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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-22023
Macrovision Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 77-0156161
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1341 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 743-8600
(Registrant's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. |_|
As of March 15, 2001, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, based on the closing
price for the registrant's common stock on that day, was approximately
$1,526,678,000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
As of March 15, 2001, there were 50,036,748 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits hereto have been specifically incorporated by reference herein
in Item 13 under Part III hereof. Certain portions of registrant's definitive
Proxy Statement, which will be filed with the Securities and Exchange Commission
in connection with the registrant's annual meeting of stockholders to be held on
May 24, 2001, are incorporated by reference in Items 10-13 of Part III hereof.
MACROVISION CORPORATION
FORM 10-K
INDEX
PART I
ITEM 1. BUSINESS ...................................................... 2
ITEM 2. PROPERTIES .................................................... 24
ITEM 3. LEGAL PROCEEDINGS ............................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...... 26
ITEM 6. SELECTED FINANCIAL DATA ....................................... 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................... 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ... 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................... 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................... 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS ............................. 38
ITEM 11. EXECUTIVE COMPENSATION ....................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................... 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K .......................................... 38
SIGNATURES ............................................................ 41
Discussions of some of the matters contained in this Annual Report on Form
10-K for the Macrovision Corporation ("Macrovision," "we" or "us") may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and as such, may involve risks and
uncertainties. Some of these discussions are contained under the captions "Item
1. - Business" and "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations." We have based these forward-looking
statements on our current expectations and projections about future events,
which include implementing our business strategy, developing and introducing new
technologies, obtaining and expanding market acceptance of the technologies we
offer, and competition in our markets.
In some cases, you can identify these forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend," or "continue," and
similar expressions. These statements are based on the beliefs and assumptions
of our management and on information currently available to our management. Our
actual results, performance and achievements may differ materially from the
results, performance and achievements expressed or implied in such
forward-looking statements. For a discussion of some of the factors that might
cause such a difference, see "Item 1. Business - Risk Factors."
PART I
ITEM 1. BUSINESS.
Macrovision Corporation, a Delaware corporation formed in 1983, develops
and licenses rights management and copy protection technologies. Our customers
include major Hollywood studios, independent video producers, enterprise and
consumer software vendors, digital set-top box manufacturers and digital
pay-per-view ("PPV") network operators. We provide content owners with the means
to market, distribute and protect video, software and audio content.
Our business originated in video copy protection. Our technology has been
used to copy protect over 3.4 billion videocassettes worldwide since 1985. In
1997, we leveraged our copy protection technology into the DVD platform. Most
Motion Picture Association of America studios use our video copy protection
technologies to protect some or all movie releases on videocassette or DVD. Our
customers include Disney, Paramount, Sony Pictures Entertainment, Twentieth
Century Fox, Universal Studios, Warner Brothers and DreamWorks. We believe that
our technologies are accepted as the de facto industry standard for video copy
protection.
As a result of our August 2000 acquisition of GLOBEtrotter Software, Inc.
("GLOBEtrotter"), we added a suite of electronic license distribution ("ELD")
and electronic license management ("ELM") technologies to our product portfolio.
These offerings encompass the areas of electronic software distribution,
electronic licensing, electronic license management, software asset management
and electronic license distribution. In October 2000, we acquired certain assets
of GLOBEtrotter's European distributor, Productivity through Software plc
("PtS"), which were applicable to PtS' electronic license management business.
We have built, and continue to add to, a large patent portfolio that
provides the basis for our license driven business model. We generate recurring
revenues from a variety of sources. In our video business, we receive unit-based
royalties on videocassettes, DVDs, and set-top boxes. We obtain transaction or
use-based royalties for PPV movies, and license fees from a range of hardware
manufacturers, digital satellite and cable network operators. In our software
business, we receive unit-based royalties on CD-ROMs, a combination of
time-based licenses and perpetual licenses for our ELM technology, and recurring
fees for maintenance.
To further expand our rights management and copy protection capabilities,
we have extended our strategic relationship with Digimarc Corporation
("Digimarc"), a leading digital watermarking technology company, to develop a
copy protection solution to address next-generation, digital-to-digital copying.
We entered into a strategic relationship with TTR Technologies, Ltd. ("TTR") to
develop copy protection technology for audio CDs, which represents a new market
for us. We have also made strategic investments in InterActual Technologies,
Inc. ("InterActual"), a developer of interactive DVD technology, SecureMedia
Inc. ("SecureMedia"), a developer of encryption technologies and AudioSoft
International SA ("AudioSoft"), a developer of copyright management reporting
systems for music. We intend to continue to evaluate and pursue additional
strategic relationships that are complementary or additive to our existing
technologies and served markets.
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We own or have rights to various copyrights, trademarks and trade names
used in our business. These include Macrovision-Registered Trademark(R),
Protecting Your Image-Registered Trademark(R), GLOBEtrotter(R), Colorstripe(TM),
SafeDisc(TM), SafeCast(TM), SafeAudio(TM), FLEXlm(R), GTlicensing(TM) and
SAMsuite(TM).
Industry Background
The industry shift towards digital media renders content owners
increasingly vulnerable to unauthorized use of their content. Consumers' ability
to make unauthorized copies of video and audio content has increased due to the
proliferation of inexpensive, easy-to-use devices, such as VCRs, CD-ROM
recorders, audio CD recorders and personal video recorders that allow in-home
copying of videocassettes, DVDs, digital PPV programs, CD-ROMs, and audio CDs.
As technological advances facilitate digital copying at declining prices, motion
picture studios and music labels have become more concerned with protecting
their intellectual property. Independent software vendors (ISVs) are similarly
concerned about unauthorized or illicit use of their software, be it in the
enterprise environment (where license parameters may be ignored) or at home
(where entertainment software may be copied and redistributed).
Content owners lose billions of dollars every year to casual copying and
piracy. The latest data available from Motion Picture Association of America
estimates that in 1999 video piracy cost the major studios more than $2.5
billion in lost revenues. The Software Information & Industry Association
estimates that computer software and video game companies based in the United
States lost $12 billion worldwide in 1999 due to software piracy.
As a result, a number of government and legislative initiatives have been
enacted in recent years to encourage technologies that protect the rights of the
content owners.
In the United States, the Digital Millennium Copyright Act was enacted in
October 1998. This law requires all VCRs to comply with analog copy protection
technologies, such as those covered in our patents, beginning in May 2000.
Approximately 80% of all VCRs manufactured prior to 1999 comply. The Act
includes a clause that outlaws all circumvention devices and technologies that
could be used to defeat any type of copy protection technology. The United
States law is based on a set of guidelines adopted by the World Intellectual
Property Organization in 1996 for amending basic copyright laws to deal with the
protection of digital media.
The European Union is continuing to discuss a proposed copyright
directive, which we believe includes a provision aimed at controlling hardware
and software circumvention devices and technologies.
In Japan, a revised copyright law that went into effect in October 1999
prohibits the sale, manufacture, and import of circumvention devices. The Japan
Industry Standard requires all digital recording devices to be responsive to
analog copy protection technologies that utilize automatic gain control
techniques, such as those covered by Macrovision patents.
Video
VHS Copy Protection. Motion picture studios wish to maximize the economic
value from each feature film or other video program over its copyright life.
Independent studies show that studios and video retailers lose VHS and DVD
revenues when consumers make copies of movies, whether from home video or PPV
releases. The International Recording Media Association has estimated that 50%
of all households in the United States own two or more VCRs. These households
are capable of making unauthorized copies of prerecorded videocassettes. Because
over 90% of all United States households own at least one VCR, any of these
households that also owns a DVD player or a digital PPV set top box can make
high quality VHS copies directly from their DVD players or set-top boxes, unless
programs are copy protected. Even with the focus on digital media and growth in
DVD, VCR sales continue to grow as prices fall. With over 600 million VCRs
installed throughout the world, and with this continued growth in VCR sales, we
believe that VCRs will remain a home copying threat to video content owners for
many years to come.
DVD Copy Protection. DVD hardware and media became commercially available
in the United States in 1997 and, through the end of 2000, approximately 15.3
million DVD players had been shipped by manufacturers in North America,
according to the Consumer Electronics Association. The very rapid growth of DVD
presents serious copy protection concerns to the studios. Without effective copy
protection, any one of the approximately 600 million VCRs throughout the world
can, when combined with a DVD player, make large numbers of videocassette copies
of a non-copy protected DVD. These copies are almost equal in quality to
professionally prerecorded videocassettes. Because of their superior picture
quality, lower manufacturing cost, relative ease of use and smaller size, DVDs
are expected to supplant videocassettes over time as the preferred home video
distribution medium. As DVD becomes the standard in home viewing, we expect the
need
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for reliable copy protection to remain important. The International Recording
Media Association estimates that 474 million DVD-Video discs were manufactured
in 2000, growing to 1.4 billion in 2002, representing a 96% annual growth rate.
PPV Copy Protection. Digital PPV enables consumers to purchase and view
movies and other programming in their homes through cable or satellite systems.
Based on data from Paul Kagan & Associates, we believe that digital PPV revenues
at the studio level were approximately $513 million in 2000. By contrast, studio
revenues from their home video business exceeded $11 billion in 2000. PPV
distribution offers motion picture studios higher profit margins than they
receive from home video rentals or sales. Studios have realized the importance
of copy protection in digital PPV networks, and many of them have required
digital PPV system operators to install copy protection capability in their
digital set-top boxes.
In an effort to protect their home video revenues, studios typically
release a movie on PPV between one and three months after it is released on
videocassette or DVD. Digital PPV providers have demonstrated that they can
substantially increase the buy rates for PPV by offering subscribers up to 60
PPV channels per cable/DBS system, and by promoting convenience of frequent
start times and greater variety of movies. In the United States, the digital PPV
system operators have installed copy protection capability in their digital set
top boxes. However, they have indicated that they will not activate copy
protection until the studios release their movies to the PPV system operators at
the same time as they release them to home video. This standoff between the
system operators and the studios is less of an issue in international markets,
where studios have been able to insist that PPV movies must be copy protected.
Software
Electronic License Management (ELM). Software vendors who sell to
enterprise customers are also vulnerable to unauthorized use of their
proprietary rights. Large organizations, which typically support many end user
applications, may inadvertently allow users to run applications beyond the scope
of their license terms; in other words, users may be obtaining "free" use of the
software vendor's application. As a result, software vendors may not be
capturing all the revenues they are due from their customer base. This has led
to increased focus on capturing all software usage revenue that is due from the
end user customer, driving demand for technology solutions that manage and
control an application's usage in the end user environment. Electronic license
management is a solution to this problem. According to International Data
Corporation, over 50% of software revenue will be delivered using electronic
licensing by 2003, and virtually all software revenues will be derived from
electronic licensing by 2008.
Consumer Software Copy Protection. With the proliferation of inexpensive
high capacity PC-based hard disc drives, the increased penetration of Internet
connections to the home, and the availability of higher bandwidth connections,
consumers now have the means to widely distribute software content. Many
consumers have the capability to copy from a CD-ROM, download computer software
to their hard drives, copy those downloaded files onto a CD-recorder device, and
distribute the unauthorized copied software through CD-ROMs or electronically
over the Internet. Recently, CD-recordable drives have been introduced that are
priced below $150 and are expected to become standard features in personal
computers in the near future. In addition, blank CD-ROM discs can be purchased
for less than $1 in the United States. As a result, computer software and
PC-based video game companies are facing an additional threat of lost revenues
due to consumer copying of CD-ROM software.
Internet. The Internet is increasingly being used as a means to distribute
content, particularly software. The proliferation of online content providers,
combined with new and evolving methods of online content delivery, has created a
large market opportunity for rights management and copy protection solutions. We
believe that there is a significant need for rights management solutions that
address these new and emerging Internet downloading and streaming business
models.
Audio. Major music labels have expressed interest in technology that would
prevent the copying of audio CDs to a PC or CD recordable device. Based on data
from the Record Industry Association of America, we believe that the music
industry is a $40 billion per year industry compared to the $16 billion per year
home video industry. We believe that there has never been an effective copy
protection technology for audio, because no one has been able to develop a copy
protection technique that does not interfere with the playback of the original
music. With the emergence of file-sharing technologies, and the availability of
low cost hardware that facilitates copying of CDs, we believe that music labels
are seeking a copy protection solution to prevent losses due to piracy.
Macrovision Solutions
We develop and market a broad array of rights management and copy
protection technologies. We offer video copy protection technologies that
address the video content protection needs of motion picture studios and other
content owners,
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program distributors, and cable and satellite PPV system operators. We provide
ELM and ELD solutions to a range of software vendors, including application
developers, major systems suppliers and embedded software vendors. We also
supply software asset management technologies to enable end user organizations
to manage internal application usage. We offer CD-ROM copy protection and rights
management technologies to a variety of software publishers in the PC games,
home education, information publishing, and desktop applications software
markets. We are actively involved in developing and acquiring various
technologies to meet the needs of emerging delivery systems such as downloading
and streaming of media via the Internet, as well as technologies to prevent the
unauthorized copying of audio CDs.
Video Copy Protection. Our video copy protection technologies allow
consumers to view programming stored on prerecorded videocassettes, DVDs or
transmitted as digital PPV programs via cable or satellite, but deter
unauthorized consumer copying of such programming. Videocassettes are encoded
with our video copy protection signal as they are manufactured. Our licensed
copy protection signal generator equipment is installed in over 230 commercial
duplication facilities in 35 countries around the world. The unique patented
aspects of our copy protection signal are transparent to a TV set, but are
disruptive to the recording circuits of VCRs. The result is that videocassettes
encoded with our anticopy process will play normally on a TV set, but will cause
unwatchable copies to be made on the vast majority of VCRs. Our patented
technology takes advantage of the differences in TV signal processing circuits,
VCR playback circuits, and VCR recording circuits without the need for the
installation of any Macrovision components in VCRs.
In the DVD and digital PPV markets, we have implemented a more robust
version of our video copy protection technology. By utilizing another copy
protection component, called Colorstripe, we have made it more difficult for a
casual copier to defeat or circumvent our technology. In these digital video
applications, the copy protection is actually applied within the consumer
device. The copy protection signal generator is part of an integrated circuit
that converts digital video to analog video for output to a standard TV set or
VCR. The Macrovision capable chips remain dormant, until activated by data
commands which are either embedded in the DVD, or are sent along with the PPV
movie transmission to the subscriber's set-top box.
Electronic License Management. Our FLEXlm technology allows independent
software vendors to license their products in various ways, and to monitor the
usage and enforce compliance with license terms in an enterprise-wide intranet,
or within an application service provider ("ASP") extranet environment. Once
FLEXlm is integrated into the software product, the product is enabled for
delivery across the Internet, as well as through more traditional media, such as
CD-ROM. The FLEXlm license server consists of two processes that together
perform the function of granting or refusing license requests based on contents
of a license file that describes authorized license use within an organization.
Our GTlicensing technology is a license distribution tool for software
vendors, allowing vendors to ship and track licenses online without direct human
intervention. The system supports multi-tier software distribution, including
the capability for third party distributors to sell software from participating
vendors and allowing end-users to pick up their licenses across the Internet.
Our SAMsuite technology is a software asset management solution, designed
for end-user companies that purchase large amounts of software from third
parties. SAMsuite captures and analyzes software usage data to help users
maximize their return on investment, and allocate related costs by project,
department or user, and administers license servers over global networks.
Consumer Software Copy Protection and Rights Management. Our SafeDisc
technology seeks to prevent the copying of CD-ROM computer software by
encrypting the executable files, embedding an authenticating digital signature
and adding multi-layered anti-hacking software. This is a proprietary
software-based copy protection solution that does not require any changes to
standard PC or CD-ROM hardware. Because SafeDisc is designed to operate while
the disc is in the CD-ROM drive, it is ideally suited to PC games and home
education software. The technology is licensed directly to interactive software
publishers, and to mastering and replication facilities that embed our patented
digital signature in a CD-ROM during the manufacturing process. SafeDisc was
introduced in September 1998 and has been licensed to more than 20 software
publishers and 100 replicators worldwide.
Our SafeCast family of digital rights management products is designed to
provide software publishers with a variety of marketing options for both
packaged media and Internet delivery. It enables the software publisher to
establish license terms, which govern the use of the application. These license
terms can be promotional in nature. For example, a software publisher may want
to give the user a limited free trial period that expires after a certain time.
At the end of that period, the user would have to pay the publisher for a
permanent license.
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Products Under Development
We have two primary new product development programs in progress: Audio CD
copy protection and digital video watermarking.
Audio CD Copy Protection. Audio CD copy protection is a technology based
on TTR Technologies, Inc.'s ("TTR") Musicguard audio copy protection offering.
Our joint development/joint marketing arrangement with TTR gives us the
exclusive worldwide rights to market audio copy protection technology. We have
been working on our joint development program over the last year, and are about
to enter field trials with our SafeAudio technology with two major music labels.
Depending upon the success of these field trials, our goal is to introduce the
technology to the market towards the end of 2001. Because of the limited testing
and field trials to date, the development project should be considered high
risk, and it may not result in a commercial product if the music labels deem
their field tests unsatisfactory.
Digital Video Watermarking. Digital watermarking is a digital-to-digital copy
protection solution designed to address the next generation of digital video
recording devices. We are working with Philips and Digimarc (the "Millennium
Group") to create a solution that will become the digital-to-digital copy
protection standard. We are simultaneously exploring a cooperative arrangement
with a rival consortium (the "Galaxy Group") that is also promoting a
digital-to-digital copy protection solution. Our goal is to position Macrovision
to be the licensing agent for the group(s) so that we may benefit from the
eventual deployment of video watermarking.
The Macrovision Strategy
Leverage Key Customer Relationships. We currently maintain strong
relationships with customers in various industry and market segments, including:
o Video content providers such as the major Hollywood studios and
independent movie producers;
o Enterprise and consumer software vendors, serving both
business-to-business and business-to-consumer segments;
o Content distributors such as the leading cable and satellite
television system operators; and
o Consumer electronics manufacturers of DVD players, CD-ROM drives,
and digital set-top boxes.
We intend to build our business by capitalizing on these customer
relationships and delivering our existing and future rights management and copy
protection technologies.
Introduce New Product Applications and Technologies. Simultaneously, we
intend to develop additional rights management solutions to sell to our
extensive customer base, thereby deriving incremental revenues. We have
committed significant resources to expand our technology base, to enhance our
existing products and to introduce additional products. We intend to propagate
our technologies and maintain our technology leadership by investing significant
resources in research and development, and by participating in industry
standard-setting efforts and organizations. We intend to pursue opportunities
for rights management and copy protection solutions in the following areas:
o Digital video;
o Audio CDs;
o Internet downloaded and streamed audio and video files;
o Internet downloaded software files;
o DVD-ROM; and
o Improved authentication, compression, and encryption technologies.
Expand and Protect Patent Position. We believe that our future success
will depend on our ability to continue to introduce proprietary solutions for
rights management and copy protection technologies. We have patented many of
these proprietary solutions, and they underpin our strong competitive position
and financial model. We have acquired key
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software rights management and copy protection patents through our recent
acquisitions. We have invested additional resources in developing and obtaining
patents covering a number of processes and devices that unauthorized parties
could use to circumvent our video copy protection technologies. We use these
patents to limit the proliferation of such devices and we have initiated
disputes relating to infringement of these patents. We intend to continue to
obtain patents and to protect and defend our patented technologies aggressively,
including developing and obtaining patents covering a number of processes and
devices that unauthorized parties could use to circumvent our video copy
protection technologies.
Continue To Make Strategic Investments. We have made strategic equity
investments in Digimarc, Command Audio Corporation ("CAC"), AudioSoft,
SecureMedia, InterActual and TTR. We intend to continue to expand our technology
portfolio by pursuing licensing arrangements, joint ventures, strategic
investments and acquisitions of companies whose technologies or proprietary
rights complement our rights management and copy protection technologies.
We currently hold minority equity interests in CAC, Digimarc, AudioSoft,
TTR, SecureMedia and InterActual. These investments, totaling $53.3 million,
represented 17.8% of our total assets as of December 31, 2000. CAC, AudioSoft,
SecureMedia and InterActual are privately held companies. There is no active
trading market for their securities and our investments in them are illiquid. We
may never have an opportunity to realize a return on our investment in these
private companies, and we may in the future be required to write off all or part
of one or more of these investments. In October 2000, we made an additional
equity investment of $21.8 million in Digimarc increasing our ownership to
approximately 12.4%.
Maintain Our High-Margin Revenue Model. In expanding our customer base and
technology portfolio, we intend to continue to pursue our intellectual
property-based licensing model which includes high margin and recurring
revenues. In assessing minority investments and acquisitions, we seek to
generate incremental revenues and operating income, preserving our profit
margins. Where possible, we look for accretive acquisition transactions and
minority investments that do not have a detrimental impact on earnings.
Technology Licensing, Sales and Marketing
Technology Licensing. We license our portfolio of rights management and
copy protection technologies. We believe that content owners utilize our
solutions to protect and increase their revenue streams from their respective
customers. We receive royalties and recurring revenues as follows:
o Video content owners typically pay us a per unit licensing fee for
the right to use our proprietary technology for videocassette and
DVD copy protection;
o Enterprise software vendors pay us to license our technology using
either time-based subscription or perpetual licenses. In addition,
such customers pay us annual maintenance fees;
o Consumer software publishers pay us a per unit licensing fee to use
our technology for CD-ROM copy protection, and transaction based,
time-based, or perpetual licenses for our DRM technology;
o Digital set-top box manufacturers license our video copy protection
technologies for an up-front fee and a per unit royalty;
o Cable and satellite television system operators pay us a one-time
license fee for the right to incorporate our video copy protection
technology into their networks for PPV services. In addition, we are
entitled to transaction-based royalty payments when copy protection
for digital PPV programming is activated by system operators; and
o DVD hardware manufacturers (Consumer electronic's DVD player
manufacturers and PC DVD ROM suppliers) license our technology for
an up-front fee and annual maintenance/certification fees.
Sales and Marketing. We market our rights management and copy protection
technologies directly to content owners in both the video and software markets.
Our primary sales strategy is to sell at senior levels, covering customers'
international operations. We supplement our direct sales efforts with reseller
programs and service partnerships among video duplicator and replicator
organizations. We also utilize a variety of marketing initiatives, including
trade show participation, trade advertisements, industry education and
newsletters.
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We develop worldwide product specifications and marketing programs for our
rights management and copy protection technologies in our Silicon Valley
offices, and sell and support our products and technologies through our US sales
force, and through our wholly owned subsidiaries in the United Kingdom and
Japan.
Customers
Video Copy Protection
Video Content. Our copy protection technology has been applied to more
than 3.4 billion videocassettes worldwide since 1985, including more than 500
million videocassettes in 2000. Since the inception of DVD in 1997, our copy
protection has been applied to nearly 400 million DVDs, including more than 250
million DVDs in 2000. Our copy protection technology for videocassettes and DVDs
is used by the following leading major motion picture studios and home video
suppliers:
o Artisan Home Entertainment; o Buena Vista Home Video;
o Columbia House; o Columbia TriStar Home Video
(Sony Pictures
o DreamWorks; Entertainment)
o New Line Home Video; o HBO Home Video;
o Twentieth Century Fox; o Paramount Pictures;
o Warner Home Video. o Universal Studios Home Video
and
One customer accounted for more than 10% of our net revenues in 2000. No
customer accounted for more than 10% of our net revenues in 1999 or 1998.
We also license our video copy protection technology to "Special Interest"
customers that include independent video producers and corporations. Licensed
commercial duplicators act as distributors of our video copy protection
technology to "Special Interest" customers. Revenues from "Special Interest"
customers in the United States accounted for approximately 5%, 11% and 11% of
our video copy protection revenues in 2000, 1999, and 1998, respectively.
PPV System Operators. We have licensed our digital PPV copy protection
technology for incorporation into the networks of 20 system operators,
including:
o British Sky Broadcasting; o Cable and Wireless
Communications;
o DIRECTV;
o EchoStar;
o Galaxy Latin America;
o Hong Kong Telecom;
o NTL;
o Sky Latin America;
o SkyPerfecTV;
o Sprint Corporation; and
o Video Networks Ltd.
These system operators have paid a one-time license fee to us and have
entered into agreements with us pursuant to which we are entitled to
transaction-based royalty payments at such time as copy protection for digital
PPV programming is activated. To this point, only our international customers
listed above have activated copy protection in their networks; US operators have
not yet committed to the studios that they will activate copy protection, even
though the technology is implemented in their network infrastructure. Other
notable system operators which have not signed license agreements with us, but
which are requiring Macrovision-capable set-top boxes in their networks include:
AT&T, Comcast, Cox Enterprises, Deutsche Telecom, Rogers Cable, Time Warner and
Via Digital.
Consumer Electronics Hardware Manufacturers. We believe that our DVD copy
protection technology is currently the only digital-to-analog copy protection
solution that satisfies the principles established by the DVD licensing and
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standards group, and has been tested and accepted for compatibility with TV sets
by leading consumer electronics companies. As of December 31, 2000, 189
companies that manufacture DVD players or DVD-ROM drives had signed agreements
with us to incorporate our DVD copy protection technology in their hardware.
Our PPV copy protection technology is embedded in more than 40 million
digital set-top boxes currently in use worldwide. We have licensed our copy
protection technology for digital PPV to 58 set-top box manufacturers,
including:
o A.B. Pace Micro Technology; o EchoStar;
o Hughes; o Motorola (General Instrument
division);
o Nokia;
o Philips;
o Scientific-Atlanta;
o Sony; and
o THOMSON multimedia.
We have also authorized 63 semiconductor companies to incorporate our
digital PPV and DVD copy protection technologies in their semiconductor and
reference designs. These companies generally pay a one-time service fee to
verify correct implementation of our video copy protection technology in
digital-to-analog application specific integrated circuits ("ASICS") that are
embedded in digital set-top boxes and DVD hardware. They are authorized to sell
these Macrovision-capable ASICs to Macrovision-licensed DVD hardware
manufacturers and to Macrovision-licensed digital set-top box manufacturers.
We have experienced significant seasonality in our business, and our
business is likely to be affected by seasonality in the future. We have
typically experienced our highest revenues in the fourth quarter of each
calendar year followed by lower revenues and operating income in the first
quarter, and at times in subsequent quarters, of the next year. We believe that
this trend has been principally due to the tendency of our customers to release
their more popular movies on videocassettes and DVDs during the year-end holiday
shopping season. We anticipate that revenues from consumer software copy
protection and DRM technologies will continue to reflect this seasonal trend.
Our ELM business also exhibited seasonal strength in the fourth calendar quarter
of 2000. Our revenues generally have tended to be lower in the summer months,
particularly in Europe.
International and export sales together represented 42.28%, 40.24% and
37.95% of our net revenues in 2000, 1999 and 1998, respectively. We expect that
international and export sales will continue to represent a substantial portion
of our net revenues for the foreseeable future. Our future growth will depend to
a large extent on worldwide deployment of digital PPV networks, DVDs, and
consumer software, and the use of copy protection in these media. Worldwide
adoption of our ELM technology will also be an important driver of future
growth.
Software
Electronic License Management. We believe our license management software
is the industry leader. We provide electronic license delivery ("ELD") and
electronic license management ("ELM") technology to software companies in a
range of market segments, with more than 2,000 software vendor customers
worldwide, including:
o AutoDesk; o Cadence;
o Cisco; o Sun Microsystems;
o Sybase and o Synopys Inc.
In addition we have licensed software asset management companion products to
over 500 corporate end users, which enable these end users to deploy, manage,
and track the software they have purchased from our software vendor customers,
as well as other third party software vendors.
Consumer Software Publishers. We entered the consumer software market in
1998 with our SafeDisc product, aimed at those applications that require the
CD-ROM to be inserted in the drive to run the application; typically PC games
and
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home entertainment applications. We estimate that over 45 million discs were
copy-protected with SafeDisc in 2000. Our copy protection technology for
consumer software is used by the following leading software publishers:
o Electronic Arts; o Eidos;
o GT Interactive; o Hasbro;
o Havas; o Interplay;
o Lego; o Mattel;
o Microsoft; o Take 2;
o 3DO and o Ubisoft.
Our PC games software customers have a wide choice of licensed replicators
that they can use throughout the world. Over 100 replicators have been licensed
with the majority having already installed SafeDisc mastering and quality
assurance systems from authorized suppliers of these systems.
To expand our SafeDisc business beyond our direct licensing program with
the major publishers, we have established a reseller program that allows
replicators to be SafeDisc value added resellers for the small publisher market.
We are now beginning to see early adopter customers for our SafeCast
family of rights management products for the consumer software publisher. Such
customers include:
o Autodesk; o BBC;
o Electronic Arts; o Microsoft;
o Phocis and o Take 2.
Although SafeCast is a more complex sale to software publishers, with a
longer sales cycle than SafeDisc, we believe that over time, as Internet
bandwidth increases, there will be increasing demand for this digital rights
management technology.
Technology
Videocassette Copy Protection. Effective video copy protection systems are
difficult to develop because of the need to address the dual requirements of
playability and effectiveness. Consumers must be able to view the copy protected
content using a VCR and a television set without the need for any intervening
devices, while the quality of an unauthorized copy must be reduced to such an
extent that it loses its entertainment value. The extent to which the
entertainment value is reduced varies, depending on the VCR model and the VCR
and television combination that plays the unauthorized copy. To prevent VCRs
from making good copies, the copy-protected video must differ in some manner
from the standard video signal because, by design, all VCRs will make good
copies from standard video signals. Television sets are designed to play
standard or near-standard video signals. As a result, there is a risk that
making a video signal non-standard in order to prevent copying will decrease
playability by causing some television sets to generate impaired or distorted
pictures. In the tradeoff between effectiveness and playability, designers of
copy protection systems must favor playability while maintaining effectiveness.
Our videocassette copy protection technology involves the patented
technique of inserting a series of electronic pulses in the vertical blanking
interval of a standard video signal. The vertical blanking interval is the blank
space between the video fields that are nominally refreshed at a rate of 60
fields per second. The copy protection pulses are embedded electronically in the
prerecorded content of the videocassettes in the process of videocassette
manufacturing. The electronic pulses are not visible in the television picture.
The pulses are intended to affect the automatic gain control circuit in the
recording system of most VCRs, but not to affect a similar circuit in the
television set. Therefore, when the consumer plays a copy protected prerecorded
videocassette, the picture is clean and crisp, but when the consumer plays an
unauthorized consumer-made copy of that same videocassette, the picture
typically is very distorted and has substantially reduced entertainment value.
Our video copy protection technology is effective against most consumer copying,
but generally does
10
not deter professional pirates who use professional duplication and video
processing equipment. Under the U.S. Digital Millennium Copyright Act of 1998,
all VCRs sold in the U.S. after May 2000 are required by law to respond to our
copy protection technology.
DVD and Digital PPV Copy Protection. The DVD and digital PPV versions of
our video copy protection technologies employ both the electronic pulses used in
videocassettes and a second patented copy protection process called Colorstripe.
Colorstripe affects the color playback circuit of a VCR causing colored
horizontal stripes to appear in the picture of an unauthorized copy. The
combination of the two processes provides a higher level of effectiveness than
that provided by either process alone. In addition, Colorstripe is more
effective against circumvention by most "black box" circumvention devices that
were sold in the past. Copy protection is implemented in DVD and digital PPV
applications by embedding a copy protection signal generator integrated circuit
within the DVD player or digital set-top box. The integrated circuit is
activated by copy protection control codes, which are integrated into the DVD
media or the PPV transmission. Once the integrated circuit is activated, it adds
the copy protection signal to the analog output of the DVD player or digital
set-top box. As with videocassette copy protection, consumers are able to see a
clear picture on their television sets, but generally cannot make a usable
videocassette copy on a VCR.
Electronic Licensing. Software vendors integrate FLEXlm into their
products to monitor or control a customer's compliance with a product's license
terms. By embedding electronic licensing into a product, software vendors define
a customer's license rights in a human readable "license file". The technology
generates electronic license certificates that describe the license rights of
software users. Compliance with those license rights is automatically monitored.
The software vendor may choose to block users from running a product if doing so
violates the license rights, or simply provide notification to the user or
system administrator when license use has exceeded the customer's license
rights. This allows customers to buy and sell software licenses using much more
flexible license terms than traditional one-computer-one-license or site license
approaches. These terms may include floating licenses (where a specific number
of licenses are shared over a network), product suites (where several product
licenses are combined to be licensed as a single product) and demo licenses
(where a prospective customer has full functional use of a product, but the
right to use expires on a specific date).
Vendors integrate electronic licensing into a product in a few lines of
code without "hard-coding" license policies into their products. This avoids the
need to change a product's source code and to support multiple releases when
licensing terms change for a product. License terms are described in a human
readable text file as an electronic license certificate, where Marketing, Sales,
Support or Order Administration staff define licensing policies, without the
need for software engineers to make changes in software. Software vendors can
include information identifying customer and other purchasing information as
part of the license certificate. This is done so that if the software and
license were diverted to another company, an audit trail is left, making
discovery of improper use of the license far more likely.
Electronic licensing also records the use of software licensing into a
transaction log called the "Report Log". The information in this log is
authenticated and compressed so software vendors and customers can use this
information as a basis for pay-per-use or other usage-based pricing or licensing
business model. In addition, customers may use this information to better manage
their software assets and to "bill back" software-related costs to different
departments or projects in the company. The SAMsuite product family contains
this functionality.
Consumer Software Copy Protection and Rights Management. Each CD-ROM
published with the SafeDisc technology is premastered with encrypted executable
files and contains authenticating instructions and a unique SafeDisc digital
signature. The digital signature, which cannot be copied by CD recorders or
transferred from a CD-ROM to a hard disc drive, or sent over the Internet, is
added to each original disc during the mastering/replication process. When a
user inserts an original disc in a CD-ROM drive, the authentication software
reads the digital signature, allowing the program to be decrypted and run
normally. The digital signature and authentication process is transparent to the
user. If a consumer or pirate uses a CD-recordable device or professional
mastering equipment to duplicate a CD-ROM and make an unauthorized copy,
SafeDisc is designed to inhibit the transfer of the digital signature to the
copy. If an unauthorized copy is made, decryption will not take place and the
copy will not run.
SafeDisc also contains anti-hacking technology to prevent the compromise
of its security features. The anti-hacking technology is designed not only to
deter consumer copying, but also to thwart destructive hackers and commercial
hackers. Because of our widespread penetration in the PC games' market, hackers
have targeted and cracked, to various degrees, several versions of SafeDisc. For
us to continue to be successful in this market, we must continually stay a step
ahead of the hacker community. We develop new product releases approximately
four to eight times per year incorporating new anti-hacking features.
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SafeDisc is covered by a pending patent application, and is compliant with
Philips' worldwide Yellow Book CD-ROM standard. We believe that SafeDisc is the
only copy protection technology that has received Philips' certification for
compliance.
SafeCast is a consumer software DRM application. SafeCast authenticates
the end user's license by transferring the software publisher's embedded digital
rights management technology from either a CD-ROM disc or from Internet
downloaded software to the user's PC hard drive at the time the application is
initially installed. SafeCast protects the launch of a licensed application by
confirming that the session conforms to the license terms established by the
application's publisher. The publisher establishes license terms that determine
how the application may be used.
Research and Development
Our research and development efforts are focused on developing
enhancements to existing products, new applications for our current technologies
and new patentable technologies related to our various rights management markets
and copy protection markets. Our core competencies are in encrypted software,
license management software, anti-hacking software, digital and analog video and
audio engineering, copy protection engineering, watermarking, CD-ROM
architecture, and integrated circuit design.
As a member of the Millennium group (Philips, Digimarc, and Macrovision),
we are jointly developing a digital video watermarking solution to address the
digital-to-digital copy protection requirements associated with the next
generation of DVD recording devices. Digital watermarks embedded in movies and
other video material provide basic copyright, record control, and playback
control information either to allow or to disallow playback, viewing and copying
onto another digital device. The jointly developed technology is based on our
patented play control technology, Digimarc's patented watermarking technology,
and Philips' patented watermarking and authentication technology. Our solution
can survive numerous transformations, such as from digital to analog and back to
digital, or from one video format to another. The digital watermarks are
designed to be imperceptible to the viewer, but to be read easily by special
purpose detection circuits that may ultimately be deployed in DVD digital
recorders and players. This jointly developed technology is intended to protect
movies and other video content from unauthorized reproduction using digital
recording devices.
With TTR Technologies, we are jointly developing a solution for CD audio
copy protection. This is a complex and high-risk development project, as we
believe other industry attempts to design a copy protection solution have not,
to date, been successful. Any solution must meet the combined objectives of
playability (where the original audio content can be heard with no discernable
reduction in audio quality) and effectiveness (where a satisfactory level of
copy protection is provided). Following our own internal testing procedures, we
are now entering field tests with two music labels. Their feedback will
determine the success of, and the next steps for, this development project.
In 2000, 1999 and 1998, our expenses for research and development were
$7.8 million, $6.5 million, and $4.1 million, respectively.
Intellectual Property Rights
Patents Issued & Pending. We hold 53 United States patents and have 45
United States patent applications pending. Of 31 relate to our copy protection
technologies, 14 relate to video scrambling, 4 relate to audio scrambling and 4
relate to electronic license management. Of the pending patent applications, 5
relate to consumer software copy protection. Our issued United States patents
expire through 2018. Our core group of patents expires through the year 2008. We
have filed applications for improvement patents to extend the expiration dates
beyond the current expiration dates. We also have 317 foreign patents issued and
331 foreign patent applications pending in 40 countries. Of the issued foreign
patents, 259 relate to our copy protection technologies, 54 relate to video
scrambling, 24 relate to audio scrambling, and 3 relate to electronic license
management.
Circumvention Technology Patents. Included in the patents related to our
copy protection technologies are 13 United States and 52 foreign patents
covering a number of processes and devices that unauthorized parties could use
to circumvent our video copy protection technologies. We have historically used
these patents to limit the proliferation of devices intended to circumvent our
video copy protection technologies. We have initiated a number of patent
infringement lawsuits against manufacturers and distributors of such devices. We
have one lawsuit of this type pending in Germany to require the defendant to
discontinue the sale of devices that circumvent our video copy protection
technologies as we believe the device infringes one or more of our circumvention
patents. In the event of an adverse ruling in this litigation or in any similar
12
litigation, the value of our protection technology might decline due to the
legal availability of such a circumvention device or we might have to obtain
rights to the offending devices to protect the value of our technology.
Competition
Video Copy Protection. We believe that there are currently no significant
video copy protection competitors. Occasionally, companies have developed
hardware based on our technology for sale in small foreign markets where we have
not sought patent protection. Our video copy protection technologies are
proprietary and have broad international patent coverage. It is possible,
however, that a competitive video copy protection technology could be developed
in the future. For example, one of our customers could attempt to promote
competition by supporting the development of alternative copy protection
technologies or solutions, including solutions that deter professional
duplication.
Digimarc, Philips, and Macrovision, together known as the Millennium
Group, are jointly developing a digital media copy protection solution, using
proprietary watermarking and play control technologies, to address the
digital-to-digital copy protection and play control requirements associated with
the next generation of DVD recording devices. Our group submitted its proposed
solution to the Copy Protection Technical Working Group, an industry standards
body. The Millennium Group is competing with another consortium, the Galaxy
Group, which is comprised of IBM, NEC, Sony, Hitachi, and Pioneer. We believe
that our group's solution offers a number of advantages in security and
resistance to hacking, as well as in the economics of implementation. We also
believe that our group has a dominant patent position with 16 issued patents.
During the past year an industry decision as to which standard would be selected
was delayed due to concerns over intellectual property conflicts. Potential
customers did not want to select either the Millennium or Galaxy solution for
fear that they might be subject to patent infringement action by the other
group. As a result, the Millennium and Galaxy groups have been exploring ways of
combining their technologies and patents to alleviate this concern. Discussions
are ongoing.
Electronic License Management. The ELM market is new and rapidly evolving.
Our primary competition currently comes from independent software vendors who
try to develop their own ELM solutions. Other more traditional competitors
include companies offering digital rights management, electronic licensing, or
electronic software distribution technology, as well as companies who have
historically offered hardware dongle products and are shifting to software-based
protection. Operating system developers or microprocessor suppliers may choose
to integrate rights management solutions into their products. Software resellers
could begin to develop their own e-commerce solutions.
Consumer Software Copy Protection and Rights Management. We believe that
there are a limited number of competitors in the consumer software copy
protection market, including LaserLock, PAN Technologies and Sony's DADC optical
disk manufacturing subsidiary. None of these companies appear to have made
significant penetration with major publishers in developed countries, and we
believe that we have captured the majority market share of the PC games market.
It is possible that our own customers may develop software copy protection
technologies on their own. It is also possible that personal computer operating
system and microprocessor companies like Microsoft, Red Hat, and Intel, may
develop or license copy protection modules or systems that are internal to the
PC.
We believe that our ability to compete depends on many factors both within
and beyond our control. These include the performance of our technology,
including ease of use, compatibility with installed base of PC and CD-ROM drives
and our ability to stay ahead of the efforts of hackers. We also rely on the
effectiveness of our sales and marketing efforts, including our ability to
establish and support a worldwide base of licensed replicators, and to provide
through third party replication equipment vendors the digital signature
technology and associated quality control systems.
Operations and Technical Support
We have technical support and certification operations to support our DVD
manufacturer licensees, set top box licensees, ELM licensees, authorized
semiconductor manufacturers, and our other hardware licensees.
We provide technical support to our videocassette, DVD, digital PPV, ELM
and consumer software customers in various ways:
o We support our licensed duplicators with hardware installation
assistance and quality control. In addition, we support licensed
duplicator sales personnel by providing sales training and sales
incentive programs and literature and by participating in trade
shows;
13
o We support the efforts of television, VCR and DVD hardware
manufacturers, digital PPV system operators and PPV set-top box
manufacturers to design hardware that properly incorporates our
video copy protection technologies;
o We assist semiconductor manufacturers in incorporating our video
copy protection technologies into a variety of digital video
integrated circuits;
o We regularly test the effectiveness and transparency of our video
copy protection technologies on representative samples of consumer
televisions and VCRs to determine whether modifications or
enhancements may be necessary;
o We assist our software licensees in incorporating our electronic
license management software into their software products;
o We provide training and application support for the SafeDisc
toolkit; and
o We test for SafeDisc compatibility with PC and CD-ROM drive
combinations.
We have minimal manufacturing operations. Our strategy is to license our
technologies to third parties that manufacture products incorporating our
technologies. Our manufacturing operations are limited to low volume video copy
protection hardware products that require in-house system integration and
quality control efforts.
Strategic Investments
We intend to expand our technology base through strategic investments in
companies with complementary technologies or intellectual property. We have made
strategic investments in the following companies:
Digimarc (Nasdaq: DMRC). In December 1997, we made our initial investment
in Digimarc. We made two subsequent investments in June 1999 and October 2000.
Digimarc completed an initial public offering in December 1999. As of December
31, 2000, we currently own approximately 12.4% of Digimarc. We have an agreement
with Digimarc to jointly develop and market a digital video watermarking copy
protection solution to address the digital-to-digital copying issues associated
with the next generation of recordable DVD and digital videocassette recording
devices.
Digimarc is a leading provider of patented digital watermarking
technologies that allow imperceptible digital code to be embedded in traditional
and digital content, including movies, photographic images and documents such as
financial instruments, passports and event tickets. Digimarc's technologies
enable new communications capabilities related to protecting copyrights,
deterring counterfeiting or piracy and, directly linking physical content with
the Internet.
TTR (Nasdaq: TTRE). In January 2000, we invested $4.0 million to acquire a
minority interest in TTR. In addition, we have entered into an agreement with
TTR to jointly develop and market a copy protection product designed to inhibit
casual copying of music CDs using dual-deck CD recorder systems and personal
computer based CD recordable drives. TTR is a provider of proprietary digital
anti-piracy technologies and products. As of December 31, 2000, we hold
approximately 11.1% of the outstanding shares of TTR.
AudioSoft. In August 1999, we acquired a 7.3% ownership interest in
AudioSoft, a developer of secure e-music delivery technology and copyright
management royalty reporting systems. We do not have the ability to exert
significant influence over AudioSoft. In 2000, we invested on a net basis, an
additional $410,000 based on the attainment of certain commercial milestones. In
addition, we received, from AudioSoft, $55,000 and $105,000 for 2000 and 1999,
respectively, under a consulting agreement by which we provide technical,
business and strategic consulting. AudioSoft is an e-commerce solutions company
dedicated to the secure electronic distribution of music over the Internet.
AudioSoft technologies provide the music industry with a turnkey solution to
deliver copyrighted music electronically over the Internet on a worldwide basis
and to ensure that music copyright collection societies are properly compensated
for performing and mechanical rights.
Command Audio Corporation. In October 1995, Command Audio Corporation, or
CAC, was initially incorporated as our wholly-owned subsidiary to commercialize
a distinct and new audio-on-demand technology. CAC's audio-on-demand system
consists of a program center that provides continuously updated news and
information on a subscription basis and a hand-held portable receiver that
stores the information. The system allows consumers to control the timing and
content of
14
the program playback. In August 1996, we divested all but 19.8% of our ownership
in CAC. We assigned to CAC all rights in specified technology and released our
reversion rights in technology that we had previously assigned to CAC. CAC
agreed to pay to us royalties equal to 2.0% of its gross revenues for 12 years,
beginning when CAC has operating revenues from certain sources or, at our
election, at any time prior thereto. As of December 31, 2000, we have invested
$3.7 million and own approximately 7.7% of the outstanding shares of this
private company.
SecureMedia (formerly known as RPK Security, Inc.). In March 2000, we
invested $1.0 million to acquire a 5.1% interest in SecureMedia. SecureMedia is
a private company that develops encryption technology for high flow Internet
applications such as streaming media and digital communication.
InterActual. In March 2000, we invested $1.2 million to acquire 5.6% of
InterActual. InterActual is a private company whose technology integrates DVD
content with Web access, enabling content developers to link the DVD experience
with that of the Web, establishing a platform for e-commerce driven by the DVD
title.
These investments, totaling $53.3 million, represented 17.8% of our total
assets as of December 31, 2000. CAC, AudioSoft, SecureMedia and InterActual are
privately held companies. There is no active trading market for their securities
and our investments in them are illiquid. We may never have an opportunity to
realize a return on our investment in these private companies, and we may in the
future be required to write off all or part of one or more of these investments.
Employees
As of December 31, 2000, we had 234 employees. Of these employees, 69 are
based outside of the United States. None of our employees is covered by a
collective bargaining agreement or is represented by a labor union. We have not
experienced any organized work stoppages.
We use a variety of incentive programs to motivate our employees,
including annual performance-based bonuses, stock purchase plans, stock options,
special recognition awards, and a package of other benefit programs including a
401(k) plan, medical/dental benefits, compensating time off for community
service and health club and educational reimbursement.
Our engineering teams develop new products and enhance existing offerings,
as well as contribute to our technical due diligence efforts when we make
strategic investments, conclude joint development agreements, or acquire rights
to third party technologies.
Our technical support staff provides customer sales support and conducts
extensive compatibility and effectiveness tests for our various rights
management and copy protection technologies. In addition, this staff runs an
extensive certification lab to confirm that our licensees have implemented our
video copy protection technologies properly in integrated circuits and DVD or
set-top box hardware.
Our sales and marketing groups include senior executives who manage our
business lines and provide executive level account management to our major
customers. We also have a direct sales staff that works with our content owner
and software vendor customers. Our in-house legal department provides licensing
and patent counsel to our business executives.
RISK FACTORS
In addition to the other information contained in this Annual Report on Form
10-K, you should consider carefully the following risks. If any of these risks
occurs, our business, financial condition or operating results could be
adversely affected.
Company Risks
The success of our business depends on the continued use by major movie studios
of our video copy protection technology.
In the event that major motion picture studios determined that the
benefits of our technology did not justify the cost of licensing the technology,
demand for our technology and our revenues would decline. We currently derive a
majority of our net revenues and operating income from fees for the application
of our patented video copy protection technology to
15
prerecorded videocassettes, DVDs and digital pay per view, or PPV programs.
These fees represented 60.9%, 61.4% and 62.1% of our net revenues during 2000,
1999 and 1998, respectively.
Any future growth in revenues from these fees will depend on the use of
our video copy protection technology on a larger number of videocassettes, DVDs
or digital PPV programs. To increase or maintain our market penetration, we must
continue to persuade content owners that the cost of licensing the technology is
outweighed by the increase in revenues that content owners and retailers gain as
a result of using copy protection, such as revenues from additional sales of the
copy protected material or subsequent revenues from other distribution channels.
Any decline in demand for our video copy protection technology, including
a change of video copy protection policy by the major motion picture studios or
a decline in sales of prerecorded videocassettes and DVDs that are encoded with
our video copy protection technology, would have a material adverse effect on
our business. If several of the motion picture studios withdraw their support
for our copy protection technologies or otherwise determine not to copy protect
a significant portion of prerecorded videocassettes, DVD or digital PPV
programs, our business would be harmed.
Our operating results may fluctuate, which may adversely affect the price of our
common stock.
Our quarterly and annual revenues, expenses and operating results could
vary significantly in the future and period-to-period comparisons should not be
relied upon as indications of future performance. Due to limited visibility in
software licensing revenues and revenues that are generated from perpetual
licenses, under which license fee revenue is recognized upfront on a one-time
basis, we may experience volatility in revenues which may cause us to not be
able to sustain our level of net revenues, or our rate of revenue growth, on a
quarterly or annual basis. Fluctuations in our operating results may cause the
price of our common stock to decline.
Further, we may not be in a position to anticipate a decline in revenues
in any quarter until late in the quarter. This is primarily due to the delay
inherent in reporting from certain licensees and closing of new sales
agreements, resulting in potential volatility in the price of our common stock.
Factors which could cause the price of our common stock to decline include:
o The timing of releases of popular movies on videocassettes, DVDs or
by digital PPV transmission;
o The ability of the Motion Picture Association of America studios to
produce one or more "blockbuster" titles on an annual basis;
o The degree of acceptance of our copy protection technologies by
major motion picture studios and software companies;
o The acceptance of our electronic licensing and DRM software by
software vendors and end-user organizations;
o The timing of releases of computer software CD-ROM multimedia
titles; and
o The extent to which various hacking technologies are viewed to be
successful by our customers.
We experience seasonality in our operating results, which may affect the price
of our common stock.
We have experienced significant seasonality in our business, and our
business is likely to be affected by seasonality in the future. We have
typically experienced our highest revenues in the fourth quarter of each
calendar year followed by lower revenues and operating income in the first
quarter, and at times in subsequent quarters, of the next year. We believe that
this trend has been principally due to the tendency of our customers to release
their more popular movies on videocassettes and DVDs during the year-end holiday
shopping season. We anticipate that revenues from consumer software copy
protection and DRM technologies will continue to reflect this seasonal trend.
Our ELM business also exhibited seasonal strength in the fourth calendar quarter
of 2000. Our revenues generally have tended to be lower in the summer months,
particularly in Europe.
We depend on a small number of key customers for a high percentage of our
revenues and the loss of a significant customer could result in a substantial
decline in our revenues and profits.
16
Our customer base and a majority of our net revenues is highly
concentrated among a limited number of customers, primarily due to the fact that
the Motion Picture Association of America studios dominate the motion picture
industry and the loss of any one customer would have a significant adverse
impact on our business. Historically, we have derived the majority of our net
revenues from a relatively small number of customers. The Motion Picture
Association of America studios as a group accounted for 24.8%, 23.9% and 30.2%
of our net revenues in 2000, 1999 and 1998, respectively.
We expect that revenues from the Motion Picture Association of America
studios will continue to account for a substantial portion of our net revenues
for the foreseeable future. We have agreements with five of the major home video
companies for copy protection of a substantial part of their videocassettes
and/or DVDs in the United States. These agreements expire at various times
ranging from 2000 to 2005. The failure of any one of these customers to renew
its contract or to enter into a new contract with us on terms that are favorable
to us would likely result in a substantial decline in our net revenues and
operating income, and our business would be harmed.
We depend on high-value license agreements during the reporting period from
major software customers for our Electronic License Management products and
the inability to capture these agreements could result in a decline in our
revenues and profits.
Currently, a significant portion of our Electronic License Management
revenues are generated from perpetual licenses, under which license fee revenue
is recognized upfront on a one-time basis. Failure to close a small number of
high-value perpetual licenses during any period could result in a decline in our
revenues and profits. As a result, we are transitioning to an annual license (or
time-based) model which results in ratable recognition of the license fee over a
12-month period. This provides better visibility into future revenues, and
smoothes peaks and troughs in revenue flows that result from perpetual licenses.
If we are unable to persuade major customers to adopt the annual (or time-based)
model, and we continue to rely on the capture of a small number of high-value
licenses in a given period, this may result in volatility in our net revenues
and operating income.
We are dependent on international sales for a substantial amount of our revenue.
We face diverse risks in our international business, which could adversely
affect our operating results.
International and export sales together represented 42.28%, 40.24% and
37.95% of our net revenues in 2000, 1999 and 1998, respectively. We expect that
international and export sales will continue to represent a substantial portion
of our net revenues for the foreseeable future. Our future growth will depend to
a large extent on worldwide deployment of digital PPV networks, DVDs, and
consumer software, and the use of copy protection in these media. Worldwide
adoption of our ELM technology will also be an important driver of future
growth.
To the extent that foreign governments impose restrictions on importation
of programming, technology or components from the United States, the requirement
for copy protection and rights management solutions in these markets could
diminish. In addition, the laws of some foreign countries may not protect our
intellectual property rights to the same extent as do the laws of the United
States, which increases the risk of unauthorized use of our technologies and the
ready availability or use of circumvention technologies. Such laws also may not
be conducive to copyright protection of video materials and digital media, which
reduces the need for our copy protection technology.
Due to our reliance on international and export sales, we are subject to
the risks of conducting business internationally, including:
o foreign government regulation;
o changes in diplomatic and trade relationships;
o changes in, or imposition of, regulatory requirements;
o tariffs or taxes and other trade barriers and restrictions;
o difficulty in staffing and managing foreign operations; and
o fluctuations in foreign currency exchange rates.
17
Our business could be materially adversely affected if foreign markets do
not continue to develop, if we do not receive additional orders to supply our
technologies or products for use in foreign prerecorded video, PPV and other
applications requiring our copy protection solutions or if regulations governing
our international business change. For example, under the United States Export
Administration Act of 1979, encryption algorithms such as those used in our
consumer software copy protection technology are classified as munitions and
subject to stringent export controls. Any changes to the statute or the
regulations with respect to export of encryption technologies could require us
to redesign our products or technologies or prevent us from selling our products
and licensing our technologies internationally.
We may not be able to integrate the GLOBEtrotter operations in a timely manner,
and if so, it could have an adverse impact on our business.
The acquisition of GLOBEtrotter has placed, and is expected to continue to
place, significant demands on our personnel, management and other resources. Our
future results of operations will depend in part on the ability of our officers
and other key employees to integrate the operations, financial control systems
and employees into our operations. We will need to augment our existing
financial and management systems or implement new systems. We may not be able to
augment or to implement these systems efficiently, without disruption, or on a
timely basis, or to manage integration successfully. We may not be able to
achieve operational and other business synergies. We may be forced to devote
substantial management time and resources to manage geographically dispersed
operations. We may experience the loss of key personnel as a result of
integration and consolidation of certain administrative functions. The failure
to manage integration successfully could harm our business.
Potential intellectual property claims and litigation could subject us to
significant liability for damages and invalidation of our property rights.
Litigation may be necessary in the future to enforce our patents and other
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. We are currently subject
to several legal proceedings. See "Legal Proceedings."
Litigation could harm our business and result in:
o substantial settlement or related costs, including
indemnification of customers;
o diversion of management and technical resources;
o discontinuing the use and sale of infringing products;
o expending significant resources to develop non-infringing
technology; and
o obtaining licenses to infringed technology.
Our success is heavily dependent upon our proprietary technologies. We
rely on a combination of patent, trademark, copyright and trade secret laws,
nondisclosure and other contractual provisions, and technical measures to
protect our intellectual property rights. Our patents, trademarks or copyrights
may be challenged and invalidated or circumvented. Our patents may not be of
sufficient scope or strength or be issued in all countries where our products
can be sold. The expiration of some of our patents may harm our business.
Others may develop technologies that are similar or superior to our
technologies, duplicate our technologies or design around our patents. Effective
intellectual property protection may be unavailable or limited in some foreign
countries. Despite efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise use aspects of processes and devices
that we regard as proprietary. Policing unauthorized use of our proprietary
information is difficult, and the steps we have taken may not prevent
misappropriation of our technologies.
It may be time-consuming and costly to enforce our patents against devices and
hacking techniques that attempt to circumvent our copy protection technology,
and our failure to control them could harm our business.
18
We use our patents to limit the proliferation of devices intended to
circumvent our video copy protection technologies. In the past, we have
initiated a number of patent infringement disputes against manufacturers and
distributors of these devices. Any legal action that we may initiate could be
time-consuming to pursue, result in costly litigation, and divert management's
attention from day-to-day operations.
In the event of an adverse ruling in a patent infringement lawsuit, we
might suffer from the legal availability of the circumvention device or have to
obtain rights to the offending device. The legal availability of circumvention
devices could result in the increased proliferation of devices that defeat our
copy protection technology and a decline in demand for our technologies, which
could have a material adverse effect on our business.
A limited number of DVD manufacturers may build products that either do
not contain our copy protection technology, or include features that allow
consumers to bypass copy protection. Though we believe this is in contravention
of the U.S. Digital Millennium Copyright Act, as well as the basic DVD CSS
license, proliferation of these products could cause a decline in demand for our
technologies, which could harm our business. Any legal or other enforcement
action that we may initiate could be time consuming to pursue, result in costly
litigation, and divert management's attention from day-to-day activities.
In the Electronic License Management market, our product includes patented
technologies. Any legal action that we may initiate regarding these patents may
be time-consuming to pursue, involve costly litigation, divert management's
attention from operations or may not be successful. (See "Part I., Item 3.
Legal Proceedings")
In the consumer software copy protection segment, a number of individuals
have developed and posted SafeDisc hacks on the Internet, or CD cloning
software. If we are not able to develop frequent SafeDisc software releases and
new digital signatures, which deter the hackers from developing circumvention or
cloning techniques, our customers could reduce their usage of our technology
because it was compromised. Although the anti-circumvention provisions in the
Digital Millennium Copyright Act may be applicable to Internet service providers
who support the hacker sites, any legal action that we initiate could be
time-consuming to pursue, result in costly litigation, and divert management's
attention from day-to-day operations.
We are exposed to risks associated with expanding our technology base through
strategic investments.
We have expanded our technology base through strategic investments in
companies with complementary technologies or intellectual property, which may
not prove to be of long-term benefit to us. We currently hold minority equity
interests in the following privately held companies; Command Audio Corporation,
AudioSoft, SecureMedia and InterActual; and two publicly traded companies,
Digimarc and TTR.
The negotiation, creation and management of these strategic relationships
typically involve a substantial commitment of our management time and resources.
We may in the future be required to write off all or part of one or more of
these investments that could harm our business.
Our strategic investments typically involve joint development, joint
marketing, or entry into new business ventures, or new technology licensing. Any
joint development efforts may not result in the successful introduction of any
new products by us or a third party, and any joint marketing efforts may not
result in increased demand for our products. Further, any current or future
strategic investments by us may not allow us to enter and compete effectively in
new markets or enhance our business in any current markets.
We currently hold minority equity interests in CAC, Digimarc, AudioSoft,
TTR Technologies, SecureMedia and InterActual. These investments, totaling $53.3
million, represented 17.8% of our total assets as of December 31, 2000. CAC,
AudioSoft, SecureMedia and InterActual are privately held companies. There is no
active trading market for their securities and our investments in them are
illiquid. We may never have an opportunity to realize a return on our investment
in these private companies, and we may in the future be required to write off
all or part of one or more of these investments. In October 2000, we made an
additional equity investment of $21.8 million in Digimarc increasing our
ownership to approximately 12.4%.
We must continue to provide satisfactory support and maintenance services to our
ELM customers.
Our future success will depend on our ability to provide adequate software
support and maintenance services to our ELM customers. As they release new
applications or modify their software to run on new platforms, it is important
that their business is not disrupted as a result of inadequate support from us.
Failure to deliver such services could harm our business.
19
We depend on third parties to develop SafeDisc compatible encoding and quality
assurance equipment and applications software.
We rely on third party vendors such as DCA, Eclipse, Media Morphics, CD
Associates, Koch Media and Audio Development to develop add-on enabling software
modules that will:
o apply the SafeDisc digital signature at licensed replication
facilities;
o allow replicators to run specialized quality assurance tests
to ensure the SafeDisc technology is applied; and
o check for manufacturing defects in the mass produced discs.
Our operations could be disrupted if our relationships with third party
vendors are disrupted or if their products are defective, not available or not
accepted by licensed replicators. This could result in a loss of customer orders
and revenue.
We must establish and maintain licensing relationships with companies other than
content owners or software publishers to continue to expand our business, and
failure to do so could harm our business prospects.
Our future success will depend upon our ability to establish and maintain
licensing relationships with companies in related business fields, including:
o videocassette duplicators;
o international distributors of videocassettes;
o DVD authoring facilities and replicators;
o DVD authoring tools software companies;
o DVD hardware manufacturers;
o semiconductor and equipment manufacturers;
o operators of digital PPV networks;
o consumer electronics and digital PPV set-top hardware
manufacturers; and
o CD-ROM mastering facilities and replicators.
Substantially all of our license agreements are non-exclusive, and
therefore our licensees are free to enter into similar agreements with third
parties, including our competitors. Our licensees may develop or pursue
alternative technologies either on their own or in collaboration with others,
including our competitors.
If we do not retain our key employees and attract new employees, our ability to
execute our business strategy will be impaired.
We compete for employees in California's Silicon Valley, one of the most
challenging employer environments in the United States. Hiring key personnel is
highly competitive. Because of the specialized nature of our business, our
future success will depend upon our continuing ability to identify, attract,
train and retain other highly skilled managerial, technical, sales and marketing
personnel, particularly as we enter new markets. The loss of key employees could
harm our business.
Calamities, power shortages or power interruptions at our Silicon Valley offices
could disrupt our business and adversely affect our operations. The inability to
obtain electricity at cost effective rates will increase our operating expenses
and could affect our earnings.
Our principal operations are located in Sunnyvale, California and our
GLOBEtrotter operations are located in San Jose, California. We are in the
process of consolidating the operations of these two offices at a facility in
the same general location. These facilities are in areas of seismic activity
near active earthquake faults. Any earthquake, fire or other calamity affecting
our facilities may disrupt our business and substantially affect our operations.
We also rely on the major Northern California public utility, Pacific Gas
& Electric Company (PG&E), to supply electric power to our facilities. Due to
problems associated with the deregulation of the power industry in California,
customers of PG&E have been faced with increased electricity prices, power
shortages and, in some cases, rolling black-outs. To date, we have not been
materially adversely affected by such power black-outs. However, more
significant disruptions of our power supply may occur in the future. These
interruptions could delay delivery or development of our technologies or
increase our operating costs, in either case having a material adverse effect on
our operations. We do not presently have a backup power generating facility. In
addition, we expect that any long-term solution to California's power crisis
could entail a substantial increase in electricity costs to users, such as us.
This would increase our operating costs and would decrease our operating income
if we were unable to pass along these costs to our customers in the price of our
products.
20
Industry Risks
We license technology for digital PPV copy protection, and if this market does
not grow as anticipated or we are unable to serve this market effectively,
our revenues will be adversely affected.
While our copy protection capability is embedded in more than 43 million
digital set-top boxes manufactured by the leading digital set-top box
manufacturers, only four system operators have activated copy protection for
digital PPV programming. Our ability to expand our markets in additional home
entertainment venues such as digital PPV will depend in large part on the
support of the major motion picture studios in advocating the incorporation of
copy protection technology into the hardware and network infrastructure required
to distribute such video programming. The Motion Picture Association of America
studios may not require copy protection for any of their PPV movies or PPV
system operators may not activate copy protection in other digital PPV networks
outside of Japan, Hong Kong or the United Kingdom.
Further, consumers may react negatively to copy protected PPV programming
because they may feel they have an entitlement having in the past routinely
copied for later viewing analog cable and satellite-delivered subscription
television and PPV programs, as well as free broadcast programming. In addition,
some television sets or combinations of VCRs and television sets may exhibit
impaired pictures while displaying a copy protected digital PPV program. If
there is consumer dissatisfaction that cannot be managed, or if there are
technical compatibility problems, our business would be harmed.
Potential revenue may be lost if our digital video watermarking technology is
not selected as an industry standard.
In cooperation with Philips and Digimarc, we are jointly developing a
digital video watermarking solution to address the digital-to-digital copying
issues associated with the next generation of DVD recording devices. Our group
has submitted a proposed solution to the DVD Copy Control Association, or
DVD/CCA, a wholly owned subsidiary of Matsushita Electric Industries, which has
assumed responsibility for selecting the industry standard. Our group is
competing with a consortium of five other companies, comprised of IBM, NEC,
Sony, Hitachi and Pioneer, that have submitted a similar proposal to the DVD/
CCA. Some of these companies have substantially greater name recognition and
significantly greater financial, technical, marketing and other resources than
Philips, Digimarc and ourselves.
We continue to discuss our solution and our implementation plans with the
studios and other industry participants, but risks of patent infringement
lawsuits still remain an issue for the studios and hardware companies. Our plan
is to continue with the development and release of our group's watermarking
solution and search for a way to minimize or eliminate the patent risks for
users.
Our digital watermarking technology may not be selected by the DVD/CCA.
The group whose digital video watermarking solution is selected will have a
significant advantage in licensing its technology to video content owners
worldwide, and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
Even if the DVD/CCA adopts our solution, other companies may elect to compete in
this market. If the solution being developed by Philips, Digimarc and ourselves
is not the selected solution or otherwise is not widely adopted by studios or
consumer electronics manufacturers, our group will be at a competitive
disadvantage in marketing our solution. The solution being developed by our
group may not be selected as the standard by the DVD/CCA or our solution may not
achieve market acceptance as the market and the standards for digital-to-digital
copy protection evolve. If this happens, our future revenue opportunities will
be negatively impacted.
We entered the market for consumer software copy protection and rights
management, and we do not know if our momentum will continue in selling our
products in this market.
Both the markets for PC hardware and software games publishers have
experienced macroeconomic pressures over the last year. Unit sales of PC's have
slowed; major PC suppliers have announced weaker financial results than
expected. Several PC games software publishers have reported financial
difficulties and experienced management and employee turnover. If economic
conditions in this segment continue to be difficult, demand for our copy
protection and rights management solutions (which is linked to the volume of PC
games and consumer titles sold) could decline. This would result in lower
revenues and operating income for this line of business.
A number of competitors and potential competitors are developing CD-ROM
copy protection solutions. Many of these competitors and potential competitors
have substantially greater name recognition and financial, technical and
marketing resources than we do. If these competitors provide superior or more
cost-effective solutions, our business will be harmed.
21
We have recently entered the ELM market, and we do not know if we will be
successful in selling our products in this market.
We acquired GLOBEtrotter Software, Inc. in August 2000. GLOBEtrotter's
major product line is FLEXlm, a product that allows independent software vendors
to license their products electronically, and monitor and enforce compliance
with their licensed use rights. GTlicensing allows software vendors to create,
ship and track licenses online. SAMSuite is an end-user software asset
management product. There is no assurance of our ability to grow and be
successful in this market and if we are unsuccessful in this market, our
business would be harmed.
Major software vendors have experienced deteriorating economic conditions
as corporate customers have reduced capital expenditures. Demand for our FLEXlm
technology is driven, to some degree, by end user demand for software
applications. If economic conditions for software vendors continue to be
difficult, demand for our ELM technology could decline. This would result in
lower revenues and operating income for this line of business.
We are entering the market for music CD copy protection and we do not know if we
will be successful in selling our products in this market.
We entered into a strategic relationship with TTR to develop and market a
copy protection system that will inhibit casual copying of music CDs using
dual-deck CD recorder systems or personal computer systems. A number of
competitors and potential competitors may be developing similar and related
music copy protection solutions. The solution we expect to market may not
achieve or sustain market acceptance, or may not meet, or continue to meet, the
demands of the music industry. It is possible that there could be significant
consumer resistance to audio copy protection, as consumers may feel that they
are entitled to copy audio CDs, because no technology has been used in the past
to prevent copying. It is not clear what the reaction of the major music labels
would be to any consumer resistance.
If the market for music CD copy protection fails to develop, or develops
more slowly than expected, if our solution does not achieve or sustain market
acceptance or if there is consumer resistance to this technology, our business
would be harmed.
If we are unable to compete successfully against competitive technologies that
may be developed in the future our business will be harmed.
We believe that there are currently no significant videocassette copy
protection competitors other than companies that have occasionally developed
hardware based on our technology for sale in small foreign markets, where we
have not sought patent protection. It is possible, however, that a competitive
copy protection technology could be developed in the future. For example, our
customers could attempt to promote competition by supporting the development of
alternative copy protection technologies or solutions, including solutions that
deter professional duplication. Increased competition would be likely to result
in price reductions and loss of market share, either of which could harm our
business.
We believe that our ELM products have no major competition other than
software vendors who attempt to develop their own ELM applications for their
software products. In the event that software vendors succeed with their
internal developments, or to forego the implementation of such applications,
this would adversely affect our business.
Investment Risks
The price of our common stock may be volatile.
The market price of our common stock has been, and in the future could be,
significantly affected by factors such as:
- actual or anticipated fluctuations in operating results;
- announcements of technical innovations;
- new products or new contracts;
- competitors or their customers;
22
- governmental regulatory action;
- developments with respect to patents or proprietary rights;
- changes in financial estimates by securities analysts; and
- general market conditions.
In addition, announcements by the Motion Picture Association of America or
its members, satellite television operators, cable television operators or
others regarding motion picture production or distribution, consumer companies'
business combinations, evolving industry standards or other developments could
cause the market price of our common stock to fluctuate substantially.
Further, the trading prices of the stocks of many technology companies
reflect price/earnings ratios substantially above historical levels. There can
be no assurance that these trading prices and price/earnings ratios will be
sustained. In the past, following periods of volatility in the market price of a
company's securities, some companies have been named in class action suits.
23
ITEM 2. PROPERTIES.
Our principal operations are located in a 43,960 square foot building in
Sunnyvale, California. The lease for this building expires on June 30, 2002 and
we have the right to renew the lease for two additional terms of five years
each. Our GLOBEtrotter operations are in a leased facility in San Jose,
California with a leased sales office in Wellesley, Massachusetts. We also lease
space for sales, marketing and technical staff in South Ruislip, Woodley and
Runcorn in the United Kingdom and in Tokyo, Japan.
We are currently in the process of consolidating our two California
offices. This move may result in increased costs as well as a temporary
disruption to the business.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in legal proceedings related to some of our intellectual
property rights.
Krypton Co., Ltd., a Japanese company, filed an invalidation claim against
one of our copy protection patents in Japan. After a hearing in March 1999, the
Japanese Patent Office recommended that our patent be invalidated. We believe
that this conclusion was reached in error. On December 27, 1999, we submitted to
the Tokyo High Court a written statement indicating that the decision of
invalidity of our patent should be overturned. In February 2000, a second round
of preparatory proceedings was conducted before the Tokyo High Court, with Oral
Arguments in March 2000. In its ruling on March 21, 2000, the Tokyo High Court
revoked the Japanese Patent Office's decision. In connection with this ruling,
the scope of our claims under the patent was slightly reduced, but this is not
expected to have a material adverse effect on the value of this patent to our
business. In short, the patent remains valid and part of our business. On
November 22, 2000, Krypton made an appeal in the Tokyo High Court regarding its
earlier decision. The first proceedings regarding this appeal will take place on
April 11, 2001. Even if an adverse ruling ultimately is reached on this
invalidation claim, this would not have a material adverse effect on our
business.
In January 1999, we filed a complaint against Dwight-Cavendish
Developments Ltd. (a UK company) in the United States District Court for the
Northern District of California (Case No. 99-20011). The complaint alleges that
Dwight-Cavendish infringes a United States patent held by us. We seek to recover
compensatory damages, treble damages and costs and to obtain injunctive relief
arising from these claims. Dwight-Cavendish's response to the complaint
contained a counterclaim alleging that we have violated the federal Sherman
Antitrust Act and the Lanham Act and the California false advertising laws and
Unfair Competition Act. The counterclaim seeks injunctive relief, compensatory
damages, treble damages and costs. It also seeks a declaratory judgment that the
United States patent held by us is invalid and that Dwight-Cavendish's products
do not infringe the patent. We intend to defend the allegations in the
counterclaim vigorously. In July 2000, the District Court issued a ruling on
claim construction regarding patent infringement. Following the claim
construction ruling, Dwight-Cavendish moved for summary judgment on the patent
infringement portion of the lawsuit. Our position was that Dwight-Cavendish
would still infringe in light of the claim construction ruling based on some
internal tests that we had performed. In November 2000, The District Court ruled
in our favor to deny Dwight-Cavendish's summary judgment motion. In December
2000, the District Court denied Dwight-Cavendish's motion for leave to file a
request for reconsideration. In January 2001, we filed a motion to dismiss
Dwight-Cavendish's counterclaim. The hearing on this motion is scheduled for
April 9, 2001. Settlement discussions between the two parties are ongoing. Trial
is scheduled for mid-to-late 2001. If an adverse ruling is ultimately reached on
patent infringement against us, we may incur legal competition from
Dwight-Cavendish in our videocassette, DVD, and PPV copy protection markets, and
a corresponding decline in demand for our technology could have a material
adverse effect on our business. If an adverse ruling is ultimately reached on
the counterclaims against us, significant monetary damages may be levied against
us.
We initiated a patent infringement lawsuit in the District Court of
Dusseldorf in March 1999 against Vitec Audio und Video GmbH, a German company,
that manufactures what we believe to be a video copy protection circumvention
device. Vitec filed a reply brief arguing that its product does not infringe
patents held by us. The case was heard in the District Court of Dusseldorf,
Germany. The District Court of Dusseldorf ruled adversely against us. We
appealed the District Court's ruling in July 2000 to the Court of Appeal in
Dusseldorf. A hearing has been scheduled for September 2001. In the event of an
adverse ruling, we may incur a corresponding decline in demand for our video
copy protection technology, which could harm our business in Germany.
In November 1997, GLOBEtrotter filed a patent infringement lawsuit (Case
No. C-98-20419-JF/EAI) in the Federal District Court for the Northern District
of California against Elan Computer Group and its founder, Ken Greer, alleging
infringement of one of its patents and unfair competition and trade practices.
In March 1998, Rainbow Technologies North
24
America, Inc. entered into an agreement to purchase certain assets of Elan and
entered into a litigation cooperation agreement with Elan regarding the pending
GLOBEtrotter litigation. Subsequently, GLOBEtrotter added Rainbow Technologies
to the patent infringement suit. Rainbow Technologies and Ken Greer filed
separate counterclaims against GLOBEtrotter and its founder, Matthew Christiano,
alleging antitrust violations, unfair competition, tortious interference with
business relations, and trade libel. Rainbow Technologies and Ken Greer are
seeking compensatory damages, punitive damages, injunctive relief, and
disgorgement of profits. GLOBEtrotter intends to defend the allegations in the
counterclaim vigorously. The patent infringement case was bifurcated from the
counterclaims. In October 1999, Judge Fogel granted the motion for partial
summary judgment for non-infringement of claims 55-59 which was filed by Rainbow
Technologies based on Judge's Fogel claim construction order. In January 2001,
the Court of Appeal of the Federal Circuit (CAFC) affirmed the denial of
GLOBEtrotter`s motion for preliminary injunction by agreeing with the District
Court's claim construction of requiring a user ID as part of the claimed
invention. In February 2001, Rainbow et al. filed a summary judgment motion to
dismiss GLOBEtrotter`s patent infringement suit. GLOBEtrotter filed an
opposition brief and a request for leave to file a reconsideration motion to the
dismissal of claims 55-59 in light of newly discovered evidence. At the hearing
on March 19, 2001, Judge Fogel granted GLOBEtrotter's request and agreed to rule
on the reconsideration motion before making a ruling on the summary judgment
motion. A hearing on the reconsideration motion is scheduled for May 29, 2001.
The patent infringement trial originally scheduled for April 2001, has been
delayed pending outcome of reconsideration motion and the summary judgment
motion. The trial for the counterclaims is still scheduled for September 2001.
If an adverse ruling is ultimately reached on the patent infringement claims,
GLOBEtrotter may incur legal competition from Rainbow Technologies, and a
corresponding decline in demand for GLOBEtrotter's technology could have a
material adverse effect on its business. If an adverse ruling is ultimately
reached on the counterclaims against GLOBEtrotter, significant monetary damages
may be levied against GLOBEtrotter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
quarter ended December 31, 2000.
25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Our common stock has been traded on the Nasdaq National Market under
the symbol "MVSN" since our initial public offering on March 13, 1997. The
following table sets forth, for the periods indicated, the reported high and low
split adjusted closing prices for our common stock. There have been two 2-for-1
stock splits, in August 1999 and in March 2000. All share and per share
information presented have been retroactively adjusted for the effect of both
such stock splits.
High Low
---- ---
1999
First Quarter............................... 10.063 7.406
Second Quarter.............................. 18.719 8.344
Third Quarter............................... 23.531 14.031
Fourth Quarter.............................. 39.250 21.625
2000
First Quarter............................... 86.125 30.250
Second Quarter.............................. 77.000 35.625
Third Quarter............................... 107.000 68.062
Fourth Quarter.............................. 80.375 39.218
As of March 15, 2001, there were 126 holders of record of our common
stock, based upon information furnished by Boston EquiServe, Boston, MA, the
transfer agent for our securities. We believe, based upon security positions
listings, that there are more than 10,500 beneficial owners of our common stock.
As of March 15, 2001, there were 50,036,748 shares of common stock outstanding.
We have not declared or paid any cash dividends on our common stock since
1994. We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain all earnings for use in our business
operations and in the expansion of our business.
26
ITEM 6. SELECTED FINANCIAL DATA.
On August 31, 2000, we completed our acquisition of GLOBEtrotter Software,
Inc. The transaction has been accounted for using the "pooling of interests"
method. As a result, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of GLOBEtrotter. The following table sets forth selected consolidated
financial data and other operating information. The data have been derived from
combination of the Company's and GLOBEtrotter's audited financial statements for
the years ended December 31, 2000, 1999 and 1998 and GLOBEtrotter's unaudited
financial statements for the years ended December 31, 1997 and 1996, which, in
the opinion of management, have been prepared on substantially the same basis as
the audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the data. The financial data and other operating information do
not purport to indicate results of operations as of any future date or for any
future period. The financial data and operating information is derived from our
consolidated financial statements and should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein.
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statements of Income Data:
Net revenues $ 80,116 $ 52,076 $ 36,446 $ 31,063 $ 25,243
-------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues (excluding
deferred stock-based compensation expense of $542) 5,425 4,885 2,435 2,693 2,867
Research and development (excluding deferred stock-based
compensation expense of $3,950) 7,822 6,463 4,072 3,541 3,434
Selling and marketing (excluding deferred stock-based
compensation expense of $10,213) 15,037 12,713 9,652 8,857 7,446
General and administrative (excluding deferred stock-based
compensation expense of $828) 12,717 7,169 7,437 6,285 5,458
Amortization of goodwill and other intangibles from
acquisitions (1) 4,878 1,600 -- -- --
Amortization of deferred stock-based compensation 15,533 -- -- -- --
In-process research and development (1) -- 4,285 -- -- --
-------- -------- -------- -------- --------
Total costs and expenses 61,412 37,115 23,596 21,376 19,205
-------- -------- -------- -------- --------
Operating income from continuing operations 18,704 14,961 12,850 9,687 6,038
Interest and other income (expense), net 10,714 1,634 1,179 480 (235)
-------- -------- -------- -------- --------
Income from continuing operations before income taxes 29,418 16,595 14,029 10,167 5,803
Income taxes 15,825 4,108 4,020 2,447 1,249
-------- -------- -------- -------- --------
Income from continuing operations 13,593 12,487 10,009 7,720 4,554
Loss from discontinued operations, net of tax benefit -- -- -- -- (827)
-------- -------- -------- -------- --------
Net income 13,593 12,487 10,009 7,720 3,727
Preferred stock dividends -- -- -- (156) (587)
-------- -------- -------- -------- --------
Net income available to common stockholders $ 13,593 $ 12,487 $ 10,009 $ 7,564 $ 3,140
======== ======== ======== ======== ========
Basic earnings per share $ 0.28 $ 0.28 $ 0.25 $ 0.22 --
======== ======== ======== ======== ========
Shares used in computing basic earnings per share (1) 49,135 45,031 40,850 34,739 --
======== ======== ======== ======== ========
Diluted earnings per share $ 0.26 $ 0.27 $ 0.23 $ 0.21 --
======== ======== ======== ======== ========
Shares used in computing diluted earnings per share (1) 51,386 47,096 43,046 36,675 --
======== ======== ======== ======== ========
27
December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data: (in thousands)
Cash, cash equivalents and short-term investments $107,909 $ 36,162 $ 27,483 $ 13,761 $ 3,481
Working capital 123,895 38,860 29,431 15,969 3,345
Total assets 296,438 132,690 70,530 33,491 16,314
Long-term obligations, net of current portion 56 133 367 476 296
Total stockholders' equity 275,975 102,273 60,292 25,306 8,246
(1) See Note 1 of Notes to Consolidated Financial Statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in the Form 10-K. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify these forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend," or "continue," and
similar expressions. These statements are only predictions. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of a variety of factors, including, but not limited to, those set
forth under "Risk Factors" and elsewhere in this Form 10-K.
Overview
We were founded in 1983 to develop copy protection and video security
solutions for major motion picture studios and independent video producers. Our
initial products were designed to prevent the unauthorized duplication and
distribution of videocassettes. We have expanded our copy protection
technologies to address the unauthorized copying and distribution of DVDs,
digital PPV programs and consumer software. We derive royalty-based licensing
revenue from multiple sources, including video content owners, consumer software
publishers, hardware manufacturers, digital set-top box manufacturers, digital
PPV system operators and commercial replicators/duplicators. In 2000, we entered
the market for Electronic License Management, ("ELM") solutions for software
vendors and software asset management tools for business through the acquisition
of GLOBEtrotter Software Inc.
The following table provides net revenues information by product line
(dollars in thousands):
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Video Copy Protection:
Videocassette ................... $ 12,899 $ 15,877 $ 15,770
DVD ............................. 20,867 8,629 3,096
Pay-Per-View .................... 15,062 7,477 3,760
Consumer Software Copy Protection .... 8,372 4,754 344
Electronic License Management Software 21,770 14,686 12,012
Other ................................ 1,146 653 1,464
--------- --------- ---------
Total ................................ $ 80,116 $ 52,076 $ 36,446
========= ========= =========
28
The following table provides percentage of net revenure informaton by
product line:
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Video Copy Protection:
Videocassette ................... 16.1% 30.5% 43.3%
DVD ............................. 26.0 16.6 8.5
Pay-Per-View .................... 18.8 14.4 10.3
Consumer Software Copy Protection .... 10.5 9.1 0.9
Electronic License Management Software 27.2 28.2 33.0
Other ................................ 1.4 1.2 4.0
--------- --------- ---------
Total ................................ 100.0% 100.0% 100.0%
========= ========= =========
Video Copy Protection.
Videocassette Copy Protection. Since inception, we have derived the
majority of our revenues and operating income from licensing our videocassette
copy protection technology. As expected, in 2000, our videocassette copy
protection revenues no longer provided the major proportion of our revenues,
reflecting the continuing trend for Hollywood studios to invest proportionally
more in copy protecting their DVD titles compared to VHS releases. Our customers
have included the home video divisions of members of the Motion Picture
Association of America, more than 500 videocassette duplication companies and a
number of low volume content owners, such as independent producers of exercise,
sports, educational, documentary and corporate videocassettes. We typically
receive license fees based upon the number of copy protected videocassettes that
are produced by Motion Picture Association of America studios or other content
owners. License fees from Motion Picture Association of America studios
represented a significant portion of such fees in 2000, 1999 and 1998.
Videocassette copy protection revenues represented 16.1%, 30.5% and 43.3% of our
net revenues in 2000, 1999 and 1998, respectively. We believe videocassette copy
protection revenues will continue to decline as a percentage of our revenues and
in absolute terms, as the studios focus more of their resources on the DVD
business line.
DVD Copy Protection. In 1997, we introduced copy protection for DVDs. Our
customers have included members of the Motion Picture Association of America and
"Special Interest" rights owners. Our customers pay per unit royalties for DVD
copy protection. Additionally, we derive annual license fees from DVD hardware
manufacturers. DVD copy protection has increased from 8.5% of net revenues in
1998 to 26.0% of net revenues in 2000. Revenues from DVD copy protection
solutions are expected to grow in both absolute dollars and as a percentage of
net revenues in 2001 as the penetration of DVDs and DVD players in the market
increases.
PPV Copy Protection. In 1993, we introduced copy protection for digital
PPV to satellite and cable system operators and to the equipment manufacturers
that supply the satellite and cable industries. We derive digital PPV copy
protection revenues from hardware royalties, up-front license fees, and PPV
programming royalties. Digital PPV revenues were 18.8%, 14.4% and 10.3% of our
net revenues in 2000, 1999 and 1998, respectively. Our agreements with digital
PPV system operators entitle us to transaction-based royalty payments when copy
protection for digital PPV programming is activated. To date, such
transaction-based royalty payments have not been significant. Revenues from PPV
copy protection are expected to grow in absolute dollar terms in 2001.
Consumer Software Copy Protection and Rights Management
In 1998, we made a minority equity investment in C-Dilla and entered into
a Software Marketing License and Development Agreement. In June 1999, we
acquired the remaining shares of C-Dilla for approximately $12.8 million in
cash, 218,398 shares of our common stock valued at $5.1 million and stock option
grants in Macrovision valued at $1.8 million. In September 1998, in conjunction
with C-Dilla, we introduced our CD-ROM consumer software copy protection
technology, called SafeDisc. Customers implementing SafeDisc include major PC
game and educational software publishers. Due to increased market acceptance of
our solution, we expect revenues from Consumer Software Copy Protection to
increase in 2001. We typically receive license fees based upon the number of
copy protected CD-ROMs that are produced by PC game and educational software
publishers. Consumer software copy protection revenues represented 10.5% of our
net revenues for 2000. We expect that our consumer software copy protection
licenses will generate a material part of our net revenues in 2001.
29
Electronic License Management Software
In August 2000, we acquired GLOBEtrotter Software, Inc., a leading
supplier of electronic licensing and license management technology to software
vendors and a leading direct supplier of software asset management products to
corporate customers. We issued 8,944,548 shares of our common stock in exchange
for all the outstanding common stock of GLOBEtrotter. The transaction has been
accounted for using the "pooling of interests" method. As a result, the
consolidated financial statements for periods prior to the combination have been
restated to include the accounts and results of operations of GLOBEtrotter
Software, Inc. GLOBEtrotter generates its revenue from licensing its software
and providing services related to the support and maintenance of this software.
Revenues from this business segment were 27.2%, 28.2% and 33.0% of our net
revenues in 2000, 1999 and 1998, respectively. We expect that our electronic
license management business will increase in absolute dollars and as a
percentage of net revenues in 2001.
Costs and Expenses
Our cost of revenues consists primarily of service fees paid to licensed
duplicators and replicators that produce videocassettes, DVDs and CD-ROMs for
content owners, costs of equipment used to apply our technology and royalties
due C-Dilla based on revenues from copy protection of CD-ROMs prior to our June
1999 acquisition. Also included in cost of revenues are patent amortization and
enforcement costs. Our research and development expenses are comprised primarily
of employee compensation and benefits, consulting fees, tooling and supplies and
an allocation of facilities costs. Our selling and marketing expenses are
comprised primarily of employee compensation and benefits, consulting and
recruiting fees, travel, advertising and an allocation of facilities costs. Our
general and administrative expenses are comprised primarily of employee
compensation and benefits, consulting and recruiting fees, travel, professional
fees and an allocation of facilities costs.
We have experienced significant seasonality in our business, and our
financial condition and results of operations are likely to be affected by
seasonality in the future. We have typically experienced our highest revenues in
the fourth quarter of each calendar year followed by lower revenues and
operating income in the first quarter, and at times in subsequent quarters, of
the following year. We believe that this trend has been principally due to the
tendency of certain of our customers to release new video and consumer software
titles during the year-end holiday shopping season, while our operating expenses
are incurred more evenly throughout the year. We anticipate that revenues from
our electronic license management business may also reflect a similar seasonal
trend. In addition, revenues tend to be lower in the summer months, particularly
in Europe.
30
Results of Operations
The following table sets forth selected consolidated statements of income
data expressed as a percentage of net revenues for the periods indicated:
Years ended December 31,
--------------------------
2000 1999 1998
------ ------ ------
Net revenues ....................................................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of revenues ............................................... 6.8 9.4 6.6
Research and development ....................................... 9.8 12.4 11.2
Selling and marketing .......................................... 18.8 24.4 26.5
General and administrative ..................................... 15.9 13.8 20.4
Amortization of goodwill and other intangibles from acquisitions 6.1 3.1 --
Amortization of deferred stock-based compensation .............. 19.4 -- --
In-process research and development ............................ -- 8.2 --
------ ------ ------
Total costs and expenses .................................... 76.7 71.3 64.7
------ ------ ------
Operating income ............................................ 23.3 28.7 35.3
Interest and other income, net ..................................... 13.4 3.1 3.2
------ ------ ------
Income before income taxes .................................. 36.7 31.8 38.5
Income taxes ....................................................... 19.7 7.8 11.0
------ ------ ------
Net income .................................................. 17.0% 24.0% 27.5%
====== ====== ======
Comparison of Years Ended December 31, 2000 and 1999
The following table provides revenue information by specific product
segments for the periods indicated (dollars in thousands):
Years ended December 31,
------------------------
$ %
2000 1999 Change Change
-------- -------------------------------
Video Copy Protection
Videocassette $ 12,899 $ 15,877 $ (2,978) (18.8)%
DVD 20,867 8,629 12,238 141.8
Pay-Per-View 15,062 7,477 7,585 101.4
Consumer Software Copy Protection 8,372 4,754 3,618 76.1
Electronic License Management Software 21,770 14,686 7,084 48.2
Other 1,146 653 493 75.5
-------- -------- --------
Total $ 80,116 $ 52,076 $ 28,040 53.8%
======== ======== ========
Net Revenues. Our net revenues for 2000 increased 53.8% from $52.1 million
in 1999 to $80.1 million in 2000. Revenues from videocassette copy protection
decreased $3.0 million or 18.8% from $15.9 million in 1999 to $12.9 million in
2000, reflecting the continuing trend for Hollywood studios to invest more
proportionally in copy protecting their DVD titles compared to VHS releases. DVD
copy protection revenues increased $12.2 million or 141.8% from $8.6 million in
1999 to $20.9 million in 2000, due to increases in DVD shipments as the market
for both DVD players and DVD titles continued to expand. Digital PPV copy
protection revenues increased $7.6 million or 101.4% from $7.5 million in 1999
to $15.1 million in 2000 due to the continued roll-out of copy protection
enabled digital set-top boxes in the direct broadcast satellite (DBS) and cable
TV markets, along with the conversion of legacy analog set-top boxes by certain
operators. Consumer Software Copy Protection revenues increased $3.6 million or
76.1% from $4.8 million in 1999 to $8.4 million in 2000 due to the increased
deployment of our solution by several major software publishers and adoption by
new customers. Revenues from our electronic license management software products
increased $7.1 million or 48.2% from $14.7 million in
31
1999 to $21.8 million in 2000 primarily due to growth in ELM software acceptance
by ISVs. Other revenue increased $493,000 or 75.5% from $653,000 in 1999 to $1.1
million in 2000, primarily from royalties on our pay TV analog scrambling
technology shipments into Brazil by one of our licensees.
Cost of Revenues. Cost of revenues as a percentage of net revenues
declined from 9.4% for 1999 to 6.8% for 2000. This decrease was primarily due to
the higher level of revenues in 2000 from royalties and license fees, which had
a substantially lower cost of revenues. Cost of revenues increased $540,000 from
$4.9 million in 1999 to $5.4 million in 2000 primarily due to higher
duplicator/replicator fees associated with a higher volume of duplication
royalty costs associated with our watermarking license agreement with Digimarc
and the write-off of our patents related to our legacy video scrambling
products, offset by lower patent defense costs and inventory reserves. Cost of
revenues includes items such as product costs, duplicator/replicator fees, video
copy protection processor costs, patent amortization, patent defense costs and
royalty expense prior to the acquisition of C-Dilla. We expect gross margin to
increase as a result of increases in royalties and license fees, partially
offset by increased patent defense costs associated with current patent
litigation.
Research and Development Research and development expenses increased by
$1.3 million or 21.0% from $6.5 million in 1999 to $7.8 million in 2000. The
increased expenses related to software development activities at C-Dilla that
were only included in Macrovision's operations for approximately six months of
1999. This increase was offset by reimbursement from TTR Technologies of
expenses relating to the SafeAudio CD copy protection project and lower expenses
for GLOBEtrotter rights management software products. There were one-time
charges in 1999 relating to licensing fees for technology and bonuses paid to
engineering employees at C-Dilla. Research and development expenses decreased as
a percentage of net revenues from 12.4% in 1999 to 9.7% in 2000. We expect
research and development expenses to increase in absolute terms over the prior
year periods as a result of expected increases in research and development
activity relating to digital rights management and ELM products, and as we
develop new technologies in other related areas.
Selling and Marketing Selling and marketing expenses increased by $2.3
million or 18.3% from $12.7 million in 1999 to $15.0 million in 2000. This
increase was primarily due to the increased selling and marketing expenses in
our consumer software copy protection and electronic license management
businesses, resulting from increased headcount. Selling and marketing expenses
decreased as a percentage of net revenues from 24.4% in 1999 to 18.8% in 2000.
Selling and marketing expenses are expected to increase in absolute terms over
the prior year periods as we continue to expand our efforts in selling and
marketing consumer software copy protection, electronic license management
software and other digital rights management products.
General and Administrative. General and administrative expenses increased
by $5.5 million or 77.4% from $7.2 million in 1999 to $12.7 million in 2000
primarily due to a one-time charge related to our acquisition of GLOBEtrotter, a
tax consulting project, increased insurance expenses and increased general and
administrative expenses relating to our electronic license management business
and for our consumer software copy protection business. General and
administrative expenses increased as a percentage of net revenues from 13.8% in
1999 to 15.9% in 2000. Without the one-time charge of $2.2 million associated
with the acquisition of GLOBEtrotter, general and administrative expenses would
have increased by $3.3 million, or 47.2% to $10.5 million. General and
administrative expenses are expected to increase in absolute terms over the
prior periods as we continue to expand our administrative support infrastructure
to serve a larger, diversified business.
Amortization of Goodwill and Other Intangibles from Acquisitions. We
amortize intangibles relating to the acquisition of C-Dilla, in June of 1999, on
a straight-line basis over three to seven years based on expected useful lives
of existing products and technologies, retention of workforce, non-compete
agreements and goodwill. If the identified projects are not successfully
developed, the value of the acquired intangible assets may also become impaired.
The Company amortized $3.0 million in 2000 related to the goodwill and other
intangibles.
In October 2000, we acquired certain assets of Manchester (UK) based
Productivity through Software plc ("PtS"). We paid approximately $23.3 million
in cash and related acquisition costs, and assumed liability to service current
customer maintenance contracts. In addition, we may pay an additional maximum
payment of $2.8 million contingent upon the business meeting certain
predetermined revenue targets. The purchase price was allocated to employee
retention, PtS's customer base and other goodwill. We will amortize these
intangibles on a straight-line basis over three years. Goodwill and other
intangibles associated with the transaction amounted to $23.5 million which
includes an additional $200,000 related to contingent payments through December
31, 2000. We amortized $1.9 million of goodwill and other intangibles in 2000.
32
Amortization of Deferred Stock-Based Compensation. In connection with the
acquisition of GLOBEtrotter, approximately 783,742 GLOBEtrotter employee stock
options have been exchanged for Macrovision stock options, resulting in a
deferred stock-based compensation charge of approximately $37.9 million. The
amortization of the deferred stock-based compensation for the year ended
December 31, 2000 was $15.5 million. The expense associated with the stock-based
compensation award will continue to result in substantial non-cash compensation
charges to future earnings.
Interest and Other Income, Net. Interest and other income increased $9.1
million or 556% from $1.6 million in 1999 to $10.7 million in 2000, primarily
from interest income received on the proceeds of our public stock offering in
January 2000.
Income Taxes. Income tax expense represents combined federal and state
taxes at effective rates of 53.8% and 24.8% for 2000 and 1999, respectively. As
GLOBEtrotter was an S corporation for federal and state income tax purposes, tax
expense relating to its income is not provided for on the combined statements
for the first eight months of 2000 prior to August 31, 2000 (the acquisition
date) and the period ended December 31, 1999, thus lowering the effective rate.
Deferred stock-based compensation expense, related to in-the-money stock options
issued, is not tax deductible and hence drives a higher effective rate for 2000.
Comparison of Years Ended December 31, 1999 and 1998
The following table provides revenue information by general product lines
for the periods indicated (dollars in thousands):
Year ended December 31,
-----------------------
$ %
1999 1998 Change Change
------- ------- -------
Video Copy Protection
Videocassette $15,877 $15,770 107 .7%
DVD 8,629 3,096 5,533 178.7%
Pay-Per-View 7,477 3,760 3,717 98.9%
Consumer Software Copy Protection 4,754 344 4,410 1,282.0%
Electronic License Management Software 14,686 12,012 2,674 22.3%
Other 653 1,464 (811) (55.4)%
------- ------- -------
Total $52,076 $36,446 15,630 42.9%
======= ======= =======
Net Revenues. Our net revenues for 1999 increased 42.9% from $36.4 million
in 1998 to $52.1 million in 1999. Revenues from videocassette copy protection
increased $107,000 from $15.8 million in 1998 to $15.9 million in 1999 due to
increased videocassette copy protection royalties for the hit fitness video
"Tae-Bo," offset by a slight decrease in Hollywood studio royalties and copy
protected videocassette volume. DVD copy protection revenues increased $5.5
million or 178.7% from $3.1 million in 1998 to $8.6 million in 1999 due to
increases in DVD shipments as the market for both DVD players and DVD titles
continued to expand. Digital PPV copy protection revenues increased $3.7 million
or 98.9% from $3.8 million in 1998 to $7.5 million in 1999 due to continued
increases in the shipments of copy protection enabled digital set-top boxes as
the digital subscriber base grew in the direct broadcast satellite (DBS) and
cable TV domestic and international markets. Revenues increased in consumer
software copy protection, electronic license management software and PPV, from
1998 to 1999. Consumer software copy protection revenues increased $4.4 million
from $344,000 in 1998 to $4.8 million in 1999 as new customers implemented our
SafeDisc copy protection on their PC games and other consumer multimedia
software during the year, with strong growth in copy protected units during the
traditionally strong third quarter in anticipation of holiday season releases.
Revenues from our electronic license management software products increased $2.7
million or 22.3% from $12.0 million in 1998 to $14.7 million in 1999 primarily
due to growth in electronic license management software acceptance by ISVs.
Other revenues were generated by our legacy Video Scrambling products, which
decreased 55.4% from $1.5 million in 1998 to $653,000 in 1998 as we continued to
experience weak demand for this technology.
Cost of Revenues. Cost of revenues as a percentage of net revenues
increased from 6.6% for 1998 to 9.4% for 1999. This increase was primarily due
to the higher level of support costs for the electronic license management
software in 1999. Cost of revenues increased $2.5 from $2.4 million in 1998 to
$4.9 million in 1999 primarily due higher support costs for the electronic
license management software, higher duplicator/replicator fees associated with a
higher volume of duplication and higher patent defense costs. Cost of revenues
includes items such as product costs, duplicator/replicator fees, video
33
copy protection processor costs, patent amortization, patent defense costs and
royalty expense prior to the acquisition of C-Dilla.
Research and Development. Research and development expenses increased by
$2.4 million or 58.7% from $4.1 million in 1998 to $6.5 million in 1999. The
increased expenses were a result of a one-time licensing fee of $300,000 related
to technology acquisition, one-time continuation bonuses of $99,000 paid to
engineering employees in C-Dilla and the absorption of research and development
expenses at C-Dilla following its acquisition. Research and development expenses
increased as a percentage of net revenues from 11.2% for 1998 to 12.4% for 1999.
If not for the one-time charges noted above, the percentage would have remained
relatively stable for 1999.
Selling and marketing Selling and marketing expenses increased by $3.0
million or 31.7% from $9.7 million in 1998 to $12.7 million in 1999. This
increase was primarily for one-time continuation bonuses of $290,000 paid to
sales and marketing employees of C-Dilla, higher compensation and benefits
associated with additional headcount in the Consumer Software Copy Protection
business, along with the increased advertising and marketing for the business
unit. Many of these expenses were offset in 1998 by C-Dilla's reimbursement of
specific marketing related expenses under the Joint Marketing Agreement and the
marketing and selling expenses at C-Dilla prior to its acquisition. Selling and
marketing expenses decreased as a percentage of net revenues from 26.5% for 1998
to 24.4% for 1999. If not for the one-time charges noted above, the percentage
would have declined further to 23.9% for 1999.
General and Administrative. General and administrative expenses decreased
by $268,000 or 3.6% from $7.4 million in 1998 to $7.2 million in 1999 primarily
due the allocation of certain administration expenses at GLOBEtrotter in 1999.
General and administrative expenses declined as a percentage of net revenues
from 20.4% in 1998 to 13.8% in 1999.
In-Process Research and Development. In June 1999, we allocated $4.3
million of the $23.2 million total purchase price for C-Dilla to in-process
research and development projects. This allocation represents the estimated fair
value based on risk adjusted cash flows related to the incomplete research and
development projects. At the date of the acquisition, this amount was expensed
as a non-recurring charge as the in-process technology had not yet reached
technological feasibility and had no alternative future uses. C-Dilla had five
major copy protection/rights management projects in progress at the time of
acquisition. These projects include a product that is being designed to protect
DVD-ROMs from unauthorized replication or copying, three products that are being
designed to prohibit the unauthorized copying of audio products and a product
that is being designed to allow DVD manufacturers to track where any DVD has
been manufactured and trace illegal copies.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities necessary to
establish that the product will meet its design requirements including
functions, features and technical performance requirements. Though we currently
expect that the acquired in-process technology will be successfully developed,
commercial or technical viability of these products may not be achieved.
Furthermore, future developments in the computer software industry, changes in
the delivery of audio products, changes in other product offerings or other
developments may cause us to alter or abandon these plans.
The value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk adjusted revenues considering completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and elapsed portion of the total project time. A net
revenue projection of $52.5 million from year 2000 through year 2007 was used to
value the in-process research and development. This projection is based on sales
forecasts and adjusted to consider only the revenue related to achievements
completed at the acquisition date. Net cash flow estimates include cost of goods
sold, sales and marketing and general and administrative expenses and taxes
forecasted based on historical operating characteristics. In addition, net cash
flow estimates were adjusted to allow for fair return on working capital and
fixed assets, charges for technology leverage and return on other intangibles.
Appropriate risk adjusted discount rates ranging from 20% to 30% were used to
discount the net cash flows back to their present values.
The remaining excess purchase price was allocated to existing products and
technologies, retention of workforce and non-compete agreements. We used the
income approach to determine the value allocated to existing products and
technologies and non-compete agreements and used the replacement cost approach
to determine the value allocated to workforce. The residual excess purchase
price was allocated to goodwill.
34
We will amortize these intangibles on a straight-line basis over three to
seven years based on expected useful lives of existing products and
technologies, retention of workforce, non-compete agreements and goodwill. If
the identified projects are not successfully developed, we may not realize the
value assigned to the in-process research and development projects and the value
of the acquired intangible assets may also become impaired.
Interest and Other Income. Other income increased $455,000 or 38.6% from
$1.2 million in 1998 to $1.6 million in 1999, primarily from interest income
received on the proceeds of our public stock offering in late June 1998.
Income Taxes. Income tax expense represents combined federal and state
taxes at effective rates of 24.8% and 28.7% for 1999 and 1998, respectively. The
lower rate for 1999 was the result of utilizing post acquisition C-Dilla net
operating losses to reduce our 1999 taxes combined with higher tax-exempt
interest earned in 1999. As GLOBEtrotter was an S corporation for federal and
state income tax purposes, tax expense relating to their respective income is
not provided for on the combined statements.
Quarterly Results of Operations
On August 31, 2000, we completed the acquisition of GLOBEtrotter Software,
Inc. The transaction has been accounted for using the "pooling of interests"
method. As a result, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of GLOBEtrotter. The following table sets forth certain quarterly
unaudited consolidated financial data for the periods indicated, as well as the
percentage of our net revenues represented by such data. The data has been
derived from our unaudited consolidated financial statements and, in the opinion
of management, have been prepared on substantially the same basis as the audited
consolidated financial statements, and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such data.
Such data should be read in conjunction with our audited consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-K. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period.
Quarter ended
1999
Mar. 31 Jun. 30 Sep. 30 Dec. 31
---------- ---------- ---------- ----------
(in thousands)
Net revenues $ 10,262 $ 11,733 $ 13,824 $ 16,257
Costs and expenses:
Cost of revenues 1,022 1,108 1,333 1,422
Research and development 1,115 1,626 1,521 2,201
Selling and marketing 2,797 2,932 3,325 3,659
General and administrative 1,740 1,599 1,780 2,050
Amortization of goodwill and other
intangibles from acquisitions -- 109 683 808
Amortization of deferred stock-based
compensation expense -- -- -- --
In-process research and development -- 4,285 -- --
---------- ---------- ---------- ----------
Total costs and expenses 6,674 11,659 8,642 10,140
---------- ---------- ---------- ----------
Operating income 3,588 74 5,182 6,117
Interest and other income, net 435 408 371 420
---------- ---------- ---------- ----------
Income (loss) before income taxes 4,023 482 5,553 6,537
Income taxes 1,193 (442) 1,273 2,084
---------- ---------- ---------- ----------
Net income (loss) $ 2,830 $ 924 $ 4,280 $ 4,453
========== ========== ========== ==========
Earnings per common share
Basic $ 0.06 $ 0.02 $ 0.09 $ 0.11
Diluted $ 0.06 $ 0.02 $ 0.09 $ 0.10
Quarter ended
2000
Mar. 31 Jun. 30 Sep. 30 Dec. 31
---------- ---------- ---------- ----------
(in thousands)
Net revenues $ 16,171 $ 18,686 $ 20,446 $ 24,813
Costs and expenses:
Cost of revenues 1,476 1,036 1,476 1,437
Research and development 1,570 1,768 2,114 2,370
Selling and marketing 3,276 3,907 3,418 4,436
General and administrative 2,451 2,639 4,657 2,970
Amortization of goodwill and other
intangibles from acquisitions 743 743 743 2,649
Amortization of deferred stock-based
compensation expense 8,732 2,115 2,405 2,281
In-process research and development -- -- -- --
---------- ---------- ---------- ----------
Total costs and expenses 18,248 12,208 14,813 16,143
---------- ---------- ---------- ----------
Operating income (2,077) 6,478 5,633 8,670
Interest and other income, net 2,002 2,892 3,127 2,693
---------- ---------- ---------- ----------
Income (loss) before income taxes (75) 9,370 8,760 11,363
Income taxes 2,853 3,648 3,957 5,367
---------- ---------- ---------- ----------
Net income (loss) $ (2,928) $ 5,722 $ 4,803 $ 5,996
========== ========== ========== ==========
Earnings per common share
Basic $ (0.06) $ 0.12 $ 0.10 $ 0.12
Diluted $ (0.06) $ 0.11 $ 0.09 $ 0.12
35
As a percentage of net revenues
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues 9.9 9.5 9.6 8.8
Research and development 10.9 13.9 11.0 13.5
Selling and marketing 27.2 25.0 24.1 22.5
General and administrative 17.0 13.6 12.9 12.6
Amortization of goodwill and other
intangibles from acquisitions -- 0.9 4.9 5.0
Amortization of deferred stock-based
compensation expense -- -- -- --
In-process research and development -- 36.5 -- --
---------- ---------- ---------- ----------
Total costs and expenses 65.0 99.4 62.5 62.4
---------- ---------- ---------- ----------
Operating income 35.0 0.6 37.5 37.6
Interest and other income, net 4.2 3.5 2.7 2.6
---------- ---------- ---------- ----------
Income (loss) before income taxes 39.2 4.1 40.2 40.2
Income taxes 11.6 (3.8) 9.2 12.8
---------- ---------- ---------- ----------
Net income (loss) 27.6% 7.9% 31.0% 27.4%
========== ========== ========== ==========
As a percentage of net revenues
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues 9.1 5.5 7.2 5.8
Research and development 9.7 9.5 10.3 9.6
Selling and marketing 20.3 20.9 16.7 17.8
General and administrative 15.2 14.1 22.8 12.0
Amortization of goodwill and other
intangibles from acquisitions 4.6 4.0 3.6 10.7
Amortization of deferred stock-based
compensation expense 54.0 11.3 11.8 9.2
In-process research and development -- -- -- --
---------- ---------- ---------- ----------
Total costs and expenses 112.9 65.3 72.4 65.1
---------- ---------- ---------- ----------
Operating income (12.9) 34.7 27.6 34.9
Interest and other income, net 12.4 15.4 15.2 10.9
---------- ---------- ---------- ----------
Income (loss) before income taxes (0.5) 50.1 42.8 45.8
Income taxes 17.6 19.5 19.3 21.6
---------- ---------- ---------- ----------
---------- ----------
Net income (loss) (18.1)% 30.6% 23.5% 24.2%
========== ========== ========== ==========
Our operating results have fluctuated in the past, and are expected to
continue to fluctuate in the future, on an annual and quarterly basis as a
result of a number of factors. Such factors include the timing of release of
popular titles on videocassettes or DVDs or by digital PPV transmission, the
timing of release of popular computer games on CD-ROM, the timing of a small
number of our ELM high-value perpetual licenses during any period, the degree of
acceptance of our copy protection technologies by major motion picture studios
and computer game publishers, the mix of products sold and technologies
licensed, any change in product or license pricing, the seasonality of revenues,
changes in our operating expenses, personnel changes, the development of our
direct and indirect distribution channels, foreign currency exchange rates and
general economic conditions. We may choose to reduce royalties and fees or
increase spending in response to competition or new technologies or elect to
pursue new market opportunities. Because a high percentage of our operating
expenses are fixed, a small variation in the timing of recognition of revenues
can cause significant variations in operating results from period to period.
Liquidity and Capital Resources
We have financed our operations primarily from cash generated by
operations, principally our copy protection businesses and our electronic
license management business. Our operating activities provided net cash of $37.0
million, $18.7 million and $11.3 million in 2000, 1999 and 1998, respectively.
In 2000, net cash was provided primarily by net income, increases due to the
amortization of deferred stock compensation, increases in tax benefit from
employee stock benefit plans, depreciation and amortization, increases in
accounts payable and deferred revenue reduced by an increase in accounts
receivable, income tax receivable, prepaids and a decrease in accrued expenses
and income taxes payable.
Investing activities used net cash of $165.1 million, $12.6 million, and
$33.3 million in 2000, 1999 and 1998, respectively. For 2000, net cash used in
investing activities was primarily for the net purchases of short and long-term
investment securities from employing funds received from a public offering of
1.7 million shares of our common stock completed in January 2000, the minority
equity investments in companies and the acquisition of the assets of PtS
relating to our ELM business. We made capital expenditures of $1.7 million,
$495,000 and $349,000 in 2000, 1999 and 1998, respectively. We also paid
$811,000, $541,000, and $666,000 in 2000, 1999 and 1998, respectively, related
to patents and other intangibles during those periods.
Net cash provided by (used in) financing activities was $145.7 million,
$(6.1) million and $24.0 million in 2000, 1999 and 1998, respectively. In 2000
net cash was provided from our January public offering and proceeds from
issuance of stock under various stock option plans partially offset by the
dividend distribution to shareholders of GLOBEtrotter.
At December 31, 2000, we had $22.4 million in cash and cash equivalents,
$85.5 million in short-term investments and $109.5 million in long-term
marketable investment securities, which includes the fair market valuation of
our holdings
36
in Digimarc and TTR, which we presently intend to hold for the long term. We
have no material commitments for capital expenditures but anticipate that
capital expenditures for the next 12 months will aggregate approximately $2.1
million. We may also use cash resources to fund the consolidation of our
California facilities. The anticipated increase in capital expenditures is
necessary to support the growth of our new business initiatives. We also have
future minimum lease payments of approximately $5.9 million under operating
leases. We believe that the current available funds and cash flows generated
from operations will be sufficient to meet our working capital and capital
expenditure requirements for the foreseeable future. We may also use cash to
acquire or invest in businesses or to obtain the rights to use certain
technologies.
Recently Issued Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 138, Accounting for Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 138, establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value would be accounted for based on
the intended use of the derivative and whether it is designated and qualifies
for hedge accounting. The Company will adopt SFAS No. 138 concurrently with SFAS
No. 133 for its first quarter of fiscal 2001. The Company expects adoption of
SFAS Nos. 133 and 138 will not have a material effect on financial position or
results from operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to financial market risks, including changes in interest
rates, foreign exchange rates and security investments. Changes in these factors
may cause fluctuations in our earnings and cash flows. We evaluate and manage
the exposure to these market risks as follows:
Fixed Income Investments. We have an investment portfolio of fixed income
securities, including those classified as cash equivalents, short-term
investments and long-term marketable investments securities of $169.0 million as
of December 31, 2000. These securities are subject to interest rate
fluctuations. An increase in interest rates could adversely affect the market
value of our fixed income securities.
We do not use derivative financial instruments in our investment portfolio
to manage interest rate risk. We limit our exposure to interest rate and credit
risk, however, by establishing and strictly monitoring clear policies and
guidelines for our fixed income portfolios. The primary objective of these
policies is to preserve principal while at the same time maximizing yields,
without significantly increasing risk. A hypothetical 50 basis point increase in
interest rates would result in an approximate $607,000 decrease (approximately
0.4%) in the fair value of our available-for-sale securities as of December 31,
2000.
Foreign Exchange Rates. Due to our reliance on international and export
sales, we are subject to the risks of fluctuations in currency exchange rates.
Because a substantial majority of our international and export revenues are
typically denominated in United States dollars, fluctuations in currency
exchange rates could cause our products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Our subsidiaries in the U.K. and Japan operate in
their local currency, which mitigates a portion of the exposure related to the
respective currency royalties collected.
Strategic Investments. We have expanded our technological base in current
as well as new markets through strategic investments in companies, technologies,
or products. We currently hold minority equity interests in CAC, Digimarc,
AudioSoft, TTR Technologies, SecureMedia and InterActual. These investments,
totaling $53.3 million, represented 17.8% of our total assets as of December 31,
2000. CAC, AudioSoft, SecureMedia and InterActual are privately held companies.
There is no active trading market for their securities and our investments in
them are illiquid. We may never have an opportunity to realize a return on our
investment in these private companies, and we may in the future be required to
write off all or part of one or more of these investments.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLELEMENTARY DATA.
The information required by this item is submitted in a separate section
of this report beginning on F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is incorporated by reference from
the information under the caption "Election of Directors," with respect to
Directors, and under the caption "Management," with respect to Executive
Officers, contained in our definitive Proxy Statement, which will be filed with
the Securities and Exchange Commission in connection with the solicitation of
proxies for our 2001 Annual Meeting of Stockholders ( the "Proxy Statement") to
be held on May 24, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" to be contained in the
Proxy Statement for the 2001 Annual Meeting of Stockholders to be held on May
24, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" to be contained in the Proxy Statement for the 2001 Annual
Meeting of Stockholders to be held on May 24, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
to be contained in the Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on May 24, 2001.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following statements are filed as part of this report:
o Report of Independent Auditors (See F-2)
o Consolidated Balance Sheets at December 31, 2000 and 1999 (See
F-3)
o Consolidated Statements of Income for the Years Ended December
31, 2000, 1999 and 1998 (see F-4)
o Consolidated Statement of Stockholders Equity and
Comprehensive Income for the Years Ended December 31, 2000,
1999 and 1998 (see F-5)
38
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 (See F-6)
o Notes to Consolidated Financial Statements (See F-7)
2. Financial Statement Schedules
The Schedule of Valuation and Qualifying Accounts is contained in
footnote 2 to the Consolidated Financial Statements.
3. Exhibits
2.01 Agreement and Plan of Merger with GLOBEtrotter Software, Inc, GSI
Acquisition Corp., Matthew Christiano and Sallie J. Calhoun dated June 19,
2000.(1)
2.02 Agreement For Sale of Shares relating to C-Dilla Limited dated as of June
18, 1999 by and among Macrovision and the shareholders of C-Dilla
Limited.(8)/**
2.03 Business Sale Agreement among Productivity through Software PLC, C-Dilla
Limited, Mr. John Rowlinson and Macrovision Corporation dated October 4,
2000. Pursuant to Item 601(b)(2) of Regulation of S-K, certain schedules
have been omitted but will be furnished supplementally to the Commission
upon request.*
3.01 Amended and Restated Certificate of Incorporation of Macrovision
Corporation.(2)
3.02 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Macrovision Corporation.
3.03 Amended and Restated Bylaws of Macrovision Corporation, amended as of
October 27, 2000.
10.01 Stock Option Plan and related documents of Macrovision Corporation.(3)
10.02 Macrovision Corporation's 1996 Equity Incentive Plan and related
documents.(3)
10.03 Macrovision Corporation's 1996 Directors Stock Option Plan.(6)
10.04 Macrovision Corporation's 1996 Employee Stock Purchase Plan and related
documents.(3)
10.05 Macrovision Corporation's Executive Incentive Plan.(3)
10.06 Macrovision Corporation's 2000 Equity Incentive Plan.(7)
10.07 Offer Letter to Ian R. Halifax dated October 8, 1999.
10.08 Form of Indemnification Agreement to be entered into by Macrovision
Corporation with each of its directors and executive officers.(3)
10.09 Recapitalization and Stock Purchase Agreement dated as of July 31, 1996,
between Macrovision Corporation and Command Audio Corporation.(3)
10.10 Restricted Stock Acquisition Agreement dated as of July 31, 1996, between
Macrovision Corporation and Command Audio Corporation, and First Amendment
dated as of November 29, 1996.(3)
10.11 Technology Transfer and Royalty Agreement dated as of July 31, 1996,
between Macrovision Corporation and Command Audio Corporation, and First
Amendment dated as of November 29, 1996.(3)
10.12 Letter dated December 6, 1996 from Macrovision Corporation to Command
Audio Corporation.(3)
10.20 Lease Agreement dated April 21, 1995, by and between Macrovision
Corporation and Caribbean Geneva Investors.(3)
10.21 Standard Sublease dated September 21, 1995, by and between Macrovision
Corporation and Deutsch Technology Research, together with Lease Agreement
dated May 26, 1992, by and between Macrovision Corporation and Crossroads
Investment Group.(3)
10.24 Second Amendment to Restricted Stock Acquisition Agreement dated as of
January 29, 1997 by and between Macrovision Corporation and Command Audio
Corporation.(3)
10.25 Letter dated February 10, 1997 from Macrovision Corporation to Command
Audio Corporation.(3)
10.26 Promissory Note dated January 7, 1997 executed by Command Audio
Corporation.(3)
39
10.27 Letter Agreement dated November 24, 1999 between Macrovision Corporation
and TTR Technologies.(9)/**
10.28 Subscription Agreement between Macrovision Corporation and C-Dilla Limited
dated February 17, 1998.(4)/**
10.29 Software Marketing License and Development Agreement between Macrovision
Corporation and C-Dilla Limited dated February 19, 1998.(5)/**
10.30 Digimarc Corporation Series C Preferred Stock Purchase Agreement by and
among Digimarc Corporation and the purchasers named in Schedule I.(6)
10.31 Key Employee Agreement dated August 31, 2000 for Matthew Christiano.
10.32 Key Employee Agreement dated August 31, 2000 for Sallie Calhoun.
10.33 Standard Office Lease dated February 1, 2000 by and between GLOBEtrotter
Software, Inc. and the Christiano Family Trust and Amendment No. 1 to the
Lease.
21.01 List of subsidiaries.
23.01 Consent of KPMG LLP, Independent Auditors.
- ----------
(1) Previously filed with the Commission on July 28, 2000 as Annex B to the 2000
Definitive Proxy Statement filed pursuant to Schedule 14A. Pursuant to Item
601(b)(2) of Regulation of S-K, certain schedules have been omitted but will be
furnished supplementally to the Commission upon request.
(2) Incorporated by reference to Exhibit 3.02 of our Registration Statement on
Form SB-2 (Registration No. 333-19373), which was declared effective on March
12, 1997.
(3) Incorporated by reference to the exhibit of the same number in our
Registration Statement on Form SB-2 (Registration No. 333-19373), which was
declared effective on March 12, 1997.
(4) Incorporated by reference to Exhibit 10.01 to our Form 10-QSB/A filed on
June 23, 1998.
(5) Incorporated by reference to Exhibit 10.02 to our Form 10-QSB filed on May
15, 1998.
(6) Previously filed with the Commission 1 to Schedule 13-D filed by us on June
23, 2000.
(7) Previously filed with the Commission on July 28, 2000 as Annex D to the 2000
Definitive Proxy Statement filed pursuant to Schedule 14A.
(8) Previously filed with the Commission as Exhibit 2.01 to our Form 8-K dated
as of June 18, 1999. Pursuant to Item 601(b)(2) of Regulation of S-K, certain
schedules have been omitted but will be furnished supplementally to the
Commission upon request.
(9) Previously filed with the Commission as Exhibit 10.01 to our Registration
Statement on Form S-3 (Registration No. 333-93477) declared effective on January
24, 2000.
*The Registrant has requested confidential treatment for certain portions of
this exhibit.
** Confidential treatment has been granted with respect to certain portions of
this Exhibit. These portions have been omitted from this filing and have been
filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K
We filed three Form 8-Ks during the fourth quarter of 2000, related to the
acquisition of certain assets of Manchester (UK) - based Productivity through
Software plc (PtS) relating to PtS' license management business (filed October
5, 2000); Board of Directors' approval of an amendment to the insider trading
policy to permit its officers, directors and other insiders to enter into
trading plans or arrangements for the sale of the Registrant's stock (filed
December 8, 2000); and the presentation of the quarterly results of operations
of the Company reflecting the combined operations of Macrovision and
GLOBEtrotter Software, Inc. that was accounted for under the "pooling of
interests" method (filed December 7, 2000).
40
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on this 2nd day of April,
2001.
MACROVISION CORPORATION
By: /s/ William Krepick
-------------------------------------
William A. Krepick
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, and in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
Principal Executive Officer:
/s/ John O. Ryan Chairman of the Board of Directors, Chief April 2, 2001
- -------------------------- Executive Officer, Secretary and Director
John O. Ryan
Principal Financial Officer and
Principal Accounting Officer:
/s/ Ian R. Halifax Vice President, Finance and Administration April 2, 2001
- -------------------------- and Chief Financial Officer
Ian R. Halifax
Additional Directors:
/s/ William A. Krepick Director April 2, 2001
- --------------------------
William A. Krepick
/s/ Matthew Christiano Director April 2, 2001
- --------------------------
Matthew Christiano
/s/ Richard S. Matuszak Director April 2, 2001
- --------------------------
Richard S. Matuszak
/s/ Donna S. Birks Director April 2, 2001
- --------------------------
Donna S. Birks
/s/ William N. Stirlen Director April 2, 2001
- --------------------------
William N. Stirlen
/s/ Thomas Wertheimer Director April 2, 2001
- --------------------------
Thomas Wertheimer
41
MACROVISION CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of KPMG LLP, Independent Auditors................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Stockholders'
Equity and Comprehensive Income (Loss)................................. F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
Report of KPMG LLP, Independent Auditors
The Board of Directors
Macrovision Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Macrovision Corporation and subsidiaries (the Company) as of December 31, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity and comprehensive income (loss), and cash flows for each of the years in
the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Macrovision
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
February 14, 2001
F-2
MACROVISION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
ASSETS
December 31,
----------------------
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents ........................................................ $ 22,409 $ 4,710
Short-term investments ........................................................... 85,500 31,452
Accounts receivable, net of allowance for doubtful accounts of $1,145 and
$1,059 as of December 31, 2000 and 1999, respectively ......................... 15,903 12,929
Inventories ...................................................................... 180 265
Receivable from related party .................................................... -- 555
Income taxes receivable .......................................................... 3,952 --
Deferred tax assets .............................................................. 5,971 2,477
Prepaid expenses and other current assets ........................................ 6,230 2,683
--------- ---------
Total current assets ....................................................... 140,145 55,071
Property and equipment, net .......................................................... 2,040 1,831
Long-term marketable investment securities ........................................... 109,532 52,241
Patents, net of accumulated amortization of $1,840 and $1,923 as of December 31,
2000 and 1999, respectively ...................................................... 2,341 2,391
Goodwill and other intangibles associated with acquisitions, net of accumulated
amortization of $6,515 and $1,600 as of December 31, 2000 and 1999,
respectively ..................................................................... 35,252 16,632
Other assets ......................................................................... 7,128 4,524
--------- ---------
$ 296,438 $ 132,690
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,436 $ 1,394
Accrued expenses .......................................................... 5,422 6,320
Deferred revenue .......................................................... 8,392 6,847
Income taxes payable ...................................................... -- 1,574
Current portion of capital lease obligations .............................. -- 76
--------- ---------
Total current liabilities ........................................... 16,250 16,211
Notes payable ................................................................. 56 133
Deferred tax liabilities ...................................................... 4,157 14,073
--------- ---------
20,463 30,417
Commitments and contingencies (Notes 6 and 8)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized; none issued -- --
Common stock, $.001 par value; 250,000,000 shares authorized;
49,818,101 and 45,666,240 shares issued and outstanding as of
December 31, 2000 and 1999, respectively ............................... 50 46
Additional paid-in capital ................................................ 266,741 63,752
Stockholder notes receivable .............................................. (297) --
Deferred stock-based compensation ......................................... (22,405) --
Accumulated other comprehensive income .................................... 10,842 25,166
Retained earnings ......................................................... 21,044 13,309
--------- ---------
Total stockholders' equity .......................................... 275,975 102,273
--------- ---------
$ 296,438 $ 132,690
========= =========
See accompanying notes to consolidated financial statements.
F-3
MACROVISION CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
Year ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
Net revenues ....................................................... $80,116 $52,076 $36,446
------- ------- -------
Costs and expenses:
Cost of revenues (excluding deferred stock-based compensation
expense of $542) ............................................ 5,425 4,885 2,435
Research and development (excluding deferred stock-based
compensation expense of $3,950) ............................. 7,822 6,463 4,072
Selling and marketing (excluding deferred stock-based
compensation expense of $10,213) ............................ 15,037 12,713 9,652
General and administrative (excluding deferred stock-based
compensation expense of $828) ............................... 12,717 7,169 7,437
Amortization of goodwill and other intangibles from acquisitions 4,878 1,600 --
Amortization of deferred stock-based compensation .............. 15,533 -- --
In-process research and development ............................ -- 4,285 --
------- ------- -------
Total costs and expenses ................................. 61,412 37,115 23,596
------- ------- -------
Operating income ......................................... 18,704 14,961 12,850
Interest and other income, net ..................................... 10,714 1,634 1,179
------- ------- -------
Income before income taxes ............................... 29,418 16,595 14,029
Income taxes ....................................................... 15,825 4,108 4,020
------- ------- -------
Net income ............................................... $13,593 $12,487 $10,009
======= ======= =======
Basic net earnings per share ....................................... $ .28 $ .28 $ .25
======= ======= =======
Shares used in computing basic net earnings per share ....... 49,135 45,031 40,850
======= ======= =======
Diluted net earning per share ...................................... $ .26 $ .27 $ .23
======= ======= =======
Shares used in computing diluted net earnings per share ...... 51,386 47,096 43,046
======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
MACROVISION CORPORATIONAND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(In thousands, except share data)
Additional Stockholder
Common Stock paid-in notes
Shares Amount capital receivable
----------- ----------- ----------- -----------
Balances as of December 31, 1997 ................................ 37,696,038 $ 38 $ 23,455 $ (131)
Comprehensive income (loss):
Net income ............................................
Translation adjustment ................................ -- -- -- --
Unrealized gain in investments, net ..................
Total comprehensive income ................................
Issuance of common stock upon exercise of options ......... 741,344 1 560 --
Issuance of common stock under employee stock purchase plan 148,156 -- 292 --
Issuance of common stock in secondary public offering,
net issuance costs of $438 ............................. 5,460,000 5 27,867 --
Distribution to shareholders ............................. -- -- -- --
Payment on stockholder note receivable .................... -- -- -- 53
Amortization of deferred stock compensation ............... -- -- -- --
Tax benefit associated with stock plans ................... -- -- 617 --
----------- ----------- ----------- -----------
Balances as of December 31, 1998 ................................ 44,045,538 $ 44 $ 52,791 $ (78)
----------- ----------- ----------- -----------
Comprehensive income (loss):
Net income ..............................................
Translation adjustment ..................................
Unrealized gain in investments, net .....................
Total comprehensive income .................................
Issuance of common stock upon exercise of options ......... 1,087,122 1 1,297 --
Issuance of common stock under employee stock purchase plan 94,784 -- 331 --
Issuance of common stock for payment of director fees
under the stock option plan ............................. 2,000 -- 25 --
Issuance of common stock in acquisition of C-Dilla Ltd. ... 436,796 1 5,072 --
Issuance of options in acquisition of C-Dilla Ltd. ....... -- -- 1,829 --
Distribution to shareholders ............................. -- -- -- --
Payment on stockholder note receivable .................... -- -- -- 78
Tax benefit associated with stock plans ................... -- -- 2,407 --
----------- ----------- ----------- -----------
Balances as of December 31, 1999 ................................ 45,666,240 $ 46 $ 63,752 $ --
----------- ----------- ----------- -----------
Comprehensive income (loss):
Net income ..............................................
Translation adjustment ..................................
Unrealized loss in investments, net .....................
Total comprehensive loss ...................................
Issuance of common stock upon exercise of options ......... 1,203,768 1 4,633 (297)
Issuance of common stock under employee stock purchase plan 73,943 728 --
Issuance of common stock in secondary public
offering, net issuance costs of $565 .................... 2,874,000 3 146,101 --
Directors fees paid in stock .............................. 150 15
Distribution to shareholders ............................. -- -- -- --
Deferred stock-based compensation related to
GLOBEtrotter stock option grants ........................ -- -- 37,938 --
Other deferred stock-based compensation ................... -- -- 225 --
Amortization of deferred stock-based compensation related
to GLOBEtrotter.......................................... -- -- -- --
Amortization of other deferred stock-based compensation
Tax benefit associated with stock plans ................... -- -- 13,349 --
----------- ----------- ----------- -----------
Balances as of December 31, 2000 ................................ 49,818,101 $ 50 $ 266,741 $ (297)
=========== =========== =========== ===========
Deferred Accumulated other Total
stock-based comprehensive Retained stockholders'
compensation income (loss) earnings equity
----------- ----------- ----------- -----------
Balances as of December 31, 1997 ................................ $ (96) $ (213) $ 2,208 $ 25,261
Comprehensive income (loss):
Net income ............................................ 10,009 10,009
Translation adjustment ................................ -- (15) -- (15)
Unrealized gain in investments, net .................. 147 147
-----------
Total comprehensive income ................................ 10,141
-----------
Issuance of common stock upon exercise of options ......... -- -- -- 561
Issuance of common stock under employee stock purchase plan -- -- -- 292
Issuance of common stock in secondary public offering,
net issuance costs of $438 ............................. -- -- -- 27,872
Distribution to shareholders ............................. -- -- (4,600) (4,600)
Payment on stockholder note receivable .................... -- -- -- 53
Amortization of deferred stock compensation ............... 96 -- -- 96
Tax benefit associated with stock plans ................... -- -- -- 617
----------- ----------- ----------- -----------
Balances as of December 31, 1998 ................................ $ -- $ (81) $ 7,617 $ 60,293
----------- ----------- ----------- -----------
Comprehensive income (loss):
Net income .............................................. . 12,487 12,487
Translation adjustment .................................. 132 132
Unrealized gain in investments, net ..................... 25,115 25,115
-----------
Total comprehensive income ................................. 37,734
-----------
Issuance of common stock upon exercise of options ......... -- -- -- 1,298
Issuance of common stock under employee stock purchase plan -- -- -- 331
Issuance of common stock for payment of director fees
under the stock option plan ............................. -- -- -- 25
Issuance of common stock in acquisition of C-Dilla Ltd. ... -- -- -- 5,073
Issuance of options in acquisition of C-Dilla Ltd. ....... -- -- -- 1,829
Distribution to shareholders ............................. -- -- (6,795) (6,795)
Payment on stockholder note receivable .................... -- -- -- 78
Tax benefit associated with stock plans ................... -- -- -- 2,407
----------- ----------- ----------- -----------
Balances as of December 31, 1999 ................................ $ -- $ 25,166 $ 13,309 $ 102,273
----------- ----------- ----------- -----------
Comprehensive income (loss):
Net income .............................................. 13,593 13,593
Translation adjustment .................................. 513 514
Unrealized loss in investments, net ..................... (14,837) (14,838)
-----------
Total comprehensive loss ................................... (731)
-----------
Issuance of common stock upon exercise of options ......... -- -- -- 4,337
Issuance of common stock under employee stock purchase plan -- -- -- 728
Issuance of common stock in secondary public
offering, net issuance costs of $565 .................... -- -- -- 146,104
Directors fees paid in stock .............................. 15
Distribution to shareholders ............................. -- -- (5,858) (5,858)
Deferred stock-based compensation related to
GLOBEtrotter............................................. (37,938) -- -- --
Other deferred stock-based compensation ................... (225) -- -- --
Amortization of other deferred stock-based compensation
related to GLOBEtrotter.................................. 15,533 -- -- 15,533
Amortization of other deferred stock-based compensation.... 225 -- -- 225
Tax benefit associated with stock plans ................... -- -- -- 13,349
----------- ----------- ----------- -----------
Balances as of December 31, 2000 ................................ $ (22,405) $ 10,842 $ 21,044 $ 275,975
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
MACROVISION CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income .............................................................................. $ 13,593 $ 12,487 $ 10,009
Adjustments to reconcile net income to net cash provided by continuing operations:
Depreciation and amortization ........................................................ 6,586 2,789 1,197
Deferred income taxes ................................................................ (3,209) (3,050) (34)
Amortization of deferred stock-based compensation .................................... 15,758 -- 96
Loss on disposal of fixed assets ..................................................... 722 15 17
Tax benefit from benefit stock options ............................................... 13,349 2,408 617
In-process research and development .................................................. -- 4,286 --
Change in provision for accounts and notes receivable ................................ 314 146 123
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets ........................ (10,702) (5,680) (2,610)
Accounts payable, accrued expenses, deferred revenue, and income taxes payable .... 115 5,206 1,914
Other ............................................................................. 520 132 (12)
--------- --------- ---------
Net cash provided by operating activities ...................................... 37,046 18,739 11,317
--------- --------- ---------
Cash flows from investing activities:
Purchases of long-term marketable investment securities ................................. (115,592) (11,578) (19,495)
Purchases of short-term investments ..................................................... (152,231) (39,513) (56,527)
Sales or maturities of long-term marketable investments ................................. 59,347 24,218 2,541
Sales or maturities of short-term investments ........................................... 97,898 30,838 44,957
Acquisition of property and equipment, net of acquisitions .............................. (1,740) (495) (349)
Payments for patents .................................................................... (811) (541) (666)
Proceeds from related party receivable .................................................. -- -- 310
Acquisition of assets of PtS ........................................................... (23,536) -- --
Acquisition of C-Dilla Ltd., net of cash acquired ...................................... -- (11,960) --
Investment in C-Dilla Ltd., CAC, InterActual, Digimarc, TTR, SecureMedia and AudioSoft . (28,410) (3,601) (4,053)
Other, net .............................................................................. -- 62 15
--------- --------- ---------
Net cash used in investing activities .......................................... (165,075) (12,570) (33,267)
--------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations ................................................... (76) (112) (108)
Payments on debt ........................................................................ (77) (267) (33)
Repayment (loan) to shareholders ........................................................ 555 (555) --
Proceeds from issuance of common stock upon exercise of options ......................... 4,337 1,298 561
Proceeds from issuance of common stock under employee stock purchase plan ............... 728 331 292
Proceeds from issuance of common stock for director fees ................................ 15 25 --
Payment of stockholder note receivable .................................................. -- 78 53
Proceeds from sale of common stock, net of issuance costs ............................... 146,104 (69) 27,872
Cash distribution to stockholders ....................................................... (5,858) (6,795) (4,600)
--------- --------- ---------
Net cash provided by (used in) financing activities ............................ 145,728 (6,066) 24,037
--------- --------- ---------
Net increase in cash and cash equivalents ................................................... 17,699 103 2,087
Cash and cash equivalents at beginning of year .............................................. 4,710 4,607 2,520
--------- --------- ---------
Cash and cash equivalents at end of year .................................................... $ 22,409 $ 4,710 $ 4,607
========= ========= =========
Cash paid during the year:
Interest ............................................................................. $ 5 $ 10 $ 11
========= ========= =========
Income taxes ......................................................................... $ 10,273 $ 3,475 $ 3,313
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
MACROVISION CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) The Company and Summary of Significant Accounting Policies
The Company
Macrovision Corporation (the "Company") was formed in 1983 and designs,
develops and markets video copy protection and digital rights management
technologies that provide copy protection for motion pictures and other
proprietary content stored on videocassettes, DVDs or other media or is
transmitted by cable, satellite or microwave transmission or through the
Internet. In 1998, the Company broadened its focus to include the copy
protection of other media, including multimedia computer software on CD-ROMs. In
2000, the Company expanded into licensing Electronic License Management, ("ELM")
solutions and software asset management tools for business. The Company is
headquartered in Sunnyvale, California and has subsidiaries in San Jose,
California, the United Kingdom and Japan.
In August 1999 and in March 2000, the Company issued one additional share
for every share outstanding, thus effecting two 2 for 1 stock splits. All share
and per share information presented have been retroactively adjusted for the
effect of such stock splits.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Acquisitions
On August 31, 2000, the Company completed its acquisition of privately
held GLOBEtrotter Software, Inc. ("GLOBEtrotter") of San Jose, California.
GLOBEtrotter is a leading OEM supplier of B2B (business-to-business) electronic
licensing and license management technology to software vendors and a leading
direct supplier of software asset management products to corporate customers
worldwide. The Company acquired all the outstanding shares of GLOBEtrotter for
8,944,548 shares of Macrovision common stock and assumed all vested and unvested
GLOBEtrotter stock options in exchange for options to purchase 821,852 shares of
Macrovision common stock. The transaction has been accounted for using the
"pooling of interests" method. As a result, the consolidated financial
statements for periods prior to the combination have been restated to include
the accounts and results of operations of GLOBEtrotter Software, Inc. The
results of operations previously reported by the separate pooled enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
Eight months ended Twelve months ended Twelve months ended Twelve months ended
August 31, 2000 December 31, 2000 December 31, 1999 December 31, 1998
------------------ ------------------ ------------------ ------------------
Net revenues:
Macrovision ............... $ 36,982 $ 58,825 $ 37,390 $ 24,434
GLOBEtrotter .............. 11,972 21,291 14,686 12,012
------------------ ------------------ ------------------ ------------------
Combined .................. $ 48,954 $ 80,116 $ 52,076 $ 36,446
================== ================== ================== ==================
Net income:
Macrovision ............... $ 14,213 $ 19,634 $ 7,230 $ 6,342
GLOBEtrotter .............. (7,607) (6,041) 5,257 3,667
------------------ ------------------ ------------------ ------------------
Combined .................. $ 6,606 $ 13,593 $ 12,487 $ 10,009
================== ================== ================== ==================
On October 5, 2000, the Company acquired certain assets of Manchester (UK)
based Productivity through Software plc ("PtS"). The Company paid approximately
$23.3 million in cash and related acquisition costs, and assumed liabilities to
service current customer maintenance contracts. In addition, the Company may pay
an additional maximum payment of $2.8 million, contingent upon this business
meeting certain predetermined revenue targets. The purchase price was allocated
to employee retention, PtS's customer base and other goodwill. The Company will
amortize these intangibles on a straight-line basis over three years. Goodwill
and other intangibles associated with the transaction amounted to $23.5 million
which includes an additional $200,000 related to contingent payments through
December 31, 2000. The Company amortized $1.9 million of goodwill and other
intangibles in 2000.
F-7
In 1998, the Company made a minority equity investment in C-Dilla and
entered into a Software Marketing License and Development Agreement. In June
1999, the Company acquired the remaining shares of C-Dilla for approximately
$12.8 million in cash, 218,398 shares of our common stock valued at $5.1 million
and stock option grants in Macrovision valued at $1.8 million.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported results of operations during the reporting period.
Actual results could differ from those estimates.
Cash, Cash Equivalents, and Investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market funds. All
other liquid investments with maturities over three months and less than 12
months are classified as short-term investments. Short-term investments consist
of government bonds, government agency securities and corporate securities. All
marketable securities with maturities over one year or which the Company's
intent is to retain for the long-term are classified as long-term marketable
investment securities.
Management determines the appropriate classification of investment
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. The Company enters into certain equity investments for the
promotion of business and strategic objectives, and typically does not attempt
to reduce or eliminate the inherent market risks associated with these
investments. In January 2000, the Company invested $4.0 million in TTR
Technologies, Ltd. ("TTR"), a public company, representing 1,880,937 shares or
11.4% of TTR's common stock outstanding. In October 2000, the Company made an
additional equity investment of $21.8 million in Digimarc Corporation
("Digimarc"), a publicly traded company and a world leader in digital watermark
technology and applications. This increased the Company's equity interest in
Digimarc to 2,014,059 shares or approximately 12.4%. As of December 31, 2000 and
1999, all investment securities were designated as "available-for-sale."
Available-for-sale securities are carried at fair value based on quoted market
prices, with unrealized gains and losses, reported in comprehensive income
(loss), a separate component of stockholders' equity.
Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities will be reported in other
income or expense as incurred. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are also included in other income.
The following is a summary of available-for-sale securities (in
thousands):
December 31,
-------------------
2000 1999
-------- --------
Cash equivalents - money market funds .................. $ 20,238 $ 2,951
-------- --------
Investments:
Corporate preferred certificates ................... -- 2,000
Municipal preferred certificates ................... -- 2,000
Corporate bonds .................................... 142,787 --
United States government bonds and agency securities 5,957 33,469
Equity investments ................................. 46,288 46,224
-------- --------
195,032 83,693
-------- --------
$215,270 $ 86,644
======== ========
As of December 31, 2000 and 1999, government and corporate bond securities
and equity investments totaling $83.1 million and $52.2 million respectively,
were classified as long-term marketable investment securities.
As of December 31, 2000 and 1999, the difference between the fair value
and the amortized cost of available-for-sale securities was an unrealized gain
of $17,595,000 and $42,634,000, respectively. As of December 31, 2000 and 1999,
the unrealized gain, net of taxes, was $10,425,000 and $25,262,000,
respectively. These unrealized gains and losses, net of deferred income taxes,
related to short-term and long-term government bonds and investment securities,
have been recorded as a component of comprehensive income (loss). As of December
31, 2000 and 1999, the
F-8
weighted average portfolio duration and contractual maturity for the government
bonds was approximately eleven months and eight months, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. The Company computes
depreciation for all property and equipment using the straight-line method. The
estimated useful lives of assets range from three to five years.
Patents
Patent application costs of $1.4 million and $1.5 million as of December
31, 2000 and 1999, respectively, are included in patents and other intangibles
and, upon the granting of the related patent, are amortized using the
straight-line method over the shorter of the estimated useful life of the patent
or 10 years.
Goodwill and Other Intangible Assets
Other intangible assets include the fair value of developed technology,
workforce, non-compete agreements, customer base and goodwill associated with
the acquisition of C-Dilla and certain assets of PtS . The Company amortizes
such intangibles on a straight-line basis over three to seven years based on
expected lives of the associated assets.
The Company regularly performs reviews to determine if the carrying value
of the goodwill is impaired. The purpose for the review is to identify any facts
or circumstances, either internal or external, which indicate that the carrying
value of the asset cannot be recovered. No such impairments have been identified
to date. Goodwill is stated net of accumulated amortization and is amortized on
a straight-line basis over three to seven years.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is tested by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment is measured
by the amount by which the carrying amount of the assets exceeds the fair value
of the assets, as derived by discounted future net cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Other Assets
The Company owns minority interests in the following closely-held
companies: AudioSoft International SA ("AudioSoft") a developer of secure
e-music delivery technology and copyright management royalty reporting systems;
Command Audio Corporation ("CAC"), a developer of audio-on-demand technology;
SecureMedia Inc. ("SecureMedia"), a developer of encryption technology for high
data flow Internet applications such as streaming media and digital
communication; InterActual Technologies, Inc. ("InterActual"), a developer of
client and server software which enables DVDs to be seamlessly linked to
Internet web sites, e-commerce transactions, interactive games, and online
communities. The Company accounts for such investments under the cost method.
Revenue Recognition
Advanced license fees attributable to minimum copy quantities or shared
revenues are deferred until earned. Revenue from the duplication of
videocassettes and the replication of digital versatile discs ("DVDs") and
CD-ROMs is earned based upon reported or estimated volume of each or, in the
case of agreements with minimum guaranteed payments with no specified volume, on
a straight-line basis over the life of the agreement. Retroactive credits on
certain agreements that contain pricing adjustments or return provisions are
accrued based upon anticipated respective unit volumes. Nonrefundable technology
licensing revenue, which applies principally to DVD and PC subassembly
manufacturers, digital PPV, cable and satellite system operators, and set-top
decoder manufacturers, is recognized upon persuasive evidence of an arrangement,
performance of all significant obligations and determination that collection of
a fixed and determinable license fee is considered probable. Royalty revenue
associated with technology licenses is recognized when earned based upon
reported unit sales or transaction based fees. In fiscal 1999, the Company began
recognizing royalty revenue associated with PPV set
F-9
top boxes when reported, rather than estimating volumes. This change did not
have a material effect on the financial statements in the year of
implementation. Revenue from the sale of encoders, decoders, and systems
incorporating the Company's video copy protection and scrambling technologies is
recognized upon shipment provided that the Company has no significant additional
performance obligations.
The Company generates a portion of its revenue from licensing software of
GLOBEtrotter and providing services related to the support of this software. The
Company follows the provisions of Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended.
License revenue is recognized upon the execution of a license agreement,
when the licensed product has been delivered, fees are fixed or determinable,
collection is probable, and when all other significant obligations have been
fulfilled. For license agreements in which customer acceptance is a condition to
earning the license fees, revenue is not recognized until acceptance occurs. For
arrangements containing multiple elements, such as software license fees,
consulting services and maintenance, or multiple products and where
vendor-specific objective evidence of fair value (VSOE) exists for all
undelivered elements, the Company accounts for the delivered elements in
accordance with the "residual method" prescribed by SOP 97-2, as amended. For
arrangements containing multiple elements where VSOE does not exist, all revenue
is deferred until such time that VSOE is evidenced or all elements of the
arrangement have been delivered, or if the only undelivered element is
maintenance, revenue is recognized pro rata over the maintenance contract
period.
Service revenues include consulting fees for training, support, and other
services and recognized as revenue as the services are performed. Maintenance
and support revenues are deferred and recognized ratably over the maintenance
contract period.
Cost of Revenues
The Company has agreements with certain licensed duplicators, DVD and CD
replicators, DVD authoring facilities and CD mastering facilities utilized by
customers of the Company's video copy protection and software copy protection
technologies. The Company has agreed to pay these licensees a specified fixed
service fee or on a per unit basis utilizing the Company's copy protection
technologies to help offset the cost of operating the Company's copy protection
equipment and reporting requirements of their contracts. Such amounts are
charged to cost of revenues when incurred. Cost of revenues also includes items
such as product costs, videocassette copy protection processor costs, royalty
expense and software product support.
Cost of revenues also includes outside legal costs of $970,000, $1,453,000
and $622,000 in 2000, 1999 and 1998, respectively, associated with litigation to
enforce the Company's patents. Amortization of patents is also included in cost
of revenues.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits of which future realization is
uncertain.
Foreign Currency Translation and Transactions
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. The translation of foreign currency denominated
financial statements into United States dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenues and expense accounts using a weighted average exchange rate for the
respective periods. Adjustments resulting from such translation are included in
comprehensive income. Gains or losses resulting from foreign currency
transactions included in the consolidated statements of income were not material
in any of the periods presented.
Business and Concentration of Credit Risk and Fair Value of Financial
Instruments
The Company licenses its video copy protection, CD-ROM copy protection and
electronic license management software to customers in the home videocassette,
DVD, cable and satellite pay-per-view, corporate communication markets,
multimedia software markets and business software markets primarily in the
United States, Europe, Japan, and the Far East. In 2000, 16.3% of the Company's
business is attributed to the licensing of its video copy protection technology
through Motion Picture Association of America ("MPAA") movie studios.
Accordingly, the ability of the Company to grow its video copy protection
operations has been dependent on MPAA movie
F-10
studios' continued success in the production and distribution of movies
utilizing the Company's technology. The Company also licenses its digital PPV
video copy protection technologies to satellite and cable television operators
and to the equipment manufacturers that supply the satellite and cable
television industries. The Company licenses its CD-ROM copy protection to
publishers of software in the multimedia and educational software and rights
management application markets. With the acquisition of GLOBEtrotter Software,
Inc. the Company began business in the electronic license management ("ELM")
software segment. The Company licenses ELM solutions to independent software
vendors (ISVs) and software asset management ("SAM") solutions to end user
companies. The Company also provides support, maintenance and consulting
services. In addition, 42.3%, 40.2% and 38.0% of the Company's sales in 2000,
1999 and 1998, respectively, are from export or foreign operations.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
marketable securities, trade accounts receivable and long-term investments. The
Company places its cash and cash equivalents and marketable securities in
deposits and money market funds with various high credit quality institutions.
The carrying value of the Company's financial instruments approximates fair
market value due to the relatively short maturities of those instruments, the
recent financing rounds for investments in closely-held companies, or the ending
price of shares as represented on a national exchange for the Company's
investments Digimarc and TTR.
The Company performs ongoing credit evaluations of its customers. One
customer accounted for 10% of net revenue for the year ended December 31, 2000.
No one customer accounted for more than 10% of net revenue for the years ended
December 31, 1999 and 1998, respectively. At December 31, 2000, receivables from
one customer were approximately 11% of accounts receivable. At December 31, 1999
and 1998, receivables from one customer were approximately 10% of accounts
receivable, respectively.
Earnings Per Share
Basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period except for periods of operating loss for which no common share
equivalents are included because their effect would be anti-dilutive. Dilutive
common equivalent shares consist of common stock issuable upon exercise of stock
options using the treasury stock method.
(In thousands) December 31,
------------------------
2000 1999 1998
------ ------ ------
Basic EPS - weighted average number
of common shares outstanding ..... 49,135 45,031 40,850
Effect of dilutive common equivalent
shares - stock options outstanding 2,251 2,065 2,196
------ ------ ------
Diluted EPS - weighted average number
of common shares and common share
equivalents outstanding .......... 51,386 47,096 43,046
====== ====== ======
In 2000, 1999 and 1998, the average number of stock options that were not
included in the diluted earnings per share calculation because the exercise
price was greater than the average market price, totaled 171,000, 82,000, and
12,000, respectively.
Advertising Expense
The cost of advertising is expensed as incurred. Such costs are included
in selling and marketing expense and totaled $1.3 million, $1.6 million and $1.3
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. In March 2000,
the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A), Amendment; Revenue
Recognition in
F-11
Financial Statements. SAB 101A delays the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. SAB 101B "Second Amendment: Revenue Recognition in Financial Statements"
delays the implementation of SAB 101 until the Company's fourth fiscal quarter
of 2000. Accordingly, the Company has adopted the provisions of SAB 101 as
required in the fourth quarter of 2000 with no material effect to its statements
of consolidated financial position and results of operations.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25. This Interpretation clarifies (a) the definition of an employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation was effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occurred after
either December 15, 1998, or January 12, 2000. Accordingly, the Company has
adopted the provisions of FIN 44 without significant impact to its statements of
consolidated financial position and results of operations.
In June 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 138, Accounting for Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 138, establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value would be accounted for based on
the intended use of the derivative and whether it is designated and qualifies
for hedge accounting. The Company will adopt SFAS No. 138 concurrently with SFAS
No. 133 for its first quarter of fiscal 2001. The Company expects the adoption
of SFAS Nos. 133 and 138 will not have a material effect on its statements of
consolidated financial position and results of operations.
(2) Financial Statement Details
Inventories
Inventories consisted of the following (in thousands):
December 31,
------------------
2000 1999
------ ------
Raw materials .......................................... $ 82 $ 138
Work in progress ....................................... 16 --
Finished goods ......................................... 82 127
------ ------
$ 180 $ 265
====== ======
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
December 31,
------------------
2000 1999
------ ------
Machinery and equipment ................................ $4,300 $4,319
Leasehold improvements ................................. 1,516 1,235
Furniture and fixtures ................................. 1,094 878
------ ------
6,910 6,432
Less accumulated depreciation and amortization ......... 4,870 4,601
------ ------
$2,040 $1,831
====== ======
Equipment recorded under capital leases aggregated zero and $518,000 with
related accumulated amortization of zero and $433,000 at December 31, 2000 and
1999, respectively.
Other Assets
During 1997, the Company invested an additional $2.0 million in CAC as
part of various external rounds of third-party financing by CAC thus maintaining
its 19.8% ownership. In 1998, the Company invested $500,000 in CAC in connection
with a round of external third-party financing obtained by CAC. This investment
by the Company was less than the 19.8% of the total investment
F-12
financing made and thus reduced the Company's previous investment balance in CAC
to 11.9%. Subsequently, CAC paid the note in full, including accrued interest.
In December 1999, the Company converted its convertible bridge loan in the
amount of $836,733 and accrued interest to CAC into equity shares as part of a
round of third-party financing. As of December 31, 2000, the Company owns
approximately 7.7% equity in CAC. The Company does not have the ability to exert
significant influence over CAC.
In August 1999, the Company acquired a 7.3% ownership interest in
AudioSoft, a developer of secure e-music delivery technology and copyright
management royalty reporting systems. The Company does not have the ability to
exert significant influence over AudioSoft. In 2000, the Company invested on a
net basis, an additional $410,000 based on the attainment of certain commercial
milestones. In addition, the Company received $55,000 and $105,000 for 2000 and
1999, respectively, under a consulting agreement entered into with AudioSoft to
provide technical, business and strategic consulting.
In March 2000, the Company made a $1.0 million strategic investment in
SecureMedia, a developer of encryption technology for high data flow Internet
applications such as streaming media and digital communication. Also in March
2000, the Company made a $1.2 million strategic investment in InterActual
Technologies, Inc. ("InterActual"), a developer of client and server software
which enables DVDs to be seamlessly linked to Internet web sites, e-commerce
transactions, interactive games, and online communities. The Company does not
have the ability to exert significant influence over either of these companies.
The Company intends to hold its investments in non-marketable securities
for the long-term and monitors the recoverability of these investments based on
management's estimates of the net realizable value based on the achievements of
milestones in business plans and third-party financings. The carrying amounts of
such investments, which are accounted for on the cost basis, are as follows (in
thousands):
-----------------------
December 31,
-----------------------
2000 1999
------ ------
Investment in CAC ............................ $3,688 $3,688
Investment in SecureMedia .................... 1,000 --
Investment in AudioSoft ...................... 1,160 750
Investment in InterActual .................... 1,200 --
Deposits and other assets .................... 80 86
------ ------
$7,128 $4,524
====== ======
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31,
-----------------------
2000 1999
------ ------
Accrued compensation ......................... $3,868 $4,352
Accrued professional fees .................... 595 527
Accrued credits .............................. -- 437
Accrued taxes ................................ 291 156
Other accrued liabilities .................... 668 848
------ ------
$5,422 $6,320
====== ======
F-13
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consisted of the following (in
thousands):
Year ended December 31,
-------------------------------------------
2000 1999 1998
--------- ------- ------
Interest income................ $ 10,913 $ 1,530 $ 1,089
Interest expense............... (5) (10) (11)
Other.......................... (194) 114 101
--------- ------- ------
$ 10,714 $ 1,634 $1,179
========= ======= ======
Valuation and Qualifying Accounts (in thousands)
Balance at
Beginning of Charged to Costs Balance at End
Period and Expenses Deductions of Period
-------------- ----------------- ------------ ----------------
Allowance for doubtful accounts:
1998 .................... $ 759 193 40 $ 912
1999 .................... $ 912 353 206 $1,059
2000 .................... $1,059 274 188 $1,145
Supplemental Cash Flow Information
Supplemental cash flow information related to non-cash investing and
financing activities is as follows (in thousands):
Year ended December 31,
-----------------------------
2000 1999 1998
------- -------- ----
Deferred stock-based compensation
relating to GLOBEtrotter ................... $37,938 -- --
======= ======== ====
Stock issued for C-Dilla Ltd. ................ -- $ 5,073 --
======= ======== ====
Issuance of options in acquisition
of C-Dilla Ltd. ............................ -- $ 1,829 --
======= ======== ====
Unrealized gain on investments,
net of tax ................................. $10,425 $ 25,262 --
======= ======== ====
(3) Transactions with Related Parties
In December 1997, the Company made our initial investment in Digimarc
(NASDAQ, symbol DMRC), a world leader in digital watermark technology and
applications. The Company made two subsequent investments in June 1999 and
October 2000. Digimarc completed an initial public offering in December 1999,
and the Company currently owns approximately 12.4% of the outstanding shares of
Digimarc. The Company has an agreement with Digimarc to jointly develop a
digital video watermarking copy protection solution to address
digital-to-digital copying associated with next-generation recordable DVD and
digital videocassette recording devices. In addition, the Company has an
exclusive marketing agreement with the Company through December 31, 2002, with
minimum royalty payments of $2 million. As of December 31, 2000, the Company
paid $1 million under this agreement.
In January 2000, the Company invested $4.0 million to acquire a minority
interest in TTR. In addition, the Company has entered into an agreement with TTR
to jointly develop and market a copy protection product designed to inhibit
casual copying of music CDs using dual-deck CD recorder systems and personal
computer based CD recordable drives. TTR is a provider of proprietary digital
anti-piracy technologies and products. Pursuant to the agreement, TTR reimbursed
the Company $1,000,000 of engineering and marketing expenses in 2000. As of
December 31, 2000, the Company holds approximately 11.1% of the outstanding
shares of TTR.
The Company leased certain of its premises in San Jose, California from a
related party. Rent paid to such related party amounted to $538,000, $249,000,
and $150,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
(4) Stockholders' Equity
F-14
Series A Convertible Preferred Stock
The Company's Certificate of Incorporation provides for the issuance of up
to 5,000,000 shares of $0.001 par value preferred stock.
Common Stock
On January 26, 2000, the Company consummated an offering of 3,820,000
shares of its Common Stock, of which 2,874,000 shares were issued and sold by
the Company and 946,000 shares were sold by shareholders of the Company. All
shares were sold for $53.44 per share. The net proceeds to the Company from the
offering, after deducting the underwriting discount and other expenses of the
offering, were approximately $146.0 million. The Company did not receive any
proceeds from the sale of shares sold by the selling stockholders.
On February 1, 2000, the Company issued 109,290 shares of common stock,
pursuant to a stock option exercise, to an officer of the Company in exchange
for a full recourse promissory note in the principal amount of $297,000.
Interest accrues at the rate of 6.03% per annum. Principal and accrued interest
are due and payable on the earlier of five years from February 1, 2000, the sale
or transfer by the officer of any or all shares purchased with this note or the
termination of the officer's service other than for death or disability.
Stock Option and Purchase Plans
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Equity Incentive Plan"), which serves as the successor to the Company's 1988
Stock Option Plan (the "1988 Plan"). Options granted under the 1988 Plan before
its termination continue to remain outstanding in accordance with their terms,
but no further options may be granted under the 1988 Plan. Nonstatutory stock
options and incentive stock options granted under the 1988 Plan were exercisable
at prices not less than 85% and 100%, respectively, of the fair value of the
Company's common stock on the date of grant, as determined by the Company's
Board of Directors. The options were generally exercisable over a 3-year vesting
period and expire 7 to 10 years from date of grant.
Pursuant to the Equity Incentive Plan, the Company's Board of Directors
has reserved 5,088,888 shares of common stock for issuance. In May 1998, an
additional 1,600,000 shares were reserved by approval of the Board of Directors
and stockholders. The Equity Incentive Plan provides for the grant of stock
options, stock appreciation rights, and restricted stock awards by the Company
to employees, officers, directors, consultants, independent contractors, and
advisers of the Company. The Equity Incentive Plan permits the grant of either
incentive or nonqualified stock options at the then current market price.
Options granted under the Equity Incentive Plan will have a maximum term of ten
years and generally vest over three years at the rate of 1/6, 1/3 and 1/2,
respectively.
In December 1996, the Company's Board of Directors adopted the 1996
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 560,000 shares
of common stock for issuance thereunder. The Purchase Plan was effective upon
the Company's initial public offering in March 1997. The Purchase Plan permits
eligible employees to purchase common stock, through payroll deductions of
between 1% and 20% of the employee's compensation, at a price equal to 85% of
the lower of the fair market value of the common stock on the first day of the
offering period or on the last day of the purchase period. The Company's
stockholders approved the Purchase Plan in February 1997. In 2000, 1999 and
1998, the Company issued 73,943, 94,784 and 148,156 shares, respectively,
pursuant to the Purchase Plan.
In August 2000, the Company adopted the 2000 Equity Incentive Plan which
serves as the successor to the Company's 1996 Equity Incentive Plan. The total
number of shares of Macrovision common stock for which options and other stock
awards may be granted under the 2000 Equity Incentive Plan is 4,500,000, and the
maximum number of stock options that the Company may grant to any individual in
any calendar year is 500,000, in each case subject to adjustment as described
below.
The shares available for issuance under the 2000 Equity Incentive Plan may
be authorized but unissued shares of common stock or shares of common stock that
the Company reacquires. If any options expire or are forfeited or canceled, the
shares are added back to the total number of shares available for issuance under
the 2000 Equity Incentive Plan.
In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 240,000 shares
of common stock for issuance thereunder. In June 2000, the Board of Directors
increased the number of shares of common stock reserved for issuance under the
Directors Plan by 126,000 shares. The Company's stockholders approved the
Directors Plan in February 1997 and approved the share increase in August 2000.
The Directors Plan provides each eligible director an initial grant of a
nonqualified option to purchase 40,000 shares (increased from 20,000 shares
prior to 1999) of common stock on the date the eligible director first becomes a
director, with each initial option granted after 1999 vesting in monthly
increments over a three-year period. The
F-15
Directors Plan provides for additional annual grants of nonqualified options to
each eligible director to purchase 15,000 shares of common stock on each
anniversary of the date such person became a director, with monthly vesting over
one year. Prior to 2001, the annual grants under the Directors Plan were for
10,000 shares vesting over one year (in 2000), for 30,000 shares vesting over
three years (in 1999), and for 12,000 shares vesting over four years (prior to
1999).
During 2000, 1999 and 1998, the Company granted options to purchase
30,000, 90,000 and 36,000 shares, respectively, of common stock to outside
directors under the Directors Plan.
The Company uses the intrinsic value-based method to account for all of
its employee stock-based compensation plans. Accordingly, compensation cost has
been recognized in the accompanying consolidated financial statements for its
plans when the exercise price of each option was less than the fair value of the
underlying common stock as of the grant date for each stock option. With respect
to the options assumed in connection with the acquisition of GLOBEtrotter, the
Company recorded deferred stock-based compensation of approximately $37.9
million, for the difference between the exercise price and the fair value of the
stock underlying the options. This amount is being amortized over the vesting
period of the individual options, generally four years. Amortization expenses
recognized in 2000, relating to the GLOBEtrotter acquisition, totaled $15.5
million.
If compensation cost for the Company's stock-based compensation plans had
been determined in a manner consistent with the fair value approach described in
SFAS No. 123, the Company's net income and net income per share as reported
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
Year ended December 31,
-------------------------------------------
2000 1999 1998
---------- ---------- ----------
Net income (loss) As reported $ 13,593 $ 12,487 $ 10,009
Adjusted pro forma (15,763) 7,656 8,758
Basic net income per share As reported .28 .28 .25
Adjusted pro forma (.28) .17 .21
Diluted net income per share As reported .26 .27 .23
Adjusted pro forma (.28) .16 .20
Options vest over several years and new options are generally granted each
year. Because of these factors, the pro forma effect shown above may not be
representative of the pro forma effect of SFAS No. 123 in future years.
The fair value of each option is estimated on the date of grant using the
Black-Scholes method with the following weighted average assumptions for options
and the ESPP plan:
Year ended December 31,
----------------------------------------------
2000 1999 1998
------------- ------------- ------------
Option Plans:
Dividends....................... None None None
Expected term................... 3.73 years 4.32 years 4.34 years
Risk free interest rate......... 6.18% 5.62% 6.45%
Volatility rate................. 85.7% 71.7% 66.8%
ESPP Plan:
Dividends....................... None None None
Expected term................... 1.25 years 1.25 years 1.25 years
Risk free interest rate......... 5.97% 5.92% 5.47%
Volatility rate................. 67.4% 65.7% 62.6%
F-16
Activity under the Company's option plans is as follows:
Weighted-average
Number of shares exercise price
------------------ ------------------
Outstanding as of December 31, 1997 ... 2,793,372 $1.16
Granted 825,580 4.28
Canceled (51,088) 3.24
Exercised (741,344) 0.76
----------
Outstanding as of December 31, 1998 ... 2,826,520 2.14
Granted 1,933,040 12.32
Canceled (242,540) 5.56
Exercised (1,089,122) 1.22
----------
Outstanding as of December 31, 1999 ... 3,427,898 7.92
Granted 1,786,788 39.09
Canceled (184,678) 18.35
Exercised (1,203,918) 3.86
----------
Outstanding as of December 31, 2000 ... 3,826,090 23.27
==========
December 31,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
Options exercisable at end of year ... 648,634 859,106 1,394,916
Weighted average fair value of options
granted during the period .......... $ 47.75 $ 7.72 $ 2.50
The following table summarizes information about fixed stock options
outstanding as of December 31, 2000:
Outstanding Exercisable
-------------------------------------------------------- ------------------------------
Weighted average Weighted
Number remaining contractual Weighted average Number average
Range of exercise prices of shares life exercise price exercisable exercise price
- ------------------------------------------------------------------------------------------------------------------
$ 0.68 - 2.72 839,586 8.24 years $ 2.43 247,297 $ 1.74
$ 3.53 - 7.91 598,986 7.21 4.44 259,279 4.31
$ 8.79 - 9.63 566,820 8.27 8.85 64,526 9.01
$ 12.91 - 18.66 744,463 8.47 13.14 37,631 14.53
$ 19.91 - 60.00 576,608 9.08 41.03 21,265 35.51
$ 62.13 - 102.31 499,627 9.62 92.01 18,636 74.40
--------- -------
3,826,090 8.44 23.27 648,634 7.42
========= =======
F-17
(5) Income Taxes
Income tax expense for the years ended December 31, 2000, 1999 and 1998
consisted of (in thousands):
December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Current:
Federal .............................. $ 4,931 $ 3,136 $ 2,119
State ................................ 592 1,074 947
Foreign .............................. 1,339 535 382
-------- -------- --------
Total current ..................... 6,862 4,745 3,448
-------- -------- --------
Deferred:
Federal .............................. (3,793) (2,447) (34)
State ................................ (593) (597) (11)
Foreign .............................. -- -- --
-------- -------- --------
Total deferred tax expense ........ (4,386) (3,044) (45)
-------- -------- --------
Charges in lieu of income taxes associated
with the exercise of stock options ..... 13,349 2,407 617
-------- -------- --------
Total tax expense ........................ $ 15,825 $ 4,108 $ 4,020
======== ======== ========
Income tax expense for the years ended December 31, 2000, 1999, and 1998,
differed from the amounts computed by applying the U.S. federal income tax rate
of 35% to pretax income as a result of the following (in thousands):
Year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Federal tax statutory rate ...... $ 10,296 $ 5,654 $ 4,770
State taxes ..................... 1,399 718 639
Income tax credits .............. (374) (287) (304)
Foreign tax differential ........ (129) 80 220
Exempt interest ................. (376) (482) (320)
Others .......................... 880 262 293
Nondeductible expenses related to
acquisition of GLOBEtrotter ... 1,480 (1,837) (1,278)
GLOBEtrotter pre-merger loss .... 2,649 -- --
-------- -------- --------
Total tax expense ............... $ 15,825 $ 4,108 $ 4,020
======== ======== ========
F-18
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
December 31,
----------------------
2000 1999
-------- --------
Deferred tax assets:
Accruals, reserves and others .................. $ 688 $ 724
Allowance for doubtful accounts ................ 427 402
Plant and equipment ............................ 623 524
Deferred revenue ............................... 3,415 1,351
Intangible assets .............................. 2,911 2,052
Net operating losses ........................... 1,564 1,440
-------- --------
Gross deferred tax assets ................... 9,628 6,493
Valuation allowance ......................... -- --
Total deferred tax assets ................... 9,628 6,493
Deferred tax liabilities:
Patents ........................................ (644) (717)
Unrealized gains ............................... (7,170) (17,372)
-------- --------
Total deferred tax liabilities ............ (7,814) (18,089)
-------- --------
Net deferred tax assets (liability) ......... $ 1,814 $(11,596)
======== ========
Net deferred tax assets as of December 31, 2000 include a deferred tax
asset of approximately $1.4 million of net operating loss carryovers, which were
generated by in the C-Dilla Limited acquisition in 1999. Net deferred tax assets
as of December 31, 2000 also include a deferred tax liability of approximately
$7.2 million of net unrealized capital gains, which primarily relates to the
Company's investment in Digimarc.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Based on projections of future taxable income over the periods in which
the deferred tax assets are deductible and the history of the Company's
profitability, management believes that it is more likely than not that the
Company will realize the benefits of these deductible differences. Accordingly,
the Company has not provided valuation allowance against the gross deferred tax
assets as of December 31, 2000.
(6) Commitments
Leases
The Company leases its facilities and certain equipment pursuant to
noncancelable operating lease agreements.
Future minimum lease payments pursuant to these leases as of December 31,
2000, were as follows (in thousands):
Operating
Leases
-------
2001 ............................................................ $1,555
2002 ............................................................ 1,215
2003 ............................................................ 922
2004 ............................................................ 897
2005 ............................................................ 257
2006 and thereafter ............................................. 1,095
------
Total ........................................................... $5,941
======
Rent expense was $1,278,000, $850,000, and $719,000 as of December 31,
2000, 1999 and 1998, respectively.
F-19
Employee Benefit Plans
The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation, which contribution was limited to $10,500 in
2000. Employee contributions and earnings thereon vest immediately. The Company
is not required to contribute to the 401(k) plan but have made voluntary
contributions. The Company made matching contributions to the 401(k) plan equal
to 20% of each participating employee's contribution, up to a maximum annual
matching contribution of $2,100, $2,000 and $2,000 in 2000, 1999, and 1998,
respectively. Matching contributions aggregated $80,000, $65,000 and $60,000 for
the year ended December 31, 2000, 1999 and 1998, respectively, and are fully
vested after three years of service.
GLOBEtrotter Software, Inc. had a 401(k) plan that allowed eligible
employees to contribute up to 15% of their compensation, which was limited to
$10,500 in 2000. This plan was terminated effective August 31, 2000. Employee
contributions and earnings thereon vest immediately. The Company is not required
to contribute to the 401(k) plan and highly compensated employees were not
eligible for the Company's contribution. The Company made no contributions for
the year ended December 31, 2000 and made contributions of $210,000 and $191,000
for years ended December 31, 1999 and 1998, respectively.
GLOBEtrotter Software, Inc. had a pension plan (404c) that allowed
eligible employees to share in contributions to the plan made solely by the
Company on behalf of the employees. This plan was terminated effective August
31, 2000. There was no provision for employee contributions to the plan. The
Company was required to contribute 10% of each eligible employee's compensation
to the plan. The Company made no contributions for the year ended December 31,
2000 and made contributions of $431,000 and $381,000 for years ended December
31, 1999 and 1998, respectively.
(7) Segment and Geographic Information
The Company operates in three industry segments as follows: video copy
protection, consumer software copy protection and electronic license management
("ELM") software. In the video copy protection segment, the Company licenses its
video technologies for videocassette, DVD and digital pay-per-view applications.
In the consumer software copy protection segment, the Company licenses copy
protection technology and digital rights management technology primarily in the
PC multimedia software market. In the electronic license management software
segment, the Company licenses ELM solutions for enterprise and networked PC
applications to independent software vendors (ISVs), and software asset
management tools for end user customers.
The Company identifies segments based principally upon the type of
products sold. The accounting policies of these reportable segments are the same
as those described for the consolidated entity. The Company evaluates the
performance of its segments based on revenue and segment income. In addition, as
the Company's assets are primarily located in its corporate office in the United
States, and not allocated to any specific segment, the Company does not produce
reports for or measure the performance of its segments based on any asset-based
metrics. Therefore, segment information is presented only for revenue and
income.
The following segment reporting information of the Company is provided (dollars
in thousands):
Revenue:
Year ended December 31,
-------------------------------
2000 1999 1998
------- ------- -------
Video Copy Protection ...................... $48,828 $31,983 $22,626
Consumer Software Copy Protection .......... 8,372 4,754 344
Electronic License Management Software ..... 21,770 14,686 12,012
Other ...................................... 1,146 653 1,464
------- ------- -------
Total ...................................... $80,116 $52,076 $36,446
======= ======= =======
F-20
Operating Income:
Year ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Video Copy Protection .................................... $ 40,973 $ 25,026 $ 17,115
Consumer Software Copy Protection ........................ 3,417 1,157 (126)
Electronic License Management Software ................... 14,828 10,380 7,991
Other .................................................... 436 (778) (621)
-------- -------- --------
Segment income ......................................... 59,654 35,785 24,359
Research and development ................................. 7,822 5,615 4,072
General and administrative ............................... 10,555 9,324 7,437
Amortization of goodwill and other intangibles from
acquisitions ......................................... 4,877 1,600 --
Acquisition costs related to GLOBEtrotter Software Inc. .. 2,163 -- --
Amortization of deferred stock-based compensation relating
to GLOBEtrotter ...................................... 15,533 -- --
In-process research and development ...................... -- 4,285 --
-------- -------- --------
Operating income ...................................... 18,704 14,961 12,850
Interest and other income, net ......................... 10,714 1,634 1,179
-------- -------- --------
Income before taxes ................................... $ 29,418 $ 16,595 $ 14,029
======== ======== ========
Information on Revenue by Significant Product Group:
Year ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
Video Copy Protection:
Videocassette ....................................... $ 12,899 $ 15,877 $ 15,770
DVD ................................................. 20,867 8,629 3,096
Pay-Per-View ........................................ 15,062 7,477 3,760
Consumer Software Copy Protection ........................ 8,372 4,754 344
Electronic License Management Software ................... 21,770 14,686 12,012
Other .................................................... 1,146 653 1,464
-------- -------- --------
Total .................................................... $ 80,116 $ 52,076 $ 36,446
======== ======== ========
Information on Revenue by Geographic Areas:
Year ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
United States ............................................ $ 46,245 $ 31,120 $ 22,615
International ............................................ 33,871 20,956 13,831
-------- -------- --------
Total Revenue ............................................ $ 80,116 $ 52,076 $ 36,446
======== ======== ========
Geographic area information is based upon country of destination for
products shipped and country of contract holder for royalties and license fees.
F-21
(8) Contingencies
The Company is involved in legal proceedings related to some of our
intellectual property rights.
Krypton Co., Ltd., a Japanese company, filed an invalidation claim against
one of the Company's copy protection patents in Japan. After a hearing in March
1999, the Japanese Patent Office recommended that the Company's patent be
invalidated. The Company believes that this conclusion was reached in error. On
December 27, 1999, the Company submitted to the Tokyo High Court a written
statement indicating that the decision of invalidity of the Company's patent
should be overturned. In February 2000, a second round of preparatory
proceedings was conducted before the Tokyo High Court, with Oral Arguments in
March 2000. In its ruling on March 21, 2000, the Tokyo High Court revoked the
Japanese Patent Office's decision. In connection with this ruling, the scope of
the Company's claims under the patent was slightly reduced, but this is not
expected to have a material adverse effect on the value of this patent to the
Company's business. In short, the patent remains valid and part of the Company's
business. On November 22, 2000, Krypton made an appeal in the Tokyo High Court
regarding its earlier decision. The first proceedings regarding this appeal will
take place on April 11, 2001. Even if an adverse ruling ultimately is reached on
this invalidation claim, this would not have a material adverse effect on the
Company's business.
In January 1999, the Company filed a complaint against Dwight-Cavendish
Developments Ltd. (a UK company) in the United States District Court for the
Northern District of California (Case No. 99-20011). The complaint alleges that
Dwight-Cavendish infringes a United States patent held by us. The Company seeks
to recover compensatory damages, treble damages and costs and to obtain
injunctive relief arising from these claims. Dwight-Cavendish's response to the
complaint contained a counterclaim alleging that the Company has violated the
federal Sherman Antitrust Act and the Lanham Act and the California false
advertising laws and Unfair Competition Act. The counterclaim seeks injunctive
relief, compensatory damages, treble damages and costs. It also seeks a
declaratory judgment that the United States patent held by the Company is
invalid and that Dwight-Cavendish's products do not infringe the patent. The
Company intends to defend the allegations in the counterclaim vigorously. In
July 2000, the District Court issued a ruling on claim construction regarding
patent infringement. Following the claim construction ruling, Dwight-Cavendish
moved for summary judgment on the patent infringement portion of the lawsuit.
The Company's position was that Dwight-Cavendish would still infringe in light
of the claim construction ruling based on some internal tests that the Company
had performed. In November 2000, The District Court ruled in the Company's favor
to deny Dwight-Cavendish's summary judgment motion. In December 2000, the
District Court denied Dwight-Cavendish's motion for leave to file a request for
reconsideration. In January 2001, the Company filed a motion to dismiss
Dwight-Cavendish's counterclaim. The hearing on this motion is scheduled for
April 9, 2001. Settlement discussions between the two parties are ongoing. Trial
is scheduled for mid-to-late 2001. If an adverse ruling is ultimately reached on
patent infringement against us, the Company may incur legal competition from
Dwight-Cavendish in the Company's videocassette, DVD, and PPV copy protection
markets, and a corresponding decline in demand for the Company's technology
could have a material adverse effect on the Company's business. If an adverse
ruling is ultimately reached on the counterclaims against us, significant
monetary damages may be levied against us.
The Company initiated a patent infringement lawsuit in the District Court
of Dusseldorf in March 1999 against Vitec Audio und Video GmbH, a German
company, that manufactures what the Company believes to be a video copy
protection circumvention device. Vitec filed a reply brief arguing that its
product does not infringe patents held by us. The case was heard in the District
Court of Dusseldorf, Germany. The District Court of Dusseldorf ruled adversely
against us. The Company appealed the District Court's ruling in July 2000 to the
Court of Appeal in Dusseldorf. A hearing has been scheduled for September 2001.
In the event of an adverse ruling, the Company may incur a corresponding decline
in demand for the Company's video copy protection technology, which could harm
the Company's business in Germany.
In November 1997, GLOBEtrotter filed a patent infringement lawsuit (Case
No. C-98-20419-JF/EAI) in the Federal District Court for the Northern District
of California against Elan Computer Group and its founder, Ken Greer, alleging
infringement of one of its patents and unfair competition and trade practices.
In March 1998, Rainbow Technologies North America, Inc. entered into an
agreement to purchase certain assets of Elan and entered into a litigation
cooperation agreement with Elan regarding the pending GLOBEtrotter litigation.
Subsequently, GLOBEtrotter added Rainbow Technologies to the patent infringement
suit. Rainbow Technologies and Ken Greer filed separate counterclaims against
GLOBEtrotter and its founder, Matthew Christiano, alleging antitrust violations,
unfair competition, tortious interference with business relations, and trade
libel. Rainbow Technologies and Ken Greer are seeking compensatory damages,
punitive damages, injunctive relief, and disgorgement of profits. GLOBEtrotter
intends to defend the allegations in the counterclaim vigorously. The patent
infringement case was bifurcated from the counterclaims. In October 1999, Judge
Fogel granted the motion for partial summary judgment for non-infringement of
claims 55-59 which was filed by Rainbow Technologies based on Judge's Fogel
claim construction order. In January 2001, the Court of Appeal of the Federal
Circuit (CAFC) affirmed the denial of GLOBEtrotter`s motion for preliminary
injunction by agreeing with the District Court's claim construction of requiring
a user ID as part of the claimed invention. In February 2001, Rainbow et al.
filed a summary judgment motion to dismiss GLOBEtrotter`s patent infringement
suit. GLOBEtrotter filed an opposition brief and a request for leave to file a
reconsideration motion to the dismissal of claims 55-59 in light of newly
discovered evidence. At the hearing on March 19, 2001, Judge Fogel granted
GLOBEtrotter's request and agreed to rule on the reconsideration motion before
making a ruling on the summary judgment motion. A
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hearing on the reconsideration motion is scheduled for May 29, 2001. The patent
infringement trial originally scheduled for April 2001, has been delayed pending
outcome of reconsideration motion and the summary judgment motion. The trial for
the counterclaims is still scheduled for September 2001. If an adverse ruling is
ultimately reached on the patent infringement claims, GLOBEtrotter may incur
legal competition from Rainbow Technologies, and a corresponding decline in
demand for GLOBEtrotter's technology could have a material adverse effect on its
business. If an adverse ruling is ultimately reached on the counterclaims
against GLOBEtrotter, significant monetary damages may be levied against
GLOBEtrotter.
As of December 31, 2000 and 1999, no accruals for these contingencies have
been recorded.
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