<PAGE>
Exhibit 99.1
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with, and are
qualified in their entirety by, the Company's consolidated financial statements,
related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales:
Products $ 55,977 $ 50,160 $ 73,100 $139,029 $ 338,005
Services 8,855 7,191 4,710 2,087 406
-------- --------- --------- --------- ----------
Total net sales 64,832 57,351 77,810 141,116 338,411
Cost of sales 24,454 27,262 50,216 98,164 315,816
-------- --------- --------- --------- ----------
Gross profit 40,378 30,089 27,594 42,952 22,595
Operating expenses:
Research and development 15,723 19,215 13,510 13,705 24,116
Selling and marketing 18,283 18,050 24,091 33,568 62,676
General and administrative 7,304 6,737 16,709 11,682 38,336
Amortization of intangible assets 231 -- -- -- --
Acquired in-process research and
development 430 -- -- -- --
Restructuring expense 424 -- 526 -- --
-------- --------- --------- --------- ----------
Total operating expenses 42,395 44,002 54,836 58,955 125,128
-------- --------- --------- --------- ----------
Operating loss (2,017) (13,913) (27,242) (16,003) (102,533)
Interest income (expense), net 1,332 1,163 (996) (2,148) (2,252)
Other income (expense), net 7,104 12,353 30,600 24,032 (3,045)
Litigation settlement -- -- -- -- (12,422)
-------- --------- --------- --------- ----------
Income (loss) from continuing
operations 6,419 (397) 2,362 5,881 (120,252)
before tax provision
Tax (benefit) provision - (1,000) 477 2,023 9,145
-------- --------- --------- --------- ----------
Income (loss) from continuing
operations 6,419 603 1,885 3,858 (129,397)
-------- --------- --------- --------- ----------
Discontinued operations:
(Loss) income from discontinued
operations -- -- -- (6,672) 2,426
-------- --------- --------- --------- ----------
Net income (loss) 6,419 603 1,885 (2,814) (126,971)
Preferred stock dividend -- -- 272 -- --
-------- --------- --------- --------- ----------
Net income applicable to common
shareholders 6,419 606 1,613 (2,814) (126,971)
======== ========= ========= ========= ==========
Basic earnings (loss) per share:
Continuing operations $ 0.57 $ 0.05 $ 0.15 $ 0.42 $ (18.85)
Discontinued operations -- -- -- (0.73) 0.35
-------- --------- --------- --------- ----------
Basic earnings (loss) per share $ 0.57 $ 0.05 $ 0.15 $ (0.31) $ (18.50)
======== ========= ========= ========= ==========
Diluted earnings (loss) per share:
Continuing operations $ 0.54 $ 0.05 $ 0.14 $ 0.40 $ (18.85)
Discontinued operations -- -- -- (0.69) 0.35
-------- --------- --------- --------- ----------
Diluted earnings (loss) per share $ 0.54 $ 0.05 $ 0.14 $ (0.29) $ (18.50)
======== ========= ========= ========= ==========
Weighted average common shares
outstanding:
Basic 11,307 11,226 11,029 9,129 6,863
======== ========= ========= ========= ==========
Diluted 11,880 11,275 11,200 9,611 6,863
======== ========= ========= ========= ==========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
(IN THOUSANDS) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
marketable securities $ 32,027 $ 33,034 $ 33,707 $ 33,690 $ 39,921
Working capital (deficiency) 22,851 16,502 37,055 42,972 (16,536)
Total assets 52,659 54,949 77,031 105,516 148,862
Long-term debt - noncurrent portion -- -- -- 22,213 1,331
Convertible preferred stock -- -- -- 3,000 --
Stockholders' equity (Net capital
deficiency) 32,251 25,311 46,001 54,025 (10,208)
</TABLE>
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes forward-looking statements, including,
but not limited to, statements with respect to the Company's future financial
performance, operating results, plans and objectives, and actual results may
differ materially from those currently anticipated depending upon a variety of
factors, including those described below. See "Certain Factors That May Affect
Future Results" herein.
OVERVIEW
Media 100 Inc., a Delaware corporation, (the "Company") engineers,
markets, sells, and supports digital video and web-based streaming media
software and systems--tools--that enable new Internet broadcasters and
traditional broadcasters, corporate marketing professionals, and educators to
create and deliver high-quality video programs quickly, easily, and with great
creative flexibility. The Company markets and delivers its products to end users
through its web sites as well as through a worldwide channel of specialized
value-added resellers ("VARs") that sell, assemble, and install turnkey systems
using personal computers, disk drives, and ancillary video equipment.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP 97-2
provides revised and expanded guidance on software revenue recognition and
applies to all entities that earn revenue from licensing, selling and otherwise
marketing computer software. The Company adopted the provisions of SOP 97-2 as
of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a
material impact on the Company. Net sales are recognized following establishment
of persuasive evidence of an arrangement, provided that the license fee is fixed
and determinable, delivery of product has occurred via physical shipment or
electronically, a determination has been made by management that collection is
probable and the Company has no remaining obligations. The Company provides for
estimated returns at the time of shipment. The Company recognizes maintenance
revenue from the sale of post-contract support services ratably over the life of
the contract.
On May 9, 2000, the Company completed its merger with Digital Origin.
Under the terms of the agreement, Digital Origin's shareholders and option
holders received 0.5347 equivalent shares, or approximately 3.7 million Media
100 common shares, to effect the business combination. The transaction has been
accounted for as a pooling of interests. As a result, all periods presented have
been restated to reflect the combined operations of the two companies. As
permitted by Accounting Principles Board Opinion No.16 BUSINESS COMBINATIONS
(APB No.16), the November 30, 1999 balance sheet presented herein reflects the
combination of the Media 100's November 30, 1999 balance sheet and Digital
Origin's September 30, 1999 balance sheet. Likewise, the 1999 statements of
operations and cash flows presented for the combined companies are the companies
respective first, second and third fiscal quarters, which also differ by two
months. The results of operations for Digital Origin for the two months ended
November 30, 1999 will be excluded from the statement of operations and will be
recorded directly to accumulated deficit as permitted by APB No.16. Management's
discussion and analysis that follows reflects the consolidated operations. For
more recent discussion, please refer to the Company's Form 10Q filings for the
quarterly periods ended May 31, 2000 and August 31, 2000 filed on July 17, 2000
and October 16, 2000, respectively.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain
consolidated statements of operations data as a percentage of net sales.
2
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales:
Products 86.3% 87.5% 93.9%
Services 13.7 12.5 6.1
---------- ---------- ----------
Total net sales 100.0 100.0 100.0
Cost of sales 37.7 47.5 64.5
---------- ---------- ----------
Gross profit 62.3 52.5 35.5
---------- ---------- ----------
Operating expenses:
Research and development expenses 24.3 33.5 17.4
Selling and marketing expenses 28.2 31.5 31.0
General and administrative expenses 11.3 11.7 21.4
Amortization of intangible assets 0.3 -- --
Acquired in-process research and development 0.7
Restructuring expense 0.6 -- 0.7
---------- ---------- ----------
Total operating expenses 65.4 76.7 70.5
Operating loss (3.1) (24.2) (35.0)
Interest income (expense), net 2.0 2.0 (1.3)
Other income (expense), net 11.0 21.5 39.3
---------- ---------- ----------
Income (loss) from operations before tax 9.9 (0.7) 3.0
provision
Tax (benefit) provision -- (1.8) 0.6
---------- ---------- ----------
Income (loss) from operations 9.9 1.1 2.4
Preferred stock dividend -- -- 0.3
---------- ---------- ----------
Net income applicable to common shareholders 9.9 % 1.1% 2.1%
========== ========== ==========
</TABLE>
COMPARISON OF FISCAL 1999 TO FISCAL 1998
Net sales. The Company's total net sales for fiscal 1999 increased
13.0% to $64.8 million from $57.4 million for fiscal 1998. Net sales from
products for fiscal 1999 increased 11.6% to $56.0 million from $50.1 million for
fiscal 1998. The increase in net sales from products is due primarily to the
shipment of Finish, the Company's high performance Windows NT-based product
line, along with Internet tools sales from the Company's wholly owned
subsidiaries Terran Interactive and Digital Origin. The Company completed the
acquisition of Terran Interactive, Inc., ("Terran") a leading developer of
streaming media tools for preparing high-quality video for broadcast on the
Internet in June 1999. Internet tools sales increased to $17.4 million in fiscal
1999 from $4.7 in fiscal 1998. 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, Digital Origin
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. No customer accounted for more than
10% of the company's net sales in fiscal 1999. One customer accounted for 13.6%
of net sales in 1998.
Net sales from services for fiscal 1999 increased 23.1% to $8.9 million
from $7.2 million for fiscal 1998. The increase in net sales from services is
due to new customers purchasing and current customers renewing their support
contracts.
Net sales from customers outside of the United States accounted for
approximately 38% and 39% of net sales in fiscal 1999 and fiscal 1998,
respectively. The Company is continuing to develop its indirect distribution
channels in the United States, Canada, Europe and Asia and currently anticipates
that customers outside the United States will continue to account for a
substantial portion of its net sales, and as a percentage of net sales, to
remain approximately the same.
Gross profit. The Company's gross profit increased 34.2% to $40.4 million
in fiscal 1999 from $30.1 million in fiscal 1998. In the first quarter of fiscal
1999, the Company reclassified certain costs associated with its Platinum
support services. The Company now classifies these costs as part of cost of
goods sold. The change in presentation had the effect of increasing cost of
goods sold and reducing selling and marketing expenses by the same amount.
Certain amounts in the comparable period of 1998 have been reclassified to
conform to the 1999 presentation. Overall gross profit as a percentage of net
sales increased to 62.3% in fiscal 1999 from 52.5% in fiscal 1998. Gross profit
as a percentage of net sales of products increased to 58.6% in fiscal 1999 from
48% in fiscal 1998, while
3
<PAGE>
gross profit as a percentage of net sales of services increased to 85.7% in
fiscal 1999 from 84.2% in fiscal 1998. The increase in gross profit in fiscal
1999 over fiscal 1998 is a result of increased sales of software products, which
provide higher gross profit, and the discontinuation of lower margin monitor and
graphics product lines.
Research and development. Research and development expenses decreased
18.2% to $15.7 million in fiscal 1999 from $19.2 million in fiscal 1998. The
majority of the decrease in research and development expenses represented lower
development costs due to the completion of Finish, the Company's
high-performance Windows NT-based product line, which began shipping in the
first quarter of fiscal 1999 and headcount reductions resulting from Digital
Origin's departure from the monitor and graphics business. The Company currently
anticipates that research and development expenses will increase in absolute
dollars in fiscal 2000 versus fiscal 1999 due to the acquisitions of Terran and
Wired, Inc. and the planned development of their products.
Selling and marketing. Selling and marketing expenses increased 1.3% to
$18.3 million in fiscal 1999 from $18.1 million in fiscal 1998. Selling expenses
consist primarily of salaries and related benefits, commissions, travel,
occupancy and depreciation. Marketing expenses consist primarily of salaries and
related benefits, trade shows, seminars, advertising, sales literature and lead
generation activities. The increase in selling and marketing expenses resulted
primarily from the acquisition of Terran and the Company's promotion of the
streaming media tools acquired as part of the transaction. The Company currently
anticipates that its selling and marketing expenses will increase in absolute
dollars in fiscal 2000 versus fiscal 1999 as the Company increases its focus on
the Internet and the related support of the Company's promotion of its streaming
media tools.
General and administrative. General and administrative expenses increased
8.4% to $7.3 million in fiscal 1999 from $6.7 million in fiscal 1998. General
and administrative expenses include the cost of human resources, finance,
information technology, legal and other administrative functions of the Company.
The increase in general and administrative expenses resulted primarily from
increased personnel costs in support of higher net sales. The Company currently
anticipates that its general and administrative expenses will increase modestly
in fiscal 2000 compared to fiscal 1999 in support of higher anticipated net
sales.
Amortization of intangible assets. The Company recorded an expense for
the amortization of intangible assets of $231,000 in fiscal 1999 as a result of
the acquisition of Terran. In fiscal 2000, the Company will record additional
amortization expense for Terran and for the acquisition of Wired, Inc., an
acquisition that closed in early fiscal 2000. There was no similar expense
recorded in fiscal 1998.
Acquired in-process research and development. In connection with the
acquisition of Terran, the Company allocated $430,000 of the purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date. In fiscal 2000, the Company
anticipates it will incur additional acquired in-process research and
development expense related to the acquisition of Wired, Inc.
Restructuring expense. In the third quarter of fiscal 1999, the Company
implemented a restructuring plan to better align its organization with its
corporate strategy. The major component of the restructuring charge relates to
the elimination of approximately 12 employees across the following functions:
research and development (4), selling and marketing (7) and general and
administration (1). At November 30, 1999, approximately $232,000 of the accrued
restructuring charge remained, which is entirely comprised of severance-related
costs. The total cash impact of the restructuring amounted to approximately
$424,000. The total cash paid as of November 30, 1999 was $192,000 and the
remaining amount will be paid by the end of the first quarter in fiscal 2000.
Interest income (expenses), net. Interest income (expense), net,
increased 14.5% to $1.3 million in fiscal 1999 from $1.2 million in fiscal 1998.
The increase in interest income (expense), net, results from lower interest
expense due primarily to lower average borrowings as a result of the repayment
of the working capital line of credit. The Company currently anticipates that
interest income will decline in fiscal 2000 versus 1999 due to a reduction in
cash early in fiscal year 2000 resulting from the acquisition of Wired, Inc.,
which the Company completed in December 1999, and due to an additional cash
payment due to the shareholders of Terran.
4
<PAGE>
Other income, net. Other income, net 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 Korea Data Systems America, Inc ("KDS") license
(as discussed in Note 13 to the consolidated financial statements), $2.5 million
from the sale of the Color Server Group and other assets to Splash Technology
Holdings, Inc. ("Splash") (as discussed in Note 14 to the consolidated financial
statements), 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
million in miscellaneous other income.
Tax provision. The Company did not require a tax provision in fiscal 1999
due to the utilization of net operating loss carryforwards and tax credits
available to the Company to offset against operating income. For fiscal 1998,
the Company reversed an 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, and the Company's closure of a foreign subsidiary.
Net income. As a result of the above factors, the Company had net income
in fiscal 1999 in the amount of $6,419,000 or $0.54 per diluted share, compared
to a net income of $603,000, or $0.05 per share, in fiscal 1998.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
Net sales. The Company's net sales for fiscal 1998 decreased 26.3% to
$57.4 million from $77.8 million for fiscal 1997. Net sales from products for
fiscal 1998 decreased 31.4% to $50.2 million from $73.1 million for fiscal 1997.
The decline is due primarily to the following factors: Digital Origin's 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 Digital Origin's monitor
products due to the agreement for the license of significant assets of Digital
Origin `s 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. 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. In addition, unit sales of
Macintosh product have decreased, as well as, the Company not having a product
available for sale on the Windows NT platform until late in the year. Net sales
from the Company's products running on the Macintosh platform declined in 1998
from 1997 due to lower unit sales as more customers opted to either wait until
the Company introduces products running on the Windows NT platform or chose
other products from the Company's competitors. Net sales from Platinum Support
Services, the Company's technical support and service products, increased 52.7%
to $7.2 million from $4.7 million for fiscal 1997 as new customers purchased
support contracts and existing customers renewed their support contracts.
Net sales from customers outside of the United States accounted for
approximately 39% and 36%, respectively, for fiscal 1998 and fiscal 1997. The
Company is continuing to develop its indirect distribution channels in the
United States, Canada, Europe and Asia and currently anticipates that customers
outside the United States will continue to account for a substantial portion of
its net sales, and as a percentage of net sales, to remain approximately the
same. One customer accounted for 13.6% and 22.3% of our net sales for fiscal
1998 and 1997, respectively.
Gross profit. The Company's gross profit increased 9.0% to $30.1
million in fiscal 1998 from $27.6 million in fiscal 1997. In the first quarter
of fiscal 1999, the Company reclassified certain costs associated with its
Platinum support services. The Company now classifies these costs as part of
cost of goods sold. The change in presentation had the affect of increasing cost
of goods sold and reducing selling and marketing expenses by the same amount.
Certain amounts in fiscal 1998 and fiscal 1997 have been reclassified to conform
to the current year's presentation. Overall gross profit as a percentage of net
sales increased to 52.5% in fiscal 1998 from 35.5% in fiscal 1997. This increase
was a result of our decision to refocus our business on higher margin digital
video software products and Internet tool sales. 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
5
<PAGE>
consistent with our decision to refocus our business. Excluding these one-time
charges, gross profit in fiscal 1997 was 60.4%. Gross profit as a percentage of
net sales of products increased to 48.0% in fiscal 1998 from 32.6% in fiscal
1997, while gross profit as a percentage of net sales of services increased to
84.2% in fiscal 1998 from 79.9% in fiscal 1998.
Research and development. Research and development expenses increased
42.2% to $19.2 million in fiscal 1998 from $13.5 million in fiscal 1997. Early
in 1998, the Company announced a major research and development expansion to
develop multiple new Windows NT products, while continuing to develop its
products that use Macintosh as a platform. Research and development expenses
consist primarily of the cost of personnel, outside consulting services,
depreciation on capital equipment, and occupancy. This offsets a decrease in
research and development costs associated with certain Digital origin product
lines that were discontinued.
Selling and marketing. Selling and marketing expenses decreased 25.1% to
$18.1 million in fiscal 1998 from $24.0 million in fiscal 1997. Selling expenses
consist primarily of salaries and related benefits, commissions, travel,
occupancy and depreciation. Marketing expenses consist primarily of salaries and
related benefits, trade shows, seminars, advertising, sales literature and lead
generation activities. Selling and marketing expenses decreased due to a
reduction in headcount.
General and administrative. General and administrative expenses decreased
59.7% to $6.7 million in fiscal 1998 from $16.7 million in fiscal 1997. General
and administrative expenses include the cost of human resources, finance,
information technology, legal and other administrative functions of the Company.
The decrease in general and administrative expenses resulted primarily from
lower personnel costs due to attrition and 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.
Restructuring expense. The Company incurred restructuring expense of
$526,000 in its third quarter of fiscal 1997 for severance and related costs
associated with a reduction of the Company's workforce. All of these expenses
have been paid out as of the end of the Company's first quarter of fiscal 1998.
Interest income (expense), net. Interest income increased to $1.2 million
in fiscal 1998 from $(1.0) million in fiscal 1997. The increase in interest
income is due to lower interest expense on the working line of credit.
Other income 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 the sale of
996,875 shares of Splash common stock in fiscal 1997 (as discussed in Note 14 to
the consolidated financial statements). Fiscal 1998 also includes $1.6 million
related to the KDS license (as discussed in Note 13 to the consolidated
financial statements).
Tax provision. The Company recorded a reversal of accrual for income
taxes of $1.0 million for fiscal 1998 compared to a provision of $.5 million in
fiscal 1997. The reversal reflects the fact that exposure in certain foreign
jurisdictions, as a result of the passage of time and the Company's closure of a
foreign subsidiary.
Net income. As a result of the above factors, the Company had net income
in fiscal 1998 in the amount of $603,000 or $0.05 per diluted share, compared to
a net income of $1,613,000, or $0.14 per share, in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily from public
offerings of equity securities and cash flows from operations. As of November
30, 1999 the Company's principal sources of liquidity included cash and cash
equivalents and marketable securities totaling approximately $32,027,000.
During fiscal 1999, cash used in operating activities was approximately
$2,601,000 compared to cash used in operating activities of approximately
$7,173,000 for the same period a year ago. Cash used in operations during fiscal
1999 resulted from increases in accounts receivable of $2,462,000, decreases in
accrued expenses of $2,987,000,and deferred revenue of $5,688,000 offset by
reductions in a note receivable of $4,500,000, inventories
6
<PAGE>
of $81,000, prepaid expenses and other current assets of $33,000, and accounts
payable of $111,000. Net cash provided by investing activities was approximately
$9,020,000 in fiscal 1999 compared to approximately $13,342,000 for the same
period a year ago. Cash provided by investing activities during 1999 was derived
from the proceeds of sales of marketable securities, net of purchases of
approximately $6,556,000 and proceeds on the sale of other assets of $6,987,000.
This was offset by approximately $2,275,000 of capital expenditures for
equipment and purchased software for internal use, purchase of intangible assets
of $280,000 and the acquisition of Terran Interactive, Inc. of $1,890,000. Cash
used in financing activities during 1999 was approximately $397,000 compared to
$3,185,000 for the same period a year ago. In 1999, cash used in financing
activities was due to repayments on short-term borrowings of $1,340,000 and
purchase of treasury stock of $289,000 offset by the proceeds from the sale of
treasury shares and stock plans of $1,232,000.
The Company believes its existing cash balance, including cash
equivalents and marketable securities, will be sufficient to meet the Company's
cash requirements for at least the next 12 months.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Media 100 Inc.:
We have audited the accompanying consolidated balance sheets of Media 100 Inc.
(a Delaware corporation) and subsidiaries as of November 30, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended November 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. As discussed in Note 1, on May 9, 2000, Media 100 Inc. merged with
Digital Origin, Inc. in a transaction that has been accounted for as a
pooling-of-interests in the accompanying consolidated financial statements. We
did not audit the financial statements of Digital Origin, Inc, as of September
30, 1999 and 1998 or for any of the years in the three-year period ended
September 30, 1999. Such statements are included in the consolidated financial
statements of Media 100, Inc. and reflect total assets of 13% and 12% as of
November 30, 1999 and 1998, respectively and total revenues of 21%, 27% and 40%
respectively, for each of the three years in the period ended November 30, 1999,
of the related consolidated totals. The financial statements of Digital Origin,
Inc. were audited by other auditors whose report has been furnished to us and
our opinion, insofar as it relates to amounts included for Digital Origin, Inc.,
is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Media 100, Inc. and subsidiaries as of November 30,
1999 and 1998, and the results of their operations and their cash flows for the
three years in the period ended November 30, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 4, 2000 (except for the
matters discussed in
Notes 7(b)(i), 7(b)(ii)
and 15(b), for which the dates are August 16, 2000,
September 21, 2000 and May 9, 2000, respectively)
8
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DIGITAL ORIGIN, INC.
We have audited the 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 (not presented separately
herein). Our audit also included the financial statement schedule (not presented
separately herein). 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
9
<PAGE>
MEDIA 100 INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 30, November 30,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,858 $ 7,849
Marketable securities 18,169 25,185
Accounts receivable, net of allowance for doubtful
accounts of $4,160 in 1999 and $4,289 in 1998 8,376 5,736
Note receivable -- 4,500
Inventories 1,610 1,691
Prepaid expenses and other current assets 1,246 1,179
--------------- --------------
Total current assets 43,259 46,140
Property and equipment, net 7,235 8,496
Intangible assets, 1,693 --
net
Other assets, net 472 313
--------------- --------------
Total assets $ 52,659 $ 54,949
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,683 $ 4,230
Accrued expenses 10,532 13,187
Deferred revenue 5,193 10,881
Short-term borrowings -- 1,340
--------------- --------------
Total current liabilities 20,408 29,638
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.01 par value,
Authorized - 1,000 shares, none issued -- --
Common stock, $0.01 par value,
Authorized - 25,000 shares
Issued - 11,477 and 11,282 shares at
November 30, 1999 and 1998, respectively
Outstanding - 11,477 and 11,234 shares at
November 30, 1999 and 1998, respectively 115 113
Capital in excess of par value 210,839 209,989
Accumulated deficit (178,497) (184,916)
Treasury stock, at cost - 0 and 48 shares at
November 30, 1999 and 1998 -- (163)
Accumulated other comprehensive (loss) income (206) 288
--------------- --------------
Total stockholders' equity 32,251 25,311
--------------- --------------
Total liabilities and stockholders' equity $ 52,659 $ 54,949
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE>
MEDIA 100 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net sales:
Products $ 55,977 $ 50,160 $ 73,100
Services 8,855 7,191 4,710
------------ ------------ -------------
Total net sales 64,832 57,351 77,810
Cost of sales 24,454 27,262 50,216
------------ ------------ -------------
Gross profit 40,378 30,089 27,594
------------ ------------ -------------
Operating expenses:
Research and development 15,723 19,215 13,510
Selling and marketing 18,283 18,050 24,091
General and administrative 7,304 6,737 16,709
Amortization of intangible assets 231 -- --
Acquired in-process research and
development 430 -- --
Restructuring expense 424 -- 526
------------ ------------ -------------
Total operating expenses 42,395 44,002 54,836
------------ ------------ -------------
Operating loss (2,017) (13,913) (27,242)
Interest income (expense) 1,332 1,163 (996)
Other income, net 7,104 12,353 30,600
------------ ------------ -------------
Income (loss) from operations before
tax provision 6,419 (397) 2,362
Tax provision -- (1,000) 477
------------ ------------ -------------
Net income 6,419 603 1,885
Preferred stock dividend -- -- 272
------------ ------------ -------------
Net income applicable to common
shareholders $ 6,419 $ 603 $ 1,613
============ ============ =============
Basic earnings per share $ 0.57 $ 0.05 $ 0.15
============ ============ =============
Diluted earnings per share $ 0.54 $ 0.05 $ 0.14
============ ============ =============
Weighted average common
shares outstanding:
Basic 11,307 11,226 11,029
============ ============ =============
Diluted 11,880 11,275 11,200
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE>
MEDIA 100 INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Retained Accumulated
------------------------ Capital in Earnings/ Other
Comprehensive Excess of (Accumulated Treasury Comprehensive
Income (loss) Preferred Stock Shares Amount Par Value Deficit) Stock Income (loss)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1996 -- $3,000 10,997 $110 $208,752 $ (174,142) -- $19,305
Issuance of common stock
under stock plans -- -- 137 1 690 -- -- --
Dividend of Data
Translation II, Inc.
stock to stockholders -- -- -- -- -- (12,990) -- --
Redemption of preferred
stock -- (3,000) -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- (272) -- --
Comprehensive Income:
Net income 1,885 -- -- -- -- 1,885 -- --
Unrealized loss on
available for sale
securities 2,859 -- -- -- -- -- -- 2,859
Translation adjustment (197) -- -- -- -- -- -- (197)
----------
Comprehensive income $4,547 -- -- -- -- -- -- --
----------
Balance, November 30, 1997 -- -- 11,134 $111 $209,442 $ (185,519) -- $21,967
Issuance of common stock
under stock plans -- -- 148 2 547 -- -- --
Purchase of treasury stock -- -- (48) -- -- -- (163) --
Comprehensive loss:
Net income 603 -- -- -- -- 603 -- --
Unrealized gain on
available for sale
securities (21,740) -- -- -- -- -- -- (21,740)
Translation adjustment 61 -- -- -- -- -- -- 61
-------------
Comprehensive loss $ (21,076) -- -- -- -- -- -- --
============= ======= ====== ===== ========= ========== ========= =======
Balance, November 30, 1998 -- -- 11,234 $ 113 $209,989 $ (184,916) $ (163) $ 288
Issuance of common stock
under stock plans -- -- 299 3 777 -- 452 --
Issuance of warrants for
common stock -- -- -- 73 -- -- -- --
Purchase of treasury stock -- -- (56) (1) -- -- (289) --
Comprehensive income:
Net income 6,419 -- -- -- -- 6,419 -- --
Unrealized loss on
available for sale
securities (482) -- -- -- -- -- -- (482)
Translation adjustment (12) -- -- -- -- -- -- (12)
-------------
Comprehensive income $5,925 -- -- -- -- -- -- --
============= ------- ------ --------- --------- ---------- ---------------------
Balance, November 30, 1999 -- 11,477 $115 $ 210,839 $(178,497) -- -- $(206)
======= ====== ========= ========= ========== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
MEDIA 100 INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,419 $ 603 $ 1,885
Adjustments to reconcile net income from operations
to net cash (used in) provided by operating activities:
Depreciation and amortization 3,740 3,074 2,415
Acquired in-process research and development 430 -- --
Amortization of acquisition-related intangible assets 231 -- --
Loss on disposition of fixed assets -- 22 500
Non cash restructuring and other charges -- -- 2,162
Gain on sale of other assets (6,987) (1,615) --
Gain on sale of marketable securities (22) (10,626) (30,760)
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable (2,462) 4,132 9,944
Note receivable 4,500 (4,500)
Inventories 81 (190) 12,824
Prepaid expenses and other current assets 33 (252) 521
Accounts payable 111 (2,234) (521)
Accrued expenses (2,987) (2,463) (656)
Deferred revenue (5,688) 6,876 1,852
------------------------------------
Net cash (used in) provided by operating activities (2,601) (7,173) 166
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Terran Interactive, Inc., net of cash (1,890) -- --
acquired
Net purchase of equipment (2,275) (3,239) (7,306)
Purchase of intangible assets (280) -- --
Other assets (78) 280 (431)
Proceeds from sale of other assets 6,987 1,615 --
Proceeds from sales of marketable securities, net 6,556 14,686 29,769
------------------------------------
Net cash provided by investing activities 9,020 13,342 22,032
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on short term borrowings (1,340) (3,298) 2,716
Net repayments on long term borrowings -- -- (21,940)
Redemption of preferred stock and related dividend -- -- (3,272)
Proceeds from issuance of common stock pursuant to plans 780 549 691
Proceeds from sale of treasury stock 452 -- --
Purchase of treasury stock (289) (163) --
Payments under capital leases -- (273) (1,074)
------------------------------------
Net cash used in financing activities (397) (3,185) (22,879)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (13) 50 (211)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,009 3,034 (892)
CASH AND CASH EQUIVALENTS, beginning of period 7,849 4,815 5,707
------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 13,858 7,849 $ 4,815
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 55 $ 495 2,988
====================================
Cash paid for income taxes $ 14 358 100
====================================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
------------------------------------
<S> <C> <C> <C>
OTHER TRANSACTIONS NOT PROVIDING (USING) CASH:
Dividend of Data Translation II, Inc. stock to stockholders $ -- $ -- $ (12,990)
====================================
Change in value of marketable securities $ (482) $(21,740) $ 2,859
====================================
Warrant issued for technology $ 73 $ -- $ --
====================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(See Note 3 )
In connection with the acquisition of Terran Interactive,
Inc. the
following transaction occurred:
<TABLE>
<S> <C> <C> <C>
Fair Value of assets acquired $ 2,558 $ -- $ --
Cash paid for acquisition and acquisition costs 1,890 -- --
------------------------------------
Liabilities assumed $ 668 $ -- $ --
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS
Media 100 Inc., a Delaware corporation, (the "Company") develops,
markets, sells, and supports digital video and web-based streaming media
software and systems, or tools, that enable new Internet broadcasters and
traditional broadcasters, corporate marketing professionals, and educators to
create and deliver high-quality video programs quickly, easily, and with great
creative flexibility. The Company markets and delivers its products to end users
through its web sites as well as through a worldwide channel of specialized
value-added resellers ("VARs") that sell, assemble, and install turnkey systems
using personal computers, disk drives, and ancillary video equipment.
On May 9, 2000, the Company completed its merger with Digital Origin.
Under the terms of the agreement, Digital Origin's shareholders and option
holders received 0.5347 equivalent shares, or approximately 3.7 million Media
100 common shares, to effect the business combination. The transaction is being
accounted for as a pooling of interests. As a result, all periods presented have
been restated to reflect the combined operations of the two companies. As
permitted by APB Opinion No.16 BUSINESS COMBINATIONS (APB No.16), the November
30, 1999 and 1998 balance sheets presented herein reflects the combination of
the Media 100's November 30, 1999 and 1998 balance sheets and Digital Origin's
September 30, 1999 and 1998 balance sheets. Likewise, the statements of
operations and cash flows reflected for the combined companies are the Media
100's three fiscal years ended November 30, 1999 and Digital Origin's three
fiscal years ended September 30, 1999
In June 1999, the Company acquired Terran Interactive Inc. ("Terran") of
Los Gatos, CA, a leading supplier of software tools for high quality Internet
and DVD video. With this acquisition, the Company develops, markets, sells and
supports software tools for streaming media for the Internet. In addition to
delivering Terran's products to end users through the Company's worldwide
channel of VARs and distributors, the Company sells the products acquired from
the Terran acquisition direct to end users using the Company's telemarketing
groups and its website. In connection with the acquisition, the Company paid
$1,890,000 in cash for all outstanding shares of Terran's common stock. The
acquisition was accounted for under the purchase method of accounting and is
described further in Note 3.
On December 21, 1999, the Company entered into a definitive agreement to
acquire Wired, Inc., a supplier of Moving Pictures Experts Group ("MPEG")
streaming media production tools for the Internet and DVD authoring (See Note
15).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries after elimination of
significant intercompany transactions and balances. These consolidated financial
statements reflect the use of the following significant accounting policies, as
described below and elsewhere in the notes to the consolidated financial
statements. These consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
(b) Cash and Cash Equivalents and Marketable Securities
Cash equivalents are carried at cost, which approximates market value,
and have original maturities of less than three months. Cash equivalents include
money market accounts and repurchase agreements with overnight maturities.
Approximately $0.3 million of the cash and cash equivalents was restricted under
various letters of credit at November 30, 1999.
15
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under this standard, the
Company is required to classify all investments in debt and equity securities
into one or more of the following three categories: held-to-maturity,
available-for-sale or trading. Available-for-sale securities are recorded at
fair market value with unrealized gains and losses excluded from earnings and
included as a component of stockholders' equity. All of the Company's marketable
securities are classified as available-for-sale.
Marketable securities held as of November 30, 1999 and 1998 consist of the
following (in thousands):
<TABLE>
<CAPTION>
MATURITY 1999 1998
-------- ---- ----
<S> <C> <C> <C>
Investments available for sale:
U.S. Treasury Notes less than 1 year $ -- $ 1,535
U.S. Treasury Notes 1 - 5 years 4,538 5,760
------------- --------
Total U.S. Treasury Notes 4,538 7,295
Municipal Bonds less than 1 year 1,797 3,837
Municipal Bonds 1 - 5 years -- 1,067
------------- --------
Total Municipal Bonds 1,797 4,904
U.S. Agency Bonds less than 1 year -- 4,298
U.S. Agency Bonds 1 - 5 years 3,008 4,136
------------- --------
Total U.S. Agency Bonds 3,008 8,434
Money Market Instruments less than 1 year 3,689 3,395
Corporate Obligations less than 1 year 4,042 516
Corporate Obligations 1 - 5 years 4,784 6,847
------------- --------
Total Corporate Obligations 8,826 7,363
Total Investments available for sale 21,858 31,391
Less: Cash equivalents (3,689) (6,206)
------------- --------
Total marketable securities $ 18,169 $ 25,185
============= ========
</TABLE>
Marketable securities had a cost of $18,380 and $24,914 at November 30,
1999 and 1998, respectively, and a market value of $18,169 and $25,185,
respectively. To adjust the carrying amount of the November 30, 1999 and 1998
marketable securities portfolio to market value, an unrealized gain (loss) has
been reflected as a separate component of stockholders' equity pursuant to the
provisions of SFAS No. 115.
(c) Inventories
Inventories at November 30, 1999 and 1998 are stated at the lower of
first-in, first-out (FIFO) cost or market and consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Raw materials $ 556 $ 250
Work-in-process 498 574
Finished goods 556 867
------------------- ---------------
$ 1,610 $ 1,691
=================== ===============
</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.
16
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Depreciation and Amortization
The Company provides for depreciation and amortization, using the
straight-line method by charges to operating expenses in amounts that allocate
the cost of the equipment over the following estimated useful lives:
<TABLE>
<CAPTION>
DESCRIPTION USEFUL LIVES
<S> <C>
Machinery and equipment 3 to 5 years
Purchased software 3 to 5 years
Furniture and fixtures 3 to 7 years
Vehicles 3 years
Leasehold Improvements Life of Lease
</TABLE>
(e) Property and equipment, net
Property and equipment, net at November 30, 1999 and 1998 is stated at
cost, less accumulated depreciation and amortization, and consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- -------------------
<S> <C> <C>
Machinery and equipment $ 11,535 $ 10,579
Purchased software 8,026 6,754
Furniture and fixtures 1,606 1,594
Vehicles 11 12
Leasehold improvements 1,599 1,921
---------------- --------------------
$ 22,777 $ 20,860
Less accumulated depreciation and
amortization (15,542) (12,364)
--------------- -------------------
$ 7,235 $ 8,496
================ ===================
</TABLE>
(f) Intangible Assets
Intangible assets consist of the following as of November 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
Patents and trademarks 169 $ --
Acquired technology 1,733 --
Goodwill 101 --
--------------- -----------------
$ 2,003 $ --
Less accumulated amortization (310) --
--------------- -----------------
$ 1,693 $ --
================ =================
</TABLE>
The Company is amortizing goodwill and acquired technology related to
the acquisition of Terran and the technology purchase from Post Digital Software
(See Note 3) using a straight-line method over 3 years, their estimated useful
life. Patents and trademarks are being amortized over periods ranging from 3 to
5 years, their estimated useful lives.
The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
Accounting Principles Board (APB) Opinion No. 17, INTANGIBLE ASSETS. SFAS No.
121 and APB No. 17 require that long-lived and intangible assets be reviewed for
impairment. Any write-downs are to be treated as permanent reductions in the
carrying amount of the assets and are determined
17
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on the fair value of the assets. The Company believes that the carrying
values of its long-lived and intangible assets are realizable as of November 30,
1999.
(g) Foreign Currency
The financial statements of the Company's subsidiaries are translated
from their functional currency into U.S. dollars using the current rate method
in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly,
assets and liabilities of the Company's foreign subsidiaries are translated at
the rates of exchange in effect at year-end. Revenues and expenses are
translated using exchange rates in effect during the year. Gains and losses from
foreign currency translation are credited or charged to "Cumulative translation
adjustment" included in stockholders' equity in accumulated other comprehensive
income (loss) in the accompanying consolidated balance sheets. The Company
realized net foreign currency transaction gains (losses) of ($77,000), $81,000
and ($215,000) in 1999, 1998 and 1997, respectively.
(h) Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position, "Software Revenue Recognition" (SOP 97-2). SOP
97-2 provides revised and expanded guidance on software revenue recognition and
applies to all entities that earn revenue from licensing, selling and otherwise
marketing computer software. The Company adopted the provisions of SOP 97-2 as
of December 1, 1997. In 1999, SOP 97-2 was modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions". Neither the adoption of 97-2, nor the adoption of 98-9, had a
material impact on the Company. Net sales are recognized following establishment
of persuasive evidence of an arrangement, provided that the license fee is fixed
and determinable, delivery of product has occurred via physical shipment or
electronically, a determination has been made by management that collection is
probable and the Company has no significant 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. The Company recognizes
maintenance revenue from the sale of post-contract support services ratably over
the life of the contract.
(i) Net Income (Loss) Per Common Share
Effective December 1, 1997, the Company adopted SFAS No. 128, EARNINGS
PER SHARE. In accordance with SFAS No. 128, basic net income (loss) per share is
computed using the weighted-average number of common shares outstanding. Diluted
income (loss) per share is computed using the weighted-average number of common
shares outstanding and potential common shares from the assumed exercise of
options outstanding during the period, if any, using the treasury stock method.
Prior periods have been restated to reflect the new standard.
The following is a reconciliation of the shares used in the computation of basic
and diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic net income - weighted average shares of common
stock outstanding 11,307 11,226 11,029
Effect of potential common shares - stock options
outstanding (unless antidilutive) 573 49 171
----------------------------------------
Diluted net income - weighted average shares and
potential common shares outstanding 11,880 11,275 11,200
========================================
</TABLE>
The Company excludes potentially dilutive securities from its diluted net
income (loss) per share computation when either the exercise price of the
securities exceeds the fair value of the Company's common stock or when the
Company reported net losses and the effect of including such securities would be
antidilutive. During
18
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fiscal years 1999, 1998 and 1997 options to purchase approximately 461,000,
1,433,000 and 1,204,000 weighted average shares of common stock were not
included in the computation of diluted net income (loss) per share as a result
of their antidilutive effect due to the loss attributable to common
stockholders.
(j) Capitalized Software Development Costs
The Company capitalizes certain computer software development costs.
Capitalization of costs commences upon establishing technological feasibility.
Capitalized costs, net of accumulated amortization, were approximately $29,000
and $89,000 as of November 30, 1999 and 1998, respectively, and are included in
other assets. These costs are amortized on a straight-line basis over two years,
which approximates the economic life of the product. Amortization expense,
included in cost of sales in the accompanying consolidated statements of
operations, was approximately $60,000, $60,000 and $80,000 in 1999, 1998 and
1997, respectively. (k) Restructuring Expense
In the third quarter of fiscal 1999, the Company implemented a
restructuring plan to better align its organization with its corporate strategy.
Substantially all of the restructuring charge of $424,000 relates to the
elimination of approximately 12 employees across the following functions:
research and development (4), selling and marketing (7) and general and
administration (1). At November 30, 1999, approximately $232,000 of the accrued
restructuring charge remained, which is entirely composed of severance-related
costs. The total cash impact of the restructuring was approximately $424,000.
The total cash paid as of November 30, 1999 was $192,000 and the remaining
amount will be paid by the end of the first quarter in fiscal 2000.
In the third quarter of fiscal 1997, the Company incurred restructuring
expenses of $526,000 for severance and related costs associated with a reduction
of the Company's workforce. All of these expenses have been paid as of the end
of the Company's first quarter of fiscal 1998.
(l) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(m) Concentration of Credit Risk and Significant Customers
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet or credit risk
concentrations such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company maintains its cash, cash equivalents
and marketable securities with established financial institutions. The Company
does not believe it has accounts receivable collection risk in excess of
existing reserves. One customer accounted for 4.2%, 13.6% and 22.3% of the
Company's net sales for fiscal years 1999, 1998 and 1997, respectively.
(n) Single or Limited Source Suppliers
The Company currently is dependent on single or limited source suppliers
for several key components used in its products that have no ready substitutes,
including various audio and video signal processing integrated circuits. These
components are purchased through purchase orders from time to time. The Company
generally does not carry significant inventories of these single or limited
source components and has no guaranteed supply arrangements for them. Although
there are a limited number of manufactures of the key components, management
believes that the other suppliers could provide similar components on comparable
terms. An extended interruption in its source of supply, however, could cause a
delay in manufacturing and a possible loss of sales, which would affect
operating results adversely.
19
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(o) Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
(p) Financial Instruments
The estimated fair values of the Company's financial instruments, which
include cash equivalents, marketable securities, accounts receivable and
accounts payable, approximate their carrying value.
3. ACQUISITIONS
TERRAN INTERACTIVE, INC.
On June 28, 1999, the Company acquired Terran of Los Gatos, CA, a leading
supplier of software tools for high quality Internet and DVD video. In
connection with the acquisition, the Company paid $1,850,000 in cash for all
outstanding shares of Terran's common stock. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of Terran's
operations and the fair market value of the acquired assets and assumed
liabilities have been included in the financial statements of the Company as of
the acquisition date. In connection with the acquisition, the purchase price
could increase depending on Terran's net sales and operating income over the
next two years. Any contingent payments based on meeting the earn-out conditions
will be considered additional goodwill and amortized over the appropriate useful
life.
The aggregate purchase price consisted of the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
<S> <C>
Cash $ 1,850
Liabilities assumed 668
Acquisition costs 40
-------
Total purchase price: $ 2,558
-------
</TABLE>
The purchase price has been allocated to the acquired assets and assumed
liabilities as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 278
Equipment and other assets 189
Acquired technology 1,560
In-process research and development 430
Goodwill 101
-------
$ 2,558
</TABLE>
Amounts allocated to tangible and intangible assets, including acquired
in-process research and development, were based on results of an independent
appraisal. The amount allocated to developed technology is being amortized on a
straight-line basis over an expected useful life of three years. In connection
with the acquisition, the Company allocated $430,000 of the purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date.
The Company allocated values to the in-process research and development
based on an in depth assessment of the R&D projects. The value assigned to these
assets were limited to significant research projects for which
20
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of the
acquired next-generation technologies.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development was based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors.
The resulting net cash flows from such projects are based on management's
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from such projects. Aggregate
revenues for Terran were estimated to grow at a compounded annual growth rate of
approximately 60% through 2003, at which time revenue growth is expected to
gradually decline to a normalized long-term growth rate.
The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental Terran
technologies met their design specifications including functional, technical,
and economic performance requirements. Anticipated completion dates ranged from
6 to 12 months, at which times the Company expected to begin selling the
developed products. Development costs to complete the R&D were estimated at
approximately $1.2 million.
Terran's primary in-process R&D projects involved designing a technology
and application platform for a next-generation Media Cleaner product and the
development of new live broadcast software technologies. The estimated revenues
for the in-process projects were expected to peak within two years of
acquisition and then decline sharply as other new products and technologies are
expected to enter the market.
Operating expenses were estimated based on historical results and
discussions with management regarding anticipated profit margin improvements.
Due to purchasing power increases and general economies of scale, estimated
operating expense as a percentage of revenues were expected to decrease after
the acquisitions.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability of
the developmental projects, a discount rate of 35% was considered appropriate
for the in-process R&D, and discount rates of 25% were appropriate for the
existing products and technologies. These discount rates were commensurate with
the Terran's stage of development and the uncertainties in the economic
estimates described above.
With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Terran prior to the
close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.
Management's estimate of net cash flow was discounted to present value.
The discount rate used in discounting the net cash flows from purchased
in-process technology is 35%. In the selection of the appropriate discount rate,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model. The discount
rate utilized for the in-process technology was higher than Media 100's WACC due
to the inherent uncertainties in the financial forecasts, including the
uncertainty surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability levels of such
technology and the uncertainty of technological advances that are unknown at
this time.
21
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If these projects are not successfully developed the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.
The following unaudited pro forma financial information presents the
combined results of operations of Media 100 and Terran as if the acquisition
occurred as of December 1, 1997. The pro forma data are presented for
illustrative purposes only and are not necessarily indicative of the combined
financial position or results of operations for future periods or the results
that actually would have occurred had Media 100 and Terran been a combined
company during the specified periods. The pro forma results include the effects
of the amortization of acquisition-related intangible assets and exclude the
charge for the purchased in-process technology.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
--------------- ---------------
<S> <C> <C>
Net sales $ 66,414 $ 59,939
Net income $ 6,086 $ 204
Net income per common share - basic $ 0.54 $ 0.02
Net income per common share - diluted $ 0.51 $ 0.02
Weighted average common share outstanding - basic 11,307 11,226
Weighted average common share outstanding - diluted 11,880 11,275
</TABLE>
TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
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 26,735 shares
of the Company's Common Stock at an exercise price of $2.81 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 6,416 shares as of May
1, 1999, plus an additional 1,069 shares for each full month that transpires
thereafter, up to a total of 26,735 shares. The value of this agreement, as
noted below, is included as intangible assets in the accompanying consolidated
balance sheet. The technology is being amortized over a three year period.
<TABLE>
<S> <C>
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
=========
</TABLE>
4. STOCKHOLDERS' EQUITY
Prior to April 1992, options were granted under the Company's 1982 Key
Employee Inventive Plan (the "1982 Plan"). Subject to certain limitations
imposed by the 1982 Plan, options were granted at a price determined by the
Board. The Board resolved to issue options under the 1982 Plan at not less than
100% of fair market value. The options expire six years from the date of grant
and become exercisable at the rate of 20% per year beginning one year from the
date of grant. No further options may be granted under the 1982 Plan.
In 1992, the Company adopted the 1992 Key Employee Incentive Plan (the
"1992 Plan"). The number of shares of common stock reserved for issuance under
the 1992 Plan is 2,200,000. Options granted pursuant to the 1992 Plan may, at
the discretion of the Board, be incentive stock options as defined by the
Internal Revenue Code.
22
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subject to the provisions of the 1992 Plan, options granted are at a price as
specified by the Board. The Board has, to date, issued options under the 1992
Plan at not less than 100% of fair market value. The options become exercisable
at a rate of 25% per year beginning one year from the date of grant unless
otherwise specified by the Board. The Board will determine when the options will
expire, but in no event will the option period exceed ten years. No options may
be granted under the 1992 Plan on or after February 29, 2002.
Information concerning stock options for each of the three years ended
November 30, 1999 follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Options Price Ranges per Share
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at November 30, 1996 1,278,292 $ 1.73 - 322.62 $ 13.67
Granted 855,044 4.19 - 11.03 8.03
Exercised (66,054) 1.73 - 8.79 5.88
Expired/canceled (553,836) 1.73 - 322.62 13.73
--------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1997 1,513,445 $ 1.73 - 203.39 $ 9.33
Granted 1,507,584 2.75 - 11.69 3.99
Exercised (54,149) 1.73 - 8.77 3.69
Expired/canceled (1,126,018) 1.73 - 11.69 8.34
--------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1998 1,840,863 $ 2.68 - 203.39 $ 5.69
Granted 930,403 1.58 - 16.25 5.76
Exercised (169,752) 1.58 - 8.77 4.04
Expired/canceled (256,111) 1.58 - 182.34 5.54
--------------------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1999 2,345,402 $ 1.58 - 203.39 $ 5.86
====================================================================================================================
Exercisable at November 30, 1999 874,071 $ 1.58 - 203.39 $ 6.52
====================================================================================================================
Exercisable at November 30, 1998 639,402 $ 2.68 - 203.39 $ 7.13
====================================================================================================================
Exercisable at November 30, 1997 456,151 $ 1.73 - 203.39 $ 6.21
====================================================================================================================
Available for grant at November 30, 1999 161,728
====================================================================================================================
</TABLE>
The weighted average fair market value of the options as of the date of
grant for the periods ended November 30, 1999, 1998 and 1997, is $5.54, $6.03,
and $3.60, respectively.
The Company also issues shares of common stock to employees pursuant to
the terms of the 1986 Employee Stock Purchase Plan (the "Plan"). The Company has
reserved 1,000,000 shares of common stock for issuance under the Plan, as
amended. Effective July 1, 1995, employees who have worked for the Company for
at least one month are eligible to participate in the Plan. The Plan allows
participants to purchase common stock of the Company at 85% of the fair market
value as defined. Under the Plan, the Company issued 112,064, 93,073 and 67,311
shares in fiscal years 1999, 1998 and 1997, respectively. At November 30, 1999,
there were 294,194 shares available for issuance under the Plan.
As part of the merger with Digital Origin, Inc., the Company has a
separate Employee Stock Purchase Plan that allows eligible Digital Origin
employees 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 price is lower. The plan consists of one year offering periods with
two six-month purchase periods in each offering period. Effective July 1, 2000
all eligible Digital Origin employees are participating in the Company's 1986
Employee Stock Purchase Plan noted above.
The Company has issued three outstanding warrants to purchase its common
stock. Two, in denominations of 32,082 and 2,674 were issued in 1996 in
connection with the Company's debt for equity exchange with various creditors at
an exercise price of $18.70 per share and will expire in September and October
2000, respectively. The
23
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
third warrant for 26,735 shares was issued in November 1998 at a strike price of
$2.81 per share in connection with the Company's acquisition of certain
technology and will expire in November 2002. See Note 3.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION, which requires the measurement of
the fair market value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to the financial statements.
As permitted by SFAS No. 123, the Company will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and has elected the disclosure-only alternative under SFAS No. 123 for
options granted using the Black-Scholes option pricing model prescribed by SFAS
No. 123. The weighted average assumptions are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Risk-free interest rate........ 4.6% - 6.0% 4.2% - 5.8% 6.0% - 6.1%
Expected dividend yield........ -- -- --
Expected lives................. 4 - 6 years 4 - 6 years 4 - 6 years
Expected volatility............ 152.0% - 154.6% 73.3% - 114.8% 75.9% - 107.1%
</TABLE>
The table below presents pro forma net income (loss) and earnings per
share, had compensation cost for the Company's stock-based employee compensation
plans been determined using the provisions of SFAS No. 123 (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
----------- ----------- -------------
<S> <C> <C> <C>
Income (loss) from operations:
As reported $ 6,419 $ 603 1,613
Pro forma $ 3,952 $ (1,147) 843
Income (loss) per share from operations:
Basic:
As reported $ 0.57 $ 0.05 $ 0.15
Pro forma $ 0.35 $ (0.10) $ 0.08
Diluted:
As reported $ 0.54 $ 0.05 $ 0.14
Pro forma $ 0.33 $ (0.10) $ 0.08
</TABLE>
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years.
The following table summarizes information about options outstanding at November
30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Average Weighted Average Weighted Average
Range of Number Remaining Exercise Price Number Exercise Price
Exercise Price Outstanding Contractual Life per Share Outstanding per Share
---------------- -------------- --------------------- -------------------- --------------- --------------------
<C> <C> <C> <C> <C> <C>
$ 1.58 - 3.57 405,557 4.5 $2.67 124,635 $2.63
3.94 412,470 4.1 3.94 222,552 3.94
4.25 - 5.38 550,167 4.7 4.98 200,530 5.05
5.55 - 5.55 445,543 5.4 5.65 13,991 5.83
6.31 - 203.39 531,665 3.4 10.80 312,363 10.88
------------- ------------ -------------- -----------
2,345,402 $5.86 874,071 $6.52
============= ============ ============== ===========
</TABLE>
In January 1998, the Company offered employees the opportunity to
participate in an option-repricing program, pursuant to which each employee
could elect to replace his or her then outstanding, options with new options on
a one-for-one basis. The per share exercise price of the replacement options is
$3.94. The replacement options are exercisable as follows: replacement options
that were granted in exchange for exercisable old options become exercisable six
months following the new grant date; replacement options that were granted in
exchange for unexercisable old options become exercisable over four years from
the new grant date, 12.5% six months following the new grant date and 6.25%
quarterly thereafter; and all replacement options expire ten years after the new
grant
24
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
date. An aggregate of 694,810 options were granted in exchange for options
cancelled in connection with this program. The option-repricing program resulted
in a new measurement date for all options replaced. Since the new exercise price
was equal to the fair market value of the Company's common stock on the new
measurement date, the Company did not record any compensation cost in connection
with this program.
5. RETIREMENT PLAN
In November 1985, the Company adopted an employee savings plan (the
"Savings Plan") in compliance with Section 401(k) of the Internal Revenue Code.
Effective April 1, 1995, the Savings Plan provides for annual Company
contributions of up to 15% of the first 6% of total compensation per
participant. Effective January 1, 1998, these contributions vest in full after a
three-year period of service. Effective January 1, 1999, the Savings Plan was
amended to provide for annual contributions of up to 40% of the first 6% of
total compensation, with a maximum matching contribution of $3,000 annually. The
Company's contributions to the Savings Plan were $203,000, $86,000 and $98,000
in 1999, 1998 and 1997, respectively.
As part of the merger with Digital Origin, Inc., the Company has a
separate employee savings plan, in which all eligible Digital Origin employees
may defer up to 15% of their pre-tax compensation, but not more than statutory
limits. Digital Origin was allowed to make contributions as defined in the
401(k) Plan and as approved by the Board of Directors. Digital Origin's
contributions to the Savings Plan were $46,972, $63,850 and $112,422 in 1999,
1998 and 1997, respectively. Digital Origin matches a specified portion of the
employee contributions up to a maximum of $1,000 per employee per year. The
Company expects that the two savings plans will be combined sometime in fiscal
2001.
The Company does not provide postretirement benefits to any employees
as defined under Statement of Financial Accounting Standards No. 106, EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.
6. BANK FACILITIES
The Company renewed an irrevocable standby letter of credit agreement
for a sum not to exceed $196,808 effective April 1, 1999 and terminating March
31, 2000. This facility was entered into in connection with the lease of the
Company's office and manufacturing facility (Note 7(a)). This letter of credit
is automatically extended without amendment annually from the termination date,
unless written notice is provided electing not to renew for any such additional
period. Notwithstanding the above, this letter of credit expires on March 31,
2002.
7. COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company's principal executive, engineering, manufacturing and sales
operations occupy approximately 56,500 square feet in a leased facility located
at 290 Donald Lynch Boulevard, Marlboro, Massachusetts. The lease for this
facility terminates on March 31, 2002, but is renewable at the Company's option
through March 31, 2007. Prior to moving into its current facility on May 2,
1997, the Company's operations occupied approximately 31,000 square feet in a
facility which it shared with Data Translation, Inc. ("DTI") located in
Marlboro, Massachusetts. Total rent expense including operating expenses
pursuant to the lease agreement charged to operations with respect to the
Company's current Marlboro facility for fiscal years 1999, 1998 and 1997 was
$879,000, $822,000 and $542,000, and with respect to its former Marlboro
facility was $527,000 for the fiscal year 1997. Rent expense with respect to the
former Marlboro facility for fiscal 1997 reflected the Company's pro rata
portion of the rental charges and operating expenses associated with that
facility and the use by the Company of certain manufacturing equipment belonging
to DTI. Rent expense including operating expenses pursuant to the lease
agreement charged to operations for the consolidated Company for fiscal years
1999, 1998, and 1997 was $1,187,000, $999,000, and $1,249,000, respectively.
25
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company has an operating lease for its Mountain View, CA
location 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 of years
three through five, if extended. Rent expense charged to operation, net of
sublease income, amounted to approximately $0.3 million, $0.5 million and $0.6
million for the fiscal years ended 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.
Future minimum lease payments, excluding operating costs, under all
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDING NOVEMBER 30,
AMOUNT
<S> <C>
2000 $1,273
2001 1,302
2002 774
2003 392
2004 350
----------------------------------------------------------------------------
Total minimum lease payments $4,091
============================================================================
</TABLE>
(b) 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.
On August 16, 2000, the U.S. Patent and Trademark Office issued an Office
Action rejecting all of the claims made by Avid in their latest request for
reexamination of the patent related to the aforementioned lawsuit. In addition,
the Examiner at the U.S. Patent and Trademark Office designated the action as
"final". Avid has the right to appeal the rejections to the Patent Office Board
of Appeals and the Company plans to continue to monitor the proceedings. There
can be no assurance that the Company will prevail in the event of an appeal by
Avid or that the expense or other effects of the appeal, whether or not the
Company prevails, will not have a material adverse effect on the Company's
business, operating results and financial condition.
(ii) On January 13, 1999 and January 28, 1999, Digital Origin and one of
its former directors, Charles Berger, were named as defendants in two
shareholder class action lawsuits against Splash Technology Holdings, Inc.
("Splash"), various directors and executives of Splash and certain selling
shareholders of Splash. The lawsuit alleges, among other things, that the
defendants made or were responsible for material misstatements, and failed to
disclose information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common stock. The
complaint does not identify any statements alleged to have been made by Charles
Berger or Digital Origin. The complaint further alleges that Digital Origin
engaged in a scheme to artificially inflate the price of Splash common stock to
reap an artificially large return on the sale of the common stock in order to
pay off its debt. Digital Origin and the former director vigorously deny all
allegations of wrongdoing and intend to aggressively defend themselves in these
matters. Defendant's initial motion to dismiss the action was granted with leave
to amend, and plaintiffs have amended the complaint. Defendants have filed their
second motion to dismiss.
26
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 18, 1997, Intelligent Electronics, Inc. filed a claim against
Digital Origin alleging a breach of contract and related claims in the
approximate amount of $800,000, maintaining that Digital Origin failed to comply
with various return, price protection, inventory balancing and marketing
development funding undertakings. In 1997, Digital Origin filed an answer to the
complaint and cross-claimed against the plaintiffs and in October 1997
additionally cross claimed against Deutsche Financial, Inc., a factor in the
account relationship between the Company and the plaintiffs, seeking the
recovery of existing accounts receivable of approximately $1.8 million. During
May 2000, the trial was completed and the Court entered two judgments in favor
of Digital Origin, one in the amount of $314,000 plus interest against
Intelligent Electronics and one in the amount of $1,491,000 plus interest
against Deutsche Financial, Inc. In September 2000, Intelligent Electronics,
Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costs
in the amount of $20,000 to the Company. Deutsche Financial, Inc. has requested
that the Court reconsiders various portions of its rulings, and an appeal of the
final judgment is expected.
(iii) From time to time the Company is involved in other disputes and/or
litigation encountered in its normal course of business. The Company does not
believe that the ultimate impact of the resolution of such other outstanding
matters will have a material effect on the Company's business, operating results
or financial condition.
8. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. The components of the net deferred tax asset recognized in the
accompanying consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 28,172 $ 28,883
Other temporary differences, principally nondeductible
accruals 3,323 6,344
Research and development credit carryforwards 1,666 1,119
Acquired technology (624) --
Inventory write-downs 559 1,275
Capitalized research & development expenses 3,130 2,769
Other -- 1,082
-----------------------------------------------------------------------------------------
Subtotal 36,226 41,472
-----------------------------------------------------------------------------------------
Valuation allowance (36,226) (41,248)
-----------------------------------------------------------------------------------------
Net deferred tax assets $ -- $ 224
=========================================================================================
</TABLE>
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future income tax returns, the Company has placed a
valuation allowance against its deferred tax assets, except for previously paid
taxes that the Company believes are refundable. These deferred tax assets are
included as a component of other assets, net on the accompanying consolidated
balance sheets.
The tax credit carryforwards expire at various dates through 2019. The
Tax Reform Act of 1986 contains provisions that may limit the tax credit
carryforwards available to be used in any given year in the event of significant
changes in ownership, as defined.
The income (loss) from continuing operations before tax provision in the
accompanying consolidated statements of operations consisted of the following
(in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 6,352 $ (385) $ 2,393
Foreign 67 (12) (31)
------------------- ------------------ ----------------
$ 6,419 $ (397) $ 2,362
=================== ================== ================
</TABLE>
27
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax provision shown in the accompanying consolidated
statements of operations consists of the following (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ (224) $ (280) $ 631
Deferred 224 280 (504)
--------------------------------------------------------------------------------------------------
-- -- 127
--------------------------------------------------------------------------------------------------
State:
Current -- -- 39
Deferred -- -- --
--------------------------------------------------------------------------------------------------
-- -- 39
--------------------------------------------------------------------------------------------------
Foreign - Current -- (1,000) 311
--------------------------------------------------------------------------------------------------
$ -- $ (1,000) $ 477
--------------------------------------------------------------------------------------------------
</TABLE>
The effective income tax rate varies from the amount computed using the
statutory U.S. income tax rate as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
FISCAL YEARS ENDED NOVEMBER 30, 1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate 34.0% (34.0)% 34.0
Federal benefit from loss carryforward -- -- --
Utilization of research and development -- --
credits (30.5)
State taxes 6.0 (6.0) 3.1
Change in valuation allowance (40.0) 40.0 --
Foreign taxes -- -- 7.7
Reversal of previously accrued foreign taxes -- (251.9) --
Tax credits -- -- 1.8
Other permanent differences -- -- 4.1
------------------------------------------------------------------------------------------------------
--% (251.9)% 20.2%
======================================================================================================
</TABLE>
9. ACCRUED EXPENSES
Accrued expenses at November 30, 1999 and 1998 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Payroll and payroll related taxes $ 3,366 $ 2,926
Accrued warranty 611 732
Accrued product development 40 2,220
Accrued inventory 1,041 --
Accrued selling and marketing 484 1,035
Accrued legal and other 4,990 6,274
-------------------------------------------------------------------------------
$10,532 $13,187
===============================================================================
</TABLE>
28
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts
receivable reserve account (in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Balance at Charges to Cost and Deductions Balance at
Beginning of Expense End of
Fiscal Year Fiscal Year
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Fiscal Year Ended $2,460 $4,893 $2,184 $5,169
November 30, 1997
================================================================================================
For the Fiscal Year Ended $5,169 $370 $1,250 $4,289
November 30, 1998
================================================================================================
For the Fiscal Year Ended $4,289 $155 $284 $4,160
November 30, 1999
================================================================================================
</TABLE>
11. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1999 (in thousands, except per share amounts) February 28 May 31 August 31 November 30
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 14,677 $ 15,466 $ 16,898 $ 17,791
Gross profit $ 8,919 $ 9,487 $ 10,627 $ 11,345
Net income $ 2,103 $ 1,260 $ 1,642 $ 1,414
Net income per share - basic $ 0.19 $ 0.11 $ 0.15 $ 0.12
Net income per share - diluted $ 0.18 $ 0.11 $ 0.14 $ 0.11
Shares - net income per share - basic 11,248 11,254 11,297 11,428
Shares - net income per share - diluted 11,536 11,669 11,746 12,480
=============================================================================================================================
Fiscal 1998 (in thousands, except per share amounts) February 28 May 31 August 31 November 30
-----------------------------------------------------------------------------------------------------------------------------
Net sales $ 15,956 $ 14,652 $ 13,994 $ 12,749
Gross profit $ 8,066 $ 7,163 $ 7,537 $ 7,323
Net (loss) income $ (570) $ (85) $ 1,467 $ (209)
Net (loss) income per share - basic $ (0.05) $ (0.01) $ 0.13 $ (0.02)
Net (loss) income per share - diluted $ (0.05) $ (0.01) $ 0.13 $ (0.02)
Shares - net (loss) income per share - basic 11,180 11,206 11,262 11,255
Shares - net (loss) income per share - diluted 11,180 11,206 11,290 11,255
=============================================================================================================================
</TABLE>
12. SEGMENT INFORMATION
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). SFAS No. 131 establishes
standards for public companies to report operating segment information in annual
and interim financial statements filed with the SEC and shareholders effective
for fiscal years beginning after December 15, 1997. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief decision
maker, or decision making group, in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision-making group is
composed of the Chief Executive Officer and members of senior management. The
Company's reportable operating segments are internet tools, digital video
systems and services.
29
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Revenues are attributed to
geographic areas based on where the customer is located. Segment information for
the years November 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Digital
Internet Video Graphics/
1997 Tools Services Systems Monitors Corporate Total
---- ------------ ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales external
customers $ 464 $ 4,710 $ 41,950 $ 30,686 $ -- $ 77,810
============ =========== =========== ========== ========== =============
Gross profit 236 3,764 23,712 (118) -- 27,594
============ =========== =========== ========== ========== =============
Depreciation 12 42 1,572 789 -- 2,415
============ =========== =========== ========== ========== =============
Restructuring -- -- -- 526 526
============ =========== =========== ========== ========== =============
Interest income (expense), net -- -- -- (996) (996)
============ =========== =========== ========== ========== =============
Income taxes $ -- $ -- $ -- $ $ 477 $ 477
============ =========== =========== ========== ========== =============
1998
----
Net sales external
customers $ 4,652 $ 7,191 $ 4,597 $ 10,911 $ -- $ 57,351
============ =========== =========== ========== ========== =============
Gross profit 2,625 6,057 18,364 3,043 -- 30,089
============ =========== =========== ========== ========== =============
Depreciation 45 40 2,885 104 -- 3,074
============ =========== =========== ========== ========== =============
Interest income(expense),
net $ -- $ -- $ -- $ -- $ 1,163 $ 1,163
============ =========== =========== ========== ========== =============
Income taxes $ -- $ -- $ -- $ -- $ (1,000) $ (1,000)
============ =========== =========== ========== ========== =============
1999
----
Net sales external
customers $ 17,411 $ 8,855 $ 38,566 $ -- $ -- $ 64,832
============ =========== =========== ========== ========== =============
Gross profit $ 11,396 $ 7,592 $ 21,390 $ -- $ -- $ 40,378
============ =========== =========== ========== ========== =============
Depreciation 171 71 3,499 -- 3,741
============ =========== =========== ========== ========== =============
Amortization of intangibles $ -- $ -- $ -- $ -- $ 231 $ 231
============ =========== =========== ========== ========== =============
Acquired in-process
research and development 430 430
============ =========== =========== ========== ========== =============
Restructuring $ -- $ -- $ -- $ -- $ 424 $ 424
============ =========== =========== ========== ========== =============
Interest income(expense),
net $ -- $ -- $ -- $ -- $ 1,332 $ 1,332
============ =========== =========== ========== ========== =============
</TABLE>
Interest income, restructuring, and income taxes are considered corporate
level activities and are, therefore, not allocated to segments. Management
believes transfers between geographic areas are accounted for on an arms length
basis.
30
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net sales by geographic area for the years ended November 30, 1999, 1998
and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ----------------- ---------------
<S> <C> <C> <C>
United States 40,476 $ 34,743 $ 49,758
United Kingdom, Sweden, Denmark and Norway 6,030 5,620 6,558
Germany, Austria and Switzerland 3,075 2,172 1,825
France, Spain and Benelux 4,654 2,827 2,265
Japan 3,376 2,825 6,479
Other foreign countries 7,221 9,164 10,925
--------------- ----------------- ---------------
$ 64,832 $ 57,351 $ 77,810
=============== ================= ===============
</TABLE>
Long-lived tangible assets by geographic area were as follows for the
years ended November 30, 1999, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- -----------------
<S> <C> <C>
United States $ 6,877 $ 8,068
United Kingdom 146 186
Germany 97 80
Italy 26 54
France 89 108
--------------- -----------------
$ 7,235 $ 8,496
=============== =================
</TABLE>
13. LICENSING OF ASSETS TO KOREA DATA SYSTEMS AMERICA, INC.
In June 1998, Digital Origin licensed certain technology and assets
necessary to conduct its monitor and color publishing business to Korea Data
Systems America, Inc. ("KDS"), leaving the Digital Origin 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, Digital Origin 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 had
accounted for substantially all of the revenues of the color publishing product
line and 55.3% of Digital Origin's revenues during fiscal 1998. Under the
license and asset transfer agreement, Digital Origin 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. Digital Origin recognized other income under the license agreement as
cash was received on the note.
On December 4, 1998, Digital Origin 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.
14. TRANSACTIONS WITH SPLASH TECHNOLOGY HOLDINGS, INC.
ESCROW FUND RELEASE
In connection with the Digital Origin'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
Digital Origin.
SALE OF CERTAIN COLOR PUBLISHING TECHNOLOGY
On December 4, 1998, Digital Origin 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.
31
<PAGE>
MEDIA 100 INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUBSEQUENT EVENTS
(a) Acquisition of Wired, Inc.
On December 21, 1999, the Company completed its acquisition of Wired,
Inc. Wired, Inc. is a fast-growing supplier of Moving Pictures Experts Group
("MPEG") streaming media production tools for the Internet and digital video
disk ("DVD") authoring. In connection with the acquisition, the Company will pay
$3,000,000 in cash for all outstanding shares of Wired, Inc. common stock. The
first payment in the amount of $1,500,000 was paid upon completion of the
acquisition and the remaining $1,500,000 to be paid on the first anniversary of
the closing. In connection with the acquisition, the purchase price could
increase depending on Wired's net sales and operating income over the next two
years. Any contingent payments based on meeting the earn-out conditions will be
considered additional goodwill and amortized over the appropriate useful life.
The Company will treat the acquisition as a purchase for accounting purposes.
(b) Acquisition of Digital Origin, Inc.
On May 9, 2000, the Company completed its merger with Digital Origin.
Under the terms of the agreement, Digital Origin's shareholders and option
holders received 0.5347 equivalent shares, or approximately 3.7 million Media
100 common shares, to effect the business combination. The transaction has been
accounted for as a pooling of interests. As a result, all periods presented have
been restated to reflect the combined operations of the two companies. As
permitted by Accounting Principles Board Opinion No.16 BUSINESS COMBINATIONS
(APB No.16), the November 30, 1999 balance sheet presented herein reflects the
combination of the Media 100's November 30, 1999 balance sheet and Digital
Origin's September 30, 1999 balance sheet. Likewise, the 1999 statements of
operations and cash flows presented for the combined companies are the companies
respective first, second and third fiscal quarters, which also differ by two
months. The results of operations for Digital Origin for the two months ended
November 30, 1999 will be excluded from the statement of operations and will be
recorded directly to accumulated deficit as permitted by APB No.16.
As part of the transaction, the Company incurred direct, merger-related
costs of approximately $2.0 million, consisting primarily of investment bank
fees, legal and accounting fees. All such costs have been expensed in the
quarter ended May 31, 2000, upon consummation of the Digital Origin merger.
Separate and combined results of Media 100 and Digital Origin during
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
Media 100 Digital Origin Eliminations Combined
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(YEAR ENDED NOVEMBER 30, 1999)
Net sales 51,479 13,353 -- 64,832
Net income 570 5,849 -- 6,419
(YEAR ENDED NOVEMBER 30, 1998)
Net sales 41,788 15,668 (105) 57,351
Net income (8,051) 8,733 (79) 603
</TABLE>
On May 9, 2000, as part of the transaction the Company's Board of Directors
voted to increase the number of shares reserved for issuance under the 1992 Key
Employee Incentive Plan to 4,200,000 from 2,200,000 (See Note 4).
32
