 (File No. 33-47525).
(5) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-35769) which became effective on
August 16, 1990.
(6) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 28, 1992.
(7) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on August 12, 1992.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-12417) filed on September 20, 1996.
(9) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-12417) filed on
November 12, 1996.
(10) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 11, 1997.
(11) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on August 11, 1998.
(12) Incorporated by reference to exhibits to the Company's Report on Form
10-K filed on December 23, 1998.
(13) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on February 10, 1999.
(14) Incorporated by reference to exhibits to the Company's Report on Form
10-Q filed on May 12, 1999.
(15) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed on August 13, 1999 (File No. 333-85213).
* management contracts or compensatory plans required to be filed as an exhibit
to Form 10-K.
- ----------------
-20-
(b) REPORTS ON FORM 8-K.
No report on Form 8-K was filed during the last quarter of fiscal 1999.
(c) EXHIBITS - See (a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES - See (a) (2) above.
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL ORIGIN, INC.
By: /s/ Mark Housley
-----------------------------------------
Mark Housley
Chairman of the Board of Directors,
Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Mark Housley
and Mary F. Bobel, jointly and severally, his true and attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his or her substitute or substitutes, may 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:
NAME TITLE DATES
- ---- ----- -----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Mark Housley Chairman of the Board of Directors, December 29, 1999
- -------------------------------------------
Mark Housley Chief Executive Officer and President
PRINCIPAL FINANCIAL OFFICER
AND CHIEF ACCOUNTING OFFICER:
/s/ Mary F. Bobel Vice-President & Chief Financial Officer December 29, 1999
- -------------------------------------------
Mary F. Bobel
DIRECTORS:
/s/ Michael D. Boich Director December 29, 1999
- -------------------------------------------
Michael D. Boich
/s/ John Cirigliano Director December 29, 1999
- -------------------------------------------
John Cirigliano
/s/ John C. Kirby Director December 29, 1999
- -------------------------------------------
John C. Kirby
-22-
/s/ Henry V. Morgan Director, Secretary December 29, 1999
- -------------------------------------------
Henry V. Morgan
/s/ Stephen Manousos Director December 29, 1999
- -------------------------------------------
Stephen Manousos
/s/ Carl Rosendahl Director December 29, 1999
- -------------------------------------------
Carl Rosendahl
-23-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DIGITAL ORIGIN, INC.
We have audited the accompanying consolidated balance sheets of Digital
Origin, Inc. as of September 30, 1999 and 1998, and the related consolidated
statements of income, convertible preferred stock and shareholders' equity,
and cash flows for each of the three years in the period ended September 30,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Digital
Origin, Inc. at September 30, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
November 3, 1999
-24-
CONSOLIDATED BALANCE SHEETS
(in thousands)
Years ended September 30,
-------------------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,627 $ 600
Accounts receivable, net of allowance for doubtful accounts
of $3,758 in 1999 and $3,894 in 1998 1,995 364
Note receivable from Korea Data Systems America, Inc. - 4,500
Inventories 211 803
Prepaid expenses and other current assets 161 156
-------- ---------
Total current assets 5,994 6,423
Property and equipment, net 726 133
Other assets 175 -
-------- ---------
$ 6,895 $ 6,556
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,791 $ 1,971
Accrued payroll and related expenses 551 324
Accrued legal expenses 285 69
Other accrued liabilities 1,086 2,000
Deferred income - 4,833
Accrued income taxes 301 1,102
Short-term borrowings - 1,340
-------- ---------
Total current liabilities 5,014 11,639
Accrued income taxes 800 -
Shareholders' equity (net capital deficiency):
Preferred stock, no par value, 2,000 authorized; none
issued and outstanding in 1999 and 1998 - -
Common stock, no par value; 100,000 shares authorized;
issued and outstanding-5,593 shares in 1999 and
5,524 shares in 1998 169,417 169,102
Accumulated deficit (168,390) (174,239)
Other comprehensive income 54 54
-------- ---------
Total shareholders' equity (net capital deficiency) 1,081 (5,083)
-------- ----------
$ 6,895 $ 6,556
======== =========
See accompanying notes.
-25-
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years ended September 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
Net sales $ 13,168 $ 14,564 $ 26,276
Commissions and royalties 185 1,104 4,874
--------- -------- ---------
Total net sales 13,353 15,668 31,150
Cost of sales 4,750 9,921 31,032
--------- -------- ---------
Gross profit 8,603 5,747 118
--------- -------- ---------
Operating expenses:
Research and development 2,649 2,801 5,002
Selling, general and administrative 7,154 7,107 21,355
--------- -------- ---------
Total operating expenses 9,803 9,908 26,357
--------- -------- ---------
Loss from operations (1,200) (4,161) (26,239)
Other income, net 7,104 12,353 30,600
Interest expense (55) (459) (2,777)
---------- --------- ----------
Income before income taxes 5,849 7,733 1,584
Provision (benefit) for income taxes - (1,000) 316
--------- --------- ---------
Net income $ 5,849 $ 8,733 $ 1,268
========= ======== =========
Preferred stock dividend - - 272
--------- ---------- ---------
Net income applicable to
common shareholders $ 5,849 $ 8,733 $ 996
========== ======== =========
Net income per common share:
Basic net income per share applicable
to common shareholders $ 1.06 $ 1.58 $ 0.18
========= ========= =========
Diluted net income per share applicable
to common shareholders $ 1.02 $ 1.57 $ 0.18
========= ========= =========
Shares used in computing net income per common share:
Shares used in computing basic net income
per common share 5,535 5,522 5,389
========== ========= =========
Shares used in computing diluted net income
per common share 5,747 5,557 5,522
========== ========= =========
See accompanying notes.
-26-
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(in thousands)
Shareholder's Equity
------------------------------------------------
Convertible Other Total
Preferred Common Accumulated Comprehensive Shareholders'
Stock Stock Deficit Income Equity
--------- -------------------------------------------------
Balance at September 30, 1996 $ 3,000 $ 168,746 $(183,968) $ 19,182 $ 3,960
Net income -- -- 1,268 -- 1,268
Net translation adjustment -- -- -- 13 13
Change in unrealized gain on available-for-sale securities -- -- -- 2,941 2,941
---------
Total comprehensive income -- -- -- -- 4,222
Issuance of 53 shares of common stock
under Stock Option Plans -- 200 -- -- 200
Issuance of 8 shares of common stock under
Employee Stock Purchase Plan -- 48 -- -- 48
Redemption of 75 shares of preferred stock
held by IBM (3,000) -- -- -- --
Dividends paid on convertible preferred stock -- -- (272) -- (272)
--------- -------------------------------------------------
Balance at September 30, 1997 -- 168,994 (182,972) 22,136 8,158
Net income -- -- 8,733 -- 8,733
Net translation adjustment -- -- -- 11 11
Change in unrealized gain on available-for-sale securities -- -- -- (22,093) (22,093)
---------
Total comprehensive loss -- -- -- -- (13,349)
Issuance of 22 shares of common stock
under Stock Option Plans -- 108 -- -- 108
--------- -------------------------------------------------
Balance at September 30, 1998 -- 169,102 (174,239) 54 (5,083)
Net income -- -- 5,849 -- 5,849
---------
Total comprehensive income -- -- -- -- 5,849
Issuance of 38 shares of common stock
under Stock Option Plans -- 153 -- -- 153
Issuance of 31 shares of common stock
under Employee Stock Purchase Plan -- 89 -- -- 89
Issuance of warrants for 50 shares of common stock -- 73 -- -- 73
--------- -------------------------------------------------
Balance at September 30, 1999 $ -- $ 169,417 $(168,390) $ 54 $ 1,081
--------- -------------------------------------------------
--------- -------------------------------------------------
See accompanying notes.
-27-
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
Years ended September 30,
-------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 5,849 $ 8,733 $ 1,268
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 150 149 801
Gain on the sale of Splash Common Stock -- (10,011) (30,779)
Gain on the monitor license and sale of other assets to KDS (4,502) (1,615) --
Gain on the sale of the Color Server Group and other assets to Splash (2,485) -- --
Gain on the sale of Umax Common Stock -- (534) --
Non-cash restructuring and other charges -- -- 2,162
Loss on disposal of fixed assets -- 22 500
(Increase) decrease in assets:
Accounts receivable (1,631) 1,815 5,968
Note receivable 4,500 (4,500) --
Inventories 592 2 12,047
Prepaid expenses and other current assets (5) 28 182
Income tax receivable -- -- 514
Increase (decrease) in liabilities:
Accounts payable 820 (2,540) (493)
Accrued payroll and related expenses 227 (996) (1,492)
Accrued legal expenses 216 49 (67)
Other accrued liabilities (914) (1,208) 272
Deferred income (4,833) 4,833 --
Accrued income taxes (1) (1,009) (116)
Accrued restructuring and other charges -- (2,033) (420)
-------- -------- --------
Net cash used in operating activities (2,017) (8,815) (9,653)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (703) (55) (55)
Other assets (142) -- 50
Net proceeds from the sale of Splash Common Stock -- 10,011 30,779
Net proceeds from the monitor license and sale of other assets to KDS 4,502 1,615 --
Net proceeds from the sale of the Color Server Group and other assets
to Splash 2,485 -- --
Net proceeds from the sale of Umax Common Stock -- 534 --
-------- -------- --------
Net cash provided by investing activities 6,142 12,105 30,774
-------- -------- --------
Cash flows from financing activities:
Principal payment of short-term borrowings, net (1,340) (3,298) 2,716
Principal payment of long-term borrowings, net -- -- (21,940)
Redemption of preferred stock and related dividend -- -- (3,272)
Issuance of common stock 242 108 248
Principal payments under capital leases -- (273) (1,074)
-------- -------- --------
Net cash used in financing activities (1,098) (3,463) (23,322)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,027 (173) (2,201)
Cash and cash equivalents, beginning of year 600 773 2,974
-------- -------- --------
Cash and cash equivalents, end of year $ 3,627 $ 600 $ 773
-------- -------- --------
-------- -------- --------
See accompanying notes.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The Company's name was changed to Digital Origin, Inc. (formerly
Radius Inc.) in fiscal 1999. The consolidated financial statements include
the accounts of Digital Origin, Inc. ("Digital Origin" or the "Company")
and its wholly-owned subsidiaries after elimination of significant
intercompany transactions and balances.
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Such estimates include levels of
allowance for potentially uncollectible receivables and sales returns;
inventory reserves for obsolete, slow-moving, or non-salable inventory; and
estimated costs for warranty and other customer support obligations. Actual
results could differ from these estimates.
MANAGEMENT'S BUSINESS RECOVERY PLANS
As shown in the accompanying consolidated financial statements,
the Company has incurred recurring operating losses. During fiscal 1997,
1998 and 1999, management implemented a number of actions to address its
cash flow and operating issues, including: refocusing its efforts on
providing solutions for digital video customers; discontinuing sales of
mass market and other low value added hardware products; divesting a number
of businesses and product lines, including the sale of its monitor business
to Korea Data Systems America, Inc.; significantly reducing expenses and
personnel headcount; and reducing its lease obligations given its reduced
occupancy requirements. All revenue in the year ended September 30, 1997
and approximately $13.0 million in the year ended September 30, 1998,
relates to businesses and product lines that have been disposed of over the
last two years. Approximately $12.9 million of revenue in the year ended
September 30, 1999 relates to digital video-related software.
For the fiscal year ended September 30, 1999 the Company had cash
and cash equivalent of $3.6 million, however, during fiscal 2000,
additional funds may be needed to finance ongoing operations and to
implement the Company's development plans and for other purposes. The
Company plans to generate cash from operations and is investigating
possible financing and strategic partnering opportunities.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to
September 30 and included 53 weeks in fiscal 1998. All other fiscal years
presented include 52 weeks. For consistency of presentation, all fiscal
periods in this Form 10-K are reported as ending on a calendar month end.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with
maturities from date of purchase of three months or less to be cash
equivalents; investments with maturities between three and twelve months
are considered to be short-term investments. Cash equivalents are carried
at cost, which approximates market. There were no short-term investments as
of September 30, 1999 and 1998. Approximately $0.1 million of the $3.6
million of cash and cash equivalents at September 30, 1999 was restricted
under various letters of credit.
-29-
FOREIGN CURRENCY TRANSLATION
There was no foreign currency translation adjustment in fiscal
1999. In prior years, the Company translated the assets and liabilities of
its foreign subsidiaries into dollars at the rates of exchange in effect at
the end of the period and translated revenues and expenses using the
average rate in effect during the period. Gains and losses from these
balance sheet translations are included in other comprehensive income in
the Consolidated Balance Sheets. Foreign currency transaction gains or
losses, which are included in the results of operations, are not material.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using standard costs that approximate cost on a first-in,
first-out basis. The Company reviews the levels of its inventory in light
of current and forecasted demand to identify and provide reserves for
obsolete, slow-moving, or non-salable inventory. Inventories consist of the
following (in thousands):
September 30,
--------------------------------
1999 1998
---- ----
Raw materials $ - $ 20
Work in process 74 238
Finished goods 137 545
-------- ---------
$ 211 $ 803
======== =========
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the
following (in thousands):
September 30,
----------------------------
1999 1998
---- ----
Computer equipment $ 7,076 $ 6,423
Machinery and equipment 111 120
Furniture and fixtures 354 354
Leasehold improvements 45 439
-------- ---------
7,586 7,336
Less accumulated depreciation
and amortization (6,860) (7,203)
--------- ----------
$ 726 $ 133
======== =========
Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful lives (three
to four years) or lease terms of the respective assets.
OTHER ASSETS
Purchased technology and other intangible assets are stated at
cost less accumulated amortization. Amortization is recorded utilizing the
straight-line method over the useful lives of the respective assets,
generally three years. The Company periodically reviews the net realizable
value of its intangible assets and adjusts the carrying amount accordingly.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company records impairment losses on long-lived assets when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than their carrying amounts.
-30-
REVENUE RECOGNITION
The Company follows Statement of Position (SOP) 97-2, "Software
Revenue Recognition." Revenue from the sale of software, net of estimated
returns, is recognized upon either shipment of the physical product or
delivery of electronic product, at which time, collection is determined to
be probable and the Company has no remaining obligations. Sales to certain
resellers are subject to agreements allowing certain rights of return and
price protection on unsold merchandise held by these resellers. The Company
provides for estimated returns at the time of shipment and for price
protection following price declines. Revenue earned under royalty or
commission agreements is recognized in the period in which it is earned.
WARRANTY EXPENSE
The Company provides at the time of sale for the estimated cost to
repair or replace products under warranty. The warranty period commences on
the end user date of purchase and is normally one year for digital video
products.
ADVERTISING EXPENSES
The Company expenses the costs of advertising as incurred. Amounts
have not been material in all periods presented.
NET INCOME PER SHARE
The Company computes net income per share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128. This statement
requires the presentation of basic and diluted net income per share. Basic
net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share
is computed using the weighted average number of common and dilutive common
shares outstanding during the period. Dilutive common equivalent shares
consist of employee stock options using the treasury stock method.
SEGMENT REPORTING
The Company operates in one business segment, specifically the
development, design and marketing of software for editing digital video.
While the Company has several products at varying price points and in
various versions, all of the products from which the Company earns revenues
are similar. The Company's business practices support the criteria for
segment reporting as outlined in Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and
Related Information.
As disclosed under "Management's business recovery plans" above,
in 1998 and 1997, the Company operated primarily in one other business
segment, the manufacture and sale of monitors and accelerated graphics
products
OFF BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors in the United
States and in various foreign countries. The Company performs on-going
credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses.
FAIR VALUE DISCLOSURES
The carrying values of cash and cash equivalents approximate their
fair values as of September 30, 1999.
Estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value.
-31-
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP
97-2 and SOP 98-4 extending the deferral of the application of certain
provisions of SOP 97-2, amended by SOP 98-4, through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective
for transactions entered into in fiscal years beginning after March 15,
1999. The adoption of SOP 98-9 is not expected to have a significant impact
on the Company's financial statements.
NOTE TWO. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has an operating lease for its headquarters in
Mountain View, California, for a period of three years beginning April 15,
1999, with an option to extend the lease for an additional two years. The
base rent is $25,000 per month the first year, $27,500 per month the second
year and $30,000 per month for years three through five, if extended.
Future annual minimum lease payments under all noncancelable
operating leases at September 30, 1999, are as follows (in thousands):
Operating
Leases
------
2000 $314
2001 343
2002 195
------
Total minimum lease payments $852
------
------
Rent expense charged to operations, net of sublease income,
amounted to approximately $0.3 million, $0.5 million and $0.6 million for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Sublease income for fiscal 1999, 1998 and 1997 was approximately
$0.2 million, $0.8 million and $1.3 million, respectively.
CONTINGENCIES
(a) On January 13, 1999 and January 28, 1999, the Company and one of its
former directors, Charles Berger, were named as defendants in two
shareholder class action lawsuits against Splash Technology Holdings, Inc.
("Splash"), various directors and executives of Splash and certain selling
shareholders of Splash. The suits were filed in the United States District
Court in Northern District of California and have been consolidated and
captioned IN RE SPLASH TECHNOLOGY HOLDINGS INC. SECURITIES LITIGATION
(Master File No. C99-0109 SBA). The law firm of Milberg Weiss Bershad Hynes
& Lerach LLP has been designated lead counsel for the eight lead
plaintiffs. The lawsuit alleges, among other things, that the defendants
made or were responsible for material misstatements, and failed to disclose
information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common
stock. The complaint does not identify any statements alleged to have been
made by Charles Berger or the Company. The complaint further alleges that
the Company engaged in a scheme to artificially inflate the price of Splash
common stock to reap an artificially large return on the sale of the common
stock in order to pay off its debt. The Company and the former director
vigorously deny all allegations of wrongdoing and intend to aggressively
defend themselves in these matters. Defendants initial motion to dismiss
the action was granted with leave to amend, and the complaint has been
amended by plaintiffs.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its affiliates
filed a suit in the United States District Court for the District of
Colorado alleging a breach of contract and related claims in the
approximate amount of $800,000, maintaining that the Company failed to
comply with various return, price protection, inventory balancing and
marketing development funding undertakings. In 1997, the Company filed an
answer to the
-32-
complaint and cross-claimed against the plaintiffs and in October 1997
additionally cross claimed against Deutsche Financial, Inc., a factor in
the account relationship between the Company and the plaintiffs, seeking
the recovery of approximately $2 million. The Company continues to
investigate these claims as well as cross claims and expect to vigorously
defend and prosecute them as applicable. This case is scheduled for trial
in April 2000.
(c) The Company is involved in a number of other judicial and
administrative proceedings incidental to its business. The Company intends
to defend these matters vigorously and although adverse decisions (or
settlements) may occur, the final resolution of these lawsuits is not
expected to have a material adverse effect on its financial position.
However, an adverse resolution and the costs of defense, regardless of the
outcome, could have a material adverse effect on the Company's results of
operations and financial condition.
NOTE THREE. SHAREHOLDERS' EQUITY
SHARES SUBJECT TO ISSUANCE
As of September 30, 1999, the Company was subject to issuing
approximately 10,000 shares of Common Stock associated with the settlement
of a securities class action lawsuit in fiscal 1995.
STOCK OPTIONS
The Company's 1995 Stock Option Plan (the "1995 Plan") authorizes
the issuance of up to 921,983 shares of common stock upon the exercise of
incentive stock options or nonqualified stock options that may be granted
to officers, employees, directors, consultants and independent contractors.
Shares available for grant under the 1995 Plan include 157,822 shares which
were not issued under a prior plan. Under the 1995 Plan, options are
exercisable, subject to vesting, for a term of up to ten years after the
grant date. Options may be granted at prices ranging from 85% to 100% of
the fair market value of the common stock on the date of grant, as
determined by the Board of Directors. Vesting of shares is also determined
by the Board of Directors at the date of grant. As of September 30, 1999,
769,831 options were outstanding under the 1995 Plan. The 1995 Plan will
expire in December 2005.
The Company has also reserved 19,000 shares of common stock for
issuance to non-employee directors pursuant to options granted under the
1994 Directors' Stock Option Plan (the "1994 Plan"), including 9,000 shares
which were not issued under the Company's prior Directors' Stock Option
Plan, which was in effect prior to the approval of the 1994 Plan. Such
options may only be nonqualified stock options, must be exercised within
ten years from the date of grant, and must be granted in accordance with a
non-discretionary formula. Under this formula, each new non-employee
director receives an option to purchase 1,000 shares when that director is
first appointed to the Board and an option to purchase 250 shares on each
anniversary of such director's appointment. As of September 30, 1999, 5,500
options were outstanding under this plan.
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During fiscal 1999, the Company granted, outside of the Company's
Stock Option Plans, 140,000 nonqualified stock options to three employees
at an exercise price equal to the fair market value of the Company's Common
Stock on the relevant dates. The exercise prices ranged from $2.625 to
$3.50. These options are exercisable for a term of ten years and vest over
a two year period commencing on the date of grant.
An additional 380,000 shares are outstanding under similar plans
and other option grants.
The following table summarizes the consolidated activity under all
of the Company's plans and grants:
Weighted
Available for Shares Under Average
Grant Option Exercise Price Exercise Price
------------- ------------ ---------------- --------------
Balance at September 30, 1996 267,490 116,816 $12.80 - $172.50 $ 43.40
Authorized 542,162 -- -- -- --
Granted (712,211) 712,211 $ 2.80 - $ 5.90 $ 4.00
Exercised -- (52,579) $ 3.40 - $ 4.70 $ 4.70
Canceled 92,851 (92,851) $ 2.80 - $172.50 $ 28.00
---------- ---------
Balance at September 30, 1997 190,292 683,597 $ 2.80 - $108.75 $ 4.20
Authorized 277,498 -- -- -- --
Granted (458,957) 458,957 $ 1.56 - $ 6.25 $ 2.87
Exercised -- (21,935) $ 3.44 - $ 4.69 $ 4.14
Canceled 275,759 (275,759) $ 2.81 - $ 6.25 $ 3.77
---------- ---------
Balance at September 30, 1998 284,592 844,860 $ 1.56 - $108.75 $ 3.62
Authorized 222,684 -- -- -- --
Granted (515,594) 515,594 $ 0.84 - $ 5.63 $ 2.45
Exercised -- (37,309) $ 0.84 - $ 4.69 $ 2.99
Canceled 166,320 (166,320) $ 0.84 - $ 97.50 $ 4.05
Expired (1,000) -- -- -- --
---------- ---------
Balance at September 30, 1999 157,002 1,156,825 $ 0.84 - $108.75 $ 3.05
---------- ---------
---------- ---------
The following table summarizes information concerning outstanding
and exercisable options at September 30, 1999:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices Life Price Price
------------------- ----------- ------------ ----------- -------------- -----------
$ 0.84 - $ 2.88 703,682 8.90 Years $ 2.38 336,633 $ 2.51
$ 2.97 - $ 4.06 378,865 8.13 Years $ 3.83 259,052 $ 4.01
$ 4.69 - $108.75 74,278 7.01 Years $ 5.48 40,198 $ 5.46
----------------- --------- -------
$ 0.84 - $108.75 1,156,825 8.53 Years $ 3.05 635,883 $ 3.31
========= =======
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The Company accounts for stock options in accordance with FASB
Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123").
Under FAS 123, the Company may continue following existing accounting rules
or adopt a new fair value method of valuing stock-based awards. The Company
has elected to continue to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in accounting
for its stock options plans and the Employee Stock Purchase Plan and has
not adopted the alternative fair value method of accounting provided under
FAS 123. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share
is required by FAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to September 30, 1995 under the fair value method of
that Statement. The weighted-average grant-date fair value of options
granted in fiscal years 1999, 1998 and 1997 were $2.25, $2.18 and $0.30,
respectively. The fair value of options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1999, 1998 and 1997,
respectively for employee stock option plans: risk free interest rate of
approximately 5.5%, 5.5% and 6%; dividend yield of 0% for all years;
volatility factors of the expected market price of the Company's Common
Stock of 1.546, 1.148 and 1.077 and a weighted-average expected life of the
option of four years. The weighted-average fair value at date of grant for
shares purchased through the Employee Stock Purchase Plan during fiscal
year 1999 was $1.62. The following assumptions were used for the Employee
Stock Purchase plan in 1999: interest rate of 5.5%, dividend yield of 0%,
volatility of 1.546 and a weighted-average expected life of one half of one
year.
For purposes of pro forma disclosures, the estimated fair values
of the options are amortized to expense over the related vesting periods.
The Company's pro forma net income for 1997 was not materially different
from reported amounts.
The Company's pro forma information for 1999 and 1998 follows (in
thousands except for income per share information):
Years ended September 30,
-------------------------
1999 1998
---- ----
Net income applicable to common
shareholders as reported $5,849 $8,733
Pro forma net income applicable ====== ======
to common shareholders for FAS 123 $4,905 $8,089
Pro forma net income per common share: ====== ======
Pro forma basic net income per share applicable
to common shareholders $0.89 $1.46
Pro forma diluted net income per share ===== =====
applicable to common shareholders $0.85 $1.46
Shares used in computing pro forma net income per common ===== =====
share:
Shares used in computing pro forma basic net
income per common share 5,535 5,522
Shares used in computing pro forma diluted ===== =====
net income per common share 5,747 5,557
===== =====
Since the estimated fair value of the options are amortized to
expense over the related vesting periods, their pro forma effect will not
be fully reflected until fiscal year 2002.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible
employee participants to purchase shares of the Company's Common Stock at a
discount through payroll deductions. Employees purchase shares at 85% of
the market value at either the beginning of the offering period or the end
of the purchase period, whichever
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price is lower. The plan consists of one year offering periods with two
six-month purchase periods in each offering period. The Company has
reserved 137,500 shares of its Common Stock for issuance under the plan,
in addition to 15,900 shares reserved under the previous plan. As of
September 30, 1999, 122,568 shares remained available for purchase.
WARRANTS TO PURCHASE COMMON STOCK
The Company has issued three outstanding warrants to purchase its
Common Stock. Two, in denominations of 60,000 and 5,000 were issued in 1996
in connection with the Company's debt for equity exchange with various
creditors at an exercise price of $10.00 per share and will expire in
September and October 2000, respectively. The third warrant for 50,000
shares was issued in November 1998 at a strike price of $1.50 per share in
connection with the Company's acquisition of certain technology and will
expire in November 2002. See Note 8.
NOTE FOUR. FEDERAL AND STATE INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
Year ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Federal:
Current $ - $ - $ 50
Foreign:
Current - (1,000) 251
State:
Current - - 15
------------- --------- --------
$ - $ (1,000) $ 316
============= ========== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
September 30,
------------------------------
1999 1998
---- ----
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 23,239 $ 25,017
Reserves and accruals not currently tax deductible 1,661 3,232
Capitalized research & development expenditures 3,130 2,769
Inventory write-downs 559 1,275
Other - 1,082
--------- ---------
Total deferred tax assets 28,589 33,375
Valuation allowance for deferred tax assets (28,589) (33,375)
---------- ----------
Deferred tax assets $ - $ -
========= =========
FASB Statement 109, Accounting for Income Taxes, provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. The Company's valuation allowance reduced the deferred tax
asset to the amount realizable. The Company has provided a full valuation
allowance against its net deferred tax assets due to uncertainties
surrounding their realization. Due to the cumulative net operating losses
reported in
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prior years, predictability of earnings in future periods is uncertain. The
Company will evaluate the realizability of the deferred tax asset on a
quarterly basis.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before taxes. The
sources and tax effects of the differences are as follows:
Year ended September 30,
---------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Expected tax at statutory rate $ 2,047 $ 2,707 $ 554
Losses previously not benefited (2,047) (2,707) (504)
Reversal of previously accrued foreign taxes - (1,000) -
State income tax, net of federal tax benefit - - 15
Other - - 251
--------- --------- ----------
$ - $ (1,000) $ 316
======== ========= ==========
As of September 30, 1999, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$63.0 million and $37.0 million, respectively. The federal loss
carryforwards will expire beginning in 2011, if not utilized and the state
loss carryforwards will expire beginning in 2000, if not utilized.
As a result of the issuance of Common Stock and Series A
Convertible Preferred Stock in exchange for certain liabilities of the
Company in September 1996, the Company experienced a "change in ownership"
as defined under Section 382 of the Internal Revenue Code. Accordingly,
utilization of net operating loss and tax credit carryforwards generated
prior to September 1996 will be subject to an annual limitation of
approximately $2.0 million due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions, except
under limited circumstances.
NOTE FIVE. STATEMENTS OF CASH FLOWS
Year ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Interest $ 55 $ 495 $ 2,988
========= ========= =========
Income taxes $ 1 $ 9 $ 8
========= ========= =========
Supplemental disclosures of non-cash
investing and financing activities:
Warrant issued for technology $ 73 $ 0 $ 0
========= ========= =========
NOTE SIX. EXPORT SALES AND MAJOR CUSTOMERS
The Company's export sales were approximately $4.2 million, $3.7
million and $4.9 million in the fiscal years ended September 30, 1999, 1998
and 1997, respectively, and included export sales to Europe of
approximately $2.8 million, $1.3 million and $1.8 million, respectively.
The Pacific, Asia, and Latin America region sales were approximately $1.4
million, $2.4 million and $3.1 million for fiscal years ended September 30,
1999, 1998 and 1997, respectively. During fiscal 1996, the Company entered
into exclusive distributor arrangements in Japan and Europe and earns
royalties and commissions under such arrangements. In fiscal 1998,
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the Company modified its relationships with its distributors in Japan and
Europe for its digital video software products and terminated the
exclusivity provisions. These products are purchased from the Company at a
discount from the price list and no commissions are paid. For the fiscal
years ended September 30, 1999, 1998 and 1997 the Company earned
approximately $0.03 million, $0.74 million, and $2.66 million, respectively
in royalties and commissions from Europe and Japan, which are included in
the above amounts.
Ingram Micro accounted for 20.7%, 53.5% and 66.1% of the Company's
net sales during the years ended September 30, 1999, 1998 and 1997,
respectively. Sales to Canon U.S.A., Inc. accounted for 18.4% of net sales
for fiscal 1999 and $0.0% for fiscal years 1998 and 1997.
NOTE SEVEN. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC.
In June 1998, the Company licensed certain technology and assets
necessary to conduct its monitor and color publishing business to Korea
Data Systems America, Inc. ("KDS"), leaving the Company free to focus on
its digital video software business. The brand name and trademark RADIUS
was one of the assets so licensed because of its primary association with
monitors. In August 1998, the Company amended and restated this license and
agreed to sell the licensed assets to KDS pursuant to an asset transfer
agreement, subject to certain contingencies at the discretion of KDS. The
monitor business has accounted for substantially all of the revenues of the
color publishing product line and 55.3% of the Company's revenues during
fiscal 1998. Under the license and asset transfer agreement, the Company
transferred its Radius, Supermac, PressView and certain other trademarks to
KDS and licensed certain intellectual property pertaining to PressView and
PrecisionView monitors. The value of the transaction was $6.2 million,
which was paid in installments under a note. The Company recognized other
income under the license agreement as cash was received on the note.
On December 4, 1998, the Company and KDS supplementally agreed to
the sale of certain tangible personal property and the transfer of rights
in the Radius Emachines and Colormatch trademarks for $100,000 and other
consideration.
NOTE EIGHT. TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and
other intangible property from Post Digital Software, Inc. for (i) an
initial payment of $50,000, (ii) earnout payments equal to at least $50,000
but not exceeding an aggregate of $700,000, based on subsequent sales of
the Company's digital video products incorporating such software and (iii)
a warrant to purchase up to 50,000 shares of the Company's Common Stock at
an exercise price of $1.50 per share. The warrant is non-forfeitable and
exercisable over a four year period through November 23, 2002. The warrant
can be exercised for up to 12,000 shares as of May 1, 1999, plus an
additional 2,000 shares for each full month that transpires thereafter, up
to a total of 50,000 shares. The value of this agreement, as noted below,
is included as other assets in the accompanying Consolidated Balance Sheet.
The technology is being amortized over a three year period and future
royalties based on digital video products sold will be expensed as they are
incurred. As of September 30, 1999, the Company has paid approximately
$14,000 in royalties.
Initial purchase price $ 50,000
Guaranteed earnout 50,000
Value assigned to warrant 73,000
---------
Purchased technology 173,000
Less amortization (39,667)
---------
Net purchased technology $ 133,333
=========
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NOTE NINE. TRANSACTIONS WITH SPLASH TECHNOLOGY HOLDINGS, INC.
ESCROW FUND RELEASE
In connection with the Company's sale of its Color Server Group to
Splash Technology Holdings, Inc. in January 1996, an escrow fund was
established to secure certain indemnification obligations. On December 31,
1998, the balance of the escrow fund of approximately $2.2 million was
released to the Company.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, the Company agreed to sell certain software and other
intangible property associated with its monitor and color publishing
business to Splash Technology Holdings, Inc. for $275,000 and other
consideration.
NOTE TEN. OTHER COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires foreign currency translation adjustments and
changes in the fair value of available-for-sale-securities to be included
in comprehensive income. However, it has no impact on the net income or
shareholders' equity as presented in the financial statements.
The following schedule shows the accumulated balances for each
item within other comprehensive income:
1999 1998 1997
-------- --------- -------
(in thousands)
Unrealized gain (loss) on investments $ - $ - $22,093
Foreign currency translation 54 54 43
-------- --------- -------
Other comprehensive income $ 54 $ 54 $22,136
======== ========= =======
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NOTE ELEVEN. COMPUTATION OF NET INCOME PER COMMON SHARE
The following table presents the calculation of basic and diluted
earnings per share as required under SFAS 128:
1999 1998 1997
------- --------- ----------
(in thousands, except per-share amounts)
NUMERATOR:
Numerator for basic and diluted net income per share -
income available to common shareholders $5,849 $8,733 $ 996
------- --------- ----------
------- --------- ----------
DENOMINATOR:
Denominator for basic net income per share - weighted-average
shares outstanding 5,535 5,522 5,389
Effect of dilutive securities:
Dilutive potential common shares 212 35 133
------- --------- ----------
Denominator for diluted net income per share - adjusted
weighted-average shares outstanding 5,747 5,557 5,522
------- --------- ----------
------- --------- ----------
Basic net income per share $ 1.06 $ 1.58 $ 0.18
------- --------- ----------
------- --------- ----------
Diluted net income per share $ 1.02 $ 1.57 $ 0.18
------- --------- ----------
------- --------- ----------
Diluted net income per share in 1999, 1998 and 1997 does not include certain
stock options in the amounts of 425,760, 750,446 and 341,252, respectively, as
those options are anti-dilutive for the periods presented.
NOTE TWELVE. EMPLOYEE BENEFIT PLAN
The Company has an employee savings plan, which qualifies under Section 401(k)
of the Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan, all
eligible employees may defer up to 15% of their pre-tax compensation, but not
more than statutory limits. The Company is allowed to make contributions as
defined in the 401(k) Plan and as approved by the Board of Directors. Company
contributions of $46,972 were made in fiscal 1999. The Company contributed
$63,850 and $112,422 in 1998 and 1997, respectively. The Company matches a
specified portion of the employee contributions up to a maximum of $1,000 per
employee per year.
NOTE THIRTEEN. SUBSEQUENT EVENTS (UNAUDITED)
AGREEMENT TO MERGE WITH MEDIA 100, INC.
The Company entered into a definitive agreement on December 28, 1999 to be
acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ: MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of the Company's common stock. The transaction is
subject to the approval of both companies' shareholders and other customary
closing conditions. The merger is expected to be complete in 90-120 days. The
combined company will target Internet desktops with low-cost applications
that allow personal computer users to capture, edit, and stream video on the
Internet using a single, integrated, and easy-to-use application. The Company
also entered into a non-exclusive, four-year OEM development and license
agreement with Media 100.by which Media 100 will use the Company's consumer
level video editing and effects software with Media 100's Internet streaming
media software in exchange for certain royalty payments.
-40-
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions(1) period
----------- --------- -------- -------- ------------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1997 $2,132 $ 4,706 $ 0 $ 2,080 $4,758
Year ended September 30, 1998 $4,758 $ 30 $ 0 $ 894 $3,894
Year ended September 30, 1999 $3,894 $ 1 $ 0 $ 137 $3,758
- -----------------------------
(1) Uncollectible accounts written off.
-41-