<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended: August 31, 1998
---------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number: 0-14779
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MEDIA 100 INC.
--------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2532613
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
organization or incorporation) Identification Number)
290 DONALD LYNCH BOULEVARD
MARLBOROUGH, MASSACHUSETTS
--------------------------------
(Address of principal executive offices)
01752-4748
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(Zip code)
(508) 460-1600
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
-
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, par value $.01 per share 8,327,347 shares
- -------------------------------------- ----------------
Class Outstanding at September 30, 1998
<PAGE>
MEDIA 100 INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION NUMBER
------
<S> <C>
ITEM 1 Consolidated Financial Statements:
Consolidated Balance Sheets as of
August 31, 1998 and November 30, 1997 3
Consolidated Statements of Operations for the three
and nine months ended August 31, 1998 and August 31, 1997 4
Consolidated Statements of Cash Flows for the nine
months ended August 31, 1998 and August 31, 1997 5
Notes to Consolidated Financial Statements 6 - 9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 13
ITEM 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, November 30,
(in thousands) 1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,957 $ 4,042
Marketable securities 30,999 28,892
Accounts receivable, net of reserves of
$329 in 1998 and $411 in 1997 4,874 7,689
Inventories 718 696
Prepaid expenses 819 743
-------------- ----------------
Total current assets 40,367 42,062
Property and equipment, net 8,600 8,104
Other assets, net 593 593
-------------- ----------------
Total assets $ 49,560 $ 50,759
-------------- ----------------
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,507 $ 1,953
Accrued expenses 10,034 6,958
Deferred revenue 5,972 4,005
-------------- ----------------
Total current liabilities 17,513 12,916
Commitments and contingencies (Note 6) - -
Stockholders' equity:
Preferred stock - -
Common stock 83 82
Capital in excess of par value 40,908 40,477
Retained deficit (9,068) (2,547)
Cumulative translation adjustment (101) (87)
Unrealized holding gain (loss) on
available for sale securities, net 225 (82)
-------------- ----------------
Total stockholders' equity 32,047 37,843
-------------- ----------------
Total liabilities and stockholders' equity $ 49,560 $ 50,759
-------------- ----------------
-------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
(in thousands, except per share data) 1998 1997 1998 1997
----------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 10,124 $ 11,107 $ 30,282 $ 34,732
Cost of sales 3,951 4,387 11,803 13,479
------------ ----------------- ------------- ----------------
Gross profit 6,173 6,720 18,479 21,253
------------ ----------------- ------------- ----------------
Operating expenses:
Research and development 4,413 1,967 12,178 6,123
Selling and marketing 3,728 4,000 11,130 12,363
General and administrative 938 1,027 2,904 2,973
Restructuring charge - 526 - 526
------------ ----------------- ------------- ----------------
Total operating expenses 9,079 7,520 26,212 21,985
------------ ----------------- ------------- ----------------
Loss from operations (2,906) (800) (7,733) (732)
Interest income 447 448 1,288 1,343
Other income (expense), net 40 (154) (64) (479)
------------ ----------------- ------------- ----------------
Income (loss) before tax
provision (benefit) (2,419) (506) (6,509) 132
Income tax provision (benefit) - (101) 12 36
------------ ----------------- ------------- ----------------
Net income (loss) $ (2,419) $ (405) $ (6,521) $ 96
------------ ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------
Earnings (loss) per share:
Basic $ (.29) $ (.05) $ (.79) $ .01
------------ ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------
Diluted $ (.29) $ (.05) $ (.79) $ .01
------------ ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------
Weighted average common shares
outstanding:
Basic 8,306 8,164 8,265 8,134
------------ ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------
Diluted 8,306 8,164 8,265 8,239
------------ ----------------- ------------- ----------------
------------ ----------------- ------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
MEDIA 100 INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
(in thousands) 1998 1997
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,521) $ 96
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 2,089 1,111
(Gain) loss on sale of marketable securities (11) 19
Changes in assets and liabilities
Accounts receivable 2,815 4,383
Inventories (22) 302
Prepaid expenses (76) (65)
Accounts payable (446) (801)
Accrued expenses 3,076 (124)
Deferred revenue 1,967 1,636
--------------- ----------------
Net cash provided by operating activities $ 2,871 $ 6,557
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (2,585) (5,519)
Increase in other assets - 23
Purchases of marketable securities (77,241) (41,008)
Proceeds from sales of marketable securities 75,452 39,307
--------------- ----------------
Net cash used in investing activities $ (4,374) $ (7,197)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock plans 432 411
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Net cash provided by financing activities $ 432 $ 411
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (14) (93)
--------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (1,085) $ (322)
CASH AND CASH EQUIVALENTS, beginning of period 4,042 2,733
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 2,957 $ 2,411
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 138 $ 90
--------------- ----------------
--------------- ----------------
OTHER TRANSACTIONS NOT PROVIDING (USING) CASH:
Acquisition of equipment under capital lease obligations $ - $ (221)
--------------- ----------------
--------------- ----------------
Increase in value of marketable securities $ 307 $ 110
--------------- ----------------
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
MEDIA 100 INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, EXCEPT FOR NOVEMBER 30, 1997 AMOUNTS)
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of Media
100 Inc. ("the Company") and its wholly-owned subsidiaries. The interim
financial statements are unaudited. However, in the opinion of management, the
consolidated financial statements and disclosures reflect all adjustments
necessary for fair presentation. Interim results are not necessarily indicative
of results expected for a full year or for any other interim period. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated condensed financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's latest audited financial statements, which are
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1997, filed with the Securities and Exchange
Commission.
The Company's preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Cash Equivalents and Marketable Securities
Cash equivalents are carried at cost, which approximates market value, and have
original maturities of less than three months. Cash equivalents include money
market accounts.
The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under this standard, the Company is
required to classify all investments in debt and equity securities into one or
more of the following three categories: held-to-maturity, available-for-sale or
trading. Available-for-sale securities are recorded at fair market value with
unrealized gains and losses excluded from earnings and reported to stockholders'
equity. All of the Company's marketable securities are classified as
available-for-sale.
Marketable securities held as of August 31, 1998, consist of the following (in
thousands):
<TABLE>
<CAPTION>
Investments available for sale: Maturity Market Value
-------- ------------
<S> <C> <C>
U.S. Treasury Notes less than 1 year $ 1,016
U.S. Treasury Notes 1 - 4 years 6,717
----------------
Total U.S. Treasury Notes 7,733
Municipal Bonds less than 1 year 1,405
Municipal Bonds 1 -3 years 1,581
----------------
Total Municipal Bonds 2,986
U.S. Agency Bonds less than 1 year 2,041
U.S. Agency Bonds more than 1 year 4,402
----------------
Total U.S. Agency Bonds 6,443
Money Market Instruments None 7,369
</TABLE>
6
<PAGE>
2. Cash Equivalents and Marketable Securities (continued)
<TABLE>
<CAPTION>
Investments available for sale: Maturity Market Value
-------- ------------
<S> <C> <C>
Corporate Obligations less than 1 year 1,207
Corporate Obligations 1 - 3 years 5,261
------------------
Total Corporate Obligations 6,468
------------------
Total investments available for sale $ 30,999
------------------
------------------
</TABLE>
Marketable securities had a cost of $30,774 and $28,974 at August 31, 1998 and
November 30, 1997, respectively, and a market value of $30,999 and $28,892,
respectively. To adjust the carrying amount of the August 31, 1998 and November
30, 1997 marketable securities portfolio to market value, an unrealized gain
(loss) has been reflected as a separate component of stockholders' equity
pursuant to the provisions of SFAS No. 115.
3. Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or market
and consist of the following (in thousands):
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
-------------- ----------------
<S> <C> <C>
Raw materials $ 258 $ 305
Work-in-process 310 252
Finished goods 150 139
-------------- ----------------
$ 718 $ 696
-------------- ----------------
-------------- ----------------
</TABLE>
Work-in-process and finished goods inventories include material, labor and
manufacturing overhead. Management performs periodic reviews of inventory and
disposes of items not required by their manufacturing plan.
4. Property and equipment, net
Property and equipment, net is stated at cost, less accumulated depreciation and
amortization, and consists of the following (in thousands):
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
---------------- -----------------
<S> <C> <C>
Machinery and equipment $ 11,631 $ 10,428
Furniture and fixtures 1,332 1,288
Vehicles 11 12
--------------- -----------------
$ 12,974 $ 11,728
Less accumulated depreciation and amortization 4,374 3,624
--------------- -----------------
$ 8,600 $ 8,104
--------------- -----------------
--------------- -----------------
</TABLE>
5. Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). The
new standard simplifies the computation of earnings per share and increases
comparability to international standards. Under SFAS No. 128, primary earnings
per share is replaced by "Basic" earnings per share, which excludes potentially
dilutive equity instruments and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. "Diluted" earnings per share, which is computed similarly to
fully diluted earnings per share, reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
7
<PAGE>
5. Net Income (Loss) Per Common Share (continued)
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
1998 (1) 1997(1) 1998(1) 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ (2,419) $ ( 405) $ (6,521) $ 96
----------- ----------- ----------- -----------
Numerator for basic and dilutive earnings per
share - income (loss) available to common
shareholders $ (2,419) $ ( 405) $ (6,521) $ 96
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DENOMINATOR:
Denominator for basic earnings per share -
weighted -average shares outstanding 8,306 8,164 8,265 8,134
Effect of dilutive securities:
Employee stock options - - - 105
----------- ----------- ----------- -----------
Dilutive potential common shares - - - 105
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted-average shares outstanding 8,306 8,164 8,265 8,239
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ (.29) $ (.05) $ (.79) $ .01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Dilutive earnings (loss) per share $ (.29) $ (.05) $ (.79) $ .01
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Diluted earnings per share does not reflect any potential shares relating
to employee stock options due to a loss reported for the period, in
accordance with FAS 128.
6. Contingencies
(i) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology,
Inc. ("Avid"), in the United States District Court for the District of
Massachusetts. The complaint generally alleges patent infringement by the
Company arising from the manufacture, sale, and use of the Company's Media 100
products. The complaint includes requests for injunctive relief, treble damages,
interest, costs and fees. In July, 1995 the Company filed an Answer and
Counterclaim denying any infringement and asserting that the Avid patent in
question is invalid. The Company intends to vigorously defend the lawsuit. In
addition, Avid is seeking reissue of the patent, including claims that it
asserts are broader than in the existing patent, and these reissue proceedings
remain pending before the U.S. Patent and Trademark Office. On January 16, 1998,
the court dismissed the lawsuit without prejudice to either party moving to
restore it to the docket upon completion of all matters pending before the U.S.
Patent and Trademark Office. There can be no assurance that the Company will
prevail in the lawsuit asserted by Avid or that the expense or other effects of
the lawsuit, whether or not the Company prevails, will not have a material
adverse effect on the Company's business, operating results and financial
condition.
(ii) From time to time the Company is involved in other disputes and/or
litigation encountered in its normal course of business. The Company does not
believe that the ultimate impact of the resolution of such other outstanding
matters will have a material effect on the Company's business, operating results
or financial condition.
8
<PAGE>
7. Capitalized Software Development Costs
The Company capitalizes certain computer software development costs.
Capitalization of costs commences upon establishing technological feasibility.
Capitalized costs, net of accumulated amortization, were approximately $89,000
as of August 31, 1998 and November 30, 1997, and are included in other assets.
These costs are amortized on a straight-line basis over two years, which
approximates the economic life of the product. Amortization expense, included in
cost of sales in the accompanying consolidated statements of operations, was
approximately $45,000 and $65,000 for the nine months ended August 31, 1998 and
August 31, 1997, respectively.
8. Income Taxes
Due to the net loss for the three and nine months ended August 31, 1998 and the
Company's current expectation that it will not be profitable for the full year
ended November 30, 1998, the Company anticipates its tax liabilities for fiscal
1998 will not be significant.
9. Accrued Expenses
Accrued expenses at August 31, 1998 and November 30, 1997 consist of the
following (in thousands):
<TABLE>
<CAPTION>
August 31, November 30,
1998 1997
------------- --------------
<S> <C> <C>
Accrued commissions $ 200 $ 213
Payroll and related taxes 1,708 1,552
Accrued engineering, marketing, legal and other expense 7,622 4,689
Accrued taxes 504 504
------------- --------------
$ 10,034 $ 6,958
------------- --------------
------------- --------------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q are forward-looking statements based on
current expectations, and involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from those
expressed in such forward-looking statements. The risks and uncertainties
associated with such statements have been described under the heading "Certain
Factors That May Affect Future Results" in the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1997.
Media 100 Inc. is a technology and market leader in the market for personal
computer-based digital video systems. The Media 100 family of products are
analog and digital conversion systems that enable users to capture video and
audio into a personal computer, perform random-access ("nonlinear") video
editing and audio mixing, and directly produce a finished program with
broadcast-quality picture and compact disc-quality sound, all without the use of
traditional video tape equipment.
Results of Operations
The following table shows certain consolidated statements of operations data as
a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended August 31, Nine Months Ended August 31,
1998 1997 1998 1997
-------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 39.0 39.5 39.0 38.8
-------------- -------------- ---------- ----------------
Gross profit 61.0 60.5 61.0 61.2
Operating expenses:
Research and development 43.6 17.7 40.2 17.6
Selling and marketing 36.8 36.0 36.7 35.6
General and administrative 9.3 9.3 9.6 8.6
Restructuring charge - 4.7 - 1.5
-------------- -------------- ---------- ----------------
Total operating expenses 89.7 67.7 86.5 63.3
-------------- -------------- ---------- ----------------
Loss from operations (28.7) (7.2) (25.5) (2.1)
Interest income and other, net 4.8 2.7 4.0 2.5
-------------- -------------- ---------- ----------------
Income (loss) before tax provision (23.9) (4.5) (21.5) .4
Tax provision (benefit) - (.9) - .1
-------------- -------------- ---------- ----------------
Net income (loss) (23.9) % (3.6) % (21.5) % .3 %
-------------- -------------- ---------- ----------------
-------------- -------------- ---------- ----------------
</TABLE>
Comparison of Third Fiscal Quarter of 1998 to Third Fiscal Quarter of 1997
Net sales for the fiscal quarter ended August 31, 1998 were $10,124,000, a
decrease of $983,000, or 8.9%, from the same period a year ago. Net sales
decreased for the quarter ended August 31, 1998 primarily due to a decrease in
overall units sold and lower average selling prices for the Company's Media 100
products. These lower unit sales and lower average selling prices reflect
increased competition for the Company's products. In August 1998, the Company
began shipping its first Windows NT products, named Media 100 qx and Media 100
qxc. These two products utilize Adobe Premiere version 5.0, which is the latest
version of the low cost video editing software application from Adobe. In
addition, this version of Adobe Premiere has been incorporated into the
Company's existing products, Media 100 qx and Media 100 qxc for Macintosh, which
the Company has been shipping since April 1996. The Company's complete product
line includes hardware and software products priced from $1,995 to $19,995,
hardware and software upgrades for these products and technical support services
for all of the Company's products.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Comparison of Third Fiscal Quarter of 1998 to Third Fiscal Quarter of 1997
(continued)
Gross profit for the fiscal quarter ended August 31, 1998 was 61.0%, compared to
60.5% in the comparable quarter a year ago. Reductions in the cost of key
component parts used in the manufacture of the Media 100 hardware offset the
lower average selling prices allowing the Company's gross profit to remain
consistent with the year ago level.
The Company sustained an operating loss for the third fiscal quarter of 1998 of
$2,906,000 compared to an operating loss of $800,000 for the same period a year
ago. Operating income was lower in the quarter ended August 31, 1998 due to
lower net sales and higher operating expenses. Operating expenses for the third
fiscal quarter of 1998 were $9,079,000, an increase of $1,559,000, or 20.7%,
from the same period a year ago. In the first quarter of fiscal 1998, the
Company announced its intentions to significantly increase research and
development expenditures in fiscal 1998 over fiscal 1997 to support the
development of products running on the Windows NT platform. Research and
development expenses for the third quarter of fiscal 1998 were $4,413,000, an
increase of $2,446,000, or 124.3%, from the same period a year ago. Selling and
marketing expenses for the third fiscal quarter of 1998 were $3,728,000, a
decrease of $272,000, or 6.8%, from the same period a year ago. The Company
decreased its selling and marketing expenses as a result of lower net sales. The
Company expects that selling and marketing expenses will increase in absolute
dollars from their current levels in connection with the planned introduction of
new products, named Finish, based on the Windows NT platform; the Company
expects to begin such shipments in the fourth quarter of fiscal 1998. General
and administrative expenses for the third fiscal quarter of 1998 were $938,000,
a decrease of $89,000, or 8.7%, from the same period a year ago. The decrease in
general and administrative expenses was due to a reduction in headcount.
Interest income for the fiscal quarter ended August 31, 1998 was $447,000, or
4.4% of net sales, compared to $448,000, or 4.0% of net sales, in the comparable
quarter a year ago. It is anticipated that interest income will decrease in
absolute dollars and as a percentage of net sales due to the utilization of cash
for the planned introduction of new products and general working capital needs.
Other income, net, for the third fiscal quarter of 1998 was $40,000 compared to,
other expense, net, of $154,000, reflecting the impact of foreign currency
translations arising out of the Company's subsidiaries.
The Company currently estimates its tax liabilities for the full year of 1998
will not be material due to an anticipated loss for fiscal 1998 and therefore
the Company has not provided for income taxes. This compares to a tax benefit of
$101,000 for the fiscal quarter ended August 31, 1997.
The net loss for the third fiscal quarter ended August 31, 1998 was $ 2,419,000
or $0.29 per share, compared to net loss of $405,000, or $0.05 per share, for
the same period a year ago.
Comparison of First Nine Months of 1998 to the First Nine Months of 1997
Net sales for the first nine months of 1998 were $30,282,000, a decrease of
$4,450,000, or 12.8%, from the same period a year ago. The decrease in net sales
for the nine months ended August 31, 1998 is primarily attributable to lower
unit sales and lower average selling prices for the Company's Media 100
products. These lower unit sales and lower average selling prices reflect
increased competition for the Company's products. In August 1998, the Company
began shipping its first Windows NT products, named Media 100 qx and Media 100
qxc. These two products utilize Adobe Premiere version 5.0, which is the latest
version of the low cost video editing software application from Adobe. In
addition, this version of Adobe Premiere has been incorporated into the
Company's existing products, Media 100 qx and Media 100 qxc for Macintosh, which
the Company has been shipping since April 1996 The Company's complete product
line includes hardware and software products priced from $1,995 to $19,995,
hardware and software upgrades for these products and technical support services
for all of the Company's products.
Gross margin for the first nine months of 1998 was 61.0%, compared to 61.2% in
the comparable period a year ago. This decrease in gross profit was primarily
the result of lower average selling prices partially offset by reductions in the
cost of key component parts used in the manufacture of the Media 100 hardware.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Comparison of First Nine Months of 1998 to the First Nine Months of 1997
(continued)
The Company sustained an operating loss for the first nine months of 1998 of
$7,733,000 compared to an operating loss of $732,000 for the same period a
year ago. Operating income was lower for the nine month period ended August
31, 1998 due to a decrease in sales and an expected increase in operating
expenses. Operating expenses for the first nine months of 1998 were
$26,212,000, an increase of $4,227,000, or 19.2%, from the same period a year
ago. In the first quarter of fiscal 1998, the Company announced its
intentions to significantly increase research and development expenditures in
fiscal 1998 over fiscal 1997 to support the development of products running
on the Windows NT platform. Research and development expenses for the first
nine months of fiscal 1998 were $12,178,000, an increase of $ 6,055,000, or
98.9%, from the same period a year ago. Selling and marketing expenses for
the first nine months of fiscal 1998 were $11,130,000, a decrease of
$1,233,000, or 10.0%, from the same period a year ago. The Company decreased
its selling and marketing expenses as a result of lower net sales. However,
the Company expects that selling and marketing expenses will increase in
absolute dollars from their current levels in connection with the planned
introduction of new products, named Finish, based on the Windows NT platform;
the Company expects to begin such shipments in the fourth quarter of fiscal
1998. General and administrative expenses for the first nine months of fiscal
1998 were $2,904,000, a decrease of $69,000, or 2.3%, from the same period a
year ago. The decrease in general and administrative expenses was due to a
reduction in headcount.
Interest income for the first nine months of 1998 was $1,288,000, or 4.3% of net
sales, compared to $1,343,000, or 3.9% of net sales, in the comparable period a
year ago. It is anticipated that interest income will decrease in absolute
dollars and as a percentage of net sales due to the utilization of cash for the
planned introduction of new products and general working capital needs. Other
expense, net of other income, for the nine month period ended August 31, 1998
was $64,000, a decrease of $415,000 over the same period a year ago, reflecting
the impact of foreign currency translations arising out of the Company's
subsidiaries.
The Company currently estimates its tax liabilities for the full year of 1998
will not be material due to an anticipated loss for fiscal 1998 and therefore a
$12,000 tax provision has been established. This compares to a tax provision of
$36,000 for the first nine months of fiscal 1997.
The net loss for the nine month period ended August 31, 1998 was $6,521,000 or
$0.79 per share, compared to net income of $96,000, or $0.01 per share, for the
same period a year ago.
Liquidity and Capital Resources
The Company has funded its operations to date primarily from public offerings of
equity securities and cash flows from operations. As of August 31, 1998 the
Company's principal sources of liquidity included cash and cash equivalents and
marketable securities totaling approximately $33,956,000.
In the first nine months of 1998, cash provided by operating activities was
approximately $2,871,000 compared to approximately $6,557,000 for the same
period a year ago. Cash was generated during the nine months ended August 31,
1998 from an increase in accrued expenses of $3,076,000 and deferred revenue of
$1,967,000 and a reduction in accounts receivable of $2,815,000. This increase
in cash and cash equivalents was partially offset by a reduction in accounts
payable of $446,000, and increases in inventories of $22,000 and prepaid
expenses of $76,000. Net cash used in investing activities was approximately
$4,374,000 during the first nine months of 1998 compared to approximately
$7,197,000 for the same period a year ago. Cash used in investing activities
during the nine month period ended August 31, 1998 was primarily for purchases
of equipment of approximately $2,585,000 and net purchases of marketable
securities of approximately $1,789,000. Cash provided by financing activities
during the first nine months of 1998 was approximately $432,000 compared to
$411,000 for the same period a year ago. All of the cash provided by financing
activities in the first nine months of 1998 came from proceeds from the
Company's stock plans.
The Company believes its existing cash balance, including cash equivalents and
marketable securities, will be sufficient to meet the Company's cash
requirements for at least the next twelve months.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
i) On June 7, 1995, a lawsuit was filed against the Company by Avid
Technology, Inc. ("Avid"), in the United States District Court for the
District of Massachusetts. The complaint generally alleges patent
infringement by the Company arising from the manufacture, sale, and use of
the Company's Media 100 product. The complaint includes requests for
injunctive relief, treble damages, interest, costs and fees. In July, 1995
the Company filed an Answer and Counterclaim denying any infringement and
asserting that the Avid patent in question is invalid. The Company intends to
vigorously defend the lawsuit. In addition, Avid is seeking reissue of the
patent, including claims that it asserts are broader than in the existing
patent, and these reissue proceedings remain pending before the U.S. Patent
and Trademark Office. On January 16, 1998, the court dismissed the lawsuit
without prejudice to either party moving to restore it to the docket upon
completion of all matters pending before the U.S. Patent and Trademark
Office. There can be no assurance that the Company will prevail in the
lawsuit asserted by Avid or that the expense or other effects of the lawsuit,
whether or not the Company prevails, will not have a material adverse effect
on the Company's business, operating results and financial condition.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibits required as part of this Quarterly Report on Form 10-Q are listed in
the exhibit index on page 15.
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media 100 Inc.
Date: October 14, 1998 By: /s/ Steven D. Shea
----------------------------------
Steven D. Shea
Corporate Controller
(Principal Financial and
Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C> <C>
10.9 Offer Letter from the Company to B.
Robert Feingold
27 Financial Data Schedule
</TABLE>
15
<PAGE>
September 24, 1998
B. Robert Feingold
35 Peakham Road
Sudbury, MA 01776
Dear Bob:
I am pleased to offer you the position of President and Chief Operating Officer
for Media 100 Inc., reporting directly to me, and a seat on the Media 100 Board
of Directors. The compensation and benefits package applicable to this position
includes:
Compensation
- ------------
An annual base salary of $200,000, paid in weekly installments of $3,846.16.
- - A sign-on bonus of $50,000 to be included in your first pay check. If
you choose to leave the Company voluntarily within one year of your date
of hire, you will be required to reimburse the Company.
- - Participation in the Company's FY1999 Executive Bonus Plan, with a
target bonus equal to 50% of your annual base salary. The bonus will be
paid based on the achievement of net sales and net income goals defined
in the FY1999 Operating Plan, which you will help to create for approval
by the Board of Directors.
- - Stock options to purchase 150,000 shares of Media 100 common stock under
the Company's Key Employee Incentive Plan (1992). The exercise price of
these options will be the fair market value (as determined in accordance
with the terms of the plan) on the date these options are formally
granted to you by the Compensation Committee. These options will vest
over a four (4) year period at the rate of 25% on the first anniversary
of the grant date, and 6.25% quarterly thereafter. These options will
have a final exercise date that is ten (10) years from the grant date. A
copy of the plan document which will govern these stock options is
available for your review upon request.
All of these options will vest in full immediately upon the occurrence
of a "change in control," defined as follows: (1) any consolidation or
merger which results in the holders of the Company's common stock
outstanding immediately prior thereto continuing to hold less than 50%
of the combined voting power of the voting securities of the surviving
or acquiring entity outstanding immediately after such consolidation or
merger; (2) any sale, lease, exchange or transfer (in one or a series of
related transactions) of all or substantially all of the assets or
business of the Company; (3) approval by the stockholders of any
proposal for the liquidation or dissolution of the Company; (4) any
individual, entity or group (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than the Company or a subsidiary thereof or any
employee benefit plan sponsored by the Company or a subsidiary thereof
or a corporation owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their ownership of
stock in the Company, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of more than 50% of the
combined voting power of the Company's then outstanding securities
ordinarily (and apart from rights accruing in special circumstances)
having the right to vote in the election of directors; or (5) at any time
<PAGE>
during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Company shall cease for any reason to constitute at least a majority
thereof, unless the election or the nomination for election by the
Company's stockholders of each new director during such two-year period
was approved by a vote of at least a majority of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination was previously so approved.
- - If your employment with the Company is terminated by the Company without
cause, the Company shall pay you, in one lump sum within 30 days of the
effective termination date, one times your then current yearly salary.
In addition, if you terminate your employment following a significant
reduction in compensation (other than a reduction applicable to
executive officers generally), or following a major reduction in
authority, the Company will also make such payment. This payment is
conditional on release of all claims against the Company. Following the
termination of your employment without cause, you will not engage in,
join, or advise any business which competes or, at the time of such
engagement plans to compete with the Company for a period of one year.
The above will be memorialized in a formal agreement upon your
employment.
Benefits
- --------
- - Participation in such Media 100 executive officer and employee benefit
plans as shall be in effect from time to time, including health, dental,
life insurance, accidental death and dismemberment, short and long term
disability, 401(k) and stock purchase plan. The provisions of each
formal benefit plan, policy or contract govern in determining
entitlement to benefits, benefit levels and all other matters.
Due to the Immigration Control and Reform Act of 1986, you will be required
to verify your identity and employment eligibility by completing the I-9
Employment Eligibility Form and supplying Media 100 with the required
documents on your first day of employment. Your acceptance of this offer of
employment is contingent upon compliance with the foregoing Act.
You will be required to sign Media 100's standard "Employee Agreement"
addressing work-for-hire, non-disclosure of confidential information,
non-competition, non- solicitation of employees and related issues. A copy of
this agreement is available for your review upon request.
Bob, I am excited about the potential of having an individual with your
background and experience join the Media 100 team. I would like your official
start date to be on or before October 12, 1998.
If this letter accurately sets forth the terms of the offer that we have
negotiated with you, kindly indicate your acceptance in the space provided
and send one signed copy back to me by Thursday, October 1, 1998.
Welcome aboard.
Sincerely,
John A. Molinari
Chief Executive Officer
I accept the position of President and Chief Operating Officer of Media 100 Inc.
commencing on or before October 1, 1998 in accordance with the terms hereof:
B. Robert Feingold Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET ON FORM 10Q FOR THE PERIOD ENDED AUGUST 31, 1998 AND
THE CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM 10Q FOR THE THREE AND
NINE MONTHS ENDED AUGUST 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> NOV-30-1998 NOV-30-1998
<PERIOD-START> JUN-01-1998 DEC-01-1997
<PERIOD-END> AUG-31-1998 AUG-31-1998
<CASH> 2,957 2,957
<SECURITIES> 30,999 30,999
<RECEIVABLES> 5,203 5,203
<ALLOWANCES> 329 329
<INVENTORY> 718 718
<CURRENT-ASSETS> 40,367 40,367
<PP&E> 12,974 12,974
<DEPRECIATION> 4,374 4,374
<TOTAL-ASSETS> 49,560 49,560
<CURRENT-LIABILITIES> 17,513 17,513
<BONDS> 0 0
0 0
0 0
<COMMON> 83 83
<OTHER-SE> 31,964 31,964
<TOTAL-LIABILITY-AND-EQUITY> 49,560 49,560
<SALES> 10,124 30,282
<TOTAL-REVENUES> 10,124 30,282
<CGS> 3,951 11,803
<TOTAL-COSTS> 3,951 11,803
<OTHER-EXPENSES> 9,079 26,212
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,419) (6,521)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,419) (6,521)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,419) (6,521)
<EPS-PRIMARY> (.29) (.79)
<EPS-DILUTED> (.29) (.79)
</TABLE>
