METACREATIONS CORP, 10-Q/A, 2000-08-21

METACREATIONS CORP
10-Q/A, 2000-08-21
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<PAGE> 1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

(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 March 31, 2000 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)

498 Seventh Ave., Suite 1810, New York, NY 10018
(Address of principal executive offices)

(646) 485-9100
(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 May 8, 2000, there were outstanding 27,579,111 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.

<PAGE> 2

METACREATIONS CORPORATION

FORM 10-Q/A

Table of Contents

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements....................................... 3

Consolidated Balance Sheets - March 31, 2000 (unaudited and
restated) and December 31, 1999 (restated)
Consolidated Statements of Operations - Three months ended
March 31, 2000 and 1999 (unaudited and restated)
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 (unaudited and restated)
Notes to Consolidated Financial Statements (unaudited and
restated)

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K........................... 23

SIGNATURES.............................................................. 24
</TABLE>

On August 8, 2000, the Company announced that it will restate its consolidated
financial statements for the three months ended March 31, 2000 and for the year
ended December 31, 1999. This amended Form 10 Q/A filing includes restated
financial information and related disclosures for the quarter ended March 31,
2000 (see Note 2 to the unaudited consolidated financial statements). The
restated financial information and related disclosures for 1999 have been
included in the amended Form 10-K/A filing for the year ended December 31, 1999,
which was filed with the Securities and Exchange Commission on August 21, 2000.

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

METACREATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------------------------------------------------
(Unaudited and Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 11,311 $ 4,480
Short-term investments ............................................. 29,178 32,836
Accounts receivable, net ........................................... 12 123
Notes receivable from related parties .............................. -- 1,000
Prepaid expenses ................................................... 552 1,139
Current assets of discontinued operations .......................... 13,399 4,702
--------------- ----------
Total current assets ........................................... 54,452 44,280

Property and equipment, net .......................................... 1,772 614
Other assets ......................................................... 146 308
Non-current assets of discontinued operations ........................ 536 1,974
--------------- ----------
Total assets ................................................... $ 56,906 $ 47,176
=============== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 613 $ 224
Accrued expenses ................................................... 1,494 1,985
Current liabilities of discontinued operations ..................... 4,079 9,178
Provision for loss on disposal of discontinued operations .......... 8,421 2,653
--------------- ----------
Total current liabilities ...................................... 14,607 14,040

Minority interest .................................................... 9,979 6,633

Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares authorized -
no shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively .................................. -- --
Common stock, $.001 par value; 75,000 shares authorized -
27,553 and 25,496 shares issued and outstanding at
March 31, 2000 and December 31, 1999, respectively ............... 28 25
Paid-in capital .................................................... 130,368 119,940
Notes receivable from related parties .............................. (3,467) (3,467)
Accumulated other comprehensive loss ............................... (129) (137)
Accumulated deficit ................................................ (94,480) (89,858)
--------------- ----------
Total stockholders' equity ..................................... 32,320 26,503
--------------- ----------
Total liabilities and stockholders' equity ..................... $ 56,906 $ 47,176
=============== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE> 4

METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------------------------
(Unaudited (Unaudited)
and
Restated)
<S> <C> <C>
Net revenues ........................................................... $ 162 $ 2,263

Operating expenses:
Sales and marketing (excluding stock based compensation totaling
$2,554 in 2000) .................................................... 1,350 404
Research and development (excluding stock based compensation
totaling $ 979 in 2000) ............................................ 949 559
General and administrative (excluding stock based compensation
totaling $ 323 in 2000) ............................................ 1,100 1,002
Stock-based compensation ............................................. 3,856 --
------------------------
Total operating expenses ............................................... 7,255 1,965
------------------------

Income (loss) from operations .......................................... (7,093) 298
Other income ........................................................... 521 557
------------------------

Income (loss) before provision for income taxes ........................ (6,572) 855
Provision for income taxes ............................................. -- --
------------------------

Income (loss) before minority interest in loss of subsidiary ........... (6,572) 855
Minority interest in loss of subsidiary ................................ 685 --
------------------------

Net income (loss) from continuing operations ........................... (5,887) 855

Discontinued operations (Note 3):
Loss from discontinued operations .................................... -- (1,947)
Adjustment to loss on disposal of discontinued operations ............ 1,265 --
------------------------
Net loss from discontinued operations .............................. 1,265 (1,947)
-----------------------

Net loss ............................................................... $ (4,622) $ (1,092)
========================

Basic net income (loss) per common share:
Net income (loss) per common share from continuing operations ........ $ (0.22) $ 0.04
Net income (loss) per common share from discontinued operations ...... 0.05 (0.08)
------------------------
Net loss per common share ............................................ $ (0.17) $ (0.04)
========================

Diluted net income (loss) per common share:
Net income (loss) per common share from continuing operations ........ $ (0.22) $ 0.03
Net income (loss) per common share from discontinued operations ...... 0.05 (0.07)
------------------------
Net loss per common share ............................................ $ (0.17) $ (0.04)
========================

Weighted average number of shares outstanding:
Basic ................................................................ 26,804 24,325
========================
Diluted .............................................................. 26,804 25,900
========================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

4
<PAGE> 5

METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------------------------
(Unaudited (Unaudited)
and Restated)

<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (4,622) $ (1,092)
Adjustments to reconcile net loss to net cash used in
operating activities:
Net loss of discontinued operations .......................... (1,265) 1,947
Amortization of deferred compensation ........................ 3,856 --
Depreciation and amortization ................................ 150 124
Minority interest in loss of subsidiary....................... (685) --
Accrued interest income ...................................... -- (44)
Changes in operating assets and liabilities:
Accounts receivable ........................................ 111 (1,143)
Prepaid expenses and other assets .......................... 691 164
Accounts payable and accrued expenses ...................... 141 (48)
Net cash used for discontinued operations .................. (5,241) (2,405)
-----------------------
Net cash used in operating activities ..................... (6,864) (2,497)

Cash flows from investing activities:
Purchases of short-term investments .............................. (26,298) (17,708)
Proceeds from sales and maturities of short-term investments ..... 29,956 7,821
Repayments of notes receivable from related parties .............. 1,000 64
Purchases of property and equipment .............................. (1,250) (26)
Net cash used for discontinued operations ........................ (84) (274)
-----------------------
Net cash provided by (used in) investing activities ....... 3,324 (10,123)

Cash flows from financing activities:
Collection of subscription receivable related to
common stock of subsidiary...................................... 1,000 --
Proceeds from exercise of stock options .......................... 9,363 185
-----------------------
Net cash provided by financing activities ................. 10,363 185

Effect of exchange rates changes on cash ........................... 8 (4)
-----------------------

Net increase (decrease) in cash and cash equivalents ............... 6,831 (12,439)
Cash and cash equivalents at beginning of period ................... 4,480 16,297
-----------------------
Cash and cash equivalents at end of period ......................... $ 11,311 $ 3,858
=======================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

5
<PAGE> 6
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 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 March 31, 2000 are not necessarily indicative of
results to be expected for the year ending December 31, 2000. The information
included in this Form 10-Q/A should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto as of December 31,
1999 and 1998, and for the three years in the period ended December 31, 1999, as
filed on Form 10-K/A.

Concentration of Risk

In connection with the sale of the MetaCreations' Painter, Kai's Power Tools,
KPT Vector Effects and Bryce product lines (see Note 3), the Company has
recorded a note receivable from Corel Corporation ("Corel") in the amount of
$10,000,000 at March 31, 2000. This note receivable, which is payable within one
year, has been classified as a current asset of discontinued operations in the
accompanying balance sheets. In a July 2000 press release, Corel announced that
it would run out of cash by the end of August 2000 if it did not take special
action. As of August 18, 2000, the Company has collected $4,000,000 of the
original $10,000,000 promissory note according to the payment schedule. The
Company has not provided a reserve for the remaining $6,000,000, as management
believes such amount is collectible.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
gives additional guidance in applying generally accepted accounting principles
to revenue recognition in the financial statements. SAB No. 101 is applicable
beginning in the fourth quarter of fiscal 2000. Management does not believe the
compliance with the provisions of SAB No. 101 will have a material effect on the
accompanying consolidated financial statements.

In March 2000, the FASB issued Financial Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board Opinion ("APB") No. 25. This
interpretation clarifies:

-- The definition of employee for purposes of applying APB No. 25,
which deals with stock compensation issues;
-- The criteria for determining whether a plan qualifies as a
noncompensatory plan;
-- The accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
-- The accounting for an exchange of stock compensation awards in a
business combination.

The interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events prior to such date. The adoption of FIN
No. 44 is not expected to have a material impact on our financial statements.

2. RESTATEMENT OF FINANCIAL STATEMENTS

On August 8, 2000, the Company announced that it will restate its consolidated
financial statements for the three months ended March 31, 2000 and for the year
ended December 31, 1999. As discussed in Note 2 to the consolidated financial
statements in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1999, the principal reason for the revisions to the December 31,
1999 financial statements is to reallocate the $7,000,000 monetary
consideration received from Computer Associates as part of license agreements,
and recorded as revenue in 1999, to minority interest and "change in interest
gain" (pursuant to SAB No. 51, "Accounting for Sales of Stock of a Subsidiary")
relating to Computer Associates simultaneous agreement to obtain a 20% equity
interest in the Company's subsidiary, Metastream Corporation. The "change in
interest gain" has been recorded as paid-in capital in the Company's
consolidated balance sheets.

In addition, based upon a revised estimate of the valuation of Metastream
Corporation at various dates during the three months ended March 31, 2000, the
Company has adjusted its estimate of the fair value of Metastream Corporation at
the time of stock option issuances to employees and non-employees resulting in
an additional charge of $1,841,000 for the three months ended March 31, 2000 for
stock-based compensation associated with stock option grants at exercise prices
which were below the fair value of Metastream Corporation's common stock on the
date of grant.

This amended Form 10 Q/A filing includes restated financial information and
related disclosures for the quarter ended March 31, 2000. The restated financial
information and related disclosures for 1999 have been included in the amended
Form 10-K/A filing for the year ended December 31, 1999, which was filed with
the Securities and Exchange Commission on August 21, 2000.

Accordingly, the unaudited financial statements for the three months ended March
31, 2000 presented in this Form 10-Q/A have been restated as follows:

<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000
--------------------
As
Reported Restated
<S> <C> <C>
Statement of Operations Data:
Net revenues .................................................. $ 137 $ 162
Operating expenses ............................................ 5,497 7,255
Loss from operations .......................................... (5,360) (7,093)
Loss before provision for income taxes ........................ (4,839) (6,572)
Loss before minority interest in loss of subsidiary ........... (4,839) (6,572)
Minority interest in loss of subsidiary ....................... 316 685
Net loss from continuing operations ........................... (4,523) (5,887)
Net loss (3,258) (4,622)

Basic and diluted net income (loss) per common share:
Net loss per common share from continuing operations .......... (0.17) (0.22)
Net income per common share from discontinued operations ...... 0.05 0.05
Net loss per common share...................................... (0.12) (0.17)

Balance Sheet Data:
Accounts receivable, net ..................................... 2,512 12
Other assets ................................................. 980 146
Accrued expenses ............................................. 1,433 1,494
Minority interest ............................................ 4,088 9,979
Paid-in capital............................................... 127,668 130,368
Accumulated deficit .......................................... (82,494) (94,480)
</TABLE>

3. DISCONTINUED OPERATIONS

In December 1999, the Board of Directors approved a plan to focus exclusively on
its industry-leading, patented marketing visualization solution, Metastream, and
to correspondingly divest itself of its prepackaged graphics software business.
Accordingly, these operations are reflected as discontinued operations for all
periods presented in the accompanying consolidated statements of operations.

The loss on disposal of discontinued operations, which totaled approximately
$21,260,000 for the year ended December 31, 1999, consisted of the estimated
future results of operations of the discontinued business through the estimated
date of divestiture of June 30, 2000, the amounts expected to be realized upon
the sale of the discontinued business, severance and related benefits, and asset
write-downs (see table below). The Company recorded an adjustment to net loss on
disposal of discontinued operations of $1,265,000 during the three months ended
March 31, 2000 as a result of better than expected net revenues during the
quarter from the discontinued business. During April 2000, the Company completed
the sale of a substantial portion of the Company's graphics software product
lines. Specifically, Corel Corporation acquired the MetaCreations' Painter,
Kai's Power Tools, KPT Vector Effects and Bryce product lines; egi.sys AG
acquired the Poser product line; and

<PAGE> 7

METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

fractal.com Corporation acquired the Headline Studio product line for total
consideration of $11,250,000, consisting of cash and promissory notes, plus
future royalties. The $11,250,000, which is payable within one year, has been
classified as a current asset of discontinued operations in the accompanying
consolidated balance sheets. The provision for loss on disposal of discontinued
operations is an estimate and subject to change. Changes in estimates will be
accounted for prospectively and included in income (loss) from discontinued
operations.

The following table depicts the loss on disposal of discontinued operations
activity through March 31, 2000 (in thousands):

<TABLE>
<CAPTION>
Loss on Disposal Provision at
of Discontinued December 31, Charged to Provision at
Operations Deductions 1999 Expense Deductions March 31, 2000
---------------- ---------- ------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Write-down of operating
assets...................... $ 18,445 $18,103 $ 342 $ (350) $ (547) $ 539
Severance and
benefits.................... 8,415 504 7,911 842 2,271 6,482
Estimated loss of discontinued
operations through
divestiture date............ 5,400 -- 5,400 (1,957) 2,443 1,000
Estimated net proceeds from
divestiture................. (11,000) -- (11,000) 200 (11,200) 400
-------- ------- -------- ------- -------- ------
$ 21,260 $18,607 $ 2,653 $(1,265) $ (7,033) $8,421
======== ======= ======== ======= ======== ======
</TABLE>

Operating results from discontinued operations were as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Net revenues ................................ $ 4,576 $ 9,805
Cost of revenues ............................ 989 1,647
-----------------------
Gross profit .............................. 3,587 8,158

Operating expenses:
Sales and marketing ....................... 2,800 6,045
Research and development .................. 2,894 3,329
General and administrative ................ 336 731
-----------------------
Total operating expenses ............ 6,030 10,105
-----------------------

Loss before benefit for income taxes ........ (2,443) (1,947)
Benefit for income taxes .................... -- --
-----------------------

Loss from discontinued operations ........... $ (2,443) $ (1,947)
=======================
</TABLE>

The net assets of the discontinued operations included in the accompanying
consolidated balance sheets consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------------------
<S> <C> <C>
Current assets of discontinued operations:
Accounts and other receivables, net .................. $ 13,175 $ 1,800
Inventories, net ..................................... -- 92
Prepaid expenses ..................................... 224 2,810
----------------------
Current assets of discontinued operations .......... $ 13,399 $ 4,702
======================

Non-current assets of discontinued operations:
Property and equipment, net .......................... $ 300 $ 1,574
Other assets ......................................... 236 400
----------------------
Non-current assets of discontinued operations ...... $ 536 $ 1,974
======================

Current liabilities of discontinued operations:
Accounts payable ..................................... $ 1,683 $ 5,631
Accrued expenses ..................................... 1,930 2,824
Royalties payable .................................... 466 723
----------------------
Current liabilities of discontinued operations ..... $ 4,079 $ 9,178
======================
</TABLE>

7
<PAGE> 8
METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

4. INCOME TAXES

The Company did not provide any current or deferred income tax provision or
benefit for any of the periods presented because of its historical operating
losses. The Company has provided a full valuation allowance on the deferred tax
assets, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability. Utilization of the Company's net
operating loss carryforwards, which begin to expire in 2011 for federal purposes
and 2001 for state purposes, may be subject to certain limitations under Section
382 of the Internal Revenues Code of 1986, as amended.

5. 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 months ended March
31, 2000 and 1999, in accordance with SFAS No. 128, "Earnings per Share" (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------------
<S> <C> <C> <C>
Three Months Ended March 31, 2000
(Restated):
Basic EPS .......................... $ (4,622) 26,804 $ (0.17)
Effect of dilutive securities ...... -- --
------------------------------------
Diluted EPS ........................ $ (4,622) 26,804 $ (0.17)
=====================================

Three Months Ended March 31, 1999:
Basic EPS .......................... $ (1,092) 24,325 $ (0.04)
Effect of dilutive securities ...... -- 1,575
-------------------------------------
Diluted EPS ........................ $ (1,092) 25,900 $ (0.04)
=====================================
</TABLE>

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,
totaled 3,664,000 and 1,199,000 for the three months ended March 31, 2000 and
1999, respectively.

<PAGE> 9

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, 1999 and 1998, and for the three
years in the period ended December 31, 1999, as filed on Form 10-K/A.

OVERVIEW

MetaCreations provides marketing visualization solutions for the World Wide Web.
MetaCreations' strategy is centered on the Company's Metastream technology and
software tools designed to make the interactive use of photo-realistic 3D on the
Web practical and pervasive.

Metastream Corporation, a joint initiative between MetaCreations and Computer
Associates International, Inc. ("Computer Associates"), was formed in June 1999.
Metastream Corporation, which is 80% owned by MetaCreations and 20% owned by
Computer Associates, is focused on providing complete end-to-end solutions for
creating and deploying virtual products centered on the Company's Metastream
technologies for e-commerce and the Web environment. Metastream Corporation's
primary initiatives include:

- Licensing technology for specific marketing visualization solutions;

- Providing a full range of fee-based professional services for
implementing 3D solutions;

- Forging technological alliances with leading interactive agencies and
web content providers; and

- Maximizing market penetration and name recognition.

In December 1999, the Board of Directors of MetaCreations approved a plan to
focus exclusively on the Company's Metastream technologies, and to
correspondingly divest itself of its prepackaged graphics software business.
Accordingly, the continuing operations of MetaCreations are focused exclusively
on Metastream Corporation.

9
<PAGE> 10
In light of this change in strategic focus, MetaCreations has a limited
operating history upon which an evaluation of the Company and its prospects can
be based. MetaCreations' prospects must be considered in light of the risks and
difficulties frequently encountered by early stage online companies. There can
be no assurance that MetaCreations will achieve or sustain profitability.
MetaCreations has had significant quarterly and annual operating losses since
its inception, and as of March 31, 2000, had an accumulated deficit of
approximately $94.5 million.

MetaCreations believes that its success will depend largely on its ability to
extend its technology and market leadership in e-commerce visualization.
Accordingly, MetaCreations intends to invest heavily in research and development
and sales and marketing. Net revenues from continuing operations primarily have
been from one-time technology licenses from a limited number of strategic
partners. In connection with its decision to focus exclusively on e-commerce
visualization, the Company has decided to no longer focus on these one-time
technology licenses, in favor of implementing a recurring broadcast licensing
model. This licensing model is based on Metastream 3.0, which was launched at
the end of the quarter. There can be no assurance that this new recurring
broadcast licensing model will result in net revenues comparable to those
realized in prior years. See "Factors That May Affect Future Operating Results."

<PAGE> 11

OPERATING RESULTS

Net Revenues

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000
(Restated) % CHANGE 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $ 162 (93)% $ 2,263
</TABLE>

The Company recognizes revenue in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition." Accordingly, revenue from software
arrangements involving multiple elements (e.g., software products,
upgrades/enhancements, postcontract customer support, etc.) is allocated to each
element based on the relative fair value of the elements. The determination of
fair value is based on objective evidence, which is specific to the Company.

Service revenue, which consists of fees for professional services, is recognized
as the services are performed or, if no pattern of performance is discernable,
on a straight-line basis over the period during which the services are
performed.

Net revenues of $162,000 for the three months ended March 31, 2000 were related
to services performed during the quarter, with 77% of the revenues being
attributed to Computer Associates. Historically, net revenues primarily
consisted of one-time licenses for Metastream and related technologies from a
limited number of strategic partners. Specifically, revenues from Intel
Corporation, Computer Associates and Real 3D Company accounted for 44%, 42% and
11% of total revenues, respectively, for the three months ended March 31, 1999.
In connection with its decision to focus exclusively on e-commerce
visualization, the Company decided to no longer focus on these one-time
technology licenses, in favor of implementing a recurring broadcast licensing
model. This licensing model is based on Metastream 3.0, which was launched at
the end of the quarter. As a result, no revenue was recorded during the three
months ended March 31, 2000 related to the licensing of Metastream 3.0. There
can be no assurance that this new recurring broadcast licensing model will
result in the revenue growth rates realized in prior years.

<PAGE> 12

Sales and Marketing

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
2000
(Restated) % CHANGE 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales and marketing $1,350 234% $404
As % of net revenues 833% 18%
</TABLE>

Sales and marketing expenses consist primarily of salaries, consulting fees,
advertising and required facilities costs related to sales, marketing, business
development, Web services and public relations personnel who promote the
Company's products, technologies and services. The 234% increase in sales and
marketing expenses is primarily due to increased salaries, consulting fees, and
related travel and facilities expenses in connection with the expansion of the
Company's sales, Web services and public relations departments. The Company is
continuing to expand its sales and marketing presence and, accordingly, expects
sales and marketing expenses will continue to 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 salaries, consulting
fees, and required equipment and facilities costs related to the Company's
product development efforts. The Company expenses as incurred research and
development costs necessary to establish the technological feasibility of its
internally-developed software products and technologies. To date, the
establishment of technological feasibility of the Company's products and general
release have substantially coincided. As a result, the Company has not
capitalized any internal software development costs since costs qualifying for
such capitalization have not been significant. Additionally, the Company
capitalizes costs of software, consulting services, hardware and payroll-related
costs incurred to purchase or develop internal-use software. The Company
expenses costs incurred during preliminary project assessment, research and
development, re-engineering, training and application maintenance.

The 70% increase in research and development expenses is primarily due to
increases in internal development personnel, consulting fees and related travel
and facilities expenses in connection with the development of Metastream 3.0.
The Company expects research and development expenses will continue to increase
in future periods, but such expenses may vary as a percentage of net revenues.

12
<PAGE> 13

General and Administrative

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 % CHANGE 1999
(Restated)
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
General and administrative $1,100 10% $1,002
As % of net revenues 679% 44%
</TABLE>

General and administrative expenses primarily consist of corporate overhead of
the Company, which includes compensation costs related to finance and
administration personnel along with other administrative costs such as legal and
accounting fees and insurance expense. The 10% increase in general and
administrative expenses was primarily attributed to general and administrative
expenses of Metastream Corporation, which was formed in July 1999.

Stock-based Compensation

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 % CHANGE 1999
(Restated)
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stock-based compensation $3,856 100% $ --
As % of net revenues 2,380% --%
</TABLE>

In connection with the grant of stock options of Metastream Corporation to
certain employees and non-employee directors, Metastream Corporation recorded
total deferred compensation of approximately $14.5 million during the three
months ended March 31, 2000. This deferred compensation represented the
difference between the deemed fair value of Metastream Corporation common stock
for accounting purposes and the exercise price of these options at the date of
grant. Stock-based compensation expense of $3.9 million was recognized during
the three months ended March 31, 2000.

Other Income

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 % CHANGE 1999
(Restated)
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Other income $521 (6)% $557
As % of net revenues 322% 25%
</TABLE>

Other income primarily consists of interest and investment income on cash and
marketable securities. Other income decreased 6% as a result of decreased cash
balances and short-term investments. Other income may vary in the future based
upon the timing of the receipt of proceeds from the divestiture of the
prepackaged graphics software products and from the

13
<PAGE> 14

exercise of stock options, in addition to cash provided by or used in the future
operations of the Company.

Provision for Income Taxes

Minority Interest in Loss of Subsidiary

Metastream Corporation, a joint initiative between MetaCreations and Computer
Associates, was formed in June 1999. For financial reporting purposes, the
assets, liabilities and earnings of Metastream Corporation are included in the
Company's consolidated financial statements. Computer Associate's 20% interest
in Metastream Corporation has been recorded as minority interest in the
Company's consolidated balance sheets, and the losses attributed to their 20%
interest have been reported as minority interest in the Company's consolidated
statements of operations.

Discontinued Operations

The loss on disposal of discontinued operations, which totaled approximately
$21.3 million for the year ended December 31, 1999, consisted of the estimated
future results of operations of the discontinued business through the estimated
date of divestiture of June 30, 2000, the amounts expected to be realized upon
the sale of the discontinued business, severance and related benefits, and asset
write-downs (see table below). The Company recorded an adjustment to net loss on
disposal of discontinued operations of $1.3 million during the three months
ended March 31, 2000 as a result of better than expected net revenues during the
quarter from the discontinued business. During April 2000, the Company completed
the sale of a substantial portion of the Company's graphics software product
lines. Specifically, Corel Corporation acquired the MetaCreations' Painter,
Kai's Power Tools, KPT Vector Effects and Bryce product lines; egi.sys acquired
the Poser product line; and fractal.com acquired the Headline Studio product
line for total consideration of $11.3 million, consisting of cash and promissory
notes, plus future royalties. The $11.3 million, which is payable within one
year, has been classified as a current asset of discontinued operations in the
accompanying consolidated balance sheets. The provision for loss or disposal of
discontinued operations is an estimate and subject to change. Changes in
estimates will be accounted for prospectively and included in income (loss) from
discontinued operations.

The following table depicts the loss on disposal of discontinued operations
activity through March 31, 2000 (in thousands):

14
<PAGE> 15

Operating results from discontinued operations were as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Net revenues ............................. $ 4,576 $ 9,805
Cost of revenues ......................... 989 1,647
-----------------------
Gross profit ........................... 3,587 8,158

Operating expenses:
Sales and marketing .................... 2,800 6,045
Research and development ............... 2,894 3,329
General and administrative ............. 336 731
-----------------------
Total operating expenses ......... 6,030 10,105
-----------------------

Loss before benefit for income taxes ..... (2,443) (1,947)
Benefit for income taxes ................. -- --
-----------------------

Loss from discontinued operations ........ $ (2,443) $ (1,947)
=======================
</TABLE>

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

This Form 10-Q/A 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, 1999 and 1998, and for the three years in the period ended December
31, 1999, as filed on Form 10-K/A. 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.

We Have A Limited Operating History That Makes An Evaluation Of Our Business
Difficult

We have been developing marketing visualization solutions for the Web since our
acquisition of Real Time Geometry Corp. in December 1996. Additionally, the
e-commerce market is relatively new and evolving rapidly. Accordingly, we have a
relatively short operating history in this market upon which you can evaluate
our business and prospects. You should consider our

15
<PAGE> 16

prospects in light of the risks and difficulties frequently encountered by early
stage online companies, including, but not limited to:

- We have an evolving and unpredictable business model;

- We face intense competition;

- We must establish and develop broad market acceptance of our
products, technologies and services;

- We must continue to develop new products, technologies and
enhancements;

- We must respond quickly to rapidly changing market developments,
customer demands and industry standards;

- We must attract, train and retain qualified employees; and

- We must effectively manage our growth.

If we are not successful in addressing these risks and challenges, we will not
be able to grow our business, compete effectively or achieve profitability.

We Have A History of Losses And Expect To Incur Losses In The Future

We have had significant quarterly and annual operating losses since our
inception, and as of March 31, 2000, we had an accumulated deficit of
approximately $94.5 million. With the divestiture of our prepackaged graphics
software business substantially complete, we have focused exclusively on our
industry-leading, patented marketing visualization solution, Metastream. We
believe that, despite this change in our strategic focus, we will continue to
incur operating losses for the foreseeable future.

Our Future Revenues May Be Unpredictable and May Cause Our Quarterly Results To
Fluctuate

As a result of our limited operating history and the rapidly changing nature of
the markets in which we compete, we may be unable to forecast our quarterly and
annual revenues accurately. 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:

- Ability to retain existing customers, attract new customers, and
satisfy our customers' demands;

- Market acceptance of our products, technologies and services;

- Introduction or enhancement of new products, technologies or services
by us or our competitors;

- Changes in prices for our products, technologies and services or our
competitors' products, technologies and services;

- Changes in usage of the Internet and online services and consumer
acceptance of the Internet and e-commerce;

- Costs of litigation and intellectual property protection;

- Growth in Internet use;

- Emergence of new competition;

16
<PAGE> 17

- Varying operating costs and capital expenditures related to the
expansion of our business operations and infrastructure; and

- Technical difficulties with our technologies.

Based on these factors, we believe our revenues, expenses and operating results
could vary significantly in the future and period-to-period comparisons should
not be relied upon as indications of future results.

Additionally, in connection with our decision to focus exclusively on e-commerce
visualization, we decided to no longer focus on one-time technology licenses, in
favor of implementing a recurring broadcast licensing model. This licensing
model is based on Metastream 3.0, which was launched at the end of the quarter.
There can be no assurance that this new recurring broadcast licensing model will
result in net revenues comparable to those realized in prior years. If we are
unable to implement this broadcast licensing model on a timely basis, if at all,
our results of operations would be adversely affected.

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 business would be harmed.

Our Stock Price Is Volatile And May Continue To Fluctuate In The Future

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:

- Our historical and anticipated operating results;

- General market and economic conditions;

- Our announcement of new products, technologies or services;

- Actual or anticipated fluctuations in our operating results; and

- Developments regarding our products, technologies or services, or
those of our competitors.

In addition, the stock market has experienced extreme price and volume
fluctuations in recent months. This volatility has had a substantial effect on
our stock price, as well as the stock prices of other software companies,
particularly Internet companies. These broad market and industry fluctuations
may adversely affect the market price of our common stock. As a result, the
market price of our common stock may continue to fluctuate.

Our Markets Are Highly Competitive

The e-commerce market is new, rapidly evolving and intensely competitive. As a
result, online merchants are looking for ways to differentiate themselves from
their competition. Accordingly, various companies are developing new
technologies, which may give the online merchants this competitive advantage.
Our current competitors include:

- Cycore AB (Cult3D);

- Flatland Online, Inc. (3DML);

- IBM Corporation (Hotmedia);

17
<PAGE> 18

- Macromedia, Inc.

- Oz.Com (Fluid3D - in conjunction with RealNetworks, Inc.'s G2 media
player);

- Shells Interactive Ltd. (3D Dreams - in conjunction with Macromedia,
Inc.'s Shockwave);

- Virtue 3D, Inc. (Virtuoso); and

- WebGlide, Inc. (Utopia - in conjunction with RealNetworks, Inc.'s G2
media player).

Some of our competitors have longer operating histories and significantly
greater financial, management, technology, development, sales, marketing and
other resources than we have. As we compete with larger competitors across a
broader range of products and technologies, we may face increasing competition
from such companies. If these or other competitors develop products,
technologies or solutions that offer significant performance, price or other
advantages over our product, technologies or solutions, our business would be
harmed.

A variety of other possible actions by our competitors could also have a
material adverse effect on our business, including increased promotion or the
introduction of new or enhanced products and technologies. Moreover, new
personal computer platforms and operating systems may provide new entrants with
opportunities to obtain a substantial market share in our markets.

Our competitors may be able to develop products or technologies comparable or
superior to ours, or may be able to develop new products or technologies more
quickly. We also face competition from developers of personal computer operating
systems such as Microsoft and Apple Computer, Inc., as well as from open-source
operating systems such as Linux. These operating systems may incorporate
functions that could be superior to or incompatible with our products and
technologies. Such competition would harm our business.

If The Internet Does Not Continue To Expand As A Widespread Commerce Medium,
Demand For Our Products And Technologies May Decline Significantly

The market for our products, technologies and services is new and evolving
rapidly. Growth in this market depends on increased use of the Internet for
e-commerce. If the Internet is not adopted as a method for e-commerce, or if the
adoption rate slows, the market for our products, technologies and services may
not grow, or may develop more slowly than expected.

We believe that increased Internet use may depend on the availability of greater
bandwidth or data transmission speeds or on other technological improvements,
and we are largely dependent on third party companies to provide or facilitate
these improvements. Changes in content delivery methods and emergence of new
Internet access devices such as TV set-top boxes could dramatically change the
market for streaming media products and services if new delivery methods or
devices do not use streaming media or if they provide a more efficient method
for transferring data than streaming media.

The e-commerce market is relatively new and evolving. Licensing of our products
and technologies depends in large part on the development of the Internet as a
viable commercial marketplace. There are now substantially more users and much
more "traffic" over the Internet than ever before, use of the Internet is
growing faster than anticipated, and the technological infrastructure of the
Internet may be unable to support the demands placed on it by continued growth.
Delays in development or adoption of new technological standards and protocols,
or

18
<PAGE> 19

increased government regulation, could also affect Internet use. In addition,
issues related to use of the Internet, such as security, reliability, cost, ease
of use and quality of service, remain unresolved and may affect the amount of
business that is conducted over the Internet.

Our Market Is Characterized By Rapidly Changing Technology, And If We Do Not
Respond In A Timely Manner, Our Products and Technologies May Not Succeed In The
Marketplace

The market for marketing visualization is characterized by rapidly changing
technology. As a result, our success depends substantially upon our ability to
continue to enhance our products and technologies and to develop new products
and technologies that meet customers' increasing expectations. Additionally, we
may not be successful in developing and marketing enhancements to our existing
products and technologies or introducing new products and technologies on a
timely basis. Our new or enhanced products and technologies may not succeed in
the marketplace.

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 harmed.

Potential Delays in Product Releases Could Harm Our Business

We also depend upon internal efforts for the development of new products,
technologies and enhancements. In the past, we have had delays in the
development of new products, technologies and enhancements. We may experience
similar delays in the future, which would harm our business.

Undetected Errors In Our Products And Technologies Could Result In Adverse
Publicity, Reduced Market Acceptance Or Lawsuits By Customers

We offer complex software products and technologies, which may contain
undetected errors. If errors are found in our products or technologies after we
have commercially released them, we could likely experience adverse publicity,
reduced market acceptance or lawsuits by customers. This would adversely affect
our business.

We May Be Unable To Protect Our Intellectual Property Rights And We May Be
Liable For Infringing The Intellectual Property Rights of Others

Our success and ability to compete partly depend on the uniqueness or value of
our products and technologies. 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 technologies. Policing unauthorized use of our products and
technologies is difficult and the steps we take may not prevent the
misappropriation or infringement of technology or proprietary rights. In
addition, litigation may be necessary to enforce our intellectual property
rights. Such misappropriation or litigation could result in substantial costs
and diversion of resources and the potential loss of intellectual property
rights, any of which would adversely impair our business.

19
<PAGE> 20

Our products and technologies 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.

Security Risks Could Limit The Growth Of E-Commerce And Expose Us To Litigation
Or Liability

E-commerce depends on the ability to transmit confidential information securely
over public networks. Any compromise of our customers' ability to transmit
confidential information securely could harm our business. Online transmissions
are subject to the following risks, among others:

- Encryption and authentication technology may be subject to events or
developments that could compromise or breach the security of customer
information;

- A third party could circumvent security measures and misappropriate
proprietary information or interrupt operations;

- Credit card companies could restrict online credit card transactions;
or

- Security breaches could damage our or our customers' reputation and
expose us to litigation or liability.

Increasing Government Regulation Could Increase Our Cost Of Doing Business Or
Increase Our Legal Exposure

We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses. It is
possible that a number of laws and regulations may be adopted in the U.S. and
abroad with particular applicability to the Internet. Governments have and may
continue to enact legislation applicable to the Internet in areas such as
content distribution, performance and copying, other copyright issues, network
security, encryption, the use of key escrow data, privacy protection, caching of
content by server products, electronic authentication or "digital" signatures,
illegal or obscene content, access charges and retransmission activities. The
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is also uncertain.
Export or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase our cost of doing business or increase our legal exposure.

We May Need To Enter Into Business Combinations And Strategic Alliances Which
Could Be Difficult To Integrate And May Disrupt Our Business

We may expand our operations or market presence by entering into business
combinations, investments, joint ventures or other strategic alliances with
other companies. These transactions create risks such as:

- Difficulty assimilating the operations, technology and personnel of
the combined companies;

- Disruption of our ongoing business;

20
<PAGE> 21

- Problems retaining key technical and managerial personnel;

- Expenses associated with amortization of goodwill and other purchased
intangible assets;

- Additional operating losses and expenses of acquired businesses; and

- Impairment of relationships with existing employees, customers and
business partners.

If we enter into such business combinations and strategic alliances and are not
successful in addressing these risks, our business would be adversely affected.

The Loss Of Any Of Our Key Personnel Would Harm Our Business

We depend on the continued employment of our senior executive officers and other
key management personnel. We do not have any long-term employment agreements
with any of our key personnel, and we do not have "key person" life insurance
policies. If any of our senior officers or other key employees leave our company
and are not adequately replaced, our business would be adversely affected.

During December 1999, our previous President and Chief Executive Officer, Gary
Lauer, resigned. Mark Zimmer, previously President of MetaCreations' business
graphics division, was appointed President and Chief Executive Officer from
December 1999 through April 2000. In April 2000, Robert Rice, previously
President and Chief Executive Officer of Metastream Corporation, was appointed
President and Chief Executive Officer of MetaCreations Corporation and James
Abate was appointed Senior Vice President and Chief Financial Officer of both
MetaCreations Corporation and Metastream Corporation. In addition, in connection
with our recent restructuring, several senior-level management personnel left
our Company. As a result of the shifting of our operations to our Metastream
Corporation subsidiary, Metastream Corporation has recently hired a Chief
Marketing Officer, a Vice President, Marketing and a Vice President, Client
Services. If we do not succeed in attracting and retaining new officers, our
business would be adversely affected.

Our Future Success Depends On Our Ability To Identify, Hire, Train and Retain
Highly Qualified Employees

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.

Additionally, in order to attract and retain employees in the past, we have
granted options to purchase shares of common stock to employees at an exercise
price below the fair value of the common stock on the date of grant. As a
result, we have had to record deferred compensation related to the intrinsic
value of the option. This deferred compensation is amortized over the vesting
period of applicable options, which is generally four years, resulting in a
non-cash charge to earnings over the related vesting period. If we have to issue
additional options at an exercise price below the fair value of the common stock
on the date of grant, our financial condition and results of operations would be
adversely affected.

21
<PAGE> 22

LIQUIDITY AND CAPITAL RESOURCES

Cash and investments totaled $40.5 million at March 31, 2000, up from $37.3
million at December 31, 1999. Net cash used in operating activities of the
Company totaled $6.9 million for the three months ended March 31, 2000, compared
to $2.5 million for the three months ended March 31, 1999. Net cash used in
operating activities for the three months ended March 31, 2000 primarily related
to $5.2 million of net cash used for discontinued operations. Similarly, net
cash used in operating activities for the three months ended March 31, 1999
primarily related to $2.4 million of net cash used for discontinued operations.
Net cash provided by investing activities totaled $3.3 million for the three
months ended March 31, 2000, compared to net cash used in investing activities
of $10.1 million for the three months ended March 31, 1999. Net cash provided by
investing activities for the three months ended March 31, 2000 primarily
resulted from $3.7 million of net proceeds from sales and maturities of
short-term investments and $1.0 million from repayment of a note receivable from
a related party, net of $1.3 million used for purchases of property and
equipment. Net cash used in investing activities for the three months ended
March 31, 1999 primarily resulted from $9.9 million of net purchases of
short-term investments. Net cash provided by financing activities totaled $10.4
million and $185,000 for the three months ended March 31, 2000 and 1999,
respectively, primarily resulting from proceeds received from the exercise of
stock options by the Company's employees during the respective periods. In
addition, during the three months ended March 31, 2000, the Company collected
$1.0 million of subscription receivable related to common stock of Metastream
Corporation.

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 and cash provided by future operations,
if any, are sufficient to meet its working capital needs and anticipated capital
expenditure requirements through at least the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which gives additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Management does not believe the compliance with the provisions of SAB No. 101
will have a material effect on the accompanying consolidated financial
statements.

-- The definition of employees for purposes of applying APB No. 25,
which deals with stock compensation issues;
-- The criteria for determining whether a plan qualifies as a
noncompensatory plan;
-- The accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
-- The accounting for an exchange of stock compensation awards in a
business combination.

The interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events prior to such date. The adoption of FIN
No. 44 does not have a material impact on our financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is subject to concentration of credit risk and interest rate risk
related to cash equivalents and short-term investments. The Company does not
have any derivative financial instruments as of March 31, 2000. Credit risk is
managed by limiting the amount of investments placed with any one issuer,
investing in high-quality investment securities and securities of the U.S.
government and limiting the average maturity of the overall portfolio. The
majority of the Company's portfolio, which is classified as available-for-sale,
is composed of fixed income investments that are subject to the risk of market
interest rate fluctuations, and all of the Company's investments are subject to
risks associated with the ability of the issuers to perform their obligations
under the instruments. The Company may suffer losses in principal if forced to
sell securities, which have declined in market value due to changes in interest
rates.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

22
<PAGE> 23

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 January 6, 2000, the Registrant filed a report on Form 8-K to file a
press release issued by the Registrant on December 30, 1999 announcing the
election of Howard Morgan as Chairman of the Board for Metastream
Corporation and other management changes.

On April 6, 2000, the Registrant filed a report on Form 8-K to file a press
release issued by the Registrant on April 3, 2000 announcing the appointment
of James A. Abate as Chief Financial Officer of both MetaCreations and
Metastream and Paul Kadin as Chief Marketing Officer of Metastream.

On April 13, 2000, the Registrant filed a report on Form 8-K to file a press
release issued by the Registrant on April 10, 2000 announcing the
appointment of Robert Rice as President and Chief Executive Officer of
MetaCreations Corporation.

On April 13, 2000, the Registrant filed a report on Form 8-K to file a press
release issued by the Registrant on April 10, 2000 announcing Corel
Corporation's acquisition of MetaCreations' Painter, Kai's Power Tools and
Bryce product lines.

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<PAGE> 24

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: August 21, 2000 /s/ JAMES A. ABATE
-----------------------------------
James A. Abate
Sr. Vice President and
Chief Financial Officer