<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 June 30, 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)
<TABLE>
<S> <C>
Delaware 95-4102687
(State of incorporation) (I.R.S. Employer Identification Number)
</TABLE>
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 August 14, 2000, there were outstanding 28,250,869 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.
1
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METACREATIONS CORPORATION
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................... 3
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 (unaudited and restated)
Consolidated Statements of Operations - Three and six
month periods ended June 30, 2000 and 1999
(unaudited and restated)
Consolidated Statements of Cash Flows - Six month
periods ended June 30, 2000 and 1999 (unaudited and
restated)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................ 33
SIGNATURES ........................................................................ 34
</TABLE>
On August 8, 2000, the Company announced that it would restate its consolidated
financial statements for the three months ended March 31, 2000 and for the year
ended December 31, 1999. The restated financial information and related
disclosures have been included in the amended Form 10-K/A filing for the year
ended December 31, 1999 and the amended Form 10-Q/A filing for the quarter ended
March 31, 2000, which were 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)
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<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------------------------------
(Unaudited) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 20,510 $ 4,480
Short-term investments................................................ 18,073 32,836
Accounts receivable, net.............................................. 7 123
Notes receivable from related parties................................. -- 1,000
Prepaid expenses...................................................... 266 1,139
Current assets of discontinued operations............................. 10,328 4,702
--------------------------------
Total current assets.............................................. 49,184 44,280
Property and equipment, net.............................................. 2,433 614
Other assets............................................................. 248 308
Non-current assets of discontinued operations............................ 157 1,974
--------------------------------
Total assets...................................................... $ 52,022 $ 47,176
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 1,722 $ 224
Accrued expenses...................................................... 1,584 1,985
Current liabilities of discontinued operations........................ 968 9,178
Provision for loss on disposal of discontinued operations............. 211 2,653
--------------------------------
Total current liabilities......................................... 4,485 14,040
Mandatorily redeemable preferred stock of subsidiary..................... 15,574 --
Minority interest........................................................ 10,399 6,633
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares authorized - no shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively..................................... -- --
Common stock, $.001 par value; 75,000 shares authorized - 27,985
and 25,496 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively................... 28 25
Paid-in capital....................................................... 133,232 119,940
Notes receivable from related parties................................. (4,967) (3,467)
Deferred compensation................................................. (1,540) --
Accumulated other comprehensive loss.................................. -- (137)
Accumulated deficit................................................... (105,189) (89,858)
--------------------------------
Total stockholders' equity........................................ 21,564 26,503
--------------------------------
Total liabilities and stockholders' equity........................ $ 52,022 $ 47,176
================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
------------------------------------ ------------------------------------
(Unaudited) (Unaudited and (Unaudited) (Unaudited and
Restated) Restated)
<S> <C> <C> <C> <C>
Net revenues........................................... $ 155 $ 15 $ 317 $ 2,278
Operating expenses:
Sales and marketing (excluding stock based
compensation totaling $1,094 for three months
ended June 30, 2000 and $3,648 for six months
ended June 30, 2000).............................. 8,764 354 10,114 758
Research and development (excluding stock based
compensation totaling $594 for three months
ended June 30, 2000 and $1,573 for six months
ended June 30, 2000).............................. 1,078 670 2,027 1,229
General and administrative (excluding stock based
compensation totaling $1,459 for three months
ended June 30, 2000 and $1,782 for six months
ended June 30, 2000).............................. 983 1,084 2,083 2,086
Stock-based compensation............................ 3,147 -- 7,003 --
------------------------------------ ------------------------------------
Total operating expenses............................... 13,972 2,108 21,227 4,073
------------------------------------ ------------------------------------
Loss from operations................................... (13,817) (2,093) (20,910) (1,795)
Other income........................................... 466 528 987 1,085
------------------------------------ ------------------------------------
Loss before provision for income taxes................. (13,351) (1,565) (19,923) (710)
Provision for income taxes............................. -- -- -- --
------------------------------------ ------------------------------------
Loss before minority interest in loss of subsidiary.... (13,351) (1,565) (19,923) (710)
Minority interest in loss of subsidiary................ 2,642 -- 3,327 --
------------------------------------ ------------------------------------
Net loss from continuing operations.................... (10,709) (1,565) (16,596) (710)
Discontinued operations (Note 3):
Loss from discontinued operations................... -- (1,296) -- (3,243)
Adjustment to loss on disposal of discontinued
operations........................................ -- -- 1,265 --
------------------------------------ ------------------------------------
Net income (loss) from discontinued operations.. -- (1,296) 1,265 (3,243)
------------------------------------ ------------------------------------
Net loss............................................... $ (10,709) $ (2,861) $ (15,331) $ (3,953)
==================================== ====================================
Basic and diluted net loss per common share:
Net loss per common share from continuing
operations........................................ $ (0.39) $ (0.07) $ (0.61) $ (0.03)
Net income (loss) per common share from
discontinued operations........................... -- (0.05) 0.05 (0.13)
------------------------------------ ------------------------------------
Net loss per common share....................... $ (0.39) $ (0.12) $ (0.56) $ (0.16)
==================================== ====================================
Weighted average number of shares outstanding -
basic and diluted................................... 27,629 24,448 27,216 24,387
==================================== ====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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METACREATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
---------------------------------
(Unaudited) (Unaudited and
Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (15,331) $ (3,953)
Adjustments to reconcile net loss to net cash used in operating
activities:
Net (income) loss of discontinued operations...................... (1,265) 3,243
Amortization of deferred compensation............................. 7,003 --
Depreciation and amortization..................................... 391 316
Minority interest in loss of subsidiary........................... (3,327) --
Non-cash sales and marketing expense.............................. 5,749 --
Accrued interest income........................................... -- (88)
Changes in operating assets and liabilities:
Accounts receivable............................................. 116 811
Prepaid expenses and other assets............................... 758 387
Accounts payable and accrued expenses........................... 1,405 4
Net cash used for discontinued operations....................... (12,983) (4,269)
---------------------------------
Net cash used in operating activities......................... (17,484) (3,549)
Cash flows from investing activities:
Purchases of short-term investments................................... (37,754) (39,019)
Proceeds from sales and maturities of short-term investments.......... 52,517 34,130
Repayment of notes receivable from related parties.................... 1,000 122
Purchases of property and equipment................................... (2,035) (34)
Net cash used for discontinued operations............................. (84) (2,888)
---------------------------------
Net cash provided by (used in) investing activities........... 13,644 (7,689)
Cash flows from financing activities:
Issuance of notes receivable from related parties..................... (1,500) (100)
Issuance of preferred stock in subsidiary, net of issuance costs of
$175................................................................ 9,825 --
Collection of subscription receivable related to common stock of
subsidiary.......................................................... 1,000 --
Proceeds from exercise of stock options............................... 10,537 324
---------------------------------
Net cash provided by financing activities..................... 19,862 224
Effect of exchange rates changes on cash................................. 8 (7)
---------------------------------
Net increase (decrease) in cash and cash equivalents..................... 16,030 (11,021)
Cash and cash equivalents at beginning of period......................... 4,480 16,297
---------------------------------
Cash and cash equivalents at end of period............................... $ 20,510 $ 5,276
=================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 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 June 30, 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 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 an
outstanding note receivable from Corel Corporation ("Corel") in the amount of
$8,000,000 at June 30, 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, which is in accordance with the payment
schedule. The Company has not provided a reserve for the remaining $6,000,000,
as management believes such amount is collectible.
6
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Deferred Compensation
In connection with the issuance of 200,000 shares of restricted common stock of
MetaCreations Corporation to an officer of the Company, the Company recorded
deferred compensation of approximately $1,625,000 during the three months ended
June 30, 2000. This deferred compensation, which is being amortized over four
years, represented the fair value of the common stock at the date of issuance.
Stock-based compensation expense of $85,000 was recognized during the three
months ended June 30, 2000.
Mandatorily Redeemable Preferred Stock of Subsidiary
In June 2000, Metastream Corporation issued 1,500,000 shares of Series A
Convertible Preferred Stock to America Online, Inc. ("AOL") for cash
consideration totaling $10,000,000. Each share of Series A Convertible Preferred
Stock may be exchanged, at AOL's option, into the number of shares of
MetaCreations' common stock as is equal to $6.67 divided by the exchange price
in effect at the time of exchange (the "Exchange Price"). The Exchange Price is
calculated as 87% of the lesser of (a) $6.67 or (b) the average closing price of
MetaCreations common stock over the 15 day period prior to the date that AOL
submits notice of its exercise of the option. In the event of a merger of
Metastream Corporation into MetaCreations, each share of Series A Convertible
Preferred Stock may be exchanged by MetaCreations, at MetaCreations' option,
into the number of shares of MetaCreations common stock as is equal to the
greater of (a) $6.67 divided by the exchange price in effect at the time of
exchange (the "Merger Exchange Price") or (b) the number of shares that AOL
would have received if it continued to hold the preferred shares but exercised
its rights to convert the preferred shares immediately prior to the merger. The
Merger Exchange Price is calculated as 87% of the lesser of (a) $6.67 or (b) the
average closing price of MetaCreations common stock over the 15 day period prior
to the date that the MetaCreations enters into arrangements for the combination
of the two companies. In connection with the issuance of the shares of Series A
Convertible Preferred Stock to AOL, the Company recorded a one-time non-cash
sales and marketing charge of $5,749,000 related to the difference between the
fair value of the MetaCreations common shares into which AOL could have
converted the Metastream preferred shares on the date of issuance and the
$10,000,000 cash consideration paid by AOL.
The Series A Convertible Preferred Stock held by AOL also contains a put right
(the "Put Right") whereby AOL may require the Company to purchase the preferred
shares at a price equal to the original purchase price paid by AOL, plus
interest. The Put Right expires on June 12, 2002. The Series A Convertible
Preferred Stock has been classified as mandatorily redeemable preferred stock of
subsidiary in the Company's consolidated balance sheets.
Minority Interest
For financial reporting purposes, the assets, liabilities and earnings of
Metastream Corporation are included in the Company's consolidated financial
statements. Cash receipts assigned to Computer Associates purchase of a 20%
interest in Metastream Corporation are included in minority interest in the
Company's consolidated balance sheets. Computer Associates 20% interest in
Metastream Corporation has been recorded as minority interest in the Company's
7
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
In connection with the grant of stock options of Metastream Corporation to
certain employees and non-employee directors, Metastream Corporation recorded
deferred compensation of $7,334,000 and $21,818,000 for the three and six month
periods ended June 30, 2000, respectively. Minority interest in the Company's
consolidated balance sheets is credited with its proportionate interest in
stock-based compensation that is recognized. Stock-based compensation expense of
$3,147,000 and $6,918,000 was recognized during the three and six month periods
ended June 30, 2000, respectively.
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.
8
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTATEMENT OF FINANCIAL STATEMENTS
On August 8, 2000, the Company announced that it would 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 was to reallocate the entire $7,000,000 monetary
consideration committed by Computer Associates as part of license agreements,
and recorded as license 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.
As part of the restatement of financial statements during the three months ended
June 30, 1999, the Company also reclassified $1,920,000 to gain on sale of
assets within loss from discontinued operations. This gain was comprised of
$2,000,000 previously recorded as license revenue relating to discontinued
operations, net of $80,000 previously recorded as other income relating to
continuing operations.
Additionally, based upon a revised estimate of the valuation of Metastream
Corporation at various dates during the year ended December 31, 1999 and during
the three months ended March 31, 2000, the Company 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 $4,000,000
and $1,841,000 during the three months ended December 31, 1999 and March 31,
2000, respectively, for stock-based compensation associated with stock option
grants at exercise prices which were below the fair value of Metastream
Corporation stock on the date of grant.
The restated financial information and related disclosures have been included in
the amended Form 10-K/A filing for the year ended December 31, 1999 and the
amended Form 10-Q/A filing for the quarter ended March 31, 2000, which were
filed with the Securities and Exchange Commission on August 21, 2000.
Accordingly, the unaudited financial statements for the three and six months
ended June 30, 1999 presented in this Form 10-Q have been restated as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
---------------------------------------------------
AS AS
REPORTED RESTATED REPORTED RESTATED
---------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net revenues....................................... $ 3,015 $ 15 $ 5,278 2,278
Income (loss) from operations...................... 907 (2,093) 1,205 (1,795)
Income (loss) before provision for income taxes.... 1,355 (1,565) 2,210 (710)
Income (loss) before minority interest............. 1,355 (1,565) 2,210 (710)
Net income (loss) from continuing operations....... 1,355 (1,565) 2,210 (710)
Net income (loss).................................. 139 (2,861) (953) (3,953)
Basic and diluted net income (loss) per common
share:
Net income (loss) per common share from
continuing operations....................... 0.06 (0.07) 0.09 (0.03)
Net loss per common share from discontinued
operations.................................. (0.05) (0.05) (0.13) (0.13)
---------------------------------------------------
Net loss per common share................... 0.01 (0.12) (0.04) (0.16)
</TABLE>
9
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, 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 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 is payable within one year. At
June 30, 2000, $8,500,000 is 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 June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
LOSS ON
DISPOSAL OF PROVISION AT
DISCONTINUED DECEMBER 31, CHARGED TO PROVISION AT
OPERATIONS DEDUCTIONS 1999 EXPENSE DEDUCTIONS JUNE 30, 2000
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Write-down of operating
assets...................... $ 18,445 $ 18,103 $ 342 $ 1,266 $ 762 $ 846
Severance and benefits........ 8,415 504 7,911 26 7,937 --
Estimated loss of
discontinued operations
through divesture date...... 5,400 -- 5,400 (2,072) 3,328 --
Estimated net proceeds from
divestiture................. (11,000) -- (11,000) (485) (10,850) (635)
--------------------------------------------------------------------------------------
$ 21,260 $ 18,607 $ 2,653 $ (1,265) $ 1,177 $ 211
--------------------------------------------------------------------------------------
</TABLE>
10
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Operating results from discontinued operations were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net revenues............................ $ 699 $ 9,365 $ 5,275 $ 19,170
Cost of revenues........................ 77 1,746 1,066 3,393
----------------------------------------------------------
Gross profit......................... 622 7,619 4,209 15,777
Operating expenses:
Sales and marketing.................. 245 6,587 3,045 12,632
Research and development............. 849 3,492 3,743 6,821
General and administrative........... 413 756 749 1,487
----------------------------------------------------------
Total operating expenses....... 1,507 10,835 7,537 20,940
----------------------------------------------------------
Loss before gain on sale of assets...... (885) (3,216) (3,328) (5,163)
Gain on sale of assets.................. -- 1,920 -- 1,920
----------------------------------------------------------
Loss before provision for income taxes.. (885) (1,296) (3,328) (3,243)
Provision for income taxes.............. -- -- -- --
----------------------------------------------------------
Loss from discontinued operations....... $ (885) $ (1,296) $ (3,328) $ (3,243)
==========================================================
</TABLE>
11
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The net assets of the discontinued operations included in the accompanying
consolidated balance sheets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------
(Restated)
<S> <C> <C>
Current assets of discontinued operations:
Notes receivable............................................... $ 8,500 $ --
Accounts receivable, net....................................... 1,804 1,800
Inventories, net............................................... -- 92
Prepaid expenses............................................... 24 2,810
-------------------------------
Current assets of discontinued operations.................... $ 10,328 $ 4,702
===============================
Non-current assets of discontinued operations:
Property and equipment, net.................................... $ -- $ 1,574
Other assets................................................... 157 400
-------------------------------
Non-current assets of discontinued operations................ $ 157 $ 1,974
===============================
Current liabilities of discontinued operations:
Accounts payable............................................... $ 805 $ 5,631
Accrued expenses............................................... 121 2,824
Royalties payable.............................................. 42 723
-------------------------------
Current liabilities of discontinued operations............... $ 968 $ 9,178
===============================
</TABLE>
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 Revenue Code of 1986, as amended.
12
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METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 and six month
periods ended June 30, 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 June 30, 2000:
Basic EPS...................................$ (10,709) 27,629 $ (0.39)
Effect of dilutive securities............... -- --
-------------------------------------
Diluted EPS.................................$ (10,709) 27,629 $ (0.39)
=====================================
Three Months Ended June 30, 1999
(Restated):
Basic EPS...................................$ (2,861) 24,448 $ (0.12)
Effect of dilutive securities............... -- --
-------------------------------------
Diluted EPS.................................$ (2,861) 24,448 $ (0.12)
=====================================
Six Months Ended June 30, 2000:
Basic EPS...................................$ (15,331) 27,216 $ (0.56)
Effect of dilutive securities............... -- --
-------------------------------------
Diluted EPS.................................$ (15,331) 27,216 $ (0.56)
=====================================
Six Months Ended June 30, 1999
(Restated):
Basic EPS...................................$ (3,953) 24,387 $ (0.16)
Effect of dilutive securities............... -- --
-------------------------------------
Diluted EPS.................................$ (3,953) 24,387 $ (0.16)
=====================================
</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,
are as follows (in thousands).
<TABLE>
<S> <C>
Three Months Ended June 30,:
2000........................................ 2,286
1999........................................ 8,453
Six Months Ended June 30,:
2000........................................ 2,286
1999........................................ 8,453
</TABLE>
13
<PAGE> 14
METACREATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. SUBSEQUENT EVENTS
Issuance of Series B Mandatorily Redeemable Convertible Preferred Stock of
Metastream Corporation to Adobe Corporation
On July 18, 2000, Metastream Corporation issued 1,500,000 shares of Series B
Convertible Preferred Stock to Adobe Corporation ("Adobe") for cash
consideration totaling $10,000,000. Each share of Series B Convertible Preferred
Stock may be exchanged, at Adobe's option, into the number of shares of
MetaCreations' common stock as is equal to $6.67 divided by the exchange price
in effect at the time of exchange (the "Exchange Price"). The Exchange Price is
calculated as 87% of the lesser of (a) $6.67 or (b) the average closing price of
MetaCreations common stock over the 15 day period prior to the date that Adobe
submits notice of its exercise of the option. In the event of a merger of
Metastream Corporation into MetaCreations, each share of Series B Convertible
Preferred Stock may be exchanged by MetaCreations, at MetaCreations' option,
into the number of shares of MetaCreations common stock as is equal to the
greater of (a) $6.67 divided by the exchange price in effect at the time of
exchange (the "Merger Exchange Price") or (b) the number of shares that Adobe
would have received if it continued to hold the preferred shares but exercised
its rights to convert the preferred shares immediately prior to the merger. The
Merger Exchange Price is calculated as 87% of the lesser of (a) $6.67 or (b) the
average closing price of MetaCreations common stock over the 15 day period prior
to the date that the MetaCreations enters into arrangements for the combination
of the two companies. In connection with the issuance of the shares of Series B
Convertible Preferred Stock to Adobe, the Company expects to record a one-time
non-cash sales and marketing charge during the three months ended September 30,
2000 related to the difference between the fair value of the MetaCreations
common shares into which Adobe could have converted the Metastream preferred
shares on the date of issuance and the $10,000,000 cash consideration paid by
Adobe.
The Series B Convertible Preferred Stock issued to Adobe also contains a put
whereby Adobe may require the Company to purchase the preferred shares at a
price equal to the original purchase price paid by Adobe, plus interest. The Put
Right expires on July 18, 2002.
Acquisition of Viewpoint Digital, Inc.
On July 24, 2000, the Company announced that it had signed a letter of intent to
acquire Viewpoint Digital, Inc. ("Viewpoint Digital"), a wholly-owned subsidiary
of Computer Associates that publishes the world's largest library of 3D digital
content and provides creative 3D services to thousands of customers in
entertainment, advertising, visual simulation, computer-based training and
corporate communications. Computer Associates also will retain a license to use
the Viewpoint technology. The financial terms of this transaction have not yet
been finalized. The Company expects to complete the acquisition during the third
quarter of 2000.
14
<PAGE> 15
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 was initially formed as a joint initiative between
MetaCreations and Computer Associates in June 1999. In June 2000, Metastream
Corporation issued 1,500,000 shares of Series A Mandatorily Redeemable
Convertible Preferred Stock to AOL for consideration totaling $10,000,000. In
July 2000, Metastream Corporation issued 1,500,000 shares of Series B
Mandatorily Redeemable Convertible Preferred Stock to Adobe for consideration
totaling $10,000,000. In July 2000, MetaStream Corporation also announced plans
to acquire Viewpoint Digital, Inc., a wholly-owned subsidiary of Computer
Associates. Viewpoint Digital publishes the world's largest library of 3D
digital content and provides creative 3D services to thousands of customers in
entertainment, advertising, visual simulation, computer-based training and
corporate communications. Metastream Corporation expects to complete this
acquisition during the third quarter of 2000.
Metastream Corporation 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.
15
<PAGE> 16
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.
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 June 30, 2000, had an accumulated deficit of
approximately $105.2 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 to
developers at the end of March 2000 and is expected to be released to the public
during the third quarter of 2000. 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."
OPERATING RESULTS
Net Revenues
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.
16
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $ 155 933% $ 15
</TABLE>
Net revenues of $155,000 for the three months ended June 30, 2000 were related
to services performed during the quarter, with 81% 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. 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 to developers at the end of March 2000 and is expected to be
released to the public during the third quarter of 2000. No revenue was recorded
during the three months ended June 30, 2000 related to the licensing of
Metastream 3.0.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenues $ 317 (86)% $ 2,278
</TABLE>
Net revenues of $317,000 for the six months ended June 30, 2000 were related to
services performed during the quarter, with 79% of the revenues being attributed
to Computer Associates. Revenues from one-time licenses from Intel Corporation
and Computer Associates accounted for 44% and 42% of total revenues,
respectively, for the six months ended June 30, 1999. No revenue was recorded
during the six months ended June 30, 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.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, consulting fees,
advertising and facilities costs related to sales, marketing, business
development, Web services and public relations personnel who promote the
Company's products, technologies and services.
17
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales and marketing $ 8,764 2,376% $ 354
As % of net revenues 5,654% 2,360%
</TABLE>
The 2,376% increase in sales and marketing expenses is primarily due to a
one-time non-cash sales and marketing charge of $5.7 million recorded during the
three months ended June 30, 2000 related to the difference between the fair
value of the MetaCreations common shares into which AOL could have converted the
Metastream preferred shares on the date of issuance and the $10.0 million cash
consideration paid by AOL. In addition, sales and marketing expenses increased
due to increased salaries, travel expenses and recruiting fees related to
increased headcount; consulting fees related to the development of a new
corporate Web site; and public relations agency fees.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales and marketing $ 10,114 1,234% $ 758
As % of net revenues 3,191% 33%
</TABLE>
Sales and marketing expenses have increased compared to the prior year due to a
one-time non-cash sales and marketing charge of $5.7 million recorded during the
six months ended June 30, 2000 related to the difference between the fair value
of the MetaCreations common shares into which AOL could have converted the
Metastream preferred shares on the date of issuance and the $10.0 million cash
consideration paid by AOL. In addition, sales and marketing expenses increased
due to increased salaries, travel expenses, and recruiting fees related to
increased headcount; consulting fees related to the development of a new
corporate Web site; public relations agency fees; and other direct expenses
related to the launch of Metastream 3.0 at the end of the first quarter of 2000.
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. In
addition, the Company expects to record an additional one-time non-cash sales
and marketing charge during the three months ended September 30, 2000 in
connection with the issuance of 1,500,000 shares of Series B Convertible
Preferred Stock of Metastream Corporation issued to Adobe Corporation in July
2000.
18
<PAGE> 19
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Research and development $ 1,078 61% $ 670
As % of net revenues 695% 4,467%
</TABLE>
The 61% increase in research and development expenses is primarily due to
increased salaries, travel and facilities expenses related to increased internal
development personnel, in addition to consulting fees in connection with the
development of Metastream 3.0.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Research and development $ 2,027 65% $ 1,229
As % of net revenues 639% 54%
</TABLE>
Research and development expenses have increased compared to the prior year due
to increased salaries and travel expenses resulting from increased headcount as
well as increased consulting fees.
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.
General and Administrative
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.
19
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
General and administrative $ 983 (9)% $ 1,084
As % of net revenues 634% 7,227%
</TABLE>
The 9% decrease in general and administrative expenses was primarily attributed
to reduced compensation and related costs associated with fewer administrative
personnel.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
General and administrative $ 2,083 --% $ 2,086
As % of net revenues 657% 92%
</TABLE>
General and administrative expenses have remained consistent compared to the
prior year with compensation and related costs decreasing period over period
due to fewer administrative personnel, and legal fees increasing period over
period as a result of additional patent filings with respect to the Company's
technologies.
The Company expects general and administrative expenses will continue to
increase in future periods, but such expenses may vary as a percentage of net
revenues.
Stock-based Compensation
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stock-based compensation $ 3,147 100% $ --
As % of net revenues 2,030% --%
</TABLE>
In connection with the grant of stock options of Metastream Corporation to
certain employees and non-employee directors, Metastream Corporation recorded
deferred compensation of approximately $7.3 million during the three months
ended June 30, 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 $3.1 million was
recognized during the three months ended June 30, 2000.
20
<PAGE> 21
In connection with the issuance of 200,000 shares of restricted common stock of
MetaCreations Corporation to an officer of the Company, the Company recorded
deferred compensation of approximately $1.6 million during the three months
ended June 30, 2000. This deferred compensation, which is being amortized over
four years, represented the fair value of the common stock at the date of
issuance. Stock-based compensation expense of $85,000 was recognized during the
three months ended June 30, 2000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999
2000 % CHANGE (RESTATED)
------------- ------------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Stock-based compensation $ 7,003 100% $ --
As % of net revenues 2,209% --%
</TABLE>
In connection with the grant of stock options of Metastream Corporation to
certain employees and non-employee directors, Metastream Corporation recorded
deferred compensation of approximately $21.8 million during the six months ended
June 30, 2000. Stock-based compensation expense of $6.9 million was recognized
during the six months ended June 30, 2000.
In connection with the issuance of 200,000 shares of restricted common stock of
MetaCreations Corporation to an officer of the Company, the Company recorded
deferred compensation of approximately $1.6 million during the three months
ended June 30, 2000. This deferred compensation, which is being amortized over
four years, represented the fair value of the common stock at the date of
issuance. Stock-based compensation expense of $85,000 was recognized during the
six months ended June 30, 2000.
Other Income
Other income consists of interest and investment income on cash and marketable
securities. As a result, other income fluctuates commensurate with changes in
the Company's cash and marketable securities balances and market interest rates.
The Company expects that its cash and marketable securities balances, as well as
other income, will continue to fluctuate in the future due to the timing of the
receipt of proceeds from the divestiture of the prepackaged graphics software
products and from the exercise of stock options, in addition to cash provided by
or used in the operations of the Company.
Provision for 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.
21
<PAGE> 22
Minority Interest in Loss of Subsidiary
For financial reporting purposes, the assets, liabilities and earnings of
Metastream Corporation are included in the Company's consolidated financial
statements. Computer Associates 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
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
$21.3 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, 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 AG acquired the Poser
product line; and fractal.com Corporation 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 is payable within one year. At
June 30, 2000, $8.5 million is 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 June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
LOSS ON
DISPOSAL OF PROVISION AT
DISCONTINUED DECEMBER 31, CHARGED TO PROVISION AT
OPERATIONS DEDUCTIONS 1999 EXPENSE DEDUCTIONS JUNE 30, 2000
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Write-down of operating
assets...................... $ 18,445 $ 18,103 $ 342 $ 1,266 $ 762 $ 846
Severance and benefits........ 8,415 504 7,911 26 7,937 --
Estimated loss of
discontinued operations
through divesture date...... 5,400 -- 5,400 (2,072) 3,328 --
Estimated net proceeds from
divestiture................. (11,000) -- (11,000) (485) (10,850) (635)
------------------------------------------------------------------------------------
$ 21,260 $ 18,607 $ 2,653 $ (1,265) $ 1,177 $ 211
====================================================================================
</TABLE>
22
<PAGE> 23
Operating results from discontinued operations were as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues........................... $ 699 $ 9,365 $ 5,275 $ 19,170
Cost of revenues....................... 77 1,746 1,066 3,393
----------------------------------------------------------
Gross profit........................... 622 7,619 4,209 15,777
Operating expenses:
Sales and marketing.................... 245 6,587 3,045 12,632
Research and development............... 849 3,492 3,743 6,821
General and administrative............. 413 756 749 1,487
----------------------------------------------------------
Total operating expenses........... 1,507 10,835 7,537 20,940
----------------------------------------------------------
Loss before gain on sale of assets..... (885) (3,216) (3,328) (5,163)
Gain on sale of assets................. -- 1,920 -- 1,920
----------------------------------------------------------
Loss before provision for income taxes. (885) (1,296) (3,328) (3,243)
Provision for income taxes............. -- -- -- --
----------------------------------------------------------
Loss from discontinued operations...... $ (885) $ (1,296) $ (3,328) $ (3,243)
==========================================================
</TABLE>
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, 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.
23
<PAGE> 24
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 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 June 30, 2000, we had an accumulated deficit of
approximately $105.2 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;
24
<PAGE> 25
- 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;
- 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 to developers at the end of
March 2000 and is expected to be released to the public during the third quarter
of 2000. 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.
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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);
- Macromedia, Inc.
- Oz.Com (Fluid3D - in conjunction with RealNetworks, Inc.'s G2 media
player);
- RichFX, Inc. (RichFX Player - 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
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
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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 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.
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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.
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
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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;
- 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. During the three months ended June 30, 2000, we
entered into long-term employment agreements with our President and Chief
Executive Officer, Robert Rice, as well as our Senior Vice President and Chief
Financial Officer, James Abate. 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.
In 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments totaled $38.6 million at June 30, 2000, up from $37.3
million at December 31, 1999.
Net cash used in operating activities of the Company totaled $17.5 million for
the six months ended June 30, 2000, compared to $3.5 million for the six months
ended June 30, 1999. Net cash used in operating activities for the six months
ended June 30, 2000 primarily related to $16.6 million net loss from continuing
operations, $13.0 million net cash used for discontinued operations (principally
severance and related expenses) and $3.3 million minority interest in loss of
subsidiary, net of $7.0 non-cash stock-based compensation charge and $5.7
million non-cash sales and marketing charge related to the issuance of
Metastream preferred stock to AOL. Net cash used in operating activities for the
six months ended June 30, 1999 primarily related to $4.3 million net cash used
for discontinued operations.
Net cash provided by investing activities totaled $13.6 million for the six
months ended June 30, 2000, compared to net cash used in investing activities of
$7.7 million for the six months ended June 30, 1999. Net cash provided by
investing activities for the six months ended June 30, 2000 primarily resulted
from $14.8 million of net proceeds from sales and maturities of short-term
investments and 1.0 million of proceeds from the repayment of a note receivable
from an officer of the Company, net of $2.0 used for purchases of property and
equipment. Net cash used in investing activities for the six months ended June
30, 1999 primarily resulted from $4.9 million of net purchases of short-term
investments and $2.9 million of net cash used for discontinued operations.
Net cash provided by financing activities totaled $19.9 million and $224,000 for
the six months ended June 30, 2000 and 1999, respectively. Net cash provided by
financing activities for the six months ended June 30, 2000 resulted from $10.5
million of proceeds received from the exercise of stock options by the Company's
employees, $9.8 million of net proceeds from the issuance of Series A
Convertible Preferred Stock in Metastream to AOL and $1.0 million collected from
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Computer Associates in connection with a subscription receivable related to
Metastream common stock, net of a $1.5 million note receivable issued to an
officer of the Company. Net cash provided by investing activities for the six
months ended June 30, 1999 primarily resulted from $324,000 of proceeds received
from the exercise of stock options by the Company's employees.
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 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. 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.
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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 June 30, 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
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
10.1 Amended Employment Agreement between the Registrant and Robert Rice dated June 29, 2000
10.2 Letter Agreement between the Registrant and James A. Abate, dated April 14, 2000
10.3 Amended and Restated Series A Preferred Stock Purchase Agreement and Related
Exchange Agreement between Registrant and America Online, Inc. dated June 12, 2000.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
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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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
34
