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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-22023
MACROVISION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0156161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2830 De La Cruz Boulevard
Santa Clara, CA 95050
(Address of principal executive offices) (Zip Code)
(408) 743-8600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 1, 2002
Common stock, $0.001 par value 51,011,315
MACROVISION CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Income
for the Three and Six Month Periods Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 2. Changes in Securities and Use of Proceeds. 26
Item 3. Defaults Upon Senior Securities. 27
Item 4. Submission of Matters to a Vote of Security Holders. 27
Item 5. Other Information. 27
Item 6. Exhibits and Reports on Form 8-K. 28
Signatures 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 30, December 31,
2002 2001
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 88,353 $ 26,112
Short-term investments 89,632 83,456
Accounts receivable, net of allowance for doubtful accounts of
$1,406 and $1,747, respectively 25,144 28,033
Inventories 367 342
Income taxes receivable 5,298 12,213
Deferred tax assets 5,367 5,287
Prepaid expenses and other current assets 5,292 6,124
-------------------- -------------------
Total current assets 219,453 161,567
Property and equipment, net 6,289 4,337
Long-term marketable investment securities 62,927 121,480
Patents, net 4,687 4,594
Goodwill and other intangibles from acquisitions, net 24,308 24,951
Deferred tax assets - 545
Other assets 22,491 17,650
-------------------- -------------------
$ 340,155 $ 335,124
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,709 $ 2,955
Deferred revenue 9,709 9,555
Other current liabilities 5,196 4,381
-------------------- -------------------
Total current liabilities 17,614 16,891
Notes payable 31 33
Deferred tax liabilities 118 -
Stockholders' equity:
Common stock 51 51
Treasury stock, at cost (3,398) -
Additional paid-in-capital 283,738 280,529
Deferred stock-based compensation (5,955) (10,526)
Accumulated other comprehensive income (1,835) 7,917
Retained earnings 49,791 40,229
-------------------- -------------------
Total stockholders' equity 322,392 318,200
-------------------- -------------------
$ 340,155 $ 335,124
==================== ===================
See the accompanying notes to these condensed consolidated financial statements.
3
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Net revenues $ 24,940 $ 25,764 $ 48,606 $ 48,738
Costs and expenses:
Cost of revenues 1,888 1,436 3,551 3,428
Research and development 2,832 2,528 5,369 4,850
Selling and marketing 4,582 4,796 9,342 8,836
General and administrative 3,618 3,719 6,666 6,887
Amortization of goodwill and other
intangibles from acquisitions 689 2,682 1,378 5,365
Amortization of deferred stock-based
compensation* 2,041 2,210 4,124 5,241
--------------- --------------- --------------- ----------------
Total costs and expenses 15,650 17,371 30,430 34,607
--------------- --------------- --------------- ----------------
Operating income 9,290 8,393 18,176 14,131
Interest and other income, net 2,067 2,844 4,168 5,540
Impairment losses on investments - (2,200) (5,477) (3,360)
--------------- --------------- --------------- ----------------
Income before income taxes 11,357 9,037 16,867 16,311
Income taxes 4,770 3,981 7,306 7,629
--------------- --------------- --------------- ----------------
Net income $ 6,587 $ 5,056 $ 9,561 $ 8,682
=============== =============== =============== ================
Basic earnings per share $ 0.13 $ 0.10 $ 0.19 $ 0.17
Shares used in computing basic earnings
per share 51,120 50,213 51,046 50,069
Diluted earnings per share $ 0.13 $ 0.10 $ 0.19 $ 0.17
Shares used in computing diluted earnings
per share 51,340 51,721 51,500 51,708
* The allocation of the amortization of deferred stock-based compensation
relates to the expense categories as set forth below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Cost of revenues 117 117 234 234
Research and development 403 1,291 847 2,634
Selling and marketing 1,257 505 2,514 1,010
General and administrative 264 297 529 1,363
--------------- --------------- --------------- ---------------
2,041 2,210 4,124 5,241
See the accompanying notes to these condensed consolidated financial statements.
4
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------------------------
2002 2001
---------------------- --------------------
Cash flows from operating activities:
Net income $ 9,561 $ 8,682
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,301 737
Amortization of goodwill and other intangibles from
acquisitions 1,378 5,365
Amortization of deferred stock-based compensation 4,124 5,241
Tax benefit from stock options 1,078 5,760
Impairment losses on investments 5,477 3,360
Changes in operating assets and liabilities:
Accounts receivable 2,912 (5,945)
Deferred revenue 133 2,582
Other assets 7,722 3,175
Other liabilities 500 (421)
---------------------- --------------------
Net cash provided by operating activities 34,186 28,536
Cash flows from investing activities:
Purchases of long-term marketable investment securities
- (88,188)
Sales or maturities of long-term marketable investment
securities 38,493 52,051
Purchases of short-term investments (81,835) (94,943)
Sales or maturities of short-term investments 75,463 102,196
Acquisition of property and equipment (2,878) (666)
Minority equity investments in companies - (8,500)
Other investing activities (423) (1,001)
---------------------- --------------------
Net cash used in investing activities 28,820 (39,051)
Cash flows from financing activities:
Proceeds from issuance of common stock from options and
stock purchase plans 2,556 2,988
Treasury stock acquisitions (3,398) -
Other financing activities - (46)
---------------------- --------------------
Net cash provided by financing activities (842) 2,942
Effect of exchange rate changes on cash 77 (106)
---------------------- --------------------
Net increase in cash and cash equivalents 62,241 (7,679)
Cash and cash equivalents at beginning of period 26,112 22,409
---------------------- --------------------
Cash and cash equivalents at end of period $ 88,353 $ 14,730
====================== ====================
Supplemental cash flow information:
Interest paid $ - $ -
Income taxes paid $ 2,000 $ 1,105
See the accompanying notes to these condensed consolidated financial statements.
5
MACROVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Macrovision Corporation and its subsidiaries (the
"Company") in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted in accordance with such rules and regulations. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, except as described in Notes 4 and 5, which in the
opinion of management are considered necessary to present fairly the financial
position of the Company as of June 30, 2002, and their consolidated results of
operations and cash flows for those periods presented. This quarterly report on
Form 10-Q should be read in conjunction with the audited financial statements
and notes thereto and other disclosures, including those items disclosed under
the caption "Risk Factors," contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The consolidated results of operations for the interim periods presented
are not necessarily indicative of the results expected for the entire year
ending December 31, 2002 or any other future interim period.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2 - REVENUE RECOGNITION
Revenue from the replication of videocassettes and DVDs is recognized when
it is realized or realizable and earned.During the current period, one major
studio customer for which certain revenues were historically recognized on a
cash basis, were recognized on an as earned basis. This stems from the execution
of a new license agreement with the customer and a consistent payment history.
For the three months ended June 30, 2002, this accrual resulted in an additional
$237,000 of revenue.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method and consisted of the following (dollars in
thousands):
JUNE 30, DECEMBER 31,
2002 2001
----------------- ----------------
Raw materials $ 149 $ 33
Finished goods 218 309
----------------- ----------------
$ 367 $ 342
================= ================
6
NOTE 4 - INVESTMENTS IN MARKETABLE SECURITIES
The Company accounts for its publicly traded investments in accordance
with Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity 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. As of June 30, 2002
and December 31, 2001, 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), as a separate component of stockholders' equity.
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.
Realized losses and declines in value judged to be other-than-temporary
for available-for-sale securities are reported as non-operating expenses under
the caption "Impairment losses on investments." The cost of securities sold is
based on the specific identification method. Realized gains, interest and
dividends on securities classified as available-for-sale are included in other
income.
During the six months ended June 30, 2002, the Company recorded a loss of
$2.5 million from an other than temporary decline in the fair value of a
long-term marketable security.
NOTE 5 - OTHER ASSETS
The Company has made certain strategic investments that it intends to hold
for the long term and monitors whether there has been a decline in value that is
considered other than temporary. Management bases its estimates of the
respective investments' net realizable value by taking into account the
achievement of milestones in business plans, third-party financing and current
working capital. The Company records its investments using the cost method.
Strategic investments are classified as other assets in the accompanying
condensed consolidated balance sheets.
During the six months ended June 30, 2002 and 2001, the Company recorded
charges of $3.0 million and $3.4 million, respectively, relating to impairment
losses considered to be other than temporary declines in the value of certain
strategic long term investments. These amounts have been recorded on the
condensed consolidated statements of income as impairment losses on investments.
7
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share ("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. The
following is a reconciliation of the shares used in the computation of basic and
diluted EPS (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Basic EPS - weighted average number of
common shares outstanding 51,120 50,213 51,046 50,069
Effect of dilutive common shares - stock
options outstanding 220 1,508 454 1,639
-------------- -------------- ------------- -------------
Diluted EPS - weighted average number of
common shares and common share
equivalents outstanding 51,340 51,721 51,500 51,708
============== ============== ============= =============
Anti-dilutive shares excluded 4,176 1,148 3,523 997
============== ============== ============= =============
The anti-dilutive shares excluded from the diluted EPS calculation noted
in the above table represent stock options where the exercise price was greater
than the average market price for the periods presented.
NOTE 7 - TREASURY STOCK
In May 2002, the Board of Directors authorized a stock repurchase program for up
to 5 million shares of the Company's common stock. Purchases of the stock may be
made, from time-to-time, in the open market at prevailing market prices, at the
discretion of Company management. The Company's repurchases of shares of common
stock have been recorded as treasury stock and result in a reduction of
stockholders' equity. As of June 30, 2002, treasury stock consisted of 240,000
shares of common stock.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets".
SFAS No. 141 requires that all business combinations be accounted for
under the purchase method for business combinations initiated after June 30,
2001. Use of the pooling-of-interests method is no longer permitted. The Company
adopted the provisions of SFAS No. 141 commencing July 1, 2001. The Company has
not effected any business combinations in 2002 and the adoption of SFAS No. 141
has not had an impact on its consolidated financial position or results of
operations.
SFAS No. 142 requires that goodwill resulting from a business combination
will no longer be amortized to earnings, but instead be reviewed for impairment.
The Company adopted SFAS No. 142 on January 1, 2002. For goodwill resulting from
business combinations prior to July 1, 2001,
8
amortization of goodwill continued through December 31, 2001. For business
combinations occurring on or after July 1, 2001, the associated goodwill is not
amortized. The Company was required to perform a transitional impairment test
for all recorded goodwill within six months of adoption. The Company has
completed this transitional impairment test and has concluded that no impairment
was indicated. The adoption of SFAS No. 142 reduced the amount of amortization
of goodwill and intangible assets from acquisitions for the quarter ended June
30, 2002 by approximately $2.0 million and for the six months ended June 30,
2002 by approximately $4.0 million. Approximately $742,000 of intangible assets
previously allocated to workforce in place were subsumed into goodwill as of
January 1, 2002. In accordance with SFAS No. 142, the Company has elected to
perform its annual impairment review on October 1. The pro forma effects of the
adoption of SFAS No. 142 are as follows (dollars in thousands):
THREE MONTHS ENDED JUNE 30
------------------------------------------------------
2002 2001 2001
AS REPORTED AS ADJUSTED AS REPORTED
--------------- --------------- ---------------
Amortization of intangibles from acquisitions $ 689 $ 689 $ 2,682
Net income $ 6,587 $ 6,343 $ 5,056
Basic EPS $ 0.13 $ 0.12 $ 0.10
Diluted EPS $ 0.13 $ 0.12 $ 0.10
SIX MONTHS ENDED JUNE 30
------------------------------------------------------
2002 2001 2001
AS REPORTED AS ADJUSTED AS REPORTED
--------------- --------------- ---------------
Amortization of intangibles from acquisitions $ 1,378 $ 1,372 $ 5,365
Net income $ 9,561 $11,261 $ 8,682
Basic EPS $ 0.19 $ 0.22 $ 0.17
Diluted EPS $ 0.19 $ 0.22 $ 0.17
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations", and in October issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 143 requires that the
fair value of an asset retirement obligation be recorded as a liability in the
period in which it incurs the obligation. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes SFAS No. 121 and the accounting and reporting provisions of APB
Opinion No. 30 as it relates to the disposal of a segment of a business. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002 and SFAS No.
144 is effective for fiscal years beginning after December 15, 2001. The Company
adopted SFAS No. 144 effective January 1, 2002, and SFAS No. 143 will be adopted
effective January 1, 2003. The adoption of SFAS 144 has not had an impact on the
Company's consolidated financial position or results of operations. The effect
of adopting SFAS 143 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that the
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The effect of adopting SFAS 146 is
not expected to have a material effect on the Company's financial position or
results of operations.
9
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of taxes, are as
follows (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
Net income $ 6,587 $ 5,056 $ 9,561 $ 8,682
Other comprehensive income (loss):
Unrealized gains (losses) on
investments (11,353) 12,512 (10,534) 9,085
Foreign currency translation
adjustments 1,109 (21) 782 (1,148)
--------------- -------------- --------------- ---------------
Comprehensive income (loss) $ (3,657) $ 17,547 $ (191) $ 16,619
=============== ============== =============== ===============
NOTE 10 - RESTRUCTURING EXPENSES
During the fourth quarter of 2001, the Company announced a restructuring
program and eliminated redundant positions relating to legacy businesses and
consolidated certain administrative functions. All terminated employees were
notified of their severance and related benefits at the time the program was
announced. This program resulted in the elimination of 26 redundant positions on
a worldwide basis and related to less than 10% of the Company's employees. The
restructuring charge totaled $2.2 million and consisted principally of severance
payments and non-cash compensation expense relating to accelerated vesting of
certain stock options. Expenses relating to the charge are summarized as follows
(dollars in thousands):
SEVERANCE COMPENSATION OTHER TOTAL
EXPENSE RELATING
TO ACCELERATED
VESTING OF
CERTAIN STOCK
OPTIONS
----------------- ------------------- ----------------- -----------------
Total charge in 2001 $ 317 $ 1,764 $ 133 $ 2,214
Cash paid (235) -- (19) (254)
Non cash charge -- (1,764) -- (1,764)
----------------- ------------------- ----------------- -----------------
Balance at December 31, 2001 82 -- 114 196
Cash paid (82) -- (114) (196)
----------------- ------------------- ----------------- -----------------
Balance at June 30, 2002 $ -- $ -- $ -- $ --
================= =================== ================= =================
10
NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION
The following segment reporting information of the Company is provided (dollars
in thousands):
NET REVENUES:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- -------------- -------------- --------------
Video Technology Division
DVD $ 11,145 $ 9,632 $ 21,744 $ 17,232
Videocassette 2,439 3,029 3,958 5,980
Pay-Per-View 2,567 3,082 5,715 7,216
Consumer Software Division 1,982 2,276 4,068 4,681
Globetrotter Software Division 6,763 7,694 12,991 13,002
Other 44 51 130 627
---------------- -------------- -------------- --------------
$ 24,940 $ 25,764 $ 48,606 $ 48,738
================ ============== ============== ==============
OPERATING INCOME:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- ---------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- ---------------
Video Technology Division $ 14,223 $ 13,797 $ 27,591 $ 26,560
Consumer Software Division 626 1,123 1,426 2,385
Globetrotter Software Division 3,852 4,583 7,102 7,107
Other (231) 29 (406) 422
-------------- -------------- -------------- ---------------
Segment income 18,470 19,532 35,713 36,474
Research and development 2,832 2,528 5,369 4,850
General and administrative 3,618 3,719 6,666 6,887
Amortization of goodwill and other intangibles
from acquisitions 689 2,682 1,378 5,365
Amortization of deferred stock-based
compensation 2,041 2,210 4,124 5,241
-------------- -------------- -------------- ---------------
$ 9,290 $ 8,393 $ 18,176 $ 14,131
============== ============== ============== ===============
Segment income is based on segment revenue less the respective segment's
cost of revenues and selling and marketing expenses.
INFORMATION ON NET REVENUES BY GEOGRAPHIC AREAS:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- ----------------------------------
2002 2001 2002 2001
-------------- ------------- --------------- ---------------
United States 12,013 $ 15,261 22,797 $ 29,076
International 12,927 10,503 25,809 19,662
-------------- -- ------------- --------------- ---------------
$ 24,940 $ 25,764 $ 48,606 $ 48,738
============== ============= =============== ===============
Geographic area information is based upon country of destination for
products shipped and country of contract holder for royalties and license fees.
11
NOTE 12 - CONTINGENCIES
The Company is involved in legal proceedings related to some of its
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. 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 Company has been involved in several
preparatory proceedings and is seeking that the Tokyo High Court reaffirm its
earlier decision. 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.
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 the Company. The case was heard in the District
Court of Dusseldorf, Germany. The District Court of Dusseldorf ruled against the
Company. The Company appealed the District Court's ruling in July 2000 to the
Court of Appeal in Dusseldorf. A hearing took place in front of the Court of
Appeal in Dusseldorf on August 23, 2001 in which the Court stated that because
the appeal involves complex technical subject matter, the Court will require
technical expert witnesses. The Court solicited the Company for a list of
experts that the Court can call on to serve as expert witnesses. The Company
submitted a list of experts in the area of analog video copy protection to the
Court on October 5, 2001. The selection of the Court's expert witnesses is
pending. 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.
On or around September 1998, Globetrotter filed a patent infringement suit
against Rainbow Technologies, which was subsequently consolidated with the
action against Elan Computer Group and Ken Greer. 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 Fogel's claim construction order. On August 31,
2000, the Company acquired Globetrotter. In January 2001, the Court of Appeals
for the Federal Circuit affirmed the denial of the Company'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 the Company's patent
12
infringement suit. The Company 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
the Company's request and agreed to rule on the reconsideration motion before
making a ruling on the summary judgment motion. The reconsideration motion was
argued before the court on July 23, 2001. In a ruling on September 24, 2001,
Judge Fogel denied the Company's reconsideration motion and granted the partial
summary judgment motion for Rainbow et al. The granting of the partial summary
judgment motion by Rainbow et al. means that the patent infringement case
against Rainbow et al. is essentially dismissed. The Company plans to appeal.
Based on the information available at this time, it is not anticipated that the
adverse ruling of partial summary judgment will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flow. The Company still has unfair competition & trade practices cause of
actions against Rainbow et al. The stay of discovery on the counterclaims has
been lifted and witness depositions have commenced. On January 18, 2002, the
Company filed a motion to dismiss some of the counterclaims from Rainbow et al.
On February 25, 2002, Judge Fogel held a hearing on the Company's motion to
dismiss and the Company's motion to dismiss was granted. On June 3, 2002, the
Company filed another motion to dismiss additional counterclaims from Rainbow et
al. On July 15, 2002, Judge Fogel held a hearing on the Company's motion to
dismiss and a decision is pending. On July 22, 2002, the Company filed yet
another motion to dismiss additional counterclaims from Rainbow et al. A hearing
on this motion to dismiss is scheduled for August 26, 2002. The trial for the
remaining counterclaims, which was scheduled for September 9, 2002, has been
continued by Judge Fogel until December 2, 2002. If an adverse ruling is
ultimately reached on the remaining counterclaims, significant monetary damages
may be levied against the Company, which could have a material adverse effect on
the Company's business, consolidated financial position, results of operations
or cash flows.
On October 23,2001, Digimarc filed a patent infringement suit in the
United States District Court, District of Oregon against Verance Corporation
alleging infringement of certain patents owned by Digimarc. Verance's answer and
counter-claim included allegations of patent infringement and antitrust
counterclaims, including allegations that Digimarc conspired with the Company to
keep Verance out of the DVD CCA bidding process for selection of a digital
watermarking copy protection technology. Verance's second amended
cross-complaint was filed on or about March 25, 2002, and specifically named the
Company as a cross-defendant in connection with our bid to the DVD CCA as one of
the VWM Companies. On August 1, 2002, Digimarc, Verance, and the Company jointly
moved for entry of an Order staying this litigation until September 1, 2002. The
parties are currently in negotiations to resolve this dispute and anticipate
jointly filing a motion with the Court to dismiss all claims, counterclaims and
third party claims in this litigation by September 1, 2002. If, for whatever
reason, the parties do not reach an agreement regarding these claims by
September 1, 2002, the parties will resume litigation. In the event litigation
is resumed, and Verance succeeds on its cross-claims, the Company may be subject
to significant monetary damages as well as be precluded from licensing the VWM
Companies' jointly developed digital media copy protection technology, which
could have a material adverse effect on the Company's business, consolidated
financial position, results of operations or cash flows.
As of June 30, 2002, it is not possible to estimate the liability, if any,
in connection with these matters. Accordingly, no accruals for these
contingencies have been recorded.
From time to time the Company has been involved in other disputes and
legal actions arising in the ordinary course of business. In management's
opinion, none of these other disputes and legal actions is expected to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
13
ITEM 2. 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 IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2001 AS FILED WITH THE SEC. 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 FACTORS
SET FORTH UNDER THE CAPTION "RISK FACTORS" IN OUR ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 2001.
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, digital set-top
box manufacturers, digital PPV system operators and consumer software
publishers. In 2000, we entered the market for electronic license management
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):
THREE MONTHS ENDED
JUNE 30, CHANGE
--------------------------------- --------------------------
2002 2001 $ %
--------------- -------------- ------------ ----------
Video Technology Division
DVD $ 11,145 $ 9,632 $ 1,513 15.7%
Videocassette 2,439 3,029 (590) (19.5)
Pay-Per-View 2,567 3,082 (515) (16.7)
Consumer Software Division 1,982 2,276 (294) (12.9)
Globetrotter Software Division 6,763 7,694 (931) (12.1)
Other 44 51 (7) (13.7)
--------------- -------------- ------------
Total $ 24,940 $ 25,764 $ (824) (3.2)%
=============== ============== ============
14
SIX MONTHS ENDED
JUNE 30, CHANGE
--------------------------------- --------------------------
2002 2001 $ %
--------------- -------------- ------------ ----------
Video Technology Division
DVD $ 21,744 $ 17,232 $ 4,512 26.2%
Videocassette 3,958 5,980 (2,022) (33.8)
Pay-Per-View 5,715 7,216 (1,501) (20.8)
Consumer Software Division 4,068 4,681 (613) (13.1)
Globetrotter Software Division 12,991 13,002 (11) (0.1)
Other 130 627 (497) (79.3)
--------------- -------------- ------------
Total $ 48,606 $ 48,738 $ (132) (0.3)%
=============== ============== ============
The following table provides percentage of net revenue information by
product line:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- ------------- --------------
Video Technology Division
DVD 44.7% 37.4% 44.7% 35.3%
Videocassette 9.8 11.7 8.1 12.3
Pay-Per-View 10.3 12.0 11.8 14.8
Consumer Software Division 7.9 8.8 8.4 9.6
Globetrotter Software Division 27.1 29.9 26.7 26.7
Other 0.2 0.2 0.3 1.3
-------------- -------------- ------------- --------------
Total 100.0% 100.0% 100.0% 100.0%
============== ============== ============= ==============
VIDEO TECHNOLOGY DIVISION.
Our customers have included the home video divisions of members of the
Motion Picture Association of America, videocassette duplication and DVD
replication companies and a number of low volume content owners, such as
independent producers of exercise, sports, educational, documentary and
corporate videocassettes ("Special Interest.") We typically receive per unit
royalties based upon the number of copy protected videocassettes or DVDs that
are produced by Motion Picture Association of America studios or other content
owners. Royalties from Motion Picture Association of America studios represented
a significant portion of such fees for the periods ended June 30, 2002 and 2001.
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 license fees from DVD hardware
manufacturers. DVD copy protection revenue represented 44.7% and 37.4% of our
net revenues for the three months ended June 30, 2002 and 2001, respectively and
44.7% and 35.3% of our net revenues for the six months ended June 30, 2002 and
2001, respectively. The increase in DVD copy protection revenue is due to the
increase in numbers of DVDs sold and continued strong demand for our DVD copy
protection solution.
VIDEOCASSETTE COPY PROTECTION. As expected, in 2002 our videocassette copy
protection revenues continued to decline, reflecting the continuing trend for
Hollywood studios to invest proportionally more in copy protecting their DVD
titles compared to VHS releases. Videocassette
15
copy protection revenues represented 9.8% and 11.7% of our net revenues for the
three months ended June 30, 2002 and 2001, respectively and 8.1% and 12.3% of
our net revenues for the six months ended June 30, 2002 and 2001, 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.
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 also have agreements with major home video
companies for copy protection of a substantial part of their videocassettes
and/or DVDs in the U.S. These agreements expire at various times ranging from
2003 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.
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 a majority of our
digital PPV copy protection revenues from hardware royalties, and the balance
from either up-front license fees and or transaction royalties associated with
copy protected PPV programming. Digital PPV revenues were 10.3% and 12.0% of our
net revenues for the three months ended June 30, 2002 and 2001, respectively,
and 11.8% and 14.8% of our net revenues for the six months ended June 30, 2002,
respectively. Our agreements with digital PPV system operators entitle us to
transaction-based royalty payments when copy protection for digital PPV
programming is activated. The decrease in our PPV copy protection revenues is
due to the overall slowdown in the roll-out of digital PPV systems worldwide,
resulting in reduced demand for digital set-top boxes.
CONSUMER SOFTWARE DIVISION.
In 1998, we made a minority equity investment in C-Dilla, Ltd. (Woodley,
UK) 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 then valued at $5.1 million
and stock option grants of Macrovision stock then 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. We typically
receive unit royalties based upon the number of copy protected CD-ROMs that are
produced by PC game and educational software publishers. Consumer software
division revenues represented 7.9% and 8.8% of our net revenues for the three
months ended June 30, 2002 and 2001, respectively, and 8.4% and 9.6% of our net
revenues for the six months ended June 30, 2002 and 2001, respectively. The
decrease in revenue is due primarily to modest price reductions in per unit
royalties.
GLOBETROTTER SOFTWARE DIVISION.
In August 2000, we acquired Globetrotter Software, Inc., a leading
supplier of electronic licensing and license management technology to software
vendors and 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 27.1% and 29.9% of our net revenues for the three
months ended June 30, 2002 and 2001, respectively, and 26.7% of our net revenues
for the six months ended June 30, 2002 and 2001. Despite difficult economic
conditions for enterprise software companies, revenue on a year to date basis is
consistent with the prior year.
16
SEASONALITY OF BUSINESS
We have experienced significant seasonality in our business, and our
consolidated 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.
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 Globetrotter
Software Division may also reflect a similar seasonal trend. In addition,
revenues tend to be lower in the summer months, particularly in Europe.
COSTS AND EXPENSES
Our cost of revenues consists of service fees paid to licensed duplicators
and replicators that produce videocassettes, DVDs and CD-ROMs for content owners
and costs of equipment used to apply our technology. Also included in cost of
revenues are software product support, patent defense costs and patent
amortization. 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.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, investments, intangible assets and
income taxes. Our estimates are based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or
conditions.
We have identified the accounting policies below as critical to our
business operations and the understanding of our consolidated results of
operations.
REVENUE RECOGNITION AND COST OF REVENUE
Our revenue recognition policy is detailed in our Annual Report on Form
10-K. Management has made significant judgments related to revenue recognition;
specifically, evaluating whether our fee relating to an arrangement is fixed or
determinable, assessing whether collectibility is probable, and estimating
earned revenue for certain studio customers. These judgments are discussed
below.
FEE IS FIXED OR DETERMINABLE. In order to recognize revenue, we must make
a judgment as to whether our fee is fixed or determinable. Except in cases where
we grant extended payment terms to a specific customer, we have determined
whether our fees are fixed or determinable at the inception of our arrangements
based on the following:
17
o The fee our customers pay for our products is negotiated at the
outset of an arrangement, and is generally based on the specific
volume of products to be delivered.
o Our license fees are not a function of variable-pricing mechanisms
or retail market success of our customers such as the number of
units distributed or copied by the customer, or the expected number
of users of the product delivered.
Under our customary payment terms, 100% of the arrangement fee is due
within one year or less. These customary payment terms are supported by
historical practice and concessions have not been granted to customers under
this policy. Arrangements with payment terms extending beyond the customary
payment terms are considered not to be fixed or determinable. Revenue from such
arrangements is recognized when amounts become due and payable.
COLLECTIBILITY IS PROBABLE. In order to recognize revenue, we must make a
judgment regarding the collectibility of our fee. Our judgment of the
collectibility is applied on a customer-by-customer basis pursuant to our credit
review policy. We typically sell to customers for which there is a history of
successful collection. New customers are subjected to a credit review process,
which evaluates the customers' financial positions and ability to pay. New
customers are typically assigned a credit limit based on a formulated review of
their financial position. Such credit limits are only increased after a
successful collection history with the customer has been established. If it is
determined from the outset of an arrangement that collectibility is not probable
based upon our credit review process, revenue is recognized on a cash-collected
basis.
ESTIMATING EARNED REVENUE. Revenue from the replication of videocassettes
and DVDs is recognized when realized or realizable and earned. Studio customers
typically report on a monthly basis and have demonstrated sufficient volumes of
reporting history and regularity of payments to enable the Company to reliably
estimate and recognize such revenues on an as earned basis.
VALUATION OF STRATEGIC INVESTMENTS
As of June 30, 2002, the adjusted cost of our strategic investments
totaled $35.7 million.
We review our investments in non-public companies and estimate the amount
of any impairment incurred during the current year based on specific analysis of
each investment, considering the activities and events occurring at each of the
underlying portfolio companies during the period. Our portfolio companies
operate in industries that are rapidly evolving and extremely competitive. For
equity investments in non-public companies for which there is no market where
their value is readily determinable, we review each investment for indicators of
impairment on a regular basis based primarily on achievement of business plan
objectives and current market conditions. The primary business plan objectives
we consider include, among others, those related to financial performance such
as liquidity, achievement of planned financial results or completion of capital
raising activities, and those that are not primarily financial in nature such as
the launching of technology or the hiring of key employees. If it is determined
that an impairment has occurred with respect to an investment in a portfolio
company, in the absence of quantitative valuation metrics, management estimates
the impairment and/or the net realizable value of the portfolio investment based
on public- and private-company market comparable information, valuations
completed for companies similar to our portfolio companies, or latest valuations
from most recent financing rounds.
For equity investments in public companies, we review each investment
based primarily on the reported market value per share. When the rolling six
month average reported market value is below the Company's original cost basis,
we determine that an other than temporary impairment has occurred.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
current carrying value of the
18
investments, thereby requiring further impairment charges in the future. Based
on these measurements, $5.5 million and $3.4 million in impairment losses were
recorded during the six months ended June 30, 2002 and 2001, respectively.
VALUATION OF INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, totaled $24.3 million
as of June 30, 2002. Intangible assets include goodwill, purchased technology,
non-compete agreements and customer base. On January 1, 2002, we adopted SFAS
No. 142 and are subject to an annual impairment test based on estimated fair
value. We also completed the transitional impairment test required under SFAS
142 and have concluded that no impairment was indicated. Accordingly, no
impairment charges for intangible assets were recorded during the six months
ended June 30, 2002 based on these measurements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Management estimates the collectibility of our accounts receivable on an
account-by-account basis. We record an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account receivable becomes
doubtful. In addition, we establish a non-specific reserve for all accounts
receivable aged greater than 90 days, using a specified percentage of the
outstanding balance of all such accounts based on historical bad debt loss
experience. Management specifically analyzes accounts receivable and historical
bad debts experience, customer creditworthiness, current economic trends,
international situations (such as currency devaluation), and changes in our
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. There has been little fluctuation in the
allowance for doubtful accounts primarily due to low historical volumes of bad
debts.
INCOME TAXES
Our effective tax rate is directly affected by the relative proportions of
domestic and international revenue and income before taxes. We are also subject
to changing tax laws in the multiple jurisdictions in which we operate. As of
June 30, 2002, deferred tax assets net of a $1.4 million valuation allowance,
totaled $13.1 million. Deferred tax assets, related valuation allowances and
deferred tax liabilities are determined separately by tax jurisdiction. We
believe sufficient uncertainty exists regarding our ability to realize our
deferred tax assets in certain foreign jurisdictions and, accordingly, a
valuation allowance has been established against the deferred tax assets in
those jurisdictions. We believe that it is more likely than not that the results
of future operations will generate sufficient taxable income to utilize these
deferred tax assets, net of valuation allowance. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for any valuation allowance, in the event we were to
determine that we will be able to realize our deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
RESULTS OF OPERATIONS
NET REVENUES. Our net revenues decreased 3.2% from $25.8 million in the
second quarter of 2001 to $24.9 million in the second quarter of 2002. DVD copy
protection revenues increased $1.5 million or 15.7% from $9.6 million in the
second quarter of 2001 to $11.1 million in the second quarter of 2002, due to
the continued strong growth of the DVD format and our continued high
19
penetration rate among Hollywood studio customers. Revenues from videocassette
copy protection decreased $590,000 or 19.5% from $3.0 million in the second
quarter of 2001 to $2.4 million in the second quarter of 2002, reflecting the
continuing trend for Hollywood studios to invest more proportionally in copy
protecting their DVD titles compared to VHS releases. Digital PPV copy
protection revenues decreased $515,000 or 16.7% from $3.1 million in the second
quarter of 2001 to $2.6 million in the second quarter of 2002 due to continued
lower demand for digital set-top boxes from digital PPV system operators.
Consumer Software Division revenues decreased $294,000 or 12.9% from $2.3
million in the second quarter of 2001 to $2.0 million in the second quarter of
2002 primarily reflecting the impact of modest price reductions in per unit
royalties. Revenues from our Globetrotter Software Division decreased $931,000
or 12.1% from $7.7 million in the second quarter of 2001 to $6.8 million in the
second quarter of 2002 primarily due to very strong perpetual license sales in
the second quarter of 2001. Other revenue from legacy businesses decreased
$7,000 or 13.7% from $51,000 in the second quarter of 2001 to $44,000 in the
second quarter of 2002.
Our net revenues decreased 0.3% from $48.7 million in the six months ended
June 30, 2001 to $48.6 million in the six months ended June 30, 2002. DVD copy
protection revenues increased $4.5 million or 26.2% from $17.2 million in the
six months ended June 30, 2001 to $21.7 million in the six months ended June 30,
2002, due to the continued strong growth of the DVD format and our continued
high penetration rate among Hollywood studio customers. Revenues from
videocassette copy protection decreased $2.0 million or 33.8% from $6.0 million
in the six months ended June 30, 2001 to $4.0 million in the six months ended
June 30, 2002, reflecting the continuing trend for Hollywood studios to invest
more proportionally in copy protecting their DVD titles compared to VHS
releases. Digital PPV copy protection revenues decreased $1.5 million or 20.8%
from $7.2 million in the six months ended June 30, 2001 to $5.7 million in the
six months ended June 30, 2002 due to continued lower demand for digital set-top
boxes from digital PPV system operators. Consumer Software Division revenues
decreased $613,000 or 13.1% from $4.7 million in the six months ended June 30,
2001 to $4.1 million in the six months ended June 30, 2002 primarily reflecting
the impact of modest price reductions in per unit royalties. Revenues from our
Globetrotter Software Division decreased $11,000 or 0.1%, remaining consistent
with the prior year period. Other revenue from legacy businesses decreased
$497,000 or 79.3% from $627,000 in the six months ended June 30, 2001 to
$130,000 in the six months ended June 30, 2002.
COST OF REVENUES. Cost of revenues as a percentage of net revenues
increased from 5.6% for the second quarter of 2001 to 7.6% for the second
quarter of 2002. Cost of revenues increased $452,000 from $1.4 million in the
second quarter of 2001 to $1.9 million in the second quarter of 2002. The
increase was primarily due to higher patent defense costs during the second
quarter of 2002.
Cost of revenues as a percentage of net revenues increased from 7.0% for
the six months ended June 30, 2001 to 7.3% for the six months ended June 30,
2002. Cost of revenues increased $123,000 from $3.4 million in the six months
ended June 30, 2001 to $3.6 million in the six months ended June 30, 2002. The
increase in cost of revenues is due mainly to increased software support costs
and patent amortization.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$304,000 or 12.0% from $2.5 million in the second quarter of 2001 to $2.8
million in the second quarter of 2002. The increase is primarily due to further
research and development activities in our Video Technology, Consumer Software
and Globetrotter Software Divisions. Research and development expenses increased
as a percentage of net revenues from 9.8% in the second quarter of 2001 to 11.4%
in the second quarter of 2002.
Research and development expenses increased by $519,000 or 10.7% from $4.9
million in the six months ended June 30, 2001 to $5.4 million in the six months
ended June 30, 2002. The increase is primarily due to further research and
development activities in our Video Technology, Consumer Software and
Globetrotter Software Divisions. Research and development expenses
20
increased as a percentage of net revenues from 10.0% in the six months ended
June 30, 2001 to 11.0% in the six months ended June 30, 2002. We expect research
and development expenses to continue to increase in absolute terms over the
prior year periods as a result of expected increases in research and development
activity as we develop new technologies across all our business areas.
SELLING AND MARKETING. Selling and marketing expenses decreased by
$214,000 or 4.5% from $4.8 million in the second quarter of 2001 to $4.6 million
in the second quarter of 2002. This decrease was primarily due to lower
recruiting costs in 2002 compared with those incurred to expand the Globetrotter
sales and marketing organizations in 2001. Selling and marketing expenses
decreased as a percentage of net revenues from 18.6% in the second quarter of
2001 to 18.4% in the first quarter of 2002.
Selling and marketing expenses increased by $506,000 or 5.7% from $8.8
million in the six months ended June 30, 2001 to $9.3 million in the six months
ended June 30, 2002. This increase was primarily due to the expansion of the
marketing organization in the Globetrotter Software Division in 2002. Selling
and marketing expenses increased as a percentage of net revenues from 18.1% in
the six months ended June 30, 2001 to 19.2% in the six months ended June 30,
2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by $101,000 or 2.7% from $3.7 million in the second quarter of 2001 to $3.6
million in the second quarter of 2002, primarily due to a reduction in
administration headcount as a result of our restructuring program during the
fourth quarter of 2001 as further described in Note 9 of Notes to Condensed
Consolidated Financial Statements. General and administrative expenses increased
marginally as a percentage of net revenues from 14.4% in the second quarter of
2001 to 14.5% in the second quarter of 2002.
General and administrative expenses decreased by $221,000 or 3.2% from
$6.9 million in the six months ended June 30, 2001 to $6.7 million in the six
months ended June 30, 2002, primarily due to a reduction in administration
headcount as a result of our restructuring program during the fourth quarter of
2001 as further described in Note 10 of Notes to Condensed Consolidated
Financial Statements. General and administrative expenses decreased as a
percentage of net revenues from 14.1% in the six months ended June 30, 2001 to
13.7% in the six months ended June 30, 2002.
AMORTIZATION OF INTANGIBLES FROM ACQUISITIONS. In accordance with new
accounting guidance, Statement of Financial Accounting Standards No. ("SFAS")
142, "Goodwill and Other Intangible Assets", goodwill and workforce in place
were not amortized beginning January 1, 2002.
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 and non-compete agreements.
We amortized $566,000 and $743,000 in the second quarters of 2002 and 2001,
respectively. For the six months ended June 30, 2002 and 2001, we amortized $1.1
million and $1.5 million, respectively. As a result of adopting SFAS No. 142,
"Goodwill and other Intangible Assets," amortization of goodwill and certain
intangibles ceased effective January 1, 2002. If we had adopted SFAS 142 in
2001, pro forma amortization would have been approximately $566,000 for the
second quarter of 2001 and $1.1 million for the six months ended June 30, 2001.
We also amortize intangibles relating to the acquisition of assets and
assumed liabilities of Productivity through Software plc ("PtS") on a
straight-line basis over three years based on the expected useful lives of the
existing customer base. We amortized $123,000 and $1.8 million in the second
quarters of 2002 and 2001, respectively. For the six months ended June 30, 2002
and 2001, we amortized $246,000 and $3.9 million, respectively. If we had
adopted SFAS 142 in 2001, pro forma amortization would have been approximately
$121,000 for the second quarter of 2001 and $244,000 for the six months ended
June 30, 2001.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. In connection with the
acquisition of Globetrotter, approximately 783,742 Globetrotter employee stock
options were exchanged for
21
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 second quarters of 2002 and 2001 were $2.0
million and $2.2 million, respectively. The amortization of the deferred
stock-based compensation for the six months ended June 30, 2002 and 2001 was
$4.1 million and $5.2 million, respectively. The expense associated with this
stock-based compensation will continue to result in substantial non-cash
compensation charges to future earnings.
IMPAIRMENT LOSSES ON INVESTMENTS. During the second quarters of 2002 and
2001, we recorded charges totaling $0 and $2.2 million, respectively, relating
to other than temporary impairments in our public and private company
investments. For the six months ended June 30, 2002 and 2001, we recorded
charges totaling $5.5 million and $3.4 million, respectively.
INTEREST AND OTHER INCOME, NET. Interest and other income decreased
$777,000 or 27.3% from $2.8 million in the second quarter of 2001 to $2.1
million in the second quarter of 2002 due to lower investment income. Interest
and other income decreased $1.4 million or 24.8% from $5.5 million in the six
months ended June 30, 2001 to $4.2 million in the six months ended June 30, 2002
due to lower investment income.
INCOME TAXES. For the second quarter of 2002, we recorded income taxes of
$4.8 million, compared to income taxes for the second quarter of 2001 of $4.0
million. This lowered our cumulative tax rate from 46.0% for the three months
ended March 31, 2002 to 43.3% for the six months ended June 30, 2002. The
effective tax rate of 43.3% reflects our current evaluation of our tax credit
potential. The effective tax rate for the six months ended June 30, 2001 was
46.8%. The decrease in the effective tax rate was due to changes in our
international operations resulting in a shift of our taxable income to more
favorable tax jurisdictions and also due to a reduction in the amortization of
deferred stock-based compensation, which is not tax deductible.
In May 2002, the Board of Directors authorized a stock repurchase program
for up to 5 million shares of Macrovision's common stock. Purchases of the stock
may be made, from time-to-time, in the open market at prevailing market prices,
at the discretion of management. Our repurchases of shares of common stock have
been recorded as treasury stock and result in a reduction of stockholders'
equity. As of June 30, 2002, treasury stock consisted of 240,000 shares of
common stock.
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 $34.2
million and $28.5 million in the six months ended June 30, 2002 and 2001,
respectively. Cash provided by operating activities increased primarily due to
increased collections and the drawdown of prepaid taxes. The availability of
cash generated by our operations could be affected by, but not limited to, those
factors set forth under the caption "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2001.
Investing activities provided net cash of $28.8 million in the six months
ended June 30, 2002 and used net cash of $39.1 million in the six months ended
June 30, 2001. Cash from investing activities increased from the prior year
period mainly from the maturity of long term marketable investments which were
reinvested in money market funds and short term investments for more favorable
interest rates. The increase is also due to reduced activity in minority equity
investments from $8.5 million in the six months ended June 30, 2001 to $0 in the
six months ended June 30, 2002. The increase from investing activities is
partially offset by capital expenditures of $2.9 million and $666,000 in the six
months ended June 30, 2002 and 2001, respectively. The increase in capital
expenditures of $2.2 million is primarily due to leasehold improvements and
furniture and fixtures for
22
our new office space, which we moved into during March 2002. We also paid
$423,000 and $248,000 in the six months ended June 30, 2002 and 2001,
respectively, related to patents.
Net cash (used) provided by financing activities was $(842,000) and $2.9
million in the six months ended June 30, 2002 and 2001, respectively. The
decrease in net cash provided by financing activities is primarily due to the
use of $3.4 million to repurchase our stock.
At June 30, 2002, we had $88.4 million in cash and cash equivalents, $89.6
million in short-term investments and $62.9 million in long-term marketable
investment securities, which includes the fair market value of our holdings in
Digimarc and TTR. The increase in cash and cash equivalents is mainly due to the
maturity of long term marketable investments which were reinvested in money
market funds and short term investments for more favorable interest rates and
cash flow from operations. We have no material commitments for capital
expenditures but anticipate that capital expenditures for the remainder of the
year will aggregate approximately $1.7 million. We also have future minimum
lease payments of approximately $30.5 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.
Because a significant portion of our cash inflows were generated by
operations, our ability to generate positive cash flow from operations may be
jeopardized by fluctuations in our operating results. Such fluctuations can
occur as a result of decreases in demand for our copy protection products, our
electronic license management products, or due to other business risks
including, but not limited to, those factors set forth under the caption "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2001.
CONTRACTUAL OBLIGATIONS
The Company leases its facilities and certain equipment pursuant to
noncancelable operating lease agreements. Future minimum lease payments pursuant
to these leases as of June 30, 2002 were as follows (in thousands):
Operating
Leases
------------
2002 $ 1,433
2003 2,852
2004 2,845
2005 2,935
2006 3,038
2007 and thereafter 17,434
------------
Total $ 30,537
============
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 8 of Notes to Condensed Consolidated Financial Statements.
23
ITEM 3. 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 $240.9 million as
of June 30, 2002. 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 $450,000 decrease (approximately
0.3%) in the fair value of our available-for-sale securities as of June 30,
2002.
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 U.S. 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 currently hold minority equity interests in CAC,
Digimarc, Digital Fountain, InterActual, iVAST, NTRU Cryptosystems, RioPort,
Inc., SecureMedia, Widevine Technologies and TTR. These investments, totaling
$35.7 million, represented 10.5% of our total assets as of June 30, 2002. CAC,
Digital Fountain, InterActual, iVAST, NTRU Cryptosystems, RioPort, Inc. and
Widevine Technologies 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 have in the past and may in the future be required to write
off all or part of one or more of these investments. During the six months ended
June 30, 2002 and 2001, we recorded charges of $5.5 million and $3.4 million,
respectively, relating to other than temporary impairments in our public and
private company investments.
24
PART II. OTHER INFORMATION
ITEM 1. 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. 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. We have been involved in several
preparatory proceedings and are seeking that the Tokyo High Court reaffirm its
earlier decision. Even if an adverse ruling ultimately is reached on this
invalidation claim, this would not have a material adverse effect on our
business.
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 our
patents. The case was heard in the District Court of Dusseldorf, Germany. The
District Court of Dusseldorf ruled against us. We appealed the District Court's
ruling in July 2000 to the Court of Appeal in Dusseldorf. A hearing took place
in front of the Court of Appeal in Dusseldorf on August 23, 2001 in which the
Court stated that because the appeal involves complex technical subject matter,
the Court will require technical expert witnesses. The Court solicited us for a
list of experts that the Court can call on to serve as expert witnesses. We
submitted a list of experts in the area of analog video copy protection to the
Court on October 5, 2001. The selection of the Court's expert witnesses is
pending. 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 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.
On or around September 1998, Globetrotter filed a patent infringement suit
against Rainbow Technologies, which was subsequently consolidated with the
action against Elan Computer Group and Ken Greer. 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 Fogel's claim construction order. On August 31,
2000, we acquired Globetrotter. In January 2001, the Court of Appeals for the
Federal Circuit affirmed the denial of our 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 our patent infringement suit. We 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 our
25
request and agreed to rule on the reconsideration motion before making a ruling
on the summary judgment motion. The reconsideration motion was argued before the
court on July 23, 2001. In a ruling on September 24, 2001, Judge Fogel denied
our reconsideration motion and granted the partial summary judgment motion by
Rainbow et al. The granting of the partial summary judgment motion by Rainbow et
al. means that the patent infringement case against Rainbow et al. is
essentially dismissed. We plan to appeal. Based on the information available at
this time, it is not anticipated that the adverse ruling of partial summary
judgment will have a material adverse effect on our consolidated financial
position, results of operation or cash flow. We still have unfair competition &
trade practices cause of actions against Rainbow et al. The stay of discovery on
the counterclaims has been lifted and witness depositions have commenced. On
January 18, 2002, we filed a motion to dismiss some of the counterclaims from
Rainbow et al. On February 25, 2002, Judge Fogel held a hearing on our motion to
dismiss and our motion to dismiss was granted. On June 3, 2002, we filed another
motion to dismiss additional counterclaims from Rainbow et al. On July 15, 2002,
Judge Fogel held a hearing on our motion to dismiss and a decision is pending.
On July 22, 2002, we filed yet another motion to dismiss additional
counterclaims from Rainbow et al. A hearing on this motion to dismiss is
scheduled for August 26, 2002. The trial for the remaining counterclaims, which
was scheduled for September 9, 2002, has been continued by Judge Fogel until
December 2, 2002. The trial for the remaining counterclaims is scheduled for
September 9, 2002. If an adverse ruling is ultimately reached on the remaining
counterclaims, significant monetary damages may be levied against us, which
could have a material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
On October 23 2001, Digimarc filed a patent infringement suit in the
United States District Court, District of Oregon against Verance Corporation
alleging infringement of certain patents owned by Digimarc. Verance's answer and
counterclaim included allegations of patent infringement and antitrust
counterclaims, including allegations that Digimarc conspired with Macrovision to
keep Verance out of the DVD CCA bidding process for selection of a digital
watermarking copy protection technology. Verance's second amended
cross-complaint was filed on or about March 25, 2002, and specifically named us
as a cross-defendant in connection with our bid to the DVD CCA as one of the VWM
Companies. On August 1, 2002, Digimarc, Verance, and Macrovision jointly moved
for entry of an Order staying this litigation until September 1, 2002. The
parties are currently in negotiations to resolve this dispute and anticipate
jointly filing a motion with the Court to dismiss all claims, counterclaims and
third party claims in this litigation by September 1, 2002. If, for whatever
reason, the parties do not reach an agreement regarding these claims by
September 1, 2002, the parties will resume litigation. In the event litigation
is resumed, and Verance succeeds on its cross-claims, we may be subject to
significant monetary damages as well as be precluded from licensing the VWM
Companies' jointly developed digital media copy protection technology, which
could have a material adverse effect on our business, consolidated financial
position, results of operations or cash flows.
As of June 30, 2002, it is not possible to estimate the liability, if any,
in connection with these matters. Accordingly, no accruals for these
contingencies have been recorded.
From time to time we have been involved in other disputes and legal
actions arising in the ordinary course of business. In management's opinion,
none of these other disputes and legal actions is expected to have a material
impact on our consolidated financial position, results of operations or cash
flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2001 Annual Meeting of Stockholders was held on June 6, 2002. The following
matters were voted on: (1) Election of Directors (2) Amendment to the 2000
Equity Incentive Plan (3) Amendment to the 1996 Directors Stock Option Plan (4)
Amendment to the 1996 Employee Stock Purchase Plan and (5) Appointment of
Auditors
(1) Election of Directors
TOTAL VOTES FOR EACH TOTAL VOTES WITHHELD
DIRECTOR FROM EACH DIRECTOR
------------------------ ---------------------
John O. Ryan 39,968,014 6,255,689
William A. Krepick 45,833,322 390,381
Matthew Christiano 45,674,012 549,691
Donna S. Birks 45,569,133 654,570
William Stirlen 45,725,528 498,175
Thomas Wertheimer 45,725,542 498,161
Steven G. Blank 45,925,091 298,612
(2 ) Amendment to the 2000 Equity Incentive Plan
FOR AGAINST ABSTAIN
----------------------- -------------------- ----------------------
29,352,932 16,813,705 57,066
(3) Amendment to the 1996 Directors Stock Option Plan
FOR AGAINST ABSTAIN
----------------------- -------------------- ----------------------
41,758,976 4,406,276 58,451
(4) Amendment to the 1996 Employee Stock Purchase Plan
FOR AGAINST ABSTAIN
----------------------- -------------------- ----------------------
45,763,961 416,652 43,090
(5) Appointment of Auditors
FOR AGAINST ABSTAIN
----------------------- -------------------- ----------------------
45,121,593 1,080,014 22,096
ITEM 5. OTHER INFORMATION.
None.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.40 Termination of Standard Office Lease
10.41 Amendment to Macrovision Key Employee Agreement for Matthew
Christiano
10.42 Executive Severance and Arbitration Agreement by and between
Macrovision Corporation and Ian R. Halifax
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350, As Adopted)
(b) Reports on Form 8-K.
During the quarter ended June 30, 2002, the Company filed one report on
Form 8-K. On April 29, 2002, the Company reported on Form 8-K, its press release
concerning revenue and earnings results for the first quarter of 2002 and
revenue and earnings estimates for the remainder of 2002.
28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Macrovision Corporation
AUTHORIZED OFFICER:
Date: AUGUST 14, 2002 By: /s/ William A. Krepick
---------------------- -----------------------------------------
William A. Krepick, President and Chief
Executive Officer
PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER:
Date: AUGUST 14, 2002 By: /s/ Ian R. Halifax
---------------------- -----------------------------------------
Ian R. Halifax, Vice President, Finance
and Administration, Chief Financial
Officer and Secretary
29