----

----

**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

(Mark One)
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For The Quarterly Period Ended:       August 31, 2001**
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**For The Transition Period From                        To                   **

 

**Commission File Number: 0-14779**

**MEDIA 100 INC.**

----

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**                                                    | **04-2532613**                           |
|-----------------------------------------------------------------|------------------------------------------|
| ****                                                            | ****                                     |
| (State  or other jurisdiction of organization or incorporation) | (I.R.S.  Employer Identification Number) |
|                                                            |                                     |
| **290 DONALD LYNCH BOULEVARD  MARLBOROUGH, MASSACHUSETTS**      |
|                                                                 |
| (Address  of principal executive offices)                       |
|                                                            |
| **01752-4748**                                                  |
|                                                                 |
| (Zip  code)                                                     |
|                                                            |
| **(508) 460-1600**                                              |
|                                                                 |
| (Registrant’s  telephone number, including area code)      |

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

                                                     Yes       ý                       No        o

 

Indicate the number of shares outstandingof each of the issuer’s classes of common stock, as of the latest practicabledate.

 
| **Common Stock, par value $.01 per share** | **12,545,325 shares**              |
|--------------------------------------------|------------------------------------|
| ****                                       | ****                               |
| Class                                      | Outstanding  at September 30, 2001 |

 

----

----

MEDIA 100 INC. ANDSUBSIDIARIES

 

INDEX

 
|                           |                                                                                                          |                                                                                 |
|--------------------------------|---------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|
| PART I - FINANCIAL INFORMATION |                                                                                                          |
|                           | ITEM 1                                                                                                        | Consolidated  Financial Statements:                                                  |   |
|                           | Consolidated Balance Sheets as of August  31, 2001 and November 30, 2000                                      |                                                                                 |
|                           |                                                                                                          |                                                                                 |
|                           | Consolidated Statements of  Operations for the three and nine months ended August 31, 2001 and August31, 2000 |                                                                                 |
|                           |                                                                                                          |                                                                                 |
|                           | Consolidated Statements  of Cash Flows for the nine months ended August 31, 2001 and August  31, 2000    |                                                                                 |
|                           |                                                                                                          |                                                                                 |
|                           | Notes To Consolidated  Financial Statements                                                                   |                                                                                 |
|                           |                                                                                                          |                                                                                 |
|                           | ITEM 2                                                                                                        | Managements Discussion And  Analysis Of Financial Condition and Resuts of Operations |   |
|                           |                                                                                                          |                                                                                 |
|                           | ITEM 3                                                                                                        | Item3 Quantitative And  Qualitative Disclosure about Market Risk                     |   |
|                           |                                                                                                          |                                                                                 |
| PART II - OTHER INFORMATION    |                                                                                                          |
|                           | ITEM 1                                                                                                        | Legal Proceedings                                                                    |   |
|                           |                                                                                                          |                                                                                 |
|                           | ITEM 5                                                                                                        | Other Information                                                                    |   |
|                           |                                                                                                          |                                                                                 |
|                           | ITEM 6                                                                                                        | Exhibits and Reports on Form 8-K                                                     |   |
|                           |                                                                                                          |                                                                                 |
| SIGNATURES                     |                                                                                                          |
|                           |                                                                                                          |                                                                                 |
| EXHIBIT  INDEX                 |                                                                                                          |

PART I - FINANCIALINFORMATION****MEDIA 100 INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(in thousands)****(unaudited)

 

 
|                                        | August  31,                                                                                   |     | November  30, |     |
|---------------------------------------------|-----------------------------------------------------------------------------------------------|----------|---------------|----------|
|                                        | 2001                                                                                          |     | 2000          |     |
|                                        |                                                                                               |     |               |     |
| ASSETS                                      |                                                                                          |     |          |     |
| Current assets:                             |                                                                                          |     |          |     |
|                                        | Cash and cash  equivalents                                                                    | $        | 6,438         |     | $ | 11,987 |   |
|                                        | Marketable securities                                                                         | 245      |          | 5,674    |   |
|                                        | Accounts receivable,  net of allowance for doubtful accounts of $629 in 2001 and $411 in 2000 | 3,775    |     | 6,321    |     |
|                                        | Inventories                                                                                   | 1,649    |          | 3,789    |   |
|                                        | Prepaid expenses and  other current assets                                                    | 830      |          | 1,180    |   |
|                                        | Net assets from  discontinued operations (Note 16)                                            | 3,888    |          | 5,582    |   |
|                                        |                                                                                          |          |          |          |   |
|                                        | Total current assets                                                                          | 16,825   |          | 34,533   |   |
|                                        |                                                                                          |     |          |     |
| Property and  equipment, net                | 4,433                                                                                         |     | 5,616         |     |
| Intangible assets, net                      | 2,464                                                                                         |     | 4,908         |     |
| Other assets, net                           | 1,131                                                                                         |     | 1,245         |     |
|                                        |                                                                                               |     |               |     |
| Total assets                                | $                                                                                             | 24,853   |          | $        | 46,302 |   |
|                                        |                                                                                               |     |               |     |
|                                        |                                                                                          |     |          |     |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY  |                                                                                          |     |          |     |
| Current liabilities:                        |                                                                                          |     |          |     |
|                                        | Accounts payable                                                                              | $        | 1,699         |     | $ | 4,561 |   |
|                                        | Accrued expenses                                                                              | 6,401    |          | 7,142    |   |
|                                        | Note payable                                                                                  | -        |          | 1,492    |   |
|                                        | Deferred revenue                                                                              | 4,304    |          | 5,272    |   |
|                                        |                                                                                          |          |          |          |   |
|                                        | Total current  liabilities                                                                    | 12,404   |          | 18,467   |   |
|                                        |                                                                                               |     |               |     |
|                                        |                                                                                          |     |          |     |
| Contingencies (Note 9)                      |                                                                                          |     |          |     |
|                                        |                                                                                          |     |          |     |
| Stockholders' equity:                       |                                                                                          |     |          |     |
|                                        | Preferred stock                                                                               | -        |          | -        |   |
|                                        | Common stock                                                                                  | 128      |          | 123      |   |
|                                        | Capital in excess of  par value                                                               | 217,681  |          | 217,182  |   |
|                                        | Treasury stock                                                                                | (78      | )             | -        |   |
|                                        | Accumulated deficit                                                                           | (205,203 | )             | (189,380 | ) |
|                                        | Accumulated other  comprehensive loss                                                         | (79      | )             | (90      | ) |
|                                        |                                                                                               |     |               |     |
|                                        | Total stockholders'  equity                                                                   | 12,449   |          | 27,835   |   |
|                                        |                                                                                               |     |               |     |
| Total liabilities and  stockholders' equity | $                                                                                             | 24,853   |          | $        | 46,302 |   |
|                                        |                                                                                               |     |               |     |
|                                             |                                                                                               |          |               |          |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

MEDIA 100 INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTSOF OPERATIONS****(in thousands, except per share data)****(unaudited)****
|                                         | Three  Months Ended August 31,                                        |          | Nine  Months Ended August 31, |          |
|----------------------------------------------|-----------------------------------------------------------------------|---------------|-------------------------------|---------------|
|                                         |                                                                       |          |                               |          |
|                                         | 2001                                                                  |          | 2000                          |          | 2001 |   | 2000 |   |
|                                         |                                                                       |          |                               |          |  |   |  |   |
| Net sales:                                   |                                                                  |          |                          |          |   |   |   |   |
|                                         | Products                                                              | $             | 5,993                         |          | $ | 9,839 |   | $ | 19,087 |   | $ | 28,549 |   |
|                                         | Services                                                              | 2,066         |                          | 2,703         |   | 6,906 |   | 7,268 |   |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
| Total net sales                              | 8,059                                                                 |          | 12,542                        |          | 25,993 |   | 35,817 |   |
|                                         |                                                                  |          |                          |          |   |   |   |   |
| Cost of sales                                | 4,582                                                                 |          | 5,381                         |          | 13,304 |   | 15,162 |   |
|                                         |                                                                       |          |                               |          |  |   |  |   |
|                                         | Gross profit                                                          | 3,477         |                          | 7,161         |   | 12,689 |   | 20,655 |   |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         |                                                                  |          |                          |          |   |   |   |   |
| Operating expenses:                          |                                                                  |          |                          |          |   |   |   |   |
|                                         | Research and  development                                             | 2,690         |                          | 2,932         |   | 8,056 |   | 8,221 |   |
|                                         | Selling and marketing                                                 | 2,585         |                          | 3,264         |   | 9,818 |   | 9,823 |   |
|                                         | General and  administrative                                           | 1,923         |                          | 1,069         |   | 4,594 |   | 3,124 |   |
|                                         | Amortization and  write-down of acquisition-related intangible assets | 480           |                     | 303           |     | 2,420 |     | 668 |     |
|                                         | Acquired in-process  research and development                         | -             |                     | -             |     | - |     | 470 |     |
|                                         | Restructuring charge                                                  | 310           |                          | -             |   | 878 |   | - |   |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Total operating  expenses                                             | 7,988         |                          | 7,568         |   | 25,766 |   | 22,306 |   |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
| Operating loss                               | (4,511                                                                | )             | (407                          | )             | (13,077 | ) | (1,651 | ) |
|                                         |                                                                  |          |                          |          |   |   |   |   |
| Interest income, net                         | 50                                                                    |          | 260                           |          | 221 |   | 809 |   |
| Other income  (expense), net                 | 464                                                                   |          | (328                          | )             | 200 |   | (646 | ) |
|                                         |                                                                       |          |                               |          |  |   |  |   |
|                                         | Loss from continuing  operations before tax provision                 | (3,997        | )                             | (475          | ) | (12,656 |   ) | ****(1,488 | ) |
| Tax provision                                | -                                                                     |          | -                             |          | - |   | 30 |   |
|                                         |                                                                       |          |                               |          |  |   |  |   |
| Loss from continuing  operations             | (3,997                                                                | )             | (475                          | )             | (12,656 | ) | (1,518 | ) |
|                                         |                                                                  |          |                          |          |   |   |   |   |
| Discontinued  Operations   (Note 16):        |                                                                  |          |                          |          |   |   |   |   |
| Income (loss) from  discontinued operations  | (1,021                                                                | )             | 752                           |          | (3,167 | ) | (1,740 | ) |
|                                         |                                                                       |          |                               |          |  |   |  |   |
|                                         | Net (loss) income                                                     | $             | (5,018                        | )             | $ | 277 |   | $ | (15,823 | ) | $ | (3,258 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         |                                                                  |          |                          |          |   |   |   |   |
| Basic net (loss)  income per share:          |                                                                  |          |                          |          |   |   |   |   |
|                                         | Continuing operations                                                 | $             | (0.32                         | )             | $ | (0.04 | ) | $ | (1.02 | ) | $ | (0.13 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Discontinued  operations                                              | $             | (0.08                         | )             | $ | 0.06 |   | $ | (0.26 | ) | $ | (0.15 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Total                                                                 | $             | (0.40                         | )             | $ | 0.02 |   | $ | (1.28 | ) | $ | (0.28 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
| Diluted net (loss)  income per share:        |                                                                  |          |                          |          |   |   |   |   |
|                                         | Continuing operations                                                 | $             | (0.32                         | )             | $ | (0.04 | ) | $ | (1.02 | ) | $ | (0.13 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Discontinued  operations                                              | $             | (0.08                         | )             | $ | 0.06 |   | $ | (0.26 | ) | $ | (0.15 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Total                                                                 | $             | (0.40                         | )             | $ | 0.02 |   | $ | (1.28 | ) | $ | (0.28 | ) |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
| Weighted average  common shares outstanding: |                                                                  |     |                          |     |   |     |   |     |
|                                         | Basic                                                                 | 12,415        |                          | 12,136        |   | 12,369 |   | 11,916 |   |
|                                         |                                                                  |               |                          |               |   |  |   |  |   |
|                                         | Diluted                                                               | 12,415        |                          | 13,167        |   | 12,369 |   | 11,916 |   |
|                                         |                                                                       |          |                               |          |  |   |  |   |
|                                              |                                                                       |               |                               |               |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

MEDIA 100 INC. ANDSUBSIDIARIES****CONSOLIDATED STATEMENTS OFCASH FLOWS****(in thousands)****(unaudited)****
|                                                     | Nine  Months Ended August 31,                                                                            |    |
|----------------------------------------------------------|----------------------------------------------------------------------------------------------------------|---------|
|                                                     |                                                                                                          |    |
|                                                     | 2001                                                                                                     |    | 2000 |   |
|                                                     |                                                                                                          |    |  |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                   |                                                                                                     |    |   |   |
|                                                     | Net loss                                                                                                 | $       | (15,823 | ) | $ | (3,258 | ) |
|                                                     | Loss from discontinued  operations                                                                       | 3,167   |   | 1,740 |   |
|                                                     | Loss from continuing  operations                                                                         | (12,656 | ) | (1,518 | ) |
|                                                     | Adjustments to  reconcile net loss from continuing operations to net cash used in operating  activities: |    |     |   |     |
|                                                     | Depreciation and  amortization                                                                           | 2,067   |   | 2,189 |   |
|                                                     | Non-cash interest  expense                                                                               | -       |   | 70 |   |
|                                                     | Acquired in-process  research and development                                                            | -       |   | 470 |   |
|                                                     | Amortization and  write-down of acquisition-related intangible assets                                    | 2,420   |   | 669 |   |
|                                                     | Gain on sale of  marketable securities                                                                   | 9       |   | 15 |   |
|                                                     | Changes in assets and  liabilities, excluding effects of acquisitions:                                   |    |   |   |   |
|                                                     | Accounts receivable                                                                                      | 2,546   |   | (1,659 | ) |
|                                                     | Inventories                                                                                              | 2,140   |   | (2,396 | ) |
|                                                     | Prepaid expenses and  other current assets                                                               | 350     |   | (373 | ) |
|                                                     | Accounts payable                                                                                         | (2,862  | ) | (35 | ) |
|                                                     | Accrued expenses                                                                                         | (741    | ) | 865 |   |
|                                                     | Deferred revenue                                                                                         | (968    | ) | 168 |   |
|                                                     |                                                                                                     |         |   |  |   |
|                                                     | Net cash used in  operating activities                                                                   | (7,695  | ) | (1,535 | ) |
|                                                     |                                                                                                          |    |  |   |
|                                                     | Net cash used in  discontinued operations                                                                | (1,473  | ) | (8,148 | ) |
|                                                     |                                                                                                          |    |  |   |
|                                                     |                                                                                                     |    |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                   |                                                                                                     |    |   |   |
|                                                     | Acquisition of Wired,  Inc., net of cash acquired                                                        | -       |   | (1,487 | ) |
|                                                     | Acquisition of 21st  Century Media Inc., net of cash acquired                                            | -       |   | (481 | ) |
|                                                     | Acquisition of J2  Digital Media Inc., net of cash acquired                                              | -       |   | (152 | ) |
|                                                     | Acquisition of certain  assets of Integrated Computing Engines, Inc.                                     | -       |   | (1,797 | ) |
|                                                     | Purchases of property  and equipment                                                                     | (768    | ) | (895 | ) |
|                                                     | Other assets                                                                                             | 114     |   | (1,225 | ) |
|                                                     | Purchase of intangible  assets                                                                           | (91     | ) | (227 | ) |
|                                                     | Net proceeds from  sales of marketable securities                                                        | 5,419   |   | 5,405 |   |
|                                                     |                                                                                                     |         |   |  |   |
|                                                     | Net cash provided by  (used in) investing activities                                                     | 4,674   |   | (859 | ) |
|                                                     |                                                                                                          |    |  |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                   |                                                                                                     |    |   |   |
|                                                     | Payment of note  payable                                                                                 | (1,492  | ) | - |   |
|                                                     | Proceeds from issuance  of common stock pursuant to stock plans                                          | 504     |   | 4,472 |   |
|                                                     | Purchase of treasury  stock                                                                              | (78     | ) | - |   |
|                                                     |                                                                                                     |         |   |  |   |
|                                                     | Net cash (used in)  provided by financing activities                                                     | $       | (1,066 | ) | $ | 4,472 |   |
|                                                     |                                                                                                          |    |  |   |
| EFFECT OF EXCHANGE  RATE CHANGES ON CASH                 | 11                                                                                                       |    | - |   |
|                                                     |                                                                                                          |    |  |   |
| NET DECREASE  INCREASE IN CASH AND CASH EQUIVALENTS | $                                                                                                        | (5,549  | ) | $ | (6,070 | ) |
|                                                     |                                                                                                     |    |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period          | 11,987                                                                                                   |    | 13,858 |   |
|                                                     |                                                                                                          |    |  |   |
| CASH AND CASH  EQUIVALENTS, end of period                | $                                                                                                        | 6,438   |   | $ | 7,788 |   |
|                                                     |                                                                                                          |    |  |   |
|                                                          |                                                                                                          |         |  |  |  |  |  |  |  |  |  |

 
|                                               | Nine  Months Ended August 31,             |   |
|----------------------------------------------------|-------------------------------------------|--------|
|                                               |                                           |   |
|                                               | 2001                                      |   | 2000 |   |
|                                               |                                           |   |  |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION: |                                      |   |   |   |
|                                               | Cash (received) paid  for income taxes    | $      | (42 | ) | $ | 13 |   |
|                                               |                                      |        |   |  |   |
| OTHER TRANSACTIONS NOT  USING CASH:                |                                      |   |   |   |
|                                               | Change in value of  marketable securities | $      | (44 | ) | $ | 27 |   |
|                                               |                                           |   |  |   |
|                                                    |                                           |        |  |  |  |  |  |  |

 
|                                                                                                                                      | Nine  Months Ended August 31, |          |
|-------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|---------------|
|                                                                                                                                      |                               |          |
|                                                                                                                                      | 2001                          |          | 2000 |   |
|                                                                                                                                      |                               |          |  |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:                                                                                |                          |          |   |   |
|                                                                                                                                      |                          |          |   |   |
| In connection with the  acquisition of Wired, Inc., the following non-cash transaction occurred:                                          |                          |     |   |     |
| Fair value of assets  acquired                                                                                                            | $                             | -             |   | $ | 3,180 |   |
| Cash paid for  acquisition and acquisition costs                                                                                          | -                             |          | 1,487 |   |
|                                                                                                                                      |                               |          |  |   |
| Note payable and  liabilities assumed                                                                                                     | $                             | -             |   | $ | 1,693 |   |
|                                                                                                                                      |                               |          |  |   |
|                                                                                                                                      |                          |          |   |   |
| In connection with the  acquisition of 21st Century Media, LLC, the following non-cash  transaction occurred:                             |                          |     |   |     |
| Fair value of assets  acquired                                                                                                            | $                             | -             |   | $ | 1,130 |   |
| Cash paid for  acquisition and acquisition costs                                                                                          | -                             |          | 481 |   |
|                                                                                                                                      |                               |          |  |   |
| Common stock issued  and liabilities assumed                                                                                              | $                             | -             |   | $ | 649 |   |
|                                                                                                                                      |                               |          |  |   |
|                                                                                                                                      |                          |          |   |   |
| In connection with the  acquisition of J2 Digital Media , Inc. the following non-cash transaction  occurred:                              |                          |     |   |     |
| Fair value of assets  acquired                                                                                                            | $                             | -             |   | $ | 280 |   |
| Cash paid for  acquisition and acquisition costs                                                                                          | -                             |          | 152 |   |
|                                                                                                                                      |                               |          |  |   |
| Common stock issued  and liabilities assumed                                                                                              | $                             | -             |   | $ | 128 |   |
|                                                                                                                                      |                               |          |  |   |
|                                                                                                                                      |                          |          |   |   |
| In connection with the  acquisition of certain assets of Integrated Computing Engines, Inc. the  following non-cash transaction occurred: |                          |     |   |     |
| Fair value of assets  acquired                                                                                                            | $                             | -             |   | $ | 2,775 |   |
| Cash paid for  acquisition and acquisition costs                                                                                          | -                             |          | 1,797 |   |
|                                                                                                                                      |                               |          |  |   |
| Common stock issued  and liabilities assumed                                                                                              | $                             | -             |   | $ | 978 |   |
|                                                                                                                                      |                               |          |  |   |
|                                                                                                                                           |                               |               |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

MEDIA 100 INC. ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(UNAUDITED, EXCEPT FOR NOVEMBER 30, 2000 AMOUNTS)

1.  Basis of Presentation

 

The accompanying interim consolidatedfinancial statements include the accounts of Media 100 Inc. (“the Company”), aDelaware corporation, and its wholly owned subsidiaries.  The interim financial statements areunaudited.  However, in the opinion ofmanagement, the interim consolidated financial statements and disclosuresreflect all adjustments necessary for fair presentation. Interim results arenot necessarily indicative of results expected for a full year or for any otherinterim period.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission. These consolidated condensed financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company's latest auditedfinancial statements, which are included in the Company's Annual Report on Form10-K for the fiscal year ended November 30, 2000, filed with the Securities andExchange Commission.

 

The Company’s preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

The Company designs and sells systems(comprising software and hardware) and services that allow Internet-based(“online”) and traditional broadcasters, corporate marketing professionals andeducators to create and deliver high-quality video programs as eithertraditional media or Internet-compatible streams (“streaming media”). On August29, 2001, the Company signed an agreement to sell its software product line toAutodesk, Inc. for $16 million in cash.  As a result of this transaction, the assets of the software product lineto be discontinued consisting primarily of accounts receivable, inventory,equipment, intangible assets, and income taxes payable have been separatelyclassified in the accompanying balance sheet at August 31, 2001.  The November 30, 2000 balance sheet has beenrestated to conform to the current year’s presentation. The disposal date wasOctober 5, 2001. The Company’s software product line consisted of products acquiredin the Terran acquisition and the merger with Digital Origin.

 

2.  Principles of Consolidation

 

The accompanying consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries after elimination of significant intercompany transactions andbalances.  These consolidated financialstatements reflect the use of the following significant accounting policies, asdescribed below and elsewhere in the notes to the consolidated financialstatements.  These consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States.

 

3. Reclassifications

 

Certain amounts in the prior period’sfinancial statements have been reclassified to conform to the current period’spresentation.

 

4. Cash Equivalents and Marketable Securities

 

Cash equivalents are carried at cost,which approximates market value, and have original maturities of less thanthree months.  Cash equivalents includemoney market accounts and repurchase agreements with overnight maturities. Approximately$0.2 million of the cash and cash equivalents were restricted under variousletters of credit at August 31, 2001.

 

The Company accounts for marketablesecurities in accordance with Statement of Financial Accounting Standards(SFAS) No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.  Under this standard, the Company is requiredto classify all investments in debt and equity securities into one or more ofthe following three categories: held-to-maturity, available-for-sale ortrading.  Available-for-sale securitiesare recorded at fair market value with unrealized gains and losses excludedfrom earnings and included as a component of stockholders’ equity.  All of the Company’s marketable securitiesare classified as available-for-sale.

 

Marketable securities held as of August31, 2001 and November 30, 2000 consist of the following (in thousands):

 
| Investments  available for sale:      | Maturity                     |   | August  31, |   | November  30, |   |
|---------------------------------------|------------------------------|--------|-------------|--------|---------------|--------|
|                                  |                         |   | 2001        |   | 2000          |   |
|                                  |                         |   |             |   |               |   |
| U.S. Treasury Notes                   | less than 1 year             |   | $           | -      |          | $      | 509 |   |
| U.S. Treasury Notes                   | 1 - 5 years                  |   | -           |   | 2,030         |   |
|                                  |                         |   |             |   |               |   |
|                                  | Total U.S. Treasury  Notes   | -      |        | -      |          | 2,539  |   |
|                                  |                         |   |        |   |          |   |
| U.S. Agency Bonds                     | less than 1 year             |   | -           |   | 507           |   |
|                                  |                         |   |             |   |               |   |
|                                  | Total U.S. Agency  Bonds     | -      |        | -      |          | 507    |   |
|                                  |                         |   |        |   |          |   |
| Money Market Instruments              | less than 1 year             |   | -           |   | 1,044         |   |
|                                  |                         |   |        |   |          |   |
| Corporate Obligations                 | less than 1 year             |   | -           |   | 1,116         |   |
| Corporate Obligations                 | 1 - 5 years                  |   | 245         |   | 1,512         |   |
|                                  |                         |   |             |   |               |   |
|                                  | Total Corporate  Obligations |   |        | 245    |          | 2,628  |   |
|                                  |                         |   |        |   |          |   |
| Total investments  available for sale |                         |   | 245         |   | 6,718         |   |
| Less: cash and cash  equivalents      |                         |   | -           |   | (1,044        | )      |
|                                  |                         |   |             |   |               |   |
| Total marketable  securities          |                         |   | $           | 245    |          | $      | 5,674 |   |
|                                  |                         |   |             |   |               |   |
|                                       |                              |        |             |        |               |        |  |  |  |  |

 

Marketable securities had a cost of  $245 and $5,718, and a market value of $245and $5,674 at August 31, 2001 and November 30, 2000, respectively. To adjustthe carrying amount of the November 30, 2000 marketable securities portfolio tomarket value, unrealized losses have been reflected as a component ofaccumulated other comprehensive loss in stockholders’ equity pursuant to theprovisions of SFAS No. 115.

 

5. Inventories

 

Inventories are stated at the lower offirst-in, first-out (FIFO) cost or market and consist of the following (inthousands): 

 
|            | August  31, |   | November  30, |   |
|-----------------|-------------|--------|---------------|--------|
|            | 2001        |   | 2000          |   |
|            |             |   |               |   |
| Raw materials   | $           | 1,202  |          | $      | 2,597 |   |
| Work-in-process | 232         |   | 662           |   |
| Finished goods  | 215         |   | 530           |   |
|            |             |   |               |   |
|            | $           | 1,649  |          | $      | 3,789 |   |
|            |             |   |               |   |

 

Work-in-process and finished goodsinventories include material, labor and manufacturing overhead. Managementperforms periodic reviews of inventory and disposes of items not required bytheir manufacturing plan.

 

6. Property and Equipment, net

 

Property and equipment, net, is stated atcost, less accumulated depreciation and amortization, and consists of thefollowing (in thousands):

 
|                                            | August  31, |   | November  30, |   |
|-------------------------------------------------|-------------|--------|---------------|--------|
|                                            | 2001        |   | 2000          |   |
|                                            |             |   |               |   |
| Machinery and  equipment                        | $           | 13,564 |          | $      | 12,894 |   |
| Purchased software                              | 6,037       |   | 6,037         |   |
| Furniture and fixtures                          | 1,283       |   | 1,603         |   |
| Vehicles                                        | 9           |   | 9             |   |
| Leasehold improvements                          | 1,730       |   | 1,559         |   |
|                                            |             |   |               |   |
|                                            | 22,623      |   | 22,102        |   |
| Less accumulated  depreciation and amortization | (18,190     | )      | (16,486       | )      |
|                                            |             |   |               |   |
|                                            | $           | 4,433  |          | $      | 5,616 |   |
|                                            |             |   |               |   |

7. Intangible Assets

Intangible assetsconsist of the following as of August 31, 2001 and November 30, 2000 (inthousands):
|                           | August  31, |   | November  30, |   |
|--------------------------------|-------------|--------|---------------|--------|
|                           | 2001        |   | 2000          |   |
|                           |             |   |               |   |
| Patents and Trademarks         | $           | 498    |          | $      | 407 |   |
| Acquired Technology            | 1,900       |   | 1,900         |   |
| Goodwill                       | 2,784       |   | 3,992         |   |
|                           |             |   |               |   |
|                           | 5,182       |   | 6,299         |   |
| Less accumulated  amortization | (2,718      | )      | (1,391        | )      |
|                           |             |   |               |   |
|                           | $           | 2,464  |          | $      | 4,908 |   |
|                           |             |   |               |   |

Patentsand trademarks are being amortized over periods ranging from three to fiveyears, their estimated useful lives. The Company amortizes goodwill anddeveloped acquired technology related to its acquisitions using a straight-linemethod over periods ranging from 2 to 3 years, their estimated useful life.

 

TheCompany recorded an expense for the amortization and write-down of intangibleassets of $2.0 million in the first fiscal quarter of 2001 compared to $0.3million in the first fiscal quarter of fiscal 2000.  Included in the $2.0 million was a write-down of goodwill of $0.9million related to the acquisitions of 21st Century LLC and J2Digital Media, Inc.  These two companieswere combined to form Streamriver, which was launched in June 2000.  During the first quarter of fiscal 2001, thegoodwill from these two acquisitions was determined to be impaired due tocontinued operating losses in Streamriver and the uncertainty surrounding theCompany’s ability to recover the goodwill through future cash flows.  The Company shutdown the Streamriverdivision in the second quarter of fiscal year 2001 and wrote off the remainingassets.

 

8. Net Income (Loss) Per Common Share

 

The Company computes earnings per sharepursuant to SFAS No. 128, *Earnings per Share*.  In accordance with SFAS No. 128, basic netincome (loss) per share is computed using the weighted-average number of commonshares outstanding.  Diluted income pershare is computed using the weighted-average number of common sharesoutstanding and potential common shares from the assumed exercise of stockoptions and warrants outstanding during the period, if any, using the treasurystock method.

 

The following is a reconciliation of theshares used in the computation of basic and diluted income (loss) per share (inthousands): 

 
|                                                                                              | Three  months ended August 31, |          | Nine  months ended August 31, |          |
|---------------------------------------------------------------------------------------------------|--------------------------------|---------------|-------------------------------|---------------|
|                                                                                              |                                |          |                               |          |
|                                                                                              | 2001                           |          | 2000                          |          | 2001 |   | 2000 |   |
|                                                                                              |                                |          |                               |          |  |   |  |   |
| Weighted average  shares of common stock Outstanding                                              | 12,415                         |     | 12,136                        |     | 12,369 |     | 11,916 |     |
| Effect of potential  common shares - stock options and warrants outstanding (unless antidilutive) | -                              |     | 1,031                         |     | - |     | - |     |
|                                                                                              |                                |          |                               |          |  |   |  |   |
| Weighted average  shares and potential common shares outstanding                                  | 12,415                         |     | 13,167                        |     | 12,369 |     | 11,916 |     |
|                                                                                              |                                |          |                               |          |  |   |  |   |

 

The Company excludes potentially dilutivesecurities from its diluted net income (loss) per share computation when eitherthe exercise price of the securities exceeds the fair value of the Company’scommon stock or when the Company reports a net loss and the effect of includingsuch securities would be antidilutive. Options to purchase approximately 3,520,000 and 1,302,000 shares ofcommon stock at August 31, 2001 and August 31, 2000, respectively, were notincluded in the computation of diluted net loss per share as a result of theirantidilutive effect.

 

9.  Contingencies

 

(i) The company provides accruals for alldirect costs associated with the estimated resolution of knowncontingencies.  The accrual isestablished at the earliest date at which it is deemed probable that a liabilityhas been incurred and the amount of such liability can be reasonably estimated.

 

(ii) On June 7, 1995, a lawsuit was filedagainst the Company by Avid Technology, Inc. (“Avid”) in the United StatesDistrict Court for the District of Massachusetts.  The complaint generally alleges patent infringement by theCompany arising from the manufacture, sale, and use of the Company's Media 100products.  The complaint includes requestsfor injunctive relief, treble damages, interest, costs and fees.  In July 1995, the Company filed an answerand counterclaim denying any infringement and asserting that the Avid patent inquestion is invalid. The Company intends to vigorously defend the lawsuit. Inaddition, Avid is seeking reissue of the patent, including claims that itasserts are broader than in the existing patent, and these reissue proceedingsremain pending before the U.S. Patent and Trademark Office.  On January 16, 1998, the court dismissed thelawsuit without prejudice to either party moving to restore it to the docketupon completion of all matters pending before the U.S. Patent and TrademarkOffice.

 

On August 16, 2000, the U.S. Patent andTrademark Office issued an Office Action rejecting all of the claims made byAvid in their latest request for reexamination of the patent related to theaforementioned lawsuit.  In addition,the Examiner at the U.S. Patent and Trademark Office designated the action as“final”.  On November 29, 2000, Avidfiled a Notice of Appeal of the Examiner’s rejections to the U.S. Patent andTrademark Office Board of Patent Appeals and Interferences.  There can be no assurance that the Companywill prevail in the appeal by Avid or that the expense or other effects of theappeal, whether or not the Company prevails, will not have a material adverseeffect on the Company’s business, operating results and financial condition.

 

(iii) On January 13, 1999 and January 28,1999, Digital Origin and one of its former directors, Charles Berger, werenamed as defendants in two shareholder class action lawsuits against SplashTechnology Holdings, Inc. (“Splash”), various directors and executives ofSplash and certain selling shareholders of Splash.  The lawsuit alleges, among other things, that the defendants madeor were responsible for material misstatements, and failed to discloseinformation concerning Splash’s business, finances and future businessprospects in order to artificially inflate the price of Splash commonstock.  The complaint does not identifyany statements alleged to have been made by Charles Berger or DigitalOrigin.  The complaint further allegesthat Digital Origin engaged in a scheme to artificially inflate the price ofSplash common stock to reap an artificially large return on the sale of thecommon stock in order to pay off its debt. Digital Origin and the former director vigorously deny all allegationsof wrongdoing and intend to aggressively defend themselves in these matters.Defendant’s two initial motions to dismiss the action were granted with leaveto amend, and plaintiffs have again amended the complaint.  Defendants have now filed their third motionto dismiss.

 

(iv) On July 18, 1997, IntelligentElectronics, Inc. filed a claim against Digital Origin alleging a breach ofcontract and related claims in the approximate amount of $800,000, maintainingthat Digital Origin failed to comply with various return, price protection,inventory balancing and marketing development funding undertakings.  In 1997, Digital Origin filed an answer tothe complaint and cross-claimed against the plaintiffs and in October 1997additionally cross claimed against Deutsche Financial, Inc., a factor in theaccount relationship between the Company and the plaintiffs, seeking therecovery of existing accounts receivable of approximately $1.8 million.  During May 2000, the trial was completed andthe Court entered two judgments in favor of Digital Origin, one in the amountof $314,000 plus interest against Intelligent Electronics and one in the amountof $1,491,000 plus interest against Deutsche Financial, Inc.  In September 2000, Intelligent Electronics,Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costsin the amount of $20,000 to the Company.

 

Pursuant to APB Opinion No. 20,Accounting Changes, the Company revised its estimate of the allowance fordoubtful accounts by reversing $314,000 of the allowance in the three monthsended August 31, 2000 by reducing the loss from discontinued operations.  The Company considers the balance of therecovery from Intelligent Electronics (interest and court costs) to be a gaincontingency, as this term is defined in SFAS No. 5, *Accounting for Contingencies*.  Accordingly, the Company recorded the interest, and court costs,as a reduction in the loss from discontinued operations, in the fourth quarterof 2000, the period in which the gain contingency was realized.

 

 On August 15, 2001, Deutsche Financial, Inc. entered into asettlement agreement with Digital Origin, Inc. to pay $1,075,000 to theCompany.  Pursuant to APB Opinion No.20, *Accounting Changes*, theCompany revised its estimate of the allowance for doubtful accounts byreversing $1,171,000 of the allowance in the three months ended August 31, 2001by reducing the loss from discontinued operations.

 

(v) On October 12, 1999, a lawsuit wasfiled against the Company by McRoberts Software, Inc. in the United StatesDistrict Court for the Southern District of Indiana.  The complaint alleges copyright infringement, breach of contract,and trade secret misappropriation.  Thecomplaint includes requests for injunctive relief, treble damages, interest,costs and fees.  In November 1999, theCompany filed an answer and counterclaim denying any infringement.  The Company intends to vigorously defend thelawsuit.

 

(vi) On May 9, 2001, a lawsuit was filedagainst the Company by the former shareholders of Wired, Inc., a companyacquired by the Company in December 1999. The complaint alleges fraud, negligent misrepresentation, breach ofexpress and implied-in-fact contract, breach of the implied covenant of goodfaith and fair dealing, breach of fiduciary duty and violation of Californiabusiness and professional code section 17200. The complaint includes requests for compensatory and punitive damages,injunctive relief, and fees.  The Companyintends to vigorously defend the lawsuit.

 

 (vii) From time to time the Company is involved in other disputesand/or litigation encountered in its normal course of business.  The Company does not believe that the ultimateimpact of the resolution of such other outstanding matters will have a materialeffect on the Company’s business, operating results or financial condition.

 

10.Capitalized Software Development Costs

 

The Company capitalizes certain computersoftware development costs. Capitalization of costs commences upon establishingtechnological feasibility.  There wereno capitalized costs at August 31, 2001. Capitalized costs, net of accumulated amortization, were $29,000 as ofNovember 30, 2000, and are included in other assets.  These costs are amortized on a straight-line basis over twoyears, which approximates the economic life of the product.

 

11. Income Taxes

 

The Company has not provided for a taxprovision in the first nine months of fiscal 2001 due to the net loss incurredduring the first nine months of the fiscal year and its expectation for notaxable income for the year.

 

12. Accrued Expenses

 

Accrued expenses at August 31, 2001 andNovember 30, 2000 consist of the following (in thousands):

 
|                                     | August  31, |   | November  30, |   |
|------------------------------------------|-------------|--------|---------------|--------|
|                                     | 2001        |   | 2000          |   |
|                                     |             |   |               |   |
| Payroll, payroll taxes  and other taxes  | $           | 1,436  |          | $      | 2,242 |   |
| Accrued warranty                         | 561         |   | 559           |   |
| Accrued restructuring                    | 309         |   | 528           |   |
| Accrued inventory                        | 867         |   | 763           |   |
| Accrued legal and  professional services | 712         |   | 692           |   |
| Accrued selling and  marketing           | 483         |   | 301           |   |
| Accrued other                            | 2,033       |   | 2,057         |   |
|                                     |             |   |               |   |
|                                     | $           | 6,401  |          | $      | 7,142 |   |
|                                     |             |   |               |   |

13. Comprehensive income (loss)

 

The Company records items ofcomprehensive income or loss in accordance with SFAS No.130*, Reporting Comprehensive Income*,and presents such information in the statement of stockholders’ equity.  The components of accumulated othercomprehensive (loss) income is as follows (in thousands):

 
|                                                      | Three  months ended August 31, |          | Nine  months ended August 31, |          |
|-----------------------------------------------------------|--------------------------------|---------------|-------------------------------|---------------|
|                                                      |                                |          |                               |          |
|                                                      | 2001                           |          | 2000                          |          | 2001 |   | 2000 |   |
|                                                      |                                |          |                               |          |  |   |  |   |
| Net (loss) income                                         | $                              | (5,018        | )                             | $             | 277 |   | $ | (15,823 | ) | $ | (3,258 | ) |
|                                                      |                           |          |                          |          |   |   |   |   |
| Cumulative translation  adjustment                        | (22                            | )             | 2                             |          | (33 | ) | - |   |
| Unrealized holding  gain on available for sale securities | 44                             |     | 150                           |     | 44 |     | 27 |     |
|                                                      |                                |          |                               |          |  |   |  |   |
| Total comprehensive  (loss) income                        | $                              | (4,996        | )                             | $             | 429 |   | $ | (15,812 | ) | $ | (3,231 | ) |
|                                                      |                                |          |                               |          |  |   |  |   |

 

14. Segment Information

 

The Company applies the provisions ofSFAS No. 131, Disclosures about Segments of an Enterprise and RelatedInformation, which establishes standards for public companies to reportoperating segment information in annual and interim financial statements.  Operating segments are defined as componentsof an enterprise about which separate financial information is available thatis evaluated regularly by the chief decision maker, or decision making group,in deciding how to allocate resources and in assessing performance.  The Company’s chief operatingdecision-making group is composed of the Chief Executive Officer and members ofsenior management.  The Company’sreportable operating segments are digital video systems and services.

 

The accounting policies of the segmentsare the same as those described in the summary of significant accountingpolicies.  Revenues are attributed togeographic areas based on where the customer is located.  Segment information for the three and ninemonths ended August 31, 2001 and August 31, 2000 is as follows:

 
| ***Three months ended August 31, 2001*** | Digital  Video Systems |   | Services |   | Corporate |   | Total  |   |
|------------------------------------------|------------------------|--------|----------|--------|-----------|--------|--------|--------|
|                                     |                        |   |          |   |           |   |        |   |
| Net sales from external  customers       | $                      | 5,993  |     | $      | 2,066     |   | $      | -      |   | $ | 8,059 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Gross profit                             | 1,759                  |   | 1,718    |   | -         |   | 3,477  |   |
|                                     |                        |   |          |   |           |   |        |   |
| Depreciation and  amortization           | 607                    |   | 21       |   | -         |   | 628    |   |
|                                     |                        |   |          |   |           |   |        |   |
| Interest income, net                     | -                      |   | -        |   | 50        |   | 50     |   |
|                                     |                        |   |          |   |           |   |        |   |
| ***Nine months ended August 31, 2001***  |                   |   |     |   |      |   |   |   |
|                                     |                   |   |     |   |      |   |   |   |
| Net sales from  external customers       | $                      | 19,087 |     | $      | 6,906     |   | $      | -      |   | $ | 25,993 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Gross profit                             | 7,376                  |   | 5,313    |   | -         |   | 12,689 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Depreciation and  amortization           | 1,907                  |   | 160      |   | -         |   | 2,067  |   |
|                                     |                        |   |          |   |           |   |        |   |
| Interest income, net                     | -                      |   | -        |   | 221       |   | 221    |   |
|                                     |                        |   |          |   |           |   |        |   |
|                                     |                   |   |     |   |      |   |   |   |
| ***Three months ended August 31, 2000*** |                   |   |     |   |      |   |   |   |
|                                     |                   |   |     |   |      |   |   |   |
| Net sales from  external customers       | $                      | 9,839  |     | $      | 2,703     |   | $      | -      |   | $ | 12,542 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Gross profit                             | 5,093                  |   | 2,068    |   | -         |   | 7,161  |   |
|                                     |                        |   |          |   |           |   |        |   |
| Depreciation and  amortization           | 701                    |   | 25       |   | -         |   | 726    |   |
|                                     |                        |   |          |   |           |   |        |   |
| Interest income, net                     | -                      |   | -        |   | 260       |   | 260    |   |
|                                     |                        |   |          |   |           |   |        |   |
| ***Nine months ended August 31, 2000***  |                   |   |     |   |      |   |   |   |
|                                     |                   |   |     |   |      |   |   |   |
| Net sales from  external customers       | $                      | 28,549 |     | $      | 7,268     |   | $      | -      |   | $ | 35,817 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Gross profit                             | 14,654                 |   | 6,001    |   | -         |   | 20,655 |   |
|                                     |                        |   |          |   |           |   |        |   |
| Depreciation and  amortization           | 2,125                  |   | 64       |   | -         |   | 2,189  |   |
|                                     |                        |   |          |   |           |   |        |   |
| Interest income, net                     | -                      |   | -        |   | 809       |   | 809    |   |
|                                     |                        |   |          |   |           |   |        |   |
| Tax provision                            |                   |   |     |   | 30        |   | 30     |   |
|                                     |                        |   |          |   |           |   |        |   |

 

Interest income and income taxes areconsidered corporate level activities and are, therefore, not allocated tosegments.  Management believes transfersbetween geographic areas are accounted for on an arms length basis.

 

Net sales by geographic area for thethree and nine months ended August 31, 2001and August 31, 2000 were as follows(in thousands):

 
|                                        | Three  months ended |   |
|---------------------------------------------|---------------------|--------|
|                                        |                     |   |
|                                        | August  31, 2001    |   | August  31, 2000 |   |
|                                        |                     |   |  |   |
| North America                               | $                   | 5,333  |   | $ | 8,803 |   |
| United Kingdom,  Sweden, Denmark and Norway | 767                 |   | 1,271 |   |
| Germany, Austria and  Switzerland           | 372                 |   | 481 |   |
| France, Spain, Benelux  and Italy           | 543                 |   | 864 |   |
| Asia Pacific                                | 1,044               |   | 1,123 |   |
|                                        |                     |   |  |   |
|                                        | $                   | 8,059  |   | $ | 12,542 |   |
|                                        |                     |   |  |   |

 
|                                        | Nine  months ended |   |
|---------------------------------------------|--------------------|--------|
|                                        |                    |   |
|                                        | August  31, 2001   |   | August  31, 2000 |   |
|                                        |                    |   |  |   |
| North America                               | $                  | 17,518 |   | $ | 22,566 |   |
| United Kingdom,  Sweden, Denmark and Norway | 2,581              |   | 3,660 |   |
| Germany, Austria and  Switzerland           | 921                |   | 2,022 |   |
| France, Spain, Benelux  and Italy           | 1,996              |   | 2,808 |   |
| Asia Pacific                                | 2,977              |   | 4,761 |   |
|                                        |                    |   |  |   |
|                                        | $                  | 25,993 |   | $ | 35,817 |   |
|                                        |                    |   |  |   |

 

Long-lived tangible assets by geographicarea for the quarters ended August 31, 2001 and November 30, 2000 consist ofthe following (in thousands):

 
|           | August  31, 2001 |   | November  30, 2000 |   |
|----------------|------------------|--------|--------------------|--------|
|           |                  |   |                    |   |
| North America  | $                | 4,156  |               | $      | 5,278 |   |
| United Kingdom | 144              |   | 194                |   |
| Germany        | 43               |   | 33                 |   |
| Italy          | 9                |   | 16                 |   |
| France         | 81               |   | 95                 |   |
|           |                  |   |                    |   |
|           | $                | 4,433  |               | $      | 5,616 |   |
|           |                  |   |                    |   |

 

15. Restructuring Expense

 

In the third quarter of fiscal 2001, theCompany implemented a restructuring plan to better align its operating costswith its anticipated future revenue stream. The restructuring charge of $310,000 related to the elimination ofapproximately 42 employees across all functions: operations (14), product development(4), selling and marketing (16), and general and administrative (8).  At August 31, 2001, all of the accruedrestructuring charge, consisting of severance-related costs, remained. Thetotal cash impact of the restructuring is $310,000, all of which will be paidby the end of the fourth quarter in fiscal 2001.

 

16. Discontinued Operations

 

On August 29, 2001, the Company signed anagreement to sell its software product line to Autodesk, Inc. for $16 millionin cash.   As a result of this transaction,the assets of the software product line to be discontinued consisting primarilyof accounts receivable, inventory, equipment, intangible assets, income taxespayable and have been separately classified in the accompanying balance sheetat August 31, 2001.  The November 30,2000 balance sheet has been restated to conform to the current year’spresentation. The disposal date was October 5, 2001. The Company’s softwareproduct line consisted of products acquired in the Terran acquisition and themerger with Digital Origin.

 

The net income (loss) from theseoperations is included in the accompanying statements of operations under“discontinued operations”.  Net sales ofthe software product line for the three and nine months ended August 31, 2001were $1.9 million and $10.0 million, respectively. Net sales of the softwareproduct line for the three and nine months ended August 31, 2000 were $6.8million and $22.0 million, respectively.

 

Net assets from discontinued operationsat August 31, 2001 and November 30, 2000 consist of the following (inthousands):

 
|                         | August  31, 2001 |   | November  30, 2000 |   |
|------------------------------|------------------|--------|--------------------|--------|
|                         |                  |   |                    |   |
| Accounts receivable          | $                | 1,100  |               | $      | 2,298 |   |
| Inventory                    | 552              |   | 525                |   |
| Property and  equipment, net | 418              |   | 440                |   |
| Intangible assets, net       | 2,907            |   | 3,408              |   |
| Income taxes payable         | (1,089           | )      | (1,089             | )      |
|                         |                  |   |                    |   |
|                         | $                | 3,888  |               | $      | 5,582 |   |
|                         |                  |   |                    |   |

 

17. New Accounting Standards

 

In July 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 141, “Business Combinations”.  SFAS No. 141 supercedes APB No 16 “BusinessCombinations” and FASB Statement No. 38 “Accounting for PreacquisitionContingencies of Purchased Enterprises.” SFAS 141 requires all business combinations initiated after June 30,2001 to be accounted for using the purchase method.  Accordingly, the Company will be adopting the provisions of thisstatement upon any business combination entered into after June 30, 2001.

 

In July 2001, the FASB issued SFAS No.142, “Goodwill and Other Intangible Assets”. This statement applies to goodwill and intangible assets acquired afterJune 30, 2001, as well as goodwill and intangible assets previouslyacquired.  Under this statement goodwillas well as certain other intangible assets, determined to have an infinitelife, will no longer be amortized. These assets will be reviewed for impairment on a periodic basis. Thisstatement is effective for the Company in the first quarter of fiscal year2003.  Management is currentlyevaluating the impact that this statement will have on the Company’s financialstatements.

 

MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

Overview

 

             Media100 Inc., a Delaware corporation, (the “Company”) designs and sells systems(comprising software and hardware) and services that allow Internet-based(“online”) and traditional broadcasters, corporate marketing professionals andeducators to create and deliver high-quality video programs as eithertraditional media or Internet-compatible streams (“streaming media”).

 

             TheCompany recognizes revenue in accordance with Statement of Position, “SoftwareRevenue Recognition” (SOP 97-2) as amended by SOP 98-9, “Modification of SOP97-2, Software Revenue Recognition, with respect to Certain Transactions”.  Net sales are recognized followingestablishment of persuasive evidence of an arrangement, provided that thelicense fee is fixed and determinable, delivery of product has occurred viaphysical shipment or electronically, a determination has been made bymanagement that collection is probable and the Company has no remainingobligations. Revenues under multiple element arrangements, which typicallyinclude products and maintenance sold together, are allocated to each elementusing the residual method in accordance with SOP 98-9.  Sales to certain resellers and distributorsare subject to agreements allowing certain rights of return and priceprotection on unsold merchandise held by these resellers and distributors.  The Company provides for estimated returnsand refunds at the time of shipment. The Company recognizes maintenance revenue from the sale ofpost-contract support services ratably over the life of the contract.

 

             OnAugust 30, 2001, the Company signed an agreement to sell its software productline to Autodesk, Inc. for $16 million in cash.   As a result of this transaction, the assets of the softwareproduct line to be discontinued consisting primarily of inventory, equipmentand intangible assets and have been separately classified in the accompanyingbalance sheet at August 31, 2001.  TheNovember 30, 2000 balance sheet has been restated to conform to the currentyear’s presentation. The disposal date was October 5, 2001.  The Company’s software product lineconsisted of products acquired in the Terran acquisition and the merger withDigital Origin.

 

Resultsof Operations

 

The following table shows certainconsolidated statements of operations data as a percentage of net sales.

 

 
|                                        | Three  months ended August 31,                                        |   | Nine  months ended August 31, |   |
|---------------------------------------------|-----------------------------------------------------------------------|--------|-------------------------------|--------|
|                                        |                                                                       |   |                               |   |
|                                        | 2001                                                                  |   | 2000                          |   | 2001 |   | 2000 |   |
|                                        |                                                                       |   |                               |   |  |   |  |   |
| Net sales:                                  |                                                                  |   |                          |   |   |   |   |   |
|                                        | Products                                                              | 74.4   | %                             | 78.4   | % | 73.4 | % | 79.7 | % |
|                                        | Services                                                              | 25.6   |                          | 21.6   |   | 26.6 |   | 20.3 |   |
|                                        |                                                                  |        |                          |        |   |  |   |  |   |
| Total net sales                             | 100.0                                                                 |   | 100.0                         |   | 100.0 |   | 100.0 |   |
| Cost of sales                               | 56.9                                                                  |   | 42.9                          |   | 51.2 |   | 42.3 |   |
|                                        |                                                                       |   |                               |   |  |   |  |   |
|                                        | Gross profit                                                          | 43.1   |                          | 57.1   |   | 48.8 |   | 57.7 |   |
| Operating expenses:                         |                                                                  |   |                          |   |   |   |   |   |
|                                        | Research and  development                                             | 33.4   |                          | 23.4   |   | 31.0 |   | 23.0 |   |
|                                        | Selling and marketing                                                 | 32.1   |                          | 26.0   |   | 37.8 |   | 27.4 |   |
|                                        | General and  administrative                                           | 23.9   |                          | 8.5    |   | 17.7 |   | 8.7 |   |
|                                        | Amortization and  write-down of acquisition-related intangible assets | 6.0    |                     | 2.4    |     | 9.3 |     | 1.9 |     |
|                                        | Acquired in-process  research and development                         | -      |                     | -      |     | - |     | 1.3 |     |
|                                        | Restructuring charge                                                  | 3.8    |                          | -      |   | 3.4 |   | - |   |
|                                        |                                                                  |        |                          |        |   |  |   |  |   |
|                                        | Total operating  expenses                                             | 99.1   |                          | 60.3   |   | 99.1 |   | 62.3 |   |
| Operating loss                              | (56.0                                                                 | )      | (3.2                          | )      | (50.3 | ) | (4.6 | ) |
| Interest income, net                        | 0.6                                                                   |   | 2.1                           |   | 0.9 |   | 2.3 |   |
| Other income  (expense), net                | 5.8                                                                   |   | (2.6                          | )      | 0.8 |   | (1.8 | ) |
|                                        |                                                                       |   |                               |   |  |   |  |   |
| Loss from continuing  operations            | (49.6                                                                 | )      | (3.8                          | )      | (48.7 | ) | (4.2 | ) |
| Tax provision                               | -                                                                     |   | -                             |   | - |   | - |   |
|                                        |                                                                       |   |                               |   |  |   |  |   |
|                                        | Net loss from  continuing operations                                  | (49.6  | )                             | (3.8   | ) | (48.7 | ) | (4.2 | ) |
| Discontinued  operations                    |                                                                  |   |                          |   |   |   |   |   |
| Income (loss) from  discontinued operations | (12.7                                                                 | )      | 6.0                           |   | (12.2 | ) | (4.9 | ) |
|                                        |                                                                       |   |                               |   |  |   |  |   |
| Net (loss) income                           | (62.3                                                                 | )%     | 2.2                           | %      | (60.9 | )% | (9.1 | )% |
|                                        |                                                                       |   |                               |   |  |   |  |   |
|                                             |                                                                       |        |                               |        |  |  |  |  |  |  |  |

Comparisonof Third Fiscal Quarter of 2001 to Third Fiscal Quarter of 2000

 

             Net sales.  Total net sales from continuing operationsfor the third fiscal quarter ended August 31, 2001 decreased 35.7% to $8.1million from $12.5 million for the third quarter of fiscal 2000.  Net sales of products from continuingoperations for the third fiscal quarter ended August 31, 2001 decreased 39.1%to $6.0 million from $9.8 million for fiscal 2000.  The decrease in net sales from products is due to a number offactors including lower unit sales on both the Macintosh and Windows operatingplatforms and lower average selling prices for our digital video systems ($3.1million) and lower sales of our MPEG-based products ($0.7 million).  We attribute the decrease in sales of ourdigital video systems to increased competition and lower demand and anticipatethis trend in lower year-over-year sales will continue for the remainder offiscal 2001.  Net sales from continuingoperations for services for the third fiscal quarter ended August 31, 2001 were$2.1 million, a decrease of 23.6% from the third quarter of fiscal 2000.   The decrease in net sales from services isthe result of lower sales of service contracts due to lower units sales of ourdigital video systems and the elimination of encoding and hosting services.

 

             Gross profit.  Gross profit from continuing operationsdecreased 51.4% to $3.5 million in the third fiscal quarter of 2001 from $7.2million in the third quarter of fiscal 2000. Gross profit as a percentage of net sales from continuing operationsdecreased to 43.1% in the third fiscal quarter of 2001 from 57.1% in the thirdquarter of fiscal 2000.  Specifically,gross profit as a percentage of net product sales from continuing operationsdecreased to 29.4% in the third fiscal quarter of 2001 from 51.8% in the thirdquarter of fiscal 2000, while gross profit as a percentage of net sales ofservices from continuing operations increased to 83.2% in the third fiscalquarter of 2001 from 76.5% in the third quarter of fiscal 2000.  The percentage increase in services resultedfrom the elimination of encoding and hosting services during the second quarterof fiscal 2001.  Gross profit as apercentage of net product sales from continuing operations decreased due tolower average selling prices for our digital video systems and lower unitssales.  We currently forecast overallgross profit as a percentage of net sales will be relatively stable for theremainder of this fiscal year, however, due to uncertainty regarding the levelof sales and potential fluctuations in the mix of products sold, gross profitas a percentage of net sales may vary from one quarter to another.

 

             Researchand development.  Research anddevelopment expenses from continuing operations decreased 8.3% to $2.7 millionin the third fiscal quarter of 2001 from $2.9 million in the third quarter offiscal 2000.  Research and developmentexpenses consist primarily of salaries and related benefits, consultants,outside services, occupancy and depreciation. At this time, we anticipate researchand development expenses will remain relatively stable, in dollar terms, overthe next several quarters as we continue to develop new products and maintainexisting products.

 

             Sellingand marketing.  Selling and marketingexpenses from continuing operations decreased 20.8% to $2.6 million in thethird fiscal quarter of 2001 from $3.3 million in the third quarter of fiscal2000.  Selling expenses consistprimarily of salaries and related benefits, commissions, travel, occupancy anddepreciation.  Marketing expensesconsist primarily of salaries and related benefits, trade shows, seminars,advertising, sales literature and lead generation activities.  The decrease in selling and marketingexpenses resulted primarily from reduced marketing expenses including salariesand related benefits, advertising and lead generation activities.  We currently anticipate that our selling andmarketing expenses will decrease in our fiscal fourth quarter due to lowersalary and other employee-related expenses as we adjust our expenses to be morein line with our forecasted lower level of sales.

 

             Generaland administrative.  General andadministrative expenses from continuing operations increased 79.9% to $1.9million in the third fiscal quarter of 2001 from $1.0 million in the thirdquarter of fiscal 2000.  General andadministrative expenses include the cost of human resources, finance,information technology, legal and other administrative functions of theCompany.  We increased the allowance fordoubtful accounts by $150,000 due to softening economy and our expectation thatsome of our customers will experience difficulties in meeting their financialobligations.  We also increased ourlegal reserve for several lawsuits (see Note 9) that we currently anticipatemay result in a settlement by the company and we increased our bonus accrual by$200,000 for payments to employees that made significant contributions to thecompany.   We currently anticipate thatour general and administrative expenses will decrease in the fourth quarter aswe reduce expenses to be more in line with our forecasted lower level of sales.

 

             Amortizationand write-down of acquisition-related intangible assets.  We recorded an expense for the amortizationand write-down of acquisition-related intangible assets from continuingoperations of $0.5 million in the third fiscal quarter of 2001 compared to $0.3million in the third quarter of fiscal 2000. Included in the $0.5 million was amortization expense associated withthe acquisitions of Wired, Inc. and certain assets of Integrated ComputingEngines, Inc.

 

             Restructuringcharge.  During the third fiscal quarterof 2001, we recorded a restructuring charge of $310,000 in connection with areorganization of the company that resulted in severance payments to terminatedemployees.  There was no similar expenserecorded in the second fiscal quarter of 2000.

 

             Interestincome, net.  Interest income decreased80.8% to $0.1 million in the third fiscal quarter of 2001 from $0.3 million inthe third quarter of fiscal 2000.  Thedecrease in interest income is due to lower cash and cash equivalent balancesin fiscal 2001 versus 2000.  Duringfiscal 2000, we purchased several companies utilizing our existing cash andcash equivalents to pay for these acquisitions.  We currently anticipate interest income will increase in fiscal2001 versus 2000 due to higher cash balances as a result of the sale of ourstreaming media software business to Autodesk, Inc.

 

             Otherincome (expense), net.  Other income was$0.5 million in the third fiscal quarter of 2001 compared to other expense of$0.3 million in the third quarter of fiscal 2000.  The increase is due to foreign exchange gains on intercompanytransactions with our foreign subsidiaries.

 

             Taxprovision. We did not provide for a tax provision in the third fiscal quarterof 2001 due to the net loss incurred during the quarter and our expectation ofno taxable income for the year.

 

             Discontinuedoperations.  We recorded a loss fromdiscontinued operations of ($1.0) million or ($0.08) per share, in the thirdfiscal quarter of 2001 versus net income of $0.8 million, or $0.06 per share,in the third quarter of fiscal 2000. The loss in the third quarter of fiscal 2001 includes all the operationsthat were sold to Autodesk, Inc. and all transaction-related expenses.

 

             Netloss.  As a result of the above factors,we had a net loss from continuing operations for the third fiscal quarter of2001 in the amount of ($4.0) million, or ($0.32) per share, compared to a netloss of ($0.5) million, or ($0.04) per share, in the third quarter of fiscal2000.  Total net loss, includingdiscontinued operations, for the third quarter of fiscal 2001 was ($5.0)million or ($0.40) per share, versus net income of $0.3 million, or $0.02 pershare, for fiscal 2000.

 

Comparisonof First Nine Months of Fiscal 2001 to First Nine Months of Fiscal 2000

 

             Net sales.  Total net sales from continuing operationsfor the first nine months ended August 31, 2001 decreased 27.4% to $26.0million from $35.8 million for the first nine months of fiscal 2000.  Net sales of products from continuingoperations for the first nine months ended August 31, 2001 decreased 33.1% to$19.1 million from $28.5 million for fiscal 2000.  The decrease in net sales of products from continuing operationsis due to a number of factors including lower unit sales on both the Macintoshand Windows operating platforms, lower average selling prices for our digitalvideo systems, and lower sales of the MPEG-based products acquired in theacquisition of Wired, Inc.  Net salesfrom products acquired from Integrated Computing Engines, Inc. in August 2000totaled $2.9 million in the first nine months of fiscal 2001 versus $0.5million for the first nine months of fiscal 2000.  We attribute the decrease in sales of our digital video systemsto increased competition and lower demand and anticipate this trend in loweryear-over-year sales will continue for the remainder of fiscal 2001.  Net sales from continuing operations forservices for first nine months ended August 31, 2001 were $6.9 million, adecrease of $.4 million from the first nine months of fiscal 2000.    During the second quarter of fiscal 2001,we closed our encoding and hosting services division, named Streamriver, andsold certain assets related to the business.  Prior to shutting down Streamriver, net sales were $0.3 million infiscal 2001.

 

             Gross profit.  Gross profit from continuing operationsdecreased 38.6% to $12.7 million in the first nine months of 2001 from $20.7million in first nine months of fiscal 2000. Gross profit as a percentage of net sales from continuing operationsdecreased to 48.8% in the first nine months of 2001 from 57.7% in the firstnine months of fiscal 2000. Specifically, gross profit as a percentage of net product sales fromcontinuing operations decreased to 38.6% in the first nine months of 2001 from51.3% in the first nine months of fiscal 2000, while gross profit as apercentage of net sales of services from continuing operations decreased to76.9% in the first nine months of 2001 from 82.6% in the first nine months offiscal 2000.  The percentage decrease inservices resulted from increased costs related to encoding and hostingservices.  Gross profit as a percentageof net product sales from continuing operations decreased due to lower averageselling prices for our digital video systems and lower unit sales.  We currently forecast overall gross profitas a percentage of net sales will be relatively stable over the next severalquarters, however, due to uncertainty regarding the level of sales andpotential fluctuations in the mix of products sold, gross profit as apercentage of net sales may vary from one quarter to another.

 

             Researchand development.  Research anddevelopment expenses from continuing operations decreased 2.0% to $8.1 millionin the first nine months of 2001 from $8.2 million in the first nine months offiscal 2000.  Research and developmentexpenses consist primarily of salaries and related benefits, consultants,outside services, occupancy and depreciation. At this time, we anticipateresearch and development expenses will remain relatively stable, in dollarterms, over the next several quarters as we continue to develop new productsand maintain existing products.

 

             Sellingand marketing.  Selling and marketingexpenses from continuing operations were $9.8 million in the first nine monthsof fiscal 2001 compared to $9.8 million in the first nine months of fiscal2000.  Selling expenses consistprimarily of salaries and related benefits, commissions, travel, occupancy anddepreciation.  Marketing expensesconsist primarily of salaries and related benefits, trade shows, seminars,advertising, sales literature and lead generation activities.  We currently anticipate that our selling andmarketing expenses will decrease in our fiscal fourth quarter due to lowersalary and other employee-related expenses as we adjust our expenses to be morein line with our forecasted lower level of sales.

 

             Generaland administrative.  General andadministrative expenses from continuing operations increased 47.1% to $4.6million in the first nine months of fiscal 2001 from $3.1 million in first ninemonths of fiscal 2000.  General andadministrative expenses include the cost of human resources, finance,information technology, legal and other administrative functions of theCompany.  We increased the allowance fordoubtful accounts by $150,000 due to softening economy and our expectation thatsome of our customers will experience difficulties in meeting their financialobligations.  We also increased ourlegal reserve in the third quarter of fiscal 2001 for several lawsuits (seeNote 9) that we currently anticipate may result in a settlement by the companyand we increased our bonus accrual by $200,000 for payments to employees thatmade significant contributions to the company.   We currently anticipate that our general and administrativeexpenses will decrease in the fourth quarter as we reduce expenses to be morein line with our forecasted lower level of sales.

 

             Amortization and write-down ofacquisition-related intangible assets. We recorded an expense for the amortization and write-down ofacquisition-related intangible assets from continuing operations of $2.4million in the first nine months of fiscal 2001 compared to $0.7 million in thefirst nine months of fiscal 2000. Included in the $2.4 million was amortization expense associated withthe acquisitions of Wired, Inc. and certain assets of Integrated Computing Engines,Inc. and a write-down of goodwill of $0.9 million related to the acquisitionsof 21st Century Media LLC and J2 Digital Media, Inc.  These two acquisitions were combined to formStreamriver, which was launched in June 2000. During the first quarter of fiscal 2001, the goodwill from these twoacquisitions was determined to be impaired due to continued operating losses inStreamriver and the uncertainty surrounding our ability to recover the goodwillthrough future cash flows.  During thesecond quarter of fiscal 2001, we closed Streamriver and sold some of theassets related to the business.

 

             Restructuringcharge.  During the first nine months offiscal 2001, we recorded a restructuring charge of $878,000 in connection witha reorganization of the company that resulted in severance payments toterminated employees and the closing of Streamriver.  There was no similar expense recorded in the first nine months offiscal 2000.

 

             Interestincome, net.  Interest income decreased72.7% to $0.2 million in the first nine months of fiscal 2001 from $0.8 millionin the first nine months of fiscal 2000. The decrease in interest income is due to lower cash and cash equivalentbalances in fiscal 2001 versus 2000. During fiscal 2000, we purchased several companies utilizing ourexisting cash and cash equivalents to pay for these acquisitions.  We currently anticipate interest income willincrease in fiscal 2001 versus 2000 due to higher cash balances as a result ofthe sale of our streaming media software business to Autodesk, Inc.

 

             Otherincome (expense), net.  Other income was$0.2 million in the first nine months of fiscal 2001 compared to other expenseof $0.6 million in the first nine months of fiscal 2000.  The increase is due to foreign exchangegains on intercompany transactions with our foreign subsidiaries.

 

             Taxprovision. We did not provide for a tax provision in the first nine months offiscal 2001 due to the net loss incurred during the period and our expectationof no taxable income for the year.

 

             Discontinuedoperations.  We recorded a loss fromdiscontinued operations of ($3.2) million or ($0.26) per share, in the firstnine months of fiscal 2001 versus a net loss of ($1.7) million or ($0.15) pershare, in the first nine months of fiscal 2000.  The loss in the first nine months of fiscal 2001 includes all theoperations that were sold to Autodesk, Inc. and all transaction-relatedexpenses.

 

             Netloss.   As a result of the abovefactors, we had a net loss from continuing operations for the first nine monthsof 2001 in the amount of ($12.7) million, or ($1.02) per share, compared to anet loss of ($1.5) million, or ($0.13) per share, in the first nine months offiscal 2000.  Total net loss, includingdiscontinued operations, for the first nine months of fiscal 2001 was ($15.8)million, or ($1.28) per share, versus a net loss of ($3.3) million, or ($0.28)per share, for fiscal 2000.

 

Liquidity and Capital Resources

 

             Wehave funded our operations to date primarily from public offerings of equitysecurities and cash flows from operations. As of August 31, 2001, the Company’s principal sources of liquidityincluded cash and cash equivalents and marketable securities totalingapproximately $6.7 million.

 

             Forthe nine months ended August 31, 2001, cash used in operating activities fromcontinuing operations was approximately $7,695,000 compared to approximately$1,535,000 for the same period a year ago. For the nine months ended August 31, 2001, cash used in operatingactivities from discontinued operations was approximately $1,473,000 comparedto approximately $8,148,000 for the same period a year ago.  The Company incurred a net loss fromcontinuing operations of $12,656,000 offset by significant non-cash items,including depreciation, amortization and write-down of intangible assets forcontinuing operations, in the amount of $4,487,000.  A significant portion of the cash used in operating activities isattributable to a significant reduction in accounts payable of $2,862,000.  Accounts receivable provided cash inoperating activities in the amount of $2,546,000 due to the timing of sales inthe quarter and the subsequent collection of those sales, which resulted indays sales outstanding of 43.  Inventory provided cash in operating activities in the amount of$2,140,000 during the first nine months of fiscal 2001, compared with inventoryutilizing cash in operating activities of $2,396,000 for the same period a yearago.  Deferred revenue for the firstnine months of fiscal 2001 utilized cash of $968,000, compared to providingcash of $168,000 for the same period a year ago.  Deferred revenue declined during the first nine months of fiscal2001 due to lower unit sales of our digital video systems and, therefore, lowerunit sales of service contracts for those systems.  Accrued expenses utilized cash of $741,000, compared to providingcash of $865,000 for the same period a year ago.  Accrued expenses declined during the first nine months of 2001due primarily to accrued legal and audit expenses that were paid during theperiod.

 

             Netcash provided by investing activities was approximately $4,674,000 during thenine months of fiscal 2001, compared to cash used in investing activities ofapproximately $859,000 for the same period a year ago.  Cash provided by investing activities duringthe first nine months of fiscal 2001 consisted of net proceeds from the sale ofmarketable securities of $5,419,000, partially offset by the purchases ofequipment for $768,000.  The proceedsfrom the sales of marketable securities were used to fund the purchases ofequipment and working capital needs due to the net loss incurred the first ninemonths of fiscal 2001.

 

             Cashused in financing activities during the first nine months of fiscal 2001 wasapproximately $1,066,000, compared to cash provided by financing activities of$4,472,000 for the same period a year ago. Cash used in financing activities resulted from the non-recurringpayment of an acquisition-related note payable in the amount of $1,492,000,offset by $504,000 from proceeds from the issuance of common stock pursuant tostock plans.  The reduction in cashprovided by financing activities that came from proceeds from the issuance ofcommon stock pursuant to stock plans is due to a significantly lower price forthe Company’s common stock in the first nine months of fiscal 2001 versus thesame period a year ago.  Given therecent reduced price of the Company’s common stock, we do not currently expectcash provided by proceeds from the issuance of common stock pursuant to stockplans to be a significant source of liquidity in fiscal 2001.

 

             Asof August 31, 2001, the Company’s principal sources of liquidity included cashand marketable securities. Additionally, on August 29, 2001 the Company executed an agreement tosell our streaming media software business to Autodesk, Inc. for $16 million incash.  The transaction was completed onOctober 5, 2001 and, subsequent to closure, the company received $14 million incash with the remaining $2 million deposited in escrow for one year.  The Company believes that its current cash,marketable securities and cash provided by future operations will be sufficientto meet the Company’s working capital and anticipated capital expenditurerequirements for at least the next twelve months.  Although operating activities may provide cash in certainperiods, to the extent the Company experiences growth in the future, itsoperating and investing activities may require significant cash.  Consequently, any such future growth mayrequire the Company to obtain additional equity or debt financing.  In addition, we may consider the sale ofcertain assets to raise capital.

 

**CautionaryStatements**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements within themeaning of the Securities Litigation Reform Act of 1995 that involve risks anduncertainties.  Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of certain factors, including those set forth in the followingcautionary statements and elsewhere in this Quarterly Report on Form 10-Q.  If any of the following risks were to occur,our business, financial condition, or results of operations would likelysuffer.  In that event, the tradingprice of our common stock would decline.

 

*Merger and Acquisition Related Risks.* During fiscal year ended November 30, 2000,we completed the merger with Digital Origin and the acquisitions of Wired, 21stCentury, and J2. In addition, we completed the acquisition of certain assets ofICE.  Our business and results ofoperations could be materially adversely affected in the event we fail tocomplete publicly announced acquisitions or to successfully integrate thebusiness and operations of the merger or the acquisitions.  In the future, we may continue to acquire ormerge with existing businesses, products, and technologies to enhance andexpand our line of products.  Suchmergers and acquisitions may be material in size and in scope.  There can be no assurance that we will beable to identify, acquire, or profitably manage additional business orsuccessfully integrate any acquired businesses into our business withoutsubstantial expenses, delays, or other operational or financial problems.  Acquisitions involve a number of specialrisks and factors, including increasing competition for attractive acquisitioncandidates in our markets, the technological enhancement and incorporation ofacquired products into existing product lines and services, the assimilation ofthe operations and personnel of the acquired companies, failure to retain keyacquired personnel, adverse short-term effects on reported operating results,the amortization of acquired intangible assets, the assumption of undisclosedliabilities of any acquired companies, the failure to achieve anticipatedbenefits such as cost savings and synergies, as well as the diversion ofmanagement’s attention during the acquisition and integration process.  We may not be able to operate the acquiredbusinesses properly and may not be able to successfully recover amounts paidfor such businesses.  Some or all ofthese special risks and factors may have a material adverse impact on ourbusiness, operating results, and financial condition and, as a result, maynegatively affect the market price of our common stock.

 

Similarly, we may determine to dispose ofassets, either assets we have historically used in the business or that we haveacquired.  Our business and results ofoperations could materially change depending on whether or not we are able to disposeof assets in an advantageous manner.  Inaddition to obtaining an advantageous price for the assets to be disposed of,dispositions involve a number of special risks and factors, including searchingfor appropriate acquirers; managing the effect of the disposition on existingand proposed product lines and services, the divestiture of operations andpersonnel of the acquired companies, adverse short-term effects on reportedoperating results, potential post-divestiture indemnification or liability forliabilities of divested operations, as well as the diversion of management’sattention during the disposition process. Some or all of these special risks and factors may have a materialadverse impact on our business, operating results, and financial condition and,as a result, may negatively affect the market price of our common stock.

 

*Significant Fluctuations andUnpredictability of Operating Results.*  Our quarterly operating results aredifficult to predict, have varied significantly in the past and are likely tovary significantly in the future for a number of reasons, including new productannouncements and introductions by ourselves or our competitors, changes inpricing, and the volume and timing of orders received during the quarter. Also,in the past, we have experienced delays in the development of new products andenhancements, and such delays may occur in the future.  These factors make the forecasting ofrevenue inherently uncertain. Additionally, a significant portion of our operating expenses isrelatively fixed, and operating expense levels are based primarily on internalexpectations of future revenue.  As aconsequence, quarterly operating expense levels cannot be reduced rapidly inthe event that quarterly revenue levels fail to meet internalexpectations.  For these reasons, youshould not rely on period-to-period comparisons of our financial results toforecast our future performance.  It islikely that in some future quarter or quarters our operating results will bebelow the expectations of securities analysts or investors.   If quarterly revenue or earnings levelsfail to meet internal or external expectations, the market price of our commonstock may decline significantly.

 

*Emerging Markets.*  The markets in which we offer our systemsproducts and services are intensely competitive and rapidly changing.  We are targeting the emerging market ofbroadcast designers, effects artists, and creative professionals.  This market and the products utilized bythese users are relatively new.  Oursuccess in this emerging market will depend on the rate at which the marketdevelops and our ability to penetrate that market.  We will not succeed if we cannot compete effectively in thismarket and, as a result, our business and operating results could be materiallyand adversely affected.

 

*Risks Associated WithDevelopment and Introduction of New Products.*  If we are not successful in developing andintroducing new products to the markets we serve our business and operatingresults will suffer.  In addition, newproduct announcements by our competitors and by us could have the effect ofreducing customer demand for our existing products.  Also, when we introduce new or enhanced products we musteffectively manage the transitions from existing products to minimizedisruption of orders from our customers. New product introductions require us to devote time and resources to thetraining of our sales channel in the features and target customers for such newproducts, which efforts could result in less selling efforts being made by thesales channel during such training period. Our failure to effectively manage new product announcements orintroductions could contribute to significant quarterly fluctuations inoperating results as orders for new products commence and orders for existingproducts decline and, as a result, our operating results will suffer.

 

*Rapid Technological Change.*  The market for our products is characterizedby rapidly changing technology, evolving industry standards and frequent newproduct introductions.  Our futuresuccess will depend in part upon our ability to enhance existing products andto introduce new products and features in a timely manner to address customerrequirements, respond to competitive offerings, adapt to new emerging industrystandards and take advantage of new enabling technologies that could render ourexisting products obsolete. We plan to continue to invest in research anddevelopment, in connection with our development strategy.  Any delay or failure on our part indeveloping additional new products or features for existing products or anyfailure of such new products or features to achieve market acceptance, couldhave a material adverse effect on our business and operating results and ourstock price will suffer.**

 

*Competition.*  The market for our products is highlycompetitive and characterized by pressure to reduce prices, incorporate newfeatures and accelerate the release of new products.  A number of companies currently offer products that competedirectly or indirectly with our products, including Accom, Inc., Adobe SystemsInc., Apple Computer Inc., Avid Technology, Inc., Discreet (a division ofAutodesk, Inc.), FAST Electronic GmbH, Leitch, Inc., Matrox Electronic SystemsLtd., Pinnacle Systems, Inc., and Sonic Foundry, Inc.  In addition, we expect much larger vendors, such as MatsushitaElectric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation,to develop and introduce digital editing systems that may compete with ourproducts.  Many of these current andpotential competitors have greater financial, technical and marketing resourcesthan us, including, without limitation, larger and more established selling andmarketing capabilities, greater brand recognition and a larger installed baseof customers, and well-established relationships with our existing andpotential customers, complementary technology vendors and other businesspartners.  As a result, our competitorsmay be able to develop products comparable to or superior to our own products,adapt more quickly than us to new technologies, evolving industry standards orcustomer requirements, or lower their product costs and thus be able to lowerprices to levels at which we could not operate profitably, the occurrence ofany of which could have a material adverse effect on our business and operatingresults.  In this regard, we believethat we will continue to experience competitive pressure to reduce prices,particularly for our high data rate systems. We have historically realized higher gross profit on the sale of these highdata rate systems, and such continued competitive pricing pressure could resultin lower sales and gross margin, which in turn could adversely affect ourbusiness and operating results and negatively affect the price of our commonstock.

 

*Dependence on and competition with Apple Computer, Inc.*  As a competitor, Apple Computer, Inc.(“Apple”) could, in the future, inhibits our ability to develop our productsthat operate on the Macintosh platform. Additionally, new products and enhancements to existing products fromApple such as Final Cut Pro could cause customers to delay purchases of ourproducts or alter their purchase decision altogether.  Furthermore, as the sole supplier of Macintosh computers, anydisruption in the availability of these computers could cause customers todefer or alter their purchase of our products. We rely on access to key information from Apple to continue developmentof our products and any failure to continue supplying our engineers with thisinformation could have a material adverse affect on our business and financialresults and negatively affect the price of our common stock.

 

*Dependence on Microsoft Corporation.*  Many of our products operate in the Windowsenvironment and our engineers depend upon access to information in advance fromMicrosoft Corporation (“Microsoft”). Any failure to continue supplying our engineers with this informationcould have a material adverse affect on our business and financial results andnegatively affect the price of our common stock.

 

*Dependence on Single orLimited Source Suppliers.*  The Company is dependent on single orlimited source suppliers for several key components used in its products thathave no ready substitutes, including various audio and video signal processingintegrated circuits manufactured in each case only by Crystal SemiconductorCorp., Raytheon Company, LSI Logic Corp., Philips Semiconductors or ZoranCorp.  The availability of many of thesecomponents is dependent on our ability to provide suppliers with accurate forecastsof our future requirements, and certain components we use to build our productshave been subject to industry-wide shortages. We do not carry significant inventories of these components and have noguaranteed supply arrangements with such suppliers.  There can be no assurance that our inventory levels will beadequate to meet production needs during any interruption of supply.  Our inability to develop alternative supplysources, if required, or a reduction or stoppage in supply, could delay productshipments until new sources of supply become available, and any such delaycould adversely affect our business and operating results in any given periodand negatively affect the price of our common stock.

 

*Dependence on Propriety Technology.*  Our ability to compete successfully andachieve future revenue growth will depend, in part, on our ability to protectour proprietary technology and operate without infringing the rights ofothers.  Previously, we have received,and may in the future continue to receive, communications suggesting that ourproducts may infringe on the patents or other intellectual property rights ofthird parties.  Our policy is toinvestigate the factual basis of such communications and negotiate licenseswhere appropriate.  While it may benecessary or desirable in the future to obtain licenses relating to one or moreproducts, or relating to current or future technologies, there can be noassurance that we will be able to do so on commercially reasonable terms or atall.  There can be no assurance thatthese or other future communications can be settled on commercially reasonableterms or that they will not result in protracted and costly litigation.  Any failure to secure the necessaryintellectual property right of third parties on commercially reasonable termsmay adversely affect our business and operating results and negatively affectthe price of our common stock.**

 

*Risks of Third-Party Claims ofInfringement.*  There has been substantial industrylitigation regarding patent, trademark and other intellectual property rightsinvolving technology companies.  In thefuture, litigation may be necessary to enforce any patents issued to us or toenforce trade secrets, trademarks and other intellectual property rights ownedby us, to defend ourselves against claimed infringement of the rights of othersand to determine the scope and validity of the proprietary rights ofothers.  For a description of certainpending litigation instituted against the Company, see Item 1, LegalProceedings of Part II, Other Information and Note 9 to the ConsolidatedFinancial Statements included herein. Any such litigation could be costly and a diversion of management’sattention, which could adversely affect our business and operating results andour financial condition.  Adversedeterminations in any such litigation could result in the loss of ourproprietary rights, subject us to significant liabilities, require us to seeklicenses from third parties or prevent us from manufacturing or selling ourproducts, any of which could adversely affect our business and operatingresults and our financial condition.

 

*Dependence on Distributors andResellers.*  We rely primarily on our worldwide networkof independent distributors and VARs to distribute and sell our products toend-users.  Our distributors andresellers generally offer products from several different companies, includingin some cases products that are competitive with our own products.  In addition, many of the VARs are smallorganizations with limited capital resources. There can be no assurance that our distributors and resellers willcontinue to purchase products from us, or that our efforts to expand ournetwork of distributors and resellers will be successful.  Any significant failure on our part to maintainor expand our network or distributors and resellers could have a materialadverse effect on our business and operating results and negatively affect theprice of our common stock.

 

*Reliance on InternationalSales.*  International sales and operations may besubject to risks such as the imposition of government controls, export licenserequirements, restrictions on the export of critical technology, less effectiveenforcement of proprietary rights; currency exchange fluctuations, generallylonger collection periods, political instability, trade restrictions, changesin tariffs, difficulties in staffing and managing international operations,potential insolvency of international resellers and difficulty in collectingaccounts receivable.  Our internationalsales are also subject to more seasonal fluctuation than domestic sales.  In this regard, the traditional summervacation period, which occurs during our third fiscal quarter, may result in adecrease in sales, particularly in Europe. There can be no assurance that these factors will not have an adverseeffect on our future international operations and consequently, on our businessand operating results.  This fluctuationmay be material and negatively affect the price of our common stock.

 

*Dependence on Key Personnel.*  Competition for employees with the skillsrequired by us is intense in the geographic areas in which we maintain physicaloperations.  We believe that our futuresuccess will depend on our continued ability to attract and retain qualifiedemployees, especially in research and development.  Any significant delay in hiring key personnel could have amaterial adverse affect on our business and operating results and negativelyaffect the price of our common stock.

 

*History of Losses.*  We have incurred substantial operatinglosses during the current year and in each of the past five fiscal years.  We incurred an operating loss fromcontinuing operations of approximately $12.7 million for the first nine monthsof fiscal 2001 and as of August 31, 2001, we had an accumulated deficit ofapproximately $205.2 million.  Over thepast three years we have significantly increased our research and developmentexpenses as a percentage of total sales and we plan to continue to invest innew technology, and as a result, we may incur operating losses in futureperiods.  We will need to generateincreases in our current sales levels to achieve profitability and we may notbe able to do so.  If our sales growmore slowly than we anticipate or if our operating expenses increase more thanwe expect or cannot be reduced in the event of lower revenue, our business willbe significantly and adversely affected. Our failure to achieve profitability or achieve the level of profitabilityexpected by investors and securities analysts may adversely affect the marketprice of our common stock.

*Stock Price Volatility*.  The trading price of our common stock hasbeen highly volatile and has fluctuated significantly in the past.  During fiscal 2000, our stock pricefluctuated between a low of $2.125 per share and a high of $52.75 pershare.  We believe that the price of ourcommon stock may continue to fluctuate significantly in the future in responseto a number of events and factors relating to our company, our competitors, andthe market for our products and services, many of which are beyond our control,such as, variations in our quarterly operating results; changes in financialestimates and recommendations by securities analysts; changes in marketvaluations of companies in our markets; announcements by us or our competitorsof significant products, acquisitions, or strategic partnerships; failure tocomplete significant business transactions; departures of key personnel;purchases or sales of common stock or other securities by us; or news relatingto trends in our markets.  In addition,the stock market in general, and the market for technology companies inparticular, have experienced extreme volatility over the past twelve months.  This volatility has often been unrelated tothe operating performance of particular companies.  These broad and industry fluctuations may adversely affect themarket price of our common stock, regardless of our operating performance.

 

*EuroConversion.*  On January 1, 1999, 11 of the 15 member countriesof the European Union established fixed conversion rates between their existingsovereign currencies and the Euro.  Asof January 1, 2002, the transition to the Euro will be complete.  We maintain operations within the EuropeanUnion and have prepared for the Euro conversion.  We do not expect the costs associated with the transition to bematerial.  However, the overall effectof the transition to the Euro may have a material adverse affect on ourbusiness, financial condition and financial results.

 

Item3.  Quantitative and QualitativeDisclosures About Market Risk

 

DerivativeFinancial Instruments, Other Financial Instruments and Derivative CommodityInstruments.  The Company is not a partyto any derivative financial instruments or other financial instruments forwhich the fair value disclosure or accounting would be required under Statementof Financial Accounting Standards No. 133*Accounting for Derivative Instruments and HedgingActivities**(* SFAS No. 133).  All of the Company’s investments are in short-term, investmentgrade commercial paper, certificates of deposit and U.S. Government and agencysecurities that are carried at fair value on the Company’s books.  Accordingly, the Company believes that the marketrisk of such investments is minimal.

 

Primary Market Risk Exposures.  The Company’s primary market risk exposuresare in the area of interest rate risk and foreign currency exchange raterisk.  The Company’s investmentportfolio of cash equivalents is subject to interest rate fluctuations, but theCompany believes this risk is immaterial due to the short-term nature of theseinvestments.  The Company’s business inEurope is conducted in local currency. In Asia, business is conducted in U.S. currency.  The Company has no foreign exchange contracts,option contracts or other foreign hedging arrangements.  However, the Company estimates that anymarket risk associated with its foreign operations is not significant and isunlikely to have a material adverse effect on the Company’s business, resultsof operations, or financial condition.

 

PARTII.  OTHER INFORMATION

 

Item1. Legal Proceedings

 

i) On June 7, 1995, a lawsuit was filedagainst the Company by Avid Technology, Inc. (“Avid”) in the United StatesDistrict Court for the District of Massachusetts.  The complaint generally alleges patent infringement by theCompany arising from the manufacture, sale, and use of the Company's Media 100products.  The complaint includesrequests for injunctive relief, treble damages, interest, costs and fees.  In July 1995, the Company filed an answerand counterclaim denying any infringement and asserting that the Avid patent inquestion is invalid. The Company intends to vigorously defend the lawsuit. Inaddition, Avid is seeking reissue of the patent, including claims that itasserts are broader than in the existing patent, and these reissue proceedingsremain pending before the U.S. Patent and Trademark Office.  On January 16, 1998, the court dismissed thelawsuit without prejudice to either party moving to restore it to the docketupon completion of all matters pending before the U.S. Patent and TrademarkOffice.

 

On August 16, 2000, the U.S. Patent andTrademark Office issued an Office Action rejecting all of the claims made byAvid in their latest request for reexamination of the patent related to theaforementioned lawsuit.  In addition,the Examiner at the U.S. Patent and Trademark Office designated the action as“final”.  On November 29, 2000, Avidfiled a Notice of Appeal of the Examiner’s rejections to the U.S. Patent andTrademark Office Board of Patent Appeals and Interferences.  There can be no assurance that the Companywill prevail in the appeal by Avid or that the expense or other effects of theappeal, whether or not the Company prevails, will not have a material adverseeffect on the Company’s business, operating results and financial condition.

 

(ii) On January 13, 1999 and January 28,1999, Digital Origin and one of its former directors, Charles Berger, werenamed as defendants in two shareholder class action lawsuits against SplashTechnology Holdings, Inc. (“Splash”), various directors and executives ofSplash and certain selling shareholders of Splash.  The lawsuit alleges, among other things, that the defendants madeor were responsible for material misstatements, and failed to discloseinformation concerning Splash’s business, finances and future businessprospects in order to artificially inflate the price of Splash commonstock.  The complaint does not identifyany statements alleged to have been made by Charles Berger or DigitalOrigin.  The complaint further allegesthat Digital Origin engaged in a scheme to artificially inflate the price ofSplash common stock to reap an artificially large return on the sale of thecommon stock in order to pay off its debt. Digital Origin and the former director vigorously deny all allegationsof wrongdoing and intend to aggressively defend themselves in these matters.Defendant’s two initial motions to dismiss the action were granted with leaveto amend, and plaintiffs have again amended the complaint.  Defendants have now filed their third motionto dismiss.

 

On July 18, 1997, IntelligentElectronics, Inc. filed a claim against Digital Origin alleging a breach ofcontract and related claims in the approximate amount of $800,000, maintainingthat Digital Origin failed to comply with various return, price protection,inventory balancing and marketing development funding undertakings.  In 1997, Digital Origin filed an answer tothe complaint and cross-claimed against the plaintiffs and in October 1997additionally cross claimed against Deutsche Financial, Inc., a factor in theaccount relationship between the Company and the plaintiffs, seeking therecovery of existing accounts receivable of approximately $1.8 million.  During May 2000, the trial was completed andthe Court entered two judgments in favor of Digital Origin, one in the amountof $314,000 plus interest against Intelligent Electronics and one in the amountof $1,491,000 plus interest against Deutsche Financial, Inc.  In September 2000, Intelligent Electronics,Inc. paid $314,000 plus interest of $139,000 and reimbursement of certain costsin the amount of $20,000 to the Company. On August 15, 2001, DeutscheFinancial, Inc. entered into a settlement agreement with Digital Origin, Inc.to pay $1,075,000 to the Company.

 

(iii) On October 12, 1999, a lawsuit wasfiled against the Company by McRoberts Software, Inc. in the United StatesDistrict Court for the Southern District of Indiana.  The complaint alleges copyright infringement, breach of contract,and trade secret misappropriation.  Thecomplaint includes requests for injunctive relief, treble damages, interest,costs and fees.  In November 1999, wefiled an answer and counterclaim denying any infringement.  We intend to vigorously defend the lawsuit.

 

(vi) On May 9, 2001, a lawsuit was filedagainst the Company by Wired, a California general partnership, in the SantaClara County Superior Court.  Thecomplaint alleges fraud, negligent misrepresentation, breach of express andimplied-in-fact contract, breach of the implied covenant of good faith and fairdealing, breach of fiduciary duty and violation of California business andprofessional code section 17200.  Thecomplaint includes requests for compensatory and punitive damages, injunctiverelief, and fees.  The Company intendsto vigorously defend the lawsuit.

 

(iv) From time to time the Company isinvolved in other disputes and/or litigation encountered in its normal courseof business.  The Company does notbelieve that the ultimate impact of the resolution of such other outstandingmatters will have a material effect on the Company’s business, operatingresults or financial condition.

 

Item5. Other Information

 

On August 30, 2001, the Company signed anagreement to sell its software product line to Autodesk, Inc. for $16 millionin cash.   As a result of thistransaction, the assets of the software product line to be discontinuedconsisting primarily of inventory, equipment and intangible assets and havebeen separately classified in the accompanying balance sheet at August 31,2001.  The November 30, 2000 balancesheet has been restated to conform to the current year’s presentation. Thedisposal date was October 5, 2001.  TheCompany’s software product line consisted of products acquired in the Terranacquisition and the merger with Digital Origin.

 

Item 6. Exhibits andReports on Form 8-K

 

a)  Exhibits

 

Exhibits required as part of thisQuarterly Report on Form 10-Q are listed in the exhibit index on page 29.

 

b)  Reports on Form 8-K

 

Therewere no reports on Form 8-K during the quarter ended August 31, 2001.

 

SIGNATURES

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
|                   |      | Media 100 Inc.           |
|------------------------|-----------|--------------------------|
|                   |      |                     |
| Date: October 15, 2001 | By:  | /s/ Steven D. Shea       |
|                   |      |                          |
|                   |      |  Steven D. Shea     |
|                   |      | Chief  Financial Officer |
|                   |      | Treasurer                |

 

EXHIBIT INDEX

 
| Number | Description                                                                                                                                                                            |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                        |
| 2.10   | Asset Purchase  Agreement by and among Media 100 Inc. and Autodesk, Inc, and with respect to  Section 9.5 of Article IX only Computershare Trust Company, Inc. dated August  30, 2001. |