<PAGE> 1
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 and
Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from ___________ to ___________.
Commission file number 0-27168
METACREATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4102687
(State of incorporation) (I.R.S. Employer Identification Number)
6303 Carpinteria Ave, Carpinteria, CA 93013
(Address of principal executive offices)
(805) 566-6200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 9, 1999, there were outstanding 24,770,841 shares of the
registrant's Common Stock, $0.001 par value per share, which is the only
outstanding class of common or voting stock of the registrant.
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METACREATIONS CORPORATION
FORM 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements....................................... 3
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998
Consolidated Statements of Operations - Three and nine
month periods ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows - Nine month periods
ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities...................................... 25
SIGNATURES ........................................................... 27
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METACREATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 8,274 $ 16,297
Short-term investments ..................................... 32,556 30,038
Accounts receivable, net ................................... 17,953 12,375
Inventories ................................................ 617 526
Income taxes receivable .................................... -- 220
Deferred income taxes ...................................... 5,913 5,913
Prepaid expenses and other current assets .................. 5,277 3,767
--------- ---------
Total current assets ................................... 70,590 69,136
Property and equipment, net .................................. 5,807 6,829
Other assets ................................................. 3,307 2,000
--------- ---------
Total assets ........................................... $ 79,704 $ 77,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable ........................................... $ 4,935 $ 3,777
Accrued expenses ........................................... 3,531 4,200
Royalties payable .......................................... 1,073 958
--------- ---------
Total current liabilities .............................. 9,539 8,935
Minority interest ............................................ 87 --
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares
authorized - no shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively.... -- --
Common stock, $.001 par value; 75,000 shares authorized -
24,738 and 24,243 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively ... 25 24
Paid-in capital ............................................ 114,544 112,829
Notes receivable from stockholders ......................... (4,592) (4,491)
Cumulative translation adjustment .......................... (135) (128)
Accumulated deficit ........................................ (39,764) (39,204)
--------- ---------
Total stockholders' equity ............................. 70,078 69,030
--------- ---------
Total liabilities and stockholders' equity ............. $ 79,704 $ 77,965
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues .................................. $ 14,758 $ 9,053 $ 41,206 $ 31,491
Cost of revenues .............................. 1,628 1,544 5,021 5,437
-------- -------- -------- --------
Gross profit ................................ 13,130 7,509 36,185 26,054
Operating expenses:
Sales and marketing ......................... 6,991 5,848 20,381 22,300
Research and development .................... 4,421 3,665 12,471 12,314
General and administrative .................. 1,890 1,581 5,463 5,025
Costs associated with restructuring ......... -- -- -- 4,955
-------- -------- -------- --------
Total operating expenses ...................... 13,302 11,094 38,315 44,594
-------- -------- -------- --------
Loss from operations .......................... (172) (3,585) (2,130) (18,540)
Other income .................................. 652 633 1,657 2,019
-------- -------- -------- --------
Income (loss) before benefit for income taxes.. 480 (2,952) (473) (16,521)
Benefit for income taxes ...................... -- -- -- (353)
-------- -------- -------- --------
Income (loss) before minority interest ........ 480 (2,952) (473) (16,168)
Minority interest in earnings of subsidiary.... (87) -- (87) --
-------- -------- -------- --------
Net income (loss) ............................. $ 393 $ (2,952) $ (560) $(16,168)
======== ======== ======== ========
Net income (loss) per common share:
Basic ....................................... $ 0.02 $ (0.12) $ (0.02) $ (0.68)
======== ======== ======== ========
Diluted ..................................... $ 0.02 $ (0.12) $ (0.02) $ (0.68)
======== ======== ======== ========
Weighted average number of shares outstanding:
Basic ....................................... 24,663 23,837 24,480 23,732
-------- -------- -------- --------
Diluted ..................................... 25,937 23,837 24,480 23,732
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------- --------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (560) $(16,168)
Adjustments to reconcile net loss to net cash (used..
in) provided by operating activities:
Non-cash restructuring costs .............................. -- 2,919
Depreciation and amortization ............................. 3,801 2,962
Provision for losses on receivables and product
returns.................................................. 9,484 9,902
Provision for losses on inventory ......................... 427 592
Accrued interest income ................................... (130) (127)
Minority interest ......................................... 87 --
Changes in operating assets and liabilities:
Accounts receivable ..................................... (14,462) 3,930
Inventories ............................................. (689) (71)
Income taxes receivable/payable ......................... 220 298
Prepaid expenses and other assets ....................... (2,127) (1,221)
Accounts payable and accrued expenses ................... 1,803 (1,230)
Royalties payable ....................................... 115 (117)
-------- --------
Net cash (used in) provided by operating activities .... (2,031) 1,669
Cash flows from investing activities:
Purchases of short-term investments ........................... (66,370) (53,714)
Proceeds from sales and maturities of short-term investments .. 63,852 53,538
Purchases of property and equipment ........................... (1,139) (2,103)
Purchases of software technology and product rights............ (1,036) (721)
Payments in connection with acquisitions ...................... (1,856) --
-------- --------
Net cash used in investing activities .................. (6,549) (3,000)
Cash flows from financing activities:
Issuance of notes receivable from stockholders ................ (225) --
Repayment of notes receivable from stockholders ............... 254 --
Proceeds from exercise of stock options ....................... 535 736
-------- --------
Net cash provided by financing activities .............. 564 736
Effect of exchange rates changes on cash ........................ (7) 11
-------- --------
Net (decrease) increase in cash and cash equivalents............. (8,023) (584)
Cash and cash equivalents at beginning of period ................ 16,297 9,653
-------- --------
Cash and cash equivalents at end of period ...................... $ 8,274 $ 9,069
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of MetaCreations Corporation and its wholly-owned subsidiaries
(collectively "MetaCreations" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, the accompanying
consolidated balance sheets and related interim consolidated statements of
operations and cash flows include all adjustments (consisting only of normal
recurring items) considered necessary for their fair presentation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The consolidated results of
operations for the period ended September 30, 1999 are not necessarily
indicative of results to be expected for the year ending December 31, 1999. The
information included in this Form 10-Q should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto as of
December 31, 1998 and 1997, and for the three years in the period ended December
31, 1998, as filed on Form 10-K.
2. RESTRUCTURING
On June 30, 1998, the Company announced a restructuring plan aimed at reducing
costs and improving competitiveness and efficiency, which was implemented during
the third quarter of 1998. In connection with the restructuring, management
considered the Company's future operating costs and levels of revenue in 1998
and beyond, and determined that a restructuring charge of approximately
$4,955,000 was required to cover the costs of reducing certain sectors of its
workforce and facilities. The restructuring charge included an accrual of
approximately $2,208,000 related to severance and benefits associated with the
reduction of approximately 75 positions during July 1998, as well as the related
reduction of certain of the Company's facilities. Non-cash restructuring costs,
which totaled approximately $2,747,000, primarily related to the write-down of
non-strategic business assets made redundant or obsolete due to the streamlining
of the Company's product lines and/or reduction of facilities. The Company
completed the restructuring plan during the first quarter of 1999.
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Finished goods .......... $296 $434
Materials and supplies... 321 92
---- ----
$617 $526
==== ====
</TABLE>
4. INCOME TAXES
The Company did not record a benefit for income taxes for the three and nine
months ended September 30, 1999, as well as for the three months ended September
30, 1998, based on management's assessment of the recoverability of the deferred
tax assets. Management's assessment included an evaluation of the Company's
deferred income tax assets; available tax carrybacks; cumulative net income,
excluding costs related to mergers and acquisitions; available tax planning
strategies; and future financial statement projections. Based on this assessment
and interpretation of the provisions of SFAS No. 109, management has concluded
that additional net operating losses and other tax benefits generated subsequent
to March 1998 require a valuation allowance. Management's assessment with
respect to the amount of deferred tax assets considered realizable may be
revised over the near term based on actual operating results and revised
financial statement projections.
The benefit for income taxes for the nine months ended September 30, 1998 is
attributed to the benefit for income taxes recorded for the three months ended
March 31, 1998, which was based on the Company's estimated annualized effective
tax rate for the year, after giving effect to the utilization of available tax
credits and tax planning opportunities.
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. MINORITY INTEREST
In June 1999, the Company formed MetaStream.com, a joint venture company between
MetaCreations and Computer Associates International, Inc. ("Computer
Associates"), with the goal of developing and delivering new MetaStream-related
solutions and services for e-commerce visualization. For financial reporting
purposes, the assets, liabilities and earnings of MetaStream.com are included in
the Company's consolidated financial statements. Computer Associate's 20%
interest in MetaStream.com has been recorded as minority interest in the
Company's consolidated balance sheets, and the earnings therefrom have been
reported as minority interest in the Company's consolidated statements of
operations.
6. INCOME (LOSS) PER SHARE
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted per-share computations for the three and nine months
ended September 30, 1999 and 1998, in accordance with SFAS No. 128, "Earnings
per Share" (in thousands, except per share amounts):
<TABLE>
<CAPTION>
INCOME (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
Three Months Ended:
September 30, 1999:
Basic EPS ..................... $ 393 24,663 $ .02
Effect of dilutive securities.. -- 1,274
-------- ------
Diluted EPS ................... $ 393 25,937 $ .02
-------- ------
September 30, 1998:
Basic EPS ..................... $ (2,952) 23,837 $ (.12)
Effect of dilutive securities.. -- --
-------- ------
Diluted EPS ................... $ (2,952) 23,837 $ (.12)
-------- ------
Nine Months Ended:
September 30, 1999:
Basic EPS ..................... $ (560) 24,480 $ (.02)
Effect of dilutive securities.. -- --
-------- ------
Diluted EPS ................... $ (560) 24,480 $ (.02)
-------- ------
September 30, 1998:
Basic EPS ..................... $(16,168) 23,732 $ (.68)
Effect of dilutive securities.. -- --
-------- ------
Diluted EPS ................... $(16,168) 23,732 $ (.68)
-------- ------
</TABLE>
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table summarizes unexercised stock options that were not included
in the computation of diluted EPS because to do so would have been anti-dilutive
for the periods presented:
<TABLE>
<S> <C>
Three Months Ended:
September 30, 1999 1,577,000
September 30, 1998 6,992,000
Nine Months Ended:
September 30, 1999 8,067,000
September 30, 1998 6,992,000
</TABLE>
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto.
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results could differ materially from those expressed
or forecasted in any such forward-looking statements as a result of certain
factors, including those set forth in "Factors That May Affect Future Operating
Results," as well as those discussed elsewhere in the Company's SEC reports,
including without limitation, the Company's audited consolidated financial
statements and notes thereto as of December 31, 1998 and 1997, and for the three
years in the period ended December 31, 1998, as filed on Form 10-K.
OVERVIEW
MetaCreations was formed in May 1997, as a result of the merger of MetaTools,
Inc. and Fractal Design Corporation, and included the acquisitions of Real Time
Geometry Corp. in December 1996 and Specular International. Ltd. in April 1997,
as well as the previous merger of Fractal and Ray Dream, Inc. in May 1996. In
the third quarter of 1998, the Company announced a restructuring plan aimed at
reducing costs and improving competitiveness and efficiency. Subsequently,
MetaCreations introduced its Creative Web strategy designed to leverage the
Company's 2D and 3D technologies for use on the Internet through both new and
existing products and technologies. In keeping with the Company's new Creative
Web strategy, in June 1999, the Company licensed and sold its consumer photo
imaging products, consisting of Kai's Super GOO, Kai's Photo Soap 2 and Kai's
Power Show, to ScanSoft, Inc.
Additionally, in June 1999, the Company formed MetaStream.com, a joint venture
company between MetaCreations and Computer Associates International, Inc.
("Computer Associates"), with the goal of developing and delivering new
MetaStream-related solutions and services for e-commerce visualization.
MetaStream.com is owned 80% by MetaCreations and 20% by Computer Associates.
The Company's future revenues continue to be substantially dependent upon the
continued market acceptance of the Company's existing leading products and
technologies: Bryce, Canoma, Headline Studio, Infini-D, Kai's Power Tools,
MetaFlash, MetaStream, Office Advantage, Painter, Poser, Ray Dream Studio and
Vector Effects. In this regard, revenue from the sale of these products and
licensing of these technologies represented a substantial majority of net
revenues during the three months ended September 30, 1999. The Company also has
a number of new product development efforts under way based upon the Company's
Creative Web strategy. A significant portion of future revenues is dependent
upon the timely introduction and ultimate success of these activities.
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The Company develops substantially all of its products either internally,
through acquisitions, or occasionally through co-development arrangements with
third parties. There can be no assurance that the Company will be able to
continue to supplement its product development efforts in the future through
acquisitions or co-development relationships.
The Company sells its products primarily to domestic and international
distributors, including mail order resellers and retail outlets. The Company
also sells its products to OEMs for bundling with their hardware or software
products. More recently, the Company has also been licensing its
MetaStream-related technologies to large organizations to strategically broaden
market acceptance and to develop new revenue sources from these technologies.
The Company also sells directly to end users, generally through telesales,
direct mail campaigns, and through the Company's online store.
Fluctuations in distributor purchases and maintenance of inventory levels can
cause significant volatility in the Company's revenues. These fluctuations are
due to a variety of reasons, including the distributors' ability to finance
product purchases and to devote shelf space, catalog space or attention to the
products. Distributor purchases may also be affected by the Company's
introduction of a new product or version of a product, the Company's end user
promotions programs, anticipated product price increases, the Company's
purchases of display space at retail outlets and other factors. Further,
licensing and OEM agreements are often entered into at the end of the quarter.
The timing of the execution of such agreements can fluctuate substantially
throughout the year, causing volatility in the Company's revenues, operating
results, and cash flows.
Since its inception, the Company has focused on building its product portfolio
and establishing brandname awareness. Historically, these activities have
resulted in significant increases in all expense categories. The Company's
recent product development efforts to focus on the Creative Web strategy has
resulted in increased research and development, and sales and marketing
expenditures subsequent to the Company's restructuring in the third quarter of
1998. Such higher expense levels combined with periodic merger and acquisition
costs, including the related write-off of acquired in-process technology, and
quarterly fluctuations in net revenues have contributed to the Company's recent
annual and quarterly losses, as well as fluctuations in its operating results.
The Company intends to continue to invest significant amounts both in expanding
its product portfolio and in maintaining and enhancing brand awareness of its
products, and accordingly may continue to experience future losses and
volatility of net revenues and operating results.
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OPERATING RESULTS
The following table sets forth certain selected financial information expressed
as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues ....................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ................... 11.0 17.1 12.2 17.3
----- ----- ----- -----
Gross profit ..................... 89.0 82.9 87.8 82.7
Operating expenses:
Sales and marketing .............. 47.4 64.6 49.4 70.8
Research and development ......... 29.9 40.5 30.3 39.1
General and administrative ....... 12.8 17.4 13.3 16.0
Costs associated with
restructuring................... -- -- -- 15.7
----- ----- ----- -----
Total operating expenses ....... 90.1 122.5 93.0 141.6
----- ----- ----- -----
Loss from operations ............... (1.1) (39.6) (5.2) (58.9)
Other income ....................... 4.4 7.0 4.0 6.5
----- ----- ----- -----
Net income (loss) before benefit
for income taxes ................. 3.3 (32.6) (1.2) (52.4)
Benefit for income taxes ........... -- -- -- (1.1)
----- ----- ----- -----
Net income (loss) before minority
interest ......................... 3.3 (32.6) (1.2) (51.3)
Minority interest in earnings of
subsidiary ....................... (.6) -- (.2) --
----- ----- ----- -----
Net income (loss) .................. 2.7% (32.6)% (1.4)% (51.3)%
===== ===== ===== =====
</TABLE>
Net Revenues
Net revenues totaled $14.8 million for the three months ended September 30,
1999, representing a 63% increase compared to $9.1 million for the three months
ended September 30, 1998. The growth in revenues was attributed to increased
licensing revenues from the Company's MetaStream-related technologies and
increased net revenues from professional graphics products. Net revenues from
the Company's e-commerce visualization tools and technologies totaled $4.9
million, or 33% of net revenues, for the three months ended September 30, 1999;
there were no net revenues from the Company's e-commerce visualization tools and
technologies for the three months ended September 30, 1998. The Company's
professional graphics software products accounted for $9.6 million, or 65% of
net revenues, for the three months ended September 30, 1999, compared to $6.8
million, or 75% of net revenues for the three months ended September 30, 1998.
The increase in net revenues from professional graphics products was primarily
attributed to the Company's release of two new versions of existing products,
Painter 6 and Vector Effects 1.5, as well as several additions to KPT X, a
series of filters for KPT which are only available via download at the Company's
Web site. International sales accounted for $2.8
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million, or 19% of net revenues, for the three months ended September 30, 1999,
compared to $2.2 million, or 25% of net revenues, for the three months ended
September 30, 1998. The increase in international revenue dollars was primarily
attributed to increased sales in Europe.
Net revenues totaled $41.2 million for the nine months ended September 30, 1999,
compared to $31.5 million for the nine months ended September 30, 1998, an
increase of 31%. The increase in net revenues is attributed to increased
licensing revenues from MetaStream-related technologies in addition to increased
net revenues from domestic retail channels. Net revenues from the Company's
e-commerce visualization tools and technologies totaled $13.3 million, or 32% of
net revenues, for the nine months ended September 30, 1999, compared to $1.1
million, or 3% of net revenues for the nine months ended September 30, 1998. Net
revenues from the Company's professional graphics software products totaled
$23.8 million, or 58% of net revenues, for the nine months ended September 30,
1999, compared to $23.0 million, or 73% of net revenues for the nine months
ended September 30, 1998. International sales accounted for $8.4 million, or 21%
of net revenues, for the nine months ended September 30, 1999, down from $9.3
million, or 30% of net revenues, for the nine months ended September 30, 1998,
primarily due to a decline in revenues from Japan.
The Company recognizes revenue from the sale of its products in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2."
SOP 97-2 and SOP 98-4 generally require revenue earned on software arrangements
involving multiple elements (e.g., software products, upgrades/enhancements,
postcontract customer support, etc.) to be allocated to each element based on
the relative fair value of the elements. The fair value of an element must be
based on evidence which is specific to the Company. The Company recognizes
product revenues upon shipment to the customer, satisfaction of Company
obligations, if any, and reasonable assurance regarding the collectability of
the corresponding receivable. Revenue allocated to postcontract customer support
is recognized ratably over the term of the support. If the Company does not have
evidence of the fair value for all elements in a multiple-element arrangement,
all revenue from the arrangement is deferred until such evidence exists or until
all elements are delivered.
The Company provides an allowance for estimated returns at the time of product
shipments and adjusts this allowance as needed based on actual return history.
Such reserves as a percentage of gross revenues have varied over recent years,
reflecting the Company's experience in product returns as it has significantly
expanded the proportion of its sales through third-party distribution channels
and increased its product portfolio. The Company expects reserves will continue
to vary in the future. The Company's agreements with its distributors generally
provide the distributors with limited rights to return unsold inventories under
a stock balancing program. The Company monitors the activities of its
distributors in an effort to minimize excessive returns and establishes its
reserves based on its estimates of expected returns. The establishment of
reserves requires judgments regarding such factors as future competitive
conditions and product life cycles, which can be difficult to predict. As a
result, there can be no assurance that established reserves will be adequate to
cover actual future returns.
The Company has entered into agreements whereby it licenses products to original
equipment manufacturers ("OEM's") and foreign publishers which provide such
customers the right to produce and distribute multiple copies of its software.
Nonrefundable fixed fees are recognized as revenue at delivery of the product
master to the customer, satisfaction of Company
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obligations, if any, and reasonable assurance regarding the collectability of
the corresponding receivable. Per copy royalties in excess of fixed amounts are
recognized as revenue when such amounts exceed fixed minimum royalties. Revenues
under OEM contracts without nonrefundable fixed fees are recognized as earned
over the term of the contract.
Cost of Revenues
Cost of revenues includes the costs of goods sold, royalties due to external
developers, inventory management costs, freight and handling costs and reserves
for inventory obsolescence. Cost of revenues totaled $1.6 million, or 11% of net
revenues, for the three months ended September 30, 1999, compared to $1.5
million, or 17% of net revenues, for the three months ended September 30, 1998.
The decrease in cost of revenues as a percentage of net revenues resulted from
increased revenues from technology licenses, in addition to reduced product
costs attributed to improved management of production and inventories. Royalties
represented 2% of net revenues for the three months ended September 30, 1999,
compared to 5% of net revenues for the three months ended September 30, 1998.
The decreased royalties resulted from the changing mix of product sales during
the quarter.
Cost of revenues totaled $5.0 million, or 12% of net revenues, for the nine
months ended September 30, 1999, compared to $5.4 million, or 17% of net
revenues, for the nine months ended September 30, 1998. The decrease in cost of
revenues as a percentage of net revenues resulted from reduced product costs and
increased licensing revenues. Royalties represented 3% of net revenues for the
nine months ended September 30, 1999, compared to 4% of net revenues for the
nine months ended September 30, 1998.
The Company expects that cost of revenues will increase in the future
commensurate with any increase in net revenues, but may vary as a percentage of
net revenues.
Sales and Marketing
Sales and marketing expenses include advertising, promotional materials, mail
campaigns, trade shows and the compensation costs of sales, marketing, customer
service and public relations personnel who promote the Company's products,
including related facilities costs. Sales and marketing expenses totaled $7.0
million, or 47% of net revenues, for the three months ended September 30, 1999,
compared to $5.8 million, or 65% of net revenues, for the three months ended
September 30, 1998. The increase in sales and marketing expenses primarily
resulted from increased headcount compared to the third quarter of 1998. As a
percentage of net revenues, sales and marketing expenses decreased as a result
of the significant increase in net revenues for the respective periods.
Sales and marketing expenses totaled $20.4 million, or 49% of net revenues, for
the nine months ended September 30, 1999, a decrease of 9% over sales and
marketing expenses of $22.3 million, or 71% of net revenues, for the nine months
ended September 30, 1998. The decrease was primarily attributed to decreased
promotional activities resulting from the restructuring programs implemented
during the third quarter of 1998. As a percentage of net revenues, sales and
marketing expenses decreased as a result of the significant increase in net
revenues for the respective periods.
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<PAGE> 15
The Company expects sales and marketing expenses will increase in future
periods, but such expenses may vary as a percentage of net revenues.
Research and Development
Research and development expenses consist primarily of personnel costs,
consultant fees and required equipment and facilities costs related to the
Company's product development efforts. Research and development expenses totaled
$4.4 million, or 30% of net revenues, for the three months ended September 30,
1999, compared to $3.7 million, or 40% of net revenues, for the three months
ended September 30, 1998. The increase in research and development expenses was
attributed to increased headcount compared to the three months ended September
30, 1998. As a percentage of net revenues, research and development expenses
decreased as a result of the significant increase in net revenues for the
respective periods.
For the nine months ended September 30, 1999, research and development expenses
totaled $12.5 million, or 30% of net revenues, compared to research and
development expenses of $12.3 million, or 39% of net revenues, for the nine
months ended September 30, 1998. The increase in research and development
expenses was attributed to increased headcount during the first nine months of
1999 compared to the first nine months of 1998. As a percentage of net revenues,
research and development expenses decreased as a result of the significant
increase in net revenues for the respective periods.
The Company expects research and development expenses will increase in future
periods, but such expenses may vary as a percentage of net revenues.
General and Administrative
General and administrative expenses include compensation costs related to
executive management, finance and administration personnel of the Company along
with other administrative costs including legal and accounting fees, insurance
and bad debt expenses. General and administrative expenses totaled $1.9 million
for the three months ended September 30, 1999, compared to $1.6 million for the
three months ended September 30, 1998. The increase in general and
administrative expenses primarily resulted from increased reserves for bad
debts. As a percentage of net revenues, general and administrative expenses were
13% for the three months ended September 30, 1999, down from 17% for the three
months ended September 30, 1998, as a result of the significant increase in net
revenues for the respective periods.
For the nine months ended September 30, 1999, general and administrative
expenses totaled $5.5 million, or 13% of net revenues, an increase of 9% over
general and administrative expenses of $5.0 million, or 16% of net revenues, for
the nine months ended September 30, 1998. The dollar increase in general and
administrative expenses resulted from increased reserves for bad debts and
increased corporate expenses. As a percentage of net revenues, general and
administrative expenses decreased as a result of the significant increase in net
revenues for the respective periods.
The Company expects that its general and administrative expenses will increase
in the future, but such expenses may vary as a percentage of net revenues.
15
<PAGE> 16
Restructuring Costs
On June 30, 1998, the Company announced a restructuring plan aimed at reducing
costs and improving competitiveness and efficiency, which was implemented during
the third quarter of 1998. In connection with the restructuring, management
considered the Company's future operating costs and levels of revenue in 1998
and beyond, and determined that a restructuring charge of approximately $5.0
million was required to cover the costs of reducing certain sectors of its
workforce and facilities. The restructuring charge included an accrual of
approximately $2.2 million related to severance and benefits associated with the
reduction of approximately 75 positions during July 1998, as well as the related
reduction of certain of the Company's facilities. Non-cash restructuring costs,
which totaled approximately $2.7 million, primarily related to the write-down of
non-strategic business assets made redundant or obsolete due to the streamlining
of the Company's product lines and/or reduction of facilities. The Company
completed the restructuring plan during the first quarter of 1999.
Benefit for Income Taxes
The Company did not record a benefit for income taxes for the three and nine
months ended September 30, 1999, as well as for the three months ended September
30, 1998, based on management's assessment of the recoverability of the deferred
tax assets. Management's assessment included an evaluation of the Company's
deferred income tax assets; available tax carrybacks; cumulative net income,
excluding costs related to mergers and acquisitions; available tax planning
strategies; and future financial statement projections. Based on this assessment
and interpretation of the provisions of SFAS No. 109, management has concluded
that additional net operating losses and other tax benefits generated subsequent
to March 1998 require a valuation allowance. Management's assessment with
respect to the amount of deferred tax assets considered realizable may be
revised over the near term based on actual operating results and revised
financial statement projections.
The benefit for income taxes for the nine months ended June 30, 1998 is
attributed to the benefit for income taxes recorded for the three months ended
March 31, 1998, which was based on the Company's estimated annualized effective
tax rate for the year, after giving effect to the utilization of available tax
credits and tax planning opportunities.
Minority Interest
In June 1999, the Company formed MetaStream.com, a joint venture company between
MetaCreations and Computer Associates International, Inc., with the goal of
developing and delivering new MetaStream-related solutions and services for
e-commerce visualization. For financial reporting purposes, the assets,
liabilities and earnings of MetaStream.com are included in the Company's
consolidated financial statements. Computer Associate's 20% interest in
MetaStream.com has been recorded as minority interest in the Company's
consolidated balance sheets, and the earnings therefrom have been reported as
minority interest in the Company's consolidated statements of operations.
16
<PAGE> 17
Net Loss
Net income was $393,000, or $0.02 per share, for the three months ended
September 30, 1999, compared to a net loss of $(3.0) million, or $(0.12) per
share, for the three months ended September 30, 1998. Net loss was $(560,000),
or $(0.02) per share, for the nine months ended September 30, 1999, compared to
a net loss of $(16.2) million, or $(0.68) per share, for the nine months ended
September 30, 1998.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results could differ materially from
those expressed or forecasted in any such forward-looking statements as a result
of certain factors, including those listed below.
Shares of MetaCreations' Common Stock are speculative in nature and involve a
high degree of risk. The following risk factors should be considered carefully.
The risks described below are not the only ones facing MetaCreations. Many
factors could cause our results to be different, including the following risk
factors and other risks described in this document, as well as those discussed
elsewhere in the Company's SEC reports, including without limitation, the
Company's audited consolidated financial statements and notes thereto as of
December 31, 1998 and 1997, and for the three years in the period ended December
31, 1998, as filed on Form 10-K. If any of the following risks occur, our
business would likely be adversely affected and the trading price of our Common
Stock could decline. This could result in a loss of all or part of your
investment.
Fluctuations in Quarterly Results
Our quarterly operating results depend on a number of factors that are difficult
to forecast. If our future quarterly operating results fall below the
expectations of securities analysts or investors, the trading price of our
common stock will likely drop. Our quarterly operating results have fluctuated
significantly in the past and may continue to fluctuate in the future as a
result of many factors, including:
o Introduction or enhancement of new products or technologies by us or our
competitors;
o Market acceptance of our products and technologies;
o Industry press reviews of our products and technologies;
o Changes in our prices or our competitors' prices;
o The mix of distribution channels for our products;
o The mix of products we sell;
o The timing of distributor purchases;
o Distributors' returns of our products; and
o General economic conditions.
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<PAGE> 18
In addition, we ship our products as we receive orders. As a result, we have
little or no backlog. A large portion of our revenues occurs in the third month
of each quarter. Demand for our products also tends to increase at the end of
the calendar year due to year-end holiday buying trends. Revenues may also be
affected by the volume and timing of the orders we receive, our ability to
fulfill these orders, and our ability to close distribution and licensing
agreements during a particular quarter. Any delays in the receipt and shipment
of orders, the failure of our suppliers and manufacturers to produce and ship
products that we have requested or our inability to close distribution and
licensing agreements would adversely affect our revenues.
Our staffing and other operating expenses are based in large part on anticipated
revenues. It would be difficult for us to adjust our spending to compensate for
any unexpected shortfall. If we are unable to reduce our spending following any
such shortfall, our results of operations would be adversely affected.
The Company has experienced recent operating losses. We restructured in the
third quarter of 1998, and reduced our operating expenses to levels more
consistent with expected revenues. We cannot guarantee that such reductions in
operating expenses will be enough to restore operating profitability.
Possible Volatility of Stock Price
The market price of our common stock has fluctuated significantly in the past.
The price at which our common stock will trade in the future will depend on a
number of factors including:
o Our historical and future operating results;
o General market and economic conditions;
o Our announcement and release of new products or technologies;
o Actual or anticipated fluctuations in our operating results; and
o Developments regarding our products and technologies, or our
competitors' products and technologies.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent quarters. This volatility has had a substantial effect on
our stock price, as well as the stock prices of other software companies,
particularly those focused on internet software solutions. These broad market
and industry fluctuations may continue to adversely affect the market price of
our common stock. As a result, the market price of our common stock may continue
to fluctuate.
Dependence on Distributors And On Other Third Parties
Although we make some direct sales to customers, we generate a majority of our
revenues from sales through third party distributors. We use many different
distribution channels to sell our products worldwide. Examples of distribution
channels include international distributors, educational distributors,
resellers, hardware superstores, retail dealers, direct marketers, and hardware
and software OEM's. Our future financial results depend in large part on our
relationship with third party distributors and their continued financial
stability. Any termination or significant disruption of our relationship with
any major distributor or retailer, or any significant reduction in sales volume
attributable to a major distributor or retailer, would adversely affect our
business.
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<PAGE> 19
The distribution channels are subject to rapid change, significant margin
pressures, consolidation and other financial difficulties. For example, if one
of our distributors experienced financial difficulties such as a bankruptcy, we
might not be able to collect on accounts receivable from that distributor. It is
also possible that new channels of distribution will develop which compete with
existing channels. For example, the Internet is currently evolving as a new
distribution channel for computer software. If we are unable to adapt our
products for distribution through the Internet, to the extent they need
adapting, our business could be adversely affected.
We depend in part on our third party distributors to promote our products to
retailers. These retailers typically have a limited amount of shelf space
subject to high demand. We cannot be sure that our distributors and retailers
will continue to purchase our products or provide our products with adequate
shelf space and promotional support. Their failure to continue to do so would
adversely affect our business.
An important part of our strategy is to enhance and diversify our domestic and
international distribution channels. We are currently restructuring our domestic
and international sales and marketing force. We are also continuing to develop
relationships with new third-party distributors and resellers. Our ability to
increase our sales and market share will depend in large part on our success in
recruiting and training sales personnel, distributors and resellers.
Highly Competitive Graphics Software and Internet Online Design and Tools
Markets
We face intense competition in the market for our products and technologies. Our
potential competitors include, among others, Adobe Systems, Incorporated;
Autodesk, Inc.; Corel Corporation; Macromedia, Inc.; Microsoft Corporation; and
RealNetworks, Inc. The market for our products can change rapidly, and customers
constantly demand new product features, accelerated releases of new products,
product enhancements and lower price points.
Many of our competitors or potential competitors are larger than we are and have
significantly greater financial, managerial, technical and marketing resources
than we have. Our business would be adversely affected if any of our competitors
cut prices, increased promotions of their products, announced or accelerated
introduction of new products or enhanced product features which compete with our
products, or acquired additional applications or technologies from third parties
which compete with our products.
Our present or future competitors may be able to develop products comparable or
superior to ours or may be able to develop new products faster than we can. We
also face possible competition from developers of personal computer operating
systems and internet browsers. These companies may incorporate functions into
their operating systems which could be superior to or incompatible with our
products and technologies. Such competition would also adversely affect our
business.
We are currently developing additional products and product enhancements that we
believe will address customer requirements. However, we cannot be sure that we
will complete our development and introduction of these products on a timely
basis. In addition, we cannot be sure that these products or product
enhancements will achieve market acceptance. If we are unable to
19
<PAGE> 20
compete effectively in our markets, or if competition becomes increasingly
intense, our business would be adversely affected.
Evolving Markets for Our Internet/Online Design Tools, Including E-Commerce
Tools and Services
The markets for Internet/online design and e-commerce visualization tools and
services are still emerging. The Internet/online design and e-commerce markets
may not adopt our products or technologies. Further, we may not have sufficient
resources to market our products and technologies successfully or these products
and technologies may not achieve market acceptance.
If the markets for these tools and services fail to grow or grow more slowly
than we currently anticipate, then our business would be adversely affected.
Risks Associated With Product Transitions and Product Returns
We may announce new products, product versions or technologies that may replace
or shorten the life cycles of our existing products or technologies. Our
competitors may also make similar announcements about their products which may
replace or shorten the life cycles of our products.
Although we provide allowances for anticipated returns, actual product returns
may exceed these allowances. Periodically, we may increase our reserves for
returns because of decreased demand and/or lower than expected revenues in our
domestic or international retail channels. This would adversely affect our
business.
In certain cases we sell our new products and product versions at a discounted
price to achieve market acceptance. These price discounts could adversely affect
our revenues. In addition, when we announce plans for new products or new
releases, or when our competitors make similar announcements, customers may
delay purchasing our current products. This would also adversely affect our
business.
Need to Expand International Operations
We sell a large percentage of our products outside of the United States.
International sales accounted for approximately 19% and 25% of net revenues for
the three months ended September 30, 1999 and 1998, respectively.
An important element of our business strategy is to continue to expand our sales
in international markets, primarily Japan, Western Europe and Asia Pacific. Our
ability to expand our international presence depends on our success in retaining
effective international distributors and our ability to hire and retain
qualified employees abroad.
There are risks inherent in expanding and doing business internationally such
as:
o Difficulties in staffing and managing foreign operations;
o Problems and delays in collecting accounts receivable;
o Fluctuations in currency exchange rates;
o Unexpected changes in regulatory requirements;
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<PAGE> 21
o Tariffs and other trade barriers;
o Political instability; and
o Potentially adverse tax consequences.
Currently we sell our products in U.S. dollars. Any increase in the value of the
U.S. dollar as compared to currencies in our principal overseas markets would
increase the cost of our products in these markets. This may adversely affect
our sales in those markets. To date, we have not engaged in currency hedging
transactions to reduce the effect of fluctuations in currency exchange rates.
In addition, effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. The occurrence of
any of these risks would adversely affect the success of our international
operations and our business.
In the past, a significant portion of our net revenues have come from the Asia
Pacific region, primarily Japan. Over the last two years, Japan has experienced
weaknesses in their economy, currency, banking and equity markets. We do not
know if the financial condition in Japan and in the Asia Pacific region will
improve in the near future. If the current financial crisis in the Asia Pacific
region continues or worsens, our business will continue to be adversely
affected. For example, during 1998 and the first nine months of 1999, our net
revenues from Japan and the Asia Pacific region decreased as a result of
depressed demand for our products.
Dependence on Key Personnel
We depend on the continued employment of our senior executive officers and other
key management personnel. If any of our senior officers or other key employees
leave our company and are not adequately replaced, our business would be
adversely affected.
Difficulty of Identifying and Hiring Certain Personnel
Our future success depends on our continuing ability to identify, hire, train
and retain other highly qualified technical and managerial employees. The
competition for such employees is intense, and we have experienced difficulty in
identifying and hiring qualified engineering personnel. If we do not succeed in
attracting and retaining necessary technical and managerial employees in the
future, our business would be adversely affected.
Rapid Technological Change and Dependence On New Products And Product Versions
The market for graphics software products is characterized by rapidly changing
technology. Product life cycles are short and downward pricing pressures are
strong. As a result, our success depends substantially upon our ability to
continue to enhance our products and to develop new products that meet
customers' increasing expectations and that incorporate the latest technology.
We may not be successful in developing and marketing enhancements to our
existing products or introducing new products on a timely basis. Our new or
enhanced products may not succeed in the marketplace. If our new products or
product versions receive bad reviews in industry publications, this would likely
decrease their potential market acceptance, and our business would be adversely
affected.
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<PAGE> 22
We expect our research and development expenditures will increase in the future.
If our increased research and development spending is not accompanied by
increased revenues, our business would be adversely affected. We have
supplemented our research and development efforts by exclusively licensing
products developed by or co-developed with third parties. We may not be able to
continue to obtain such outside product development capabilities on terms
favorable to us or at all. If we cannot maintain existing development
arrangements or fail to attract new product development partners, then we would
have to further increase our research and development spending. This would
adversely affect our business.
Potential Delays in Product Releases
We also depend upon internal efforts for the development of new products and
product enhancements. In the past, we have had delays in the development of new
products and product versions. We may experience similar delays in the future.
Risk of Undetected Errors
We offer complex software products which may contain undetected errors. In the
past, we discovered software errors in certain new products and enhancements
after these products were introduced to the marketplace. If errors are found in
our products after we have commercially shipped them, we would likely experience
bad product reviews and a loss or delay of market acceptance. This would
adversely affect our business.
Risks of Infringement and Proprietary Rights
We rely on a combination of copyright, trademark, patent, trade secret laws,
employee and third-party nondisclosure agreements and exclusive contracts to
protect our intellectual and proprietary rights, products, and technology, such
as MetaStream and MetaFlash. We distribute our packaged software under
shrinkwrap license agreements. We generally do not obtain signed license
agreements from the end users of our packaged software.
As is typical in the software industry, we do not copy-protect our software. As
a result, unauthorized third parties may be able to copy or reverse engineer our
products. We may not be able to police unauthorized uses of our products, and we
expect that software piracy could be a chronic problem. We also distribute or
plan to distribute our products in other countries which do not protect the
intellectual property of our products to the same extent as laws in the United
States.
We also believe that the growing number of software products available and the
increasing overlap of products may lead to a greater number of infringement
claims. Our products may be the subject of infringement claims in the future.
This could result in costly litigation and could require us to obtain a license
to the intellectual property of third parties. We may be unable to obtain
licenses from these third parties on favorable terms, if at all. Even if a
license is available, we may have to pay substantial royalties to obtain it. If
we cannot obtain necessary licenses on reasonable terms, our business would be
adversely affected.
22
<PAGE> 23
Year 2000 Risks
Background
Many currently installed computer systems and software products are coded to
accept only two digit entries for the year in the date code field. Beginning in
the year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, over the
next year, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. The Year 2000 problem
could affect computers, software and other equipment used, operated, or
maintained by us, our business partners, our suppliers and our customers.
Project
We have identified potential Year 2000 risks in five categories:
1) Internal business software and systems;
2) Systems other than information technology systems ("Non-IT systems");
3) Software products we sell to customers;
4) Third party distributors of our products; and
5) Third party suppliers of products and services to us.
Our Year 2000 project includes the following phases for the first three
categories above:
1) Inventorying Year 2000 items;
2) Assessing Year 2000 compliance for items determined to be material;
3) Assigning priorities to identified items;
4) Implementing remediation plans for items determined to be material and
not Year 2000 compliant;
5) Re-testing items for which corrections have been implemented; and
6) Developing contingency plans.
With respect to the our third-party distributors and suppliers, our Year 2000
project consists of the following phases:
1) Contacting distributors and suppliers for information concerning their
Year 2000 readiness;
2) Prioritizing distributors and suppliers as to relative importance;
3) Validating distributor and supplier responses regarding Year 2000
compliance; and
4) Developing contingency plans in the event one or more distributors or
suppliers fails to achieve Year 2000 compliance.
Assessment
Internal business software and systems consist primarily of our business
information system which is based in the United States and services our
worldwide operations. During 1997, we completed implementation of a Year 2000
compliant enterprise-wide information system. Additionally, we have completed
the first four phases of the Year 2000 project related to our
23
<PAGE> 24
mission critical business systems. We currently expect completion of the
re-testing phases of our mission critical business systems by November 30, 1999,
and the development of applicable contingency plans, by December 31, 1999. We
presently believe that with the implementation of our new information system and
modification to existing software, Year 2000 compliance will not adversely
affect our business. However, there can be no assurance that our internal
business software and systems will contain all date code changes necessary to
prevent processing errors potentially arising from calculations using the Year
2000 date. If our mission critical business systems are not compliant, we could
experience interruptions to our development programs and general business
operations.
We have been advised by our suppliers of non-IT systems, which primarily consist
of environmental systems such as fire suppression, air conditioning and heating,
and security systems at various buildings we occupy, that such systems are
currently Year 2000 compliant.
The computer graphics software products that we sell to customers are not
date-sensitive. As a result, we believe that the current versions of our
products are Year 2000 compliant. However, there can be no assurance that our
current products do not contain undetected errors or defects associated with
Year 2000 that may result in costs which adversely affect our business.
We contract with third parties for the manufacture and distribution of our
products. As a result, we have initiated communications with our key suppliers
and distributors and plan to monitor the status of their Year 2000 readiness. We
have completed the first three phases of our Year 2000 project related to our
key distributors. We have also reviewed the Year 2000 project plan implemented
by our key supplier and have held quarterly meetings with them since the middle
of 1998 in order to monitor their progress. Our key supplier has completed their
Year 2000 remediation and testing phases and will be developing contingency
plans, if necessary, throughout the rest of 1999. If any of our principal
suppliers and distributors fail to demonstrate Year 2000 readiness, then we will
evaluate alternatives that could include the identification of alternate
suppliers or distributors which have demonstrated Year 2000 readiness and/or the
accumulation of inventory to assure production capability where feasible or
warranted. These activities are intended to provide a means of managing our
risk, but cannot eliminate the potential for disruption due to third party
failure to achieve Year 2000 compliance. We expect the development of
contingency plans, if necessary, to be completed by November 30, 1999. Should
any of our key suppliers or distributors not achieve Year 2000 readiness, we may
be unable to effectively manufacture our products or distribute our products to
our customers.
Costs
The balance of the effort for our Year 2000 project has been by employees whose
costs for this project are not tracked separately. We believe that costs for the
remainder of the project will not be material to our business, financial
position, results of operations, or cash flows.
Risks
Our business, financial position, results of operations, and cash flows could be
materially adversely affected if we or our key suppliers, distributors, or
customers do not achieve Year 2000 compliance. Although our Year 2000 project is
expected to minimize our risks of experiencing a Year 2000 problem, inherent
risks and uncertainties exist despite our efforts. As a result, we are
24
<PAGE> 25
unable to determine at this time whether the consequences of Year 2000 failures
resulting from these inherent risks and uncertainties will have a material
effect on our business, financial position, results of operations, or cash
flows.
LIQUIDITY AND CAPITAL RESOURCES
Historically, net cash used in operating activities and investing activities of
the Company has been significant due to operating losses from acquisitions,
restructuring and working capital requirements. Cash and investments totaled
$40.8 million at September 30, 1999, down from $46.3 million at December 31,
1998. Net cash used in operating activities of the Company totaled $2.0 million
for the nine months ended September 30, 1999, compared to net cash provided by
operating activities of $1.7 million for the nine months ended September 30,
1998. The increase in cash used in operating activities is attributed to the
increase in net accounts receivable over the respective period, offset to a
lesser extent by the increase in depreciation and amortization and other changes
in operating assets and liabilities. Net cash used in investing activities
totaled $6.5 million for the nine months ended September 30, 1999, compared to
$3.0 million for the nine months ended September 30, 1998. The change resulted
primarily from net purchases of short-term investments during the nine months
ended September 30, 1999, in addition to $2.9 million of cash paid in connection
with acquisitions and acquired technology. Net cash provided by financing
activities totaled $564,000 and $736,000 for the nine months ended September 30,
1999 and 1998, respectively, resulting substantially from proceeds received from
the exercise of stock options by the Company's employees during the respective
periods.
The Company expects that its working capital requirements will continue to
increase to the extent the Company continues to grow. The Company believes that
its current cash and investment balances, cash provided by future operations, if
any, and available borrowings under the Company's line of credit are sufficient
to meet its working capital needs and anticipated capital expenditure
requirements through at least the next twelve months.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
On July 27, 1998, pursuant to a Rights Agreement (the "Original Agreement")
between the Company and BankBoston, N.A., as Rights Agent (the "Rights Agent"),
the Company's Board of Directors declared a dividend of one right (a "Right") to
purchase one share of the Company's Series A Participating Preferred Stock
("Series A Preferred"), for each outstanding share of Common Stock of the
Company. The dividend is payable on August 13, 1998 to stockholders of record as
of the close of business on that date. Each Right entitles the registered holder
to purchase from the Company one share of Series A Preferred at an exercise
price of $38.00, subject to adjustment.
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<PAGE> 26
On June 24, 1999, the Board of Directors of the Company approved certain changes
to the Original Agreement in the form of an Amended and Restated Rights
Agreement between the Company and the Rights Agent (the "Amended and Restated
Rights Agreement"). The Amended and Restated Rights Agreement was filed with the
Securities and Exchange Commission on Form 8-A/A on October 29, 1999.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On July 21, 1999, the Company filed a report on Form 8-K to file a press
release issued by the Company on June 30, 1999 announcing ScanSoft, Inc.'s
acquisition of photo imaging products and technology from MetaCreations
Corporation. Additionally, on July 21, 1999, the Company filed a report on
Form 8-K to announce the formation of MetaStream.com, a joint venture
company between MetaCreations Corporation and Computer Associates
International, Inc.
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<PAGE> 27
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.
METACREATIONS CORPORATION
(Registrant)
Date: November 12, 1999 /s/ TERANCE A. KINNINGER
-------------------------
Terance A. Kinninger
Sr. Vice President and
Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 8,274 8,274
<SECURITIES> 32,556 32,556
<RECEIVABLES> 17,953 17,953
<ALLOWANCES> 0 0
<INVENTORY> 617 617
<CURRENT-ASSETS> 70,590 70,590
<PP&E> 13,249 13,249
<DEPRECIATION> 7,442 7,442
<TOTAL-ASSETS> 79,704 79,704
<CURRENT-LIABILITIES> 9,539 9,539
<BONDS> 0 0
0 0
0 0
<COMMON> 25 25
<OTHER-SE> 70,053 70,053
<TOTAL-LIABILITY-AND-EQUITY> 79,704 79,704
<SALES> 14,758 41,206
<TOTAL-REVENUES> 14,758 41,206
<CGS> 1,628 5,021
<TOTAL-COSTS> 1,628 5,021
<OTHER-EXPENSES> 13,302 38,315
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 480 (473)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 480 (473)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 393 (560)
<EPS-BASIC> 0.02 (0.02)
<EPS-DILUTED> 0.02 (0.02)
</TABLE>
