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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 1, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.
COMMISSION FILE NUMBER: 0-18690
DIGITAL ORIGIN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NUMBER)
460 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(650) 404-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY
10, 2000 WAS 5,688,869.
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DIGITAL ORIGIN, INC.
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 (unaudited) and
September 30, 1999 3
Consolidated Statements of Income for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL ORIGIN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999 (1)
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,629 $ 3,627
Accounts receivable, net 2,258 1,995
Inventories 610 211
Prepaid expenses and other current assets 340 161
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Total current assets 4,837 5,994
Property and equipment, net 1,028 726
Other assets 163 175
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$ 6,028 $ 6,895
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,216 $ 2,791
Accrued payroll and related expenses 200 551
Accrued legal expenses 169 285
Other accrued liabilities 963 1,086
Accrued income taxes 301 301
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Total current liabilities 3,849 5,014
Accrued income taxes 800 800
Shareholders' equity:
Common stock 169,474 169,417
Accumulated deficit (168,149) (168,390)
Other comprehensive income 54 54
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Total shareholders' equity 1,379 1,081
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$ 6,028 $ 6,895
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</TABLE>
(1) The balance sheet at September 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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DIGITAL ORIIGN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
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1999 1998
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<S> <C> <C>
Net sales $ 4,161 $ 2,538
Cost of sales 1,402 994
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Gross profit 2,759 1,544
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Operating expenses:
Research and development 552 676
Selling, general and administrative 2,015 1,642
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Total operating expenses 2,567 2,318
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Income (loss) from operations 192 (774)
Other income, net 49 3,620
Interest expense - (54)
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Income before income taxes 241 2,792
Provision for income taxes - -
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Net income $ 241 $ 2,792
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Net income per common share:
Basic net income per common share $ 0.04 $ 0.50
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Diluted net income per common share $ 0.04 $ 0.50
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Shares used in computing net income per common share:
Shares used in computing basic net income per common share 5,603 5,524
======== =========
Shares used in computing diluted net income per common share 6,391 5,563
======== =========
</TABLE>
See accompanying notes.
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DIGITAL ORIGIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 30,
----------------------
1999 1998
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Cash flows from operating activities:
Net income $ 241 $ 2,792
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 49 35
Gain on the sale of the Color Server Group and other assets to Splash - (2,504)
Gain on the monitor license and sale of other assets to KDS - (1,118)
(Increase) decrease in assets:
Accounts receivable (263) (523)
Note receivable - 1,050
Inventories (399) 211
Prepaid expenses and other current assets (179) 73
Decrease in liabilities:
Accounts payable (575) (111)
Accrued payroll and related expenses (351) (40)
Accrued legal expenses (116) (35)
Other accrued liabilities (123) (6)
Deferred income - (1,225)
Accrued income taxes - (4)
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Net cash used in operating activities (1,716) (1,405)
Cash flows from investing activities:
Capital expenditures (339) -
Other assets - (150)
Net proceeds on the sale of the Color Server Group and other assets to Splash - 2,504
Net proceeds from the monitor license and sale of other assets to KDS - 1,118
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Net cash provided by (used in) investing activities (339) 3,472
Cash flows from financing activities:
Short-term borrowings, net - (1,104)
Issuance of common stock 57 73
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Net cash provided by (used in) financing activities 57 (1,031)
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Net increase (decrease) in cash and cash equivalents (1,998) 1,036
Cash and cash equivalents, beginning of period 3,627 600
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Cash and cash equivalents, end of period $ 1,629 $ 1,636
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ 46
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Income taxes $ 1 $ 4
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</TABLE>
See accompanying notes.
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DIGITAL ORIGIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Digital Origin, Inc.
("Digital Origin" or the "Company") as of December 31, 1999 and for the
three months ended December 31, 1999 and 1998 are unaudited. In the opinion
of management, the consolidated financial statements reflect all
adjustments (consisting only of normal recurring items) necessary for a
fair presentation in conformity with generally accepted accounting
principles. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Examples include provisions for sales
returns and bad debts and the length of product life cycles. Actual results
may differ from management's estimates. Results for the three months ended
December 31, 1999 will not necessarily indicate the results to be expected
for the fiscal year ending September 30, 2000 or any other future period.
The information included in this Form 10-Q should be read in conjunction
with the Consolidated Financial Statements and notes thereto included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended
September 30, 1999.
For clarity of presentation, all fiscal periods are reported as
ending on a calendar month end.
NOTE 2. INVENTORIES
Inventories, stated at the lower of cost or market, consist of (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1999 1999
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(unaudited)
Work in process $ 295 $ 74
Finished goods 315 137
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$ 610 $ 211
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NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) On January 13, 1999 and January 28, 1999, the Company and one
of its former directors, Charles Berger, were named as defendants in two
shareholder class action lawsuits against Splash Technology Holdings, Inc.
("Splash"), various directors and executives of Splash and certain selling
shareholders of Splash. The suits were filed in the United States District
Court in Northern District of California and have been consolidated and
captioned IN RE SPLASH TECHNOLOGY HOLDINGS INC. SECURITIES LITIGATION
(Master File No. C99-0109 SBA). The law firm of Milberg Weiss Bershad Hynes
& Lerach LLP has been designated lead counsel for the eight lead
plaintiffs. The lawsuit alleges, among other things, that the defendants
made or were responsible for material misstatements, and failed to disclose
information concerning Splash's business, finances and future business
prospects in order to artificially inflate the price of Splash common
stock. The complaint does not identify any statements alleged to have been
made by Charles Berger or the Company. The complaint further alleges that
the Company engaged in a scheme to artificially inflate the price of Splash
common stock to reap an artificially large return on the sale of the common
stock in order to pay off its debt. The Company and the former director
vigorously deny all allegations of wrongdoing and intend to aggressively
defend themselves in these matters. Defendant's initial motion to dismiss
the action was granted with leave to amend, and the complaint has been
amended by plaintiffs. Defendants have filed their second motion to
dismiss.
(b) On July 18, 1997, Intelligent Electronics, Inc. and its
affiliates filed a suit in the United States District Court for the
District of Colorado alleging a breach of contract and related claims in
the approximate amount of $800,000, maintaining that the Company failed to
comply with various return, price protection, inventory balancing and
marketing development funding undertakings. In 1997, the Company filed an
answer to the complaint and cross-claimed against the plaintiffs and in
October 1997 additionally cross claimed against Deutsche Financial, Inc., a
factor in the account relationship between the Company and the plaintiffs,
seeking the recovery of approximately $2 million.
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The Company continues to investigate these claims as well as cross claims
and expect to vigorously defend and prosecute them as applicable. This
case is scheduled for trial in April 2000.
(c) The Company is involved in a number of other judicial and
administrative proceedings incidental to its business. The Company intends
to defend these matters vigorously and although adverse decisions (or
settlements) may occur, the final resolution of these lawsuits is not
expected to have a material adverse effect on its financial position.
However, an adverse resolution and the costs of defense, regardless of the
outcome, could have a material adverse effect on the Company's results of
operations and financial condition.
NOTE 4. TECHNOLOGY PURCHASE FROM POST DIGITAL SOFTWARE, INC.
On November 23, 1998, the Company acquired certain software and
other intangible property from Post Digital Software, Inc. for (i) an
initial payment of $50,000, (ii) earnout payments equal to at least $50,000
but not exceeding an aggregate of $700,000, based on subsequent sales of
the Company's digital video products incorporating such software and (iii)
a warrant to purchase up to 50,000 shares of the Company's Common Stock at
an exercise price of $1.50 per share. The warrant is non-forfeitable and
exercisable over a four year period through November 23, 2002. The warrant
can be exercised for up to 12,000 shares as of May 1, 1999, plus an
additional 2,000 shares for each full month that transpires thereafter, up
to a total of 50,000 shares. The net book value of the purchased technology
of $120,833 at December 31, 1999, is included as other assets in the
accompanying Consolidated Balance Sheet. The technology is being amortized
over a three year period and future royalties based on digital video
products sold will be expensed as they are incurred. As of December 31,
1999, the Company has paid or accrued approximately $22,000 in royalties.
NOTE 5. SEGMENT REPORTING
The Company operates in one business segment, specifically
the development, design and marketing of software for editing digital
video. While the Company has several products at varying price points
and in various versions, all of the products from which the Company
earns revenues are similar. The Company's business practices support the
criteria for segment reporting as outlined in Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures About Segments of an
Enterprise and Related Information.
NOTE 6. AGREEMENT TO MERGE AND LICENSE AGREEMENT WITH MEDIA 100, INC.
The Company entered into a definitive agreement on December 28,
1999 to be acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ:
MDEA), a pioneer of streaming media production tools. The merger is
intended to be completed as a pooling of interests for accounting purposes
and as a tax-free transaction. Under the agreement, Media 100 will issue
.5347 shares of common stock for each share of the Company's common stock.
The transaction is subject to the approval of both companies' shareholders
and other customary closing conditions. The merger is expected to be
completed no later than June 30, 2000. The combined company will target
Internet desktops with low-cost applications that allow personal computer
users to capture, edit, and stream video on the Internet using a single,
integrated, and easy-to-use application.
The Company also entered into a non-exclusive, four-year OEM
development and license agreement with Media 100 by which Media 100 will
use the Company's consumer level video editing and effects software with
Media 100's Internet streaming media software in exchange for certain
royalty payments of $250,000 per quarter over the term of the agreement. As
of December 31, 1999, the Company recorded $125,000 in royalties related to
this agreement.
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NOTE 7. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of employee stock options and warrants using the
treasury stock method.
The following table shows the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
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1999 1998
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NUMERATOR:
Numerator for basic and diluted net income per share -
Net income $ 241 $ 2,792
========== ==========
DENOMINATOR:
Denominator for basic net income per share - weighted-average
shares outstanding 5,603 5,524
Effect of dilutive securities:
Dilutive potential common shares 788 39
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Denominator for diluted net income per share - adjusted
weighted-average shares outstanding 6,391 5,563
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Basic net income per share $ 0.04 $ 0.50
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Diluted net income per share $ 0.04 $ 0.50
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</TABLE>
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income was the same as net income for the three
months ended December 31, 1999 and 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: Our discussion contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 that are subject to risks and uncertainties. Statements
indicating that we "intend", "plan", "expect," "estimate" or "believe" are
forward-looking, as are all other statements concerning future financial
results, product offerings or other events that have not yet occurred. There are
several important factors that could cause actual results or events to differ
materially from those anticipated by our forward-looking statements. Such
factors include, but are not limited to: our ability to achieve and maintain
profitability; the success of our digital video software products; our ability
to compete successfully with Apple in the digital video software market; the
success of Apple's QuickTime technology for Windows; continued favorable
licensing terms for QuickTime from Apple; our ability to successfully develop,
introduce and market new software products, including products for the Windows
operating system, to keep pace with technological innovation, particularly in
light of our limited financial resources; the ability of our manufacturers and
suppliers to deliver components and manufacture our products; our reliance on
international sales and our key distributor arrangements; our ability to attract
and retain its key personnel; the resources necessary to conclude the merger
with Media 100, Inc., whether the merger does in fact close and the costs and
risks associated with a failure to conclude the merger.
Each forward-looking statement should be read in conjunction with the entire
consolidated interim financial statements and the notes thereto in Part I, Item
1 of this Quarterly Report, with the information contained in Item 2, including,
but not limited to, "Certain Factors That May Affect Future Results," and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in our Annual Report on Form 10-K/A for the fiscal year
ended September 30, 1999, including, but not limited to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Certain Factors That May Affect the Company's Future Results of Operations."
OVERVIEW
We design, develop, assemble, market and support digital video computer
products for creative professionals and consumers who use digital camcorders.
Our current product line consists of multimedia authoring and nonlinear editing
video software and related hardware that can manipulate video and audio
information in conjunction with desktop computers and digital camcorders. Our
primary target markets are video editors, video producers, and creators of
multimedia with an increasing emphasis on consumers. Historically, substantially
all of our products have been designed for and sold to users of Macintosh
computer products manufactured by Apple Computer, Inc. During 1999, we focused
on the Windows market. Sales made to Windows only users were 54% of unit sales
in the first quarter of fiscal 2000 as compared to 27% in the same quarter in
fiscal 1999. We distribute our products directly through our web site and
through various distributors and resellers.
For the quarter ended December 31, 1999, we had an operating profit of
$241,000. During fiscal 1998 and 1999, management implemented a number of
actions to address its cash flow and operating issues including: refocusing its
efforts on providing solutions for digital video customers; discontinuing sales
of mass market and other low value added hardware products; divesting a number
of businesses and product lines, including most recently the agreement for the
sale and related license of significant assets of its monitor business to Korea
Data Systems America, Inc. ("KDS"); significantly reducing expenses and
headcount; and reducing its lease obligations given its reduced occupancy
requirements. There can be no assurance that these measures will be sufficient
to allow us continued success in achieving profitability. As of December 31,
1999, we had working capital of $1.0 million. We intend to finance our existing
working capital needs through cash, and cash equivalents on hand and cash
generated by operations. We also are attempting to establish a commercial credit
line, if acceptable terms can be reached. We may need to further reduce our
operating expenses or seek additional sources of working capital or additional
equity if software product sales do not increase at the rate assumed in our
current operating plans or if we increase our working capital needs.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
operational data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31
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1999 1998
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<S> <C> <C>
Total net sales 100.0% 100.0%
Cost of sales 33.7 39.2
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Gross profit 66.3 60.8
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Operating expenses:
Research and development 13.3 26.6
Selling, general and administrative 48.4 64.7
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Total operating expenses 61.7 91.3
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Income (loss) from operations 4.6 (30.5)
Other income, net 1.2 142.6
Interest expense 0.0 (2.1)
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Income before income taxes 5.8 110.0
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Provision for income taxes 0.0 0.0
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Net income 5.8% 110.0%
====== ======
</TABLE>
NET SALES
Our total net sales increased 64% to $4.2 million in the first quarter
of fiscal 2000 from $2.5 million for the same quarter in fiscal 1999. During
fiscal 1999, we decided to focus our efforts on our digital video software
product lines in the Windows market with an emphasis on consumers. During the
fourth quarter of fiscal 1999, we introduced IntroDV, our first consumer level
product. Sales of IntroDV represented 30% of shipments in the quarter ended
December 31, 1999.
Future unit sales will be predominantly attributable to sales of
software products to consumers. There can be no assurance that sales of these
consumer software products will continue to increase. We also experienced
continued growth in direct and on-line sales, which represented 18% of net
revenue in the first quarter of fiscal 2000 as compared with 12% of net
revenue in the same quarter of fiscal 1999. Revenue recognition related to
software product sales is as follows: revenue from the sale of software, net
of estimated returns, is recognized upon either shipment of the physical
product or delivery of electronic product, at which time, collection is
determined to be probable and we have no remaining obligations. Sales to
certain resellers are subject to agreements allowing certain rights of return
and price protection on unsold merchandise held by these resellers. We
provide for estimated returns at the time of shipment and for price
protection following price declines. Revenue earned under royalty or
commission agreements is recognized in the period in which it is earned.
Sales to Canon U.S.A. and Ingram Micro Inc., accounted for 36.9% and
12.0% of net sales for the first quarter of fiscal 2000, respectively. For the
corresponding period of fiscal 1999, the same customers accounted for 12.8% and
27.9% of net sales, respectively.
GROSS PROFIT
Our gross profit margin was 66.3% for the three month period ended
December 31, 1999, as compared with 60.8% for the same period in fiscal 1999.
The increase in gross profit margin in fiscal 2000 was due primarily to
increased sales
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through electronic delivery and higher gross margin digital video software
products. Included in the first quarter of fiscal 1999 were lower profit
margins OEM sales.
We anticipate the gross profit margins will remain at similar levels
during fiscal 2000 due to the expected growth in e-commerce related sales,
offset by competitive pricing and increased sales of our consumer oriented
products. Additionally, we are taking further steps to reduce product costs and
control expenses. However, there can be no assurance that our gross margins will
improve or remain at current levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $0.6 million or 13.3% of net
sales in the first quarter of fiscal 2000 compared to $0.7 million or 26.6% of
net sales in the same quarter of fiscal 1999. During the first quarter of fiscal
2000, research and development expenses decreased due to the completion of
several projects by outside consultants and the inability to hire additional
headcount due to the intensely competitive local job market. We expect research
and development expenses to increase in the subsequent quarters of fiscal 2000.
The decrease in research and development expenses expressed as a percentage of
net sales for the three month period ended December 31, 1999 were primarily
attributed to the increase in net sales. We believe that research and
development expenditures are essential to maintaining our competitive position
and expect to continue to invest in research and development activities to
support our goal of continued growth through the development of new and
competitive digital software products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.0 million or 48.4%
of net sales for the three month period ended December 31, 1999, compared to
$1.6 million or 64.7% of net sales for the same period of the prior year. We
increased our selling, general and administrative expenses in the three month
period ended December 31, 1999 primarily due to sales efforts in Europe,
increased expenses in customer support due to higher volume of unit sales to the
consumer market, and depreciation expense for the new computer system.
OTHER INCOME, NET
Other income was $49,000 for the three month period ended December 31,
1999, compared to $3,620,000 for the same period in fiscal 1999. In the first
quarter of fiscal 2000, other income resulted from the reversal of approximately
$148,000 in previously accrued property taxes as a result of settlement of
property tax exposure in certain jurisdiction, offset by legal expenses related
to the Intelligent Electronics, Inc. litigation. Other income in the first
quarter of fiscal 1999 resulted primarily from the release of $2,200,000 from
escrow related to the 1996 divestiture of the Color Server Group and $1,000,000
in income from KDS for certain monitor business assets.
INTEREST EXPENSE
Interest expense was minimal in the first quarter of fiscal 2000 and
$54,000 for the same period in the prior year. This decrease was due to the
repayment of the working capital line of credit to Silicon Valley Bank in
January 1999.
INCOME TAXES
We did not record a provision for income taxes for the three month
period ended December 31, 1999 and December 31, 1998 due to the availability of
net operating loss carryforwards.
FAS 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based on the weight of
available evidence, we provided a full valuation allowance against our deferred
tax assets. We will continue to evaluate the realization of the deferred tax
assets on a quarterly basis.
NET PROFIT
As a result of the above factors, we had a net income of $0.2 million
for the three months ended December 31, 1999, compared to a net income of $2.8
million for the three months ended December 31, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased to $1.6 million at December
31,1999, a $2.0 million decrease from September 30, 1999. The decrease in our
cash and cash equivalents was primarily attributable to investment in a new
computer system. We had working capital of $1.0 million at December 31, 1999. We
have been negotiating the terms of a commercial line of credit with a third
party and have not yet reached a definitive agreement. There can be no assurance
that any funds will be available from this source despite management's efforts
to conclude an agreement.
Approximately $1.3 million of the $1.6 million of cash and cash
equivalents available at December 31, 1999 was in highly liquid investments with
maturities of three months or less at date of acquisition to primarily minimize
principal risk and maintain liquidity and $0.1 million was restricted under a
letter of credit.
We believe that our cash and cash equivalents, cash flow from
operations, and other sources of financing, will be sufficient to fund
operations for at least the remainder of this fiscal year. However, there can be
no assurances that the sale of software products will continue to increase to a
sufficient extent to fund our operating plan for fiscal 2000. In the event we
were unable to generate sufficient net sales or if we incur unforeseen operating
expenses, we may not be able to meet our operating expenses without additional
financing. We may need to further reduce our operating expenses or seek
additional sources of working capital if software product sales do not increase
at the rate assumed in the current operating plans. We believe that other
sources of financing will be available and that we can further reduce such
operating expenses, if necessary.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
A number of uncertainties exist that could affect our future operating
results, including, without limitation, the following factors: our ability to
sustain profitability; our ability to successfully conclude the litigation with
Intelligent Electronics, Inc. and Splash shareholders; the success of our
digital video software products; the success of the Apple Macintosh computer
line and operating system, the success of Apple, as well as our ability to
compete successfully with Apple in its markets, including the non linear digital
video editing software market; the success of Apple's Quicktime technology for
Windows; favorable licensing terms for Quicktime from Apple; our ability to
successfully develop, introduce and market new software products, including
products for the Windows operating system, to keep pace with technological
innovation, particularly in light of our limited financial resources; our
ability to compete in the digital video software market, including with Apple;
the ability of our manufacturers and suppliers to deliver components and
manufacture our products; our reliance on international sales and our
distributor arrangements with respect to Europe and Japan and with Canon; our
ability to attract and retain key personnel; and the risk factors identified
from our Annual Report on Form 10-K/A for the fiscal year ended September 30,
1999.
IMPACT OF YEAR 2000
The year 2000 Issue ("Y2K Issue") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of our computer programs or hardware that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on prior assessments of our information management and accounting systems,
we determined that it was necessary to replace significant portions of this
software and certain hardware, and this was completed during fiscal 1999. We
have spent approximately $1,000,000 on our new information technology and
accounting systems through the first quarter of fiscal 2000. We paid for this
investment from internally generated funds. The upgrade of those systems
represented over 90% of the information technology budget for the prior year and
was our major project. In addition to Y2K readiness, these systems provide
additional functionality in streamlining and automating many business processes
and increasing operating efficiencies. We started using these new systems in
October 1999, the start of our fiscal year 2000. We have not encountered any
problems to date.
-12-
<PAGE>
Based on a review of our product line, we have concluded that none of
our products required remediation to be Year 2000 compliant, as primarily all
operate in conjunction with the MacOS or the Windows operating system. There
have been no Y2K problems with any of our products. We had received assurances
from our key suppliers and distributors that they were fully compliant and we
have not experienced any interruptions or delays in our course of business. Our
contingency plans, if our suppliers and distributors had failed to be Year 2000
compliant, would primarily have involved manual processes and workarounds, which
could have resulted in delays in obtaining components for our products, in
shipping product, in collecting receivables, and also increased administrative
expense. To date, we believe that we have adequately addressed the Y2K Issue,
and the likelihood of problems decreases significantly as time elapses.
AGREEMENT TO MERGE AND LICENSE AGREEMENT WITH MEDIA 100, INC.
We entered into a definitive agreement on December 28, 1999 to be
acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ: MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of our common stock. The transaction is subject to the
approval of both companies' shareholders and other customary closing
conditions. The merger is expected to be completed no later than June 30,
2000. The combined company will target Internet desktops with low-cost
applications that allow personal computer users to capture, edit, and stream
video on the Internet using a single, integrated, and easy-to-use
application. We also entered into a non-exclusive, four-year OEM development
and license agreement with Media 100 by which Media 100 will use our consumer
level video editing and effects software with Media 100's Internet streaming
media software in exchange for certain royalty payments.
Both companies are in the process of implementing the agreements. There
is significant time and cost associated with such efforts and there can be no
assurance that the merger agreement will be concluded, even if approved by our
shareholders. Management expects that there would be significant adverse impact
on our business, operations, profitability and liquidity if the merger were not
concluded for any reason. Under certain circumstances related to a failure to
close, we would be obligated to make substantial payments to Media 100, Inc.
-13-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to Consolidated Financial Statements - Commitments and Contingencies.
ITEM 5. OTHER INFORMATION
AGREEMENT TO MERGE WITH MEDIA 100, INC.
The Company entered into a definitive agreement on December 28, 1999
to be acquired by Media 100 Inc. of Marlboro, Massachusetts (NASDAQ: MDEA), a
pioneer of streaming media production tools. The merger is intended to be
completed as a pooling of interests for accounting purposes and as a tax-free
transaction. Under the agreement, Media 100 will issue .5347 shares of common
stock for each share of the Company's common stock. The transaction is
subject to the approval of both companies' shareholders and other customary
closing conditions. The merger is expected to be completed no later than June
30, 2000. The combined company will target Internet desktops with low-cost
applications that allow personal computer users to capture, edit, and stream
video on the Internet using a single, integrated, and easy-to-use
application. The Company also entered into a non-exclusive, four-year OEM
development and license agreement with Media 100 by which Media 100 will use
the Company's consumer level video editing and effects software with Media
100's Internet streaming media software in exchange for certain royalty
payments.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
The following exhibits are filed with this Quarterly Report:
27.01 Financial Data Schedule (EDGAR version only).
(b) REPORTS ON FORM 8-K
-------------------
No report on Form 8-K was filed during the three months ended December 31,
1999.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 14, 2000 DIGITAL ORIGIN, INC.
By: /s/
-----------------------
Mary F. Bobel
Chief Financial Officer
-15-
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