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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 September 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 November 1, 2002
Common stock, $0.001 par value 48,366,176
MACROVISION CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 3
Condensed Consolidated Statements of Income
for the Three and Nine Month Periods Ended September 30, 2002
and 2001 4
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 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
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 26
Item 2. Changes in Securities and Use of Proceeds. 28
Item 3. Defaults Upon Senior Securities. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Item 5. Other Information. 28
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)
September 30, December 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 82,718 $ 26,112
Short-term investments 92,010 83,456
Accounts receivable, net of allowance for doubtful accounts of
$1,240 and $1,747, respectively 24,297 28,033
Inventories 378 342
Income taxes receivable 9,322 12,213
Deferred tax assets 5,422 5,287
Prepaid expenses and other current assets 5,798 6,124
--------- ---------
Total current assets 219,945 161,567
Property and equipment, net 6,465 4,337
Long-term marketable investment securities 41,332 121,480
Patents, net 4,610 4,594
Goodwill and other intangibles from acquisitions, net 24,206 24,951
Deferred tax assets 5,522 545
Other assets 10,984 17,650
--------- ---------
$ 313,064 $ 335,124
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,366 $ 2,955
Deferred revenue 9,918 9,555
Other current liabilities 4,196 4,381
--------- ---------
Total current liabilities 17,480 16,891
Notes payable 31 33
Other non current liabilities 313 --
Stockholders' equity:
Common stock 51 51
Treasury stock, at cost (38,450) --
Additional paid-in-capital 284,565 280,529
Deferred stock-based compensation (4,118) (10,526)
Accumulated other comprehensive income 1,798 7,917
Retained earnings 51,394 40,229
--------- ---------
Total stockholders' equity 295,240 318,200
--------- ---------
$ 313,064 $ 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 Nine Months Ended
September 30 September 30
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues $ 23,497 $ 23,043 $ 72,103 $ 71,781
Costs and expenses:
Cost of revenues 2,065 1,043 5,616 4,471
Research and development 3,049 1,990 8,418 6,840
Selling and marketing 5,097 4,434 14,439 13,270
General and administrative 3,633 3,063 10,299 9,950
Amortization of goodwill and other
intangibles from acquisitions 519 2,723 1,897 8,088
Amortization of deferred stock-based
compensation* 1,206 2,194 5,330 7,435
-------- -------- -------- --------
Total costs and expenses 15,569 15,447 45,999 50,054
-------- -------- -------- --------
Operating income 7,928 7,596 26,104 21,727
Interest and other income, net 1,632 2,472 5,800 8,012
Impairment losses on investments (6,795) -- (12,272) (3,360)
-------- -------- -------- --------
Income before income taxes 2,765 10,068 19,632 26,379
Income taxes 1,161 3,665 8,467 11,294
-------- -------- -------- --------
Net income $ 1,604 $ 6,403 $ 11,165 $ 15,085
======== ======== ======== ========
Basic earnings per share $ 0.03 $ 0.13 $ 0.22 $ 0.30
Shares used in computing basic earnings per
share 49,720 50,498 50,599 50,167
Diluted earnings per share $ 0.03 $ 0.12 $ 0.22 $ 0.29
Shares used in computing diluted earnings
per share 49,720 51,829 51,166 51,760
* The allocation of the amortization of deferred stock-based compensation
relates to the expense categories as set forth below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
2002 2001 2002 2001
----- ----- ----- -----
Cost of revenues 80 117 314 351
Research and development 220 505 1,067 1,515
Selling and marketing 642 1,300 3,156 3,934
General and administrative 264 272 793 1,635
----- ----- ----- -----
1,206 2,194 5,330 7,435
See the accompanying notes to these condensed consolidated financial statements.
4
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 11,165 $ 15,085
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,033 1,200
Amortization of goodwill and other intangibles from
acquisitions 1,897 8,088
Amortization of deferred stock-based compensation 5,330 7,435
Tax benefit from stock options 1,419 7,463
Impairment losses on investments 12,272 3,360
Changes in operating assets and liabilities:
Accounts receivable 3,767 (8,245)
Deferred revenue 285 1,849
Other assets 3,158 (678)
Other liabilities 472 1,464
--------- ---------
Net cash provided by operating activities 41,798 37,021
Cash flows from investing activities:
Purchases of long-term marketable investment securities
-- (105,920)
Sales or maturities of long-term marketable investment
securities 62,350 77,711
Purchases of short-term investments (137,003) (140,058)
Sales or maturities of short-term investments 128,117 143,608
Acquisition of property and equipment (3,627) (1,988)
Minority equity investments in companies -- (17,000)
Other investing activities (578) (3,511)
--------- ---------
Net cash provided by (used in) investing activities 49,259 (47,158)
Cash flows from financing activities:
Proceeds from issuance of common stock from options and
stock purchase plans 3,667 5,195
Treasury stock acquisitions (38,450) --
Repayment of stockholder notes -- 297
Other financing activities -- (11)
--------- ---------
Net cash provided by (used in) financing activities (34,783) 5,481
Effect of exchange rate changes on cash 332 (72)
--------- ---------
Net increase in cash and cash equivalents 56,606 (4,728)
Cash and cash equivalents at beginning of period 26,112 22,409
--------- ---------
Cash and cash equivalents at end of period $ 82,718 $ 17,681
========= =========
Supplemental cash flow information:
Interest paid $ -- $ --
Income taxes paid $ 6,383 $ 2,077
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
September 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 on the December 31,
2001 condensed consolidated balance sheet to conform to the current period
presentation.
NOTE 2 - 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):
September 30, December 31,
2002 2001
------------- ------------
Raw materials $155 $ 33
Finished goods 223 309
---- ----
$378 $342
==== ====
6
NOTE 3 - 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 September 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 Company performs regular
reviews, in accordance with Company policy, of the value of its public company
strategic 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 three and nine months ended September 30, 2002, the Company
recorded losses of $3.1 million and $5.6 million, respectively, from other than
temporary declines in the fair value of long-term marketable securities. The
charge of $5.6 million for the nine months ended September 30, 2002 represented
approximately 16.3% of our total strategic investments at September 30, 2002.
There were no charges related to other than temporary declines in the fair value
of long-term marketable securities for the three and nine months ended September
30, 2001.
NOTE 4 - 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 reviewing each investment for
indicators of impairment on a regular basis based primarily on achievement of
business plan objectives and current market conditions. The Company performs
regular reviews, in accordance with Company policy, of the value of its private
company strategic investments. 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. 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 three and nine months ended September 30, 2002, the Company
recorded charges of $3.7 million and $6.7 million, respectively, relating to
impairment losses considered to be other than temporary declines in the value of
certain strategic long term investments. The charge of $6.7 million for the nine
months ended September 30, 2002 represented approximately 19.5% of our total
strategic investments at September 30, 2002. During the three and nine months
ended September 30, 2001, the Company recorded charges of $0 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 5 - 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 potential common shares
outstanding during the period except for periods of operating loss for which no
common shares are included because their effect would be anti-dilutive. Dilutive
potential common 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 Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------ ------ ------ ------
Basic EPS - weighted average number of
common shares outstanding 49,720 50,498 50,599 50,167
Effect of dilutive potential common
shares - stock options outstanding -- 1,331 567 1,593
------ ------ ------ ------
Diluted EPS - weighted average number of
common shares and potential common
shares outstanding 49,720 51,829 51,166 51,760
====== ====== ====== ======
Anti-dilutive shares excluded 5,194 1,558 3,622 1,075
====== ====== ====== ======
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 6 - 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 and as monitored by the Audit Committee
of the Company's Board of Directors. The Company's repurchases of shares of
common stock have been recorded as treasury stock at cost and result in a
reduction of stockholders' equity. As of September 30, 2002, treasury stock
consisted of 3,000,000 shares of common stock with a cost basis of approximately
$38.5 million.
NOTE 7 - 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. Goodwill amortization
resulting from business combinations prior to July 1, 2001 continued through
December 31, 2001. The Company performed its transitional impairment test
8
for all recorded goodwill during the quarter ended June 30, 2002 and 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 September 30, 2002 by approximately $2.0 million and for the
nine months ended September 30, 2002 by approximately $6.0 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 during
its fourth fiscal quarter. The pro forma effects of the adoption of SFAS No. 142
are as follows (amounts in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2002 2001 2002 2001
---------- ------- ---------- -------
Net income, as reported $ 1,604 $ 6,403 $ 11,165 $15,085
Adjustments:
Amortization of goodwill, net of tax -- 1,293 -- 3,445
---------- ------- ---------- -------
Adjusted net income $ 1,604 $ 7,696 $ 11,165 $18,530
========== ======= ========== =======
Basic net income per share, as reported $ 0.03 $ 0.13 $ 0.22 $ 0.30
Basic net income per share, as adjusted $ 0.03 $ 0.15 $ 0.22 $ 0.37
Diluted net income per share, as
reported $ 0.03 $ 0.12 $ 0.22 $ 0.29
Diluted net income per share, as
adjusted $ 0.03 $ 0.15 $ 0.22 $ 0.36
Shares used in computing:
Basic 49,720 50,498 50,599 50,167
Diluted 49,720 51,829 51,166 51,760
The following tables summarize the Company's goodwill and intangible assets
as of September 30, 2002 and the estimated amortization expense through the year
2006 (in thousands):
Accumulated
Gross Costs Amortization Net Intangibles
----------- ------------ ---------------
Amortized Intangibles
Existing technology $11,668 $ 5,487 $ 6,181
Non-complete agreements 1,788 1,788 --
Customer base 1,461 738 723
------- ------- -------
Total 14,917 8,013 6,904
Unamortized Intangibles
Goodwill * 29,375 12,073 17,302
------- ------- -------
Total Intangibles $44,292 $20,086 $24,206
======= ======= =======
Year ending
2003 $ 2,028
2004 1,938
2005 1,667
2006 764
-------
Total amortization expense $ 6,397
=======
* Amortization ceased effective January 1, 2002 upon the adoption of SFAS 142.
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 8 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of taxes, are as follows
(dollars in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 1,604 $ 6,403 $ 11,165 $ 15,085
Other comprehensive income (loss):
Unrealized gains (losses) on investments 3,100 (16,970) (7,433) (7,885)
Foreign currency translation adjustments 533 711 1,314 (437)
-------- -------- -------- --------
Comprehensive income (loss) $ 5,237 $ (9,856) $ 5,046 $ 6,763
======== ======== ======== ========
NOTE 9 - 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):
Compensation
expense
relating to
accelerated
vesting of
certain stock
Severance options Other Total
--------- ------------ ------- -------
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 September 30, 2002 $ -- $ -- $ -- $ --
======= ======= ======= =======
10
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
The following segment reporting information of the Company is provided (dollars
in thousands):
Net Revenues:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Video Technology Division
DVD $10,158 $ 8,689 $31,902 $25,921
Videocassette 1,770 2,256 5,728 8,236
Pay-Per-View 3,051 3,304 8,766 10,520
Consumer Software Division 1,853 2,284 5,921 6,965
Enterprise Software Division 6,584 6,402 19,575 19,404
Other 81 108 211 735
------- ------- ------- -------
$23,497 $23,043 $72,103 $71,781
======= ======= ======= =======
Operating Income:
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Video Technology Division $ 12,705 $ 12,638 $ 40,249 $ 39,198
Consumer Software Division 505 1,155 1,931 3,540
Enterprise Software Division 3,298 3,727 10,400 10,834
Other (173) 46 (532) 468
-------- -------- -------- --------
Segment income 16,335 17,566 52,048 54,040
Research and development 3,049 1,990 8,418 6,840
General and administrative 3,633 3,063 10,299 9,950
Amortization of goodwill and other intangibles
from acquisitions 519 2,723 1,897 8,088
Amortization of deferred stock-based
compensation 1,206 2,194 5,330 7,435
-------- -------- -------- --------
$ 7,928 $ 7,596 $ 26,104 $ 21,727
======== ======== ======== ========
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 Nine Months Ended
September 30 September 30
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
United States $15,065 $13,999 $47,102 $43,075
International 8,432 9,044 25,001 28,706
------- ------- ------- -------
$23,497 $23,043 $72,103 $71,781
======= ======= ======= =======
Geographic area information is based upon country of destination for
products shipped and country of contract holder for royalties and license fees.
11
NOTE 11 - CONTINGENCIES
The Company is involved in legal proceedings related to certain
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 appealed this decision to the
Tokyo High Court, and 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, Germany 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 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 has selected an
expert and the expert opinion 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
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. 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,
12
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. On January 18, 2002, the
Company filed a motion to dismiss some of the counterclaims from Rainbow et al.
and Judge Fogel granted the Company's motion to dismiss. On June 3, 2002, the
Company filed another motion to dismiss additional counterclaims from Rainbow et
al. and the Company's motion to dismiss was later denied. On July 22, 2002, the
Company filed three more motions to dismiss additional counterclaims from
Rainbow et al. On August 26, 2002, Judge Fogel granted two of the Company's
dismissal motions. On October 7, 2002, Judge Fogel held a hearing on the third
motion and a decision is currently pending. On September 30, 2002 the Company
filed yet two more motions to dismiss all remaining counterclaims and a request
for leave to file motion for reconsideration of the patent infringement case or
in the alternative for leave to supplement the record. A hearing was held on
November 4, 2002 and a decision is pending. The trial for the remaining
counterclaims is currently scheduled for January 13, 2003 pending the outcome of
the motions to dismiss. 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 September 26, 2002, the parties Joint Motion to Dismiss
was granted by the Court, and the action was dismissed.
As of September 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 and
digital PPV programs. We have also expanded our copy protection technologies to
address unauthorized copying of consumer software such as personal computer
games and educational 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 businesses through the
acquisition of Globetrotter Software, Inc. and the purchase of certain assets of
Productivity through Software plc (PtS), which comprise our Enterprise Software
Division.
The following table provides net revenues information by product line
(dollars in thousands):
Three Months Ended
September 30, Change
-------------------- -------------------
2002 2001 $ %
------- ------- ------- ----
Video Technology Division
DVD $10,158 $ 8,689 $ 1,469 16.9%
Videocassette 1,770 2,256 (486) (21.5)
Pay-Per-View 3,051 3,304 (253) (7.7)
Consumer Software Division 1,853 2,284 (431) (18.9)
Enterprise Software Division 6,584 6,402 182 2.8
Other 81 108 (27) (25.0)
------- ------- -------
Total $23,497 $23,043 $ 454 (2.0)%
======= ======= =======
14
Nine Months Ended
September 30, Change
-------------------- ------------------
2002 2001 $ %
------- ------- ------- ----
Video Technology Division
DVD $31,902 $25,921 $ 5,981 23.1%
Videocassette 5,728 8,236 (2,508) (30.5)
Pay-Per-View 8,766 10,520 (1,754) (16.7)
Consumer Software Division 5,921 6,965 (1,044) (15.0)
Enterprise Software Division 19,575 19,404 171 0.9
Other 211 735 (524) (71.3)
------- ------- -------
Total $72,103 $71,781 $ 332 0.4%
======= ======= =======
The following table provides percentage of net revenue information by
product line:
Three Months Ended Nine Months Ended
September 30 September 30
------------------- --------------------
2002 2001 2002 2001
------ ------ ------ ------
Video Technology Division
DVD 43.3% 37.7% 44.3% 36.1%
Videocassette 7.5 9.8 7.9 11.5
Pay-Per-View 13.0 14.3 12.2 14.7
Consumer Software Division 7.9 9.9 8.2 9.7
Enterprise Software Division 28.0 27.8 27.1 27.0
Other 0.3 0.5 0.3 1.0
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Video Technology Division.
Our customers have included the home video divisions of member companies 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 represent a
significant portion of such fees for the periods ended September 30, 2002 and
2001.
DVD Copy Protection. In 1997, we introduced copy protection for DVDs. Our
customers have included member companies 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 43.3% and 37.7% of our
net revenues for the three months ended September 30, 2002 and 2001,
respectively and 44.3% and 36.1% of our net revenues for the nine months ended
September 30, 2002 and 2001, respectively. The increase in DVD copy protection
revenue is due to the increase in numbers of DVDs sold and continued growth in
demand for our DVD copy protection solution. We expect these trends to continue
as long as the growth in DVD demand exceeds future declines in our DVD copy
protection average unit royalties and usage rates.
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 copy protection revenues
represented 7.5% and 9.8% of our net revenues for the three months ended
15
September 30, 2002 and 2001, respectively and 7.9% and 11.5% of our net revenues
for the nine months ended September 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 or transaction royalties associated with copy
protected PPV programming. Digital PPV revenues were 13.0% and 14.3% of our net
revenues for the three months ended September 30, 2002 and 2001, respectively,
and 12.2% and 14.7% of our net revenues for the nine months ended September 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 continued weak digital cable and digital satellite business on a
worldwide basis.
Consumer Software Division.
We entered into the market for copy protection of consumer software in
1998, when 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 consideration of
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. SafeCast is another product within our consumer software division
which has recently gained increased market adoption. SafeAudio and
SafeAuthenticate are two new products that are in development and currently
being tested by major record labels in the music industry. Consumer software
division revenues represented 7.9% and 9.9% of our net revenues for the three
months ended September 30, 2002 and 2001, respectively, and 8.2% and 9.7% of our
net revenues for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in revenue is due to a reduction of titles shipped
and lower per unit royalties.
Enterprise Software Division.
We entered the market for copy protection of enterprise software in August
2000, when 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. In October 2000, we
acquired certain assets of Manchester (UK) based PtS for approximately $23.3
million in cash and related acquisition costs, and assumed liabilities. Our
Globetrotter division generates its revenue from licensing its software and
providing services related
16
to the support and maintenance of this software. Revenues from this business
segment were 28.0% and 27.8% of our net revenues for the three months ended
September 30, 2002 and 2001, respectively, and 27.1% and 27.0% of our net
revenues for the nine months ended September 30, 2002 and 2001. Despite
difficult economic conditions for enterprise software companies, revenue has
remained consistent with the prior year's quarter and the prior year-to-date
period.
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. 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
allocation of facilities costs. Our selling and marketing expenses are comprised
primarily of employee compensation and benefits, consulting and recruiting fees,
travel, advertising and 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
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 and accordingly, record the necessary adjustments. 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 Note 1 of the Notes to the
Audited Consolidated Financial Statements filed with 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.
17
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:
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 software 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 customary payment
terms or arrangements where the fee is not determinable at the outset 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 with copy protection technology 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 September 30, 2002, the carrying value of our strategic investments
totaled $34.2 million.
We review our investments in non-public companies and estimate the amount
of any impairment incurred during the current period 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.
18
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 at period end is below the Company's original cost
basis, we determine that an other than temporary impairment has occurred and
record an impairment charge for the difference between the cost basis and the
period end reported market value.
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 investments, thereby requiring further impairment
charges in the future. Based on these measurements, $6.8 million and $12.3
million, and $0 and $3.4 million in impairment losses were recorded during the
three and nine months ended September 30, 2002 and 2001, respectively.
Valuation of Intangible Assets.
SFAS 142, "Goodwill and Other Intangible Assets" (SFAS 142) requires that
goodwill be tested for impairment at least annually and more frequently upon the
occurrence of certain events as defined by SFAS 142. Goodwill will be tested for
impairment annually in the fourth quarter. The Company performed its
transitional impairment test and concluded that the fair value of the Company's
reporting units were greater than the carrying amounts of the respective
reporting units.
The Company evaluates all of its long-lived assets, including intangible
assets other than goodwill, for impairment in accordance with the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets"
(SFAS 144). SFAS 144 requires that long-lived assets and intangible assets other
than goodwill be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flow attributable to that asset.
Should events indicate that any of the Company's assets are impaired, the amount
of such impairment will be measured as the difference between the carrying value
and the fair value of the impaired asset and recorded in earnings during the
period of such impairment.
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.
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
September 30, 2002, deferred tax assets net of a $1.4 million valuation
allowance, totaled $10.9 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.
19
Results of Operations
Net Revenues. Our net revenues increased 2.0% from $23.0 million in the
third quarter of 2001 to $23.5 million in the third quarter of 2002. DVD copy
protection revenues increased $1.5 million or 16.9% from $8.7 million in the
third quarter of 2001 to $10.2 million in the third quarter of 2002, due to the
continued growth in demand of the DVD format which more than offset modest
declines in our average unit royalties and reduced copy protection usage by
certain customers. Revenues from videocassette copy protection decreased
$486,000 or 21.5% from $2.3 million in the third quarter of 2001 to $1.8 million
in the third 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
$253,000 or 7.7% from $3.3 million in the third quarter of 2001 to $3.1 million
in the third quarter of 2002 due to the continued weak digital cable and digital
satellite business on a worldwide basis. The decrease is partially offset by an
increase in set-top box licenses that had large up-front fees and an increase in
set-top box royalties tied to the initial activation of our technology in a
European digital satellite operator. Consumer Software Division revenues
decreased $431,000 or 18.9% from $2.3 million in the third quarter of 2001 to
$1.9 million in the third quarter of 2002 primarily due to a reduction of titles
shipped and lower per unit royalties. Revenues from our Enterprise Software
Division were consistent with the third quarter of 2001. Other revenue from
legacy video encryption businesses decreased $27,000 or 25.0% from $108,000 in
the third quarter of 2001 to $81,000 in the third quarter of 2002.
Our net revenues increased 0.4% from $71.8 million in the nine months ended
September 30, 2001 to $72.1 million in the nine months ended September 30, 2002.
DVD copy protection revenues increased $6.0 million or 23.1% from $25.9 million
in the nine months ended September 30, 2001 to $31.9 million in the nine months
ended September 30, 2002, due to the continued growth in demand of the DVD
format. Revenues from videocassette copy protection decreased $2.5 million or
30.5% from $8.2 million in the nine months ended September 30, 2001 to $5.7
million in the nine months ended September 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 $1.8 million or 16.7% from $10.5 million in the nine months ended
September 30, 2001 to $8.8 million in the nine months ended September 30, 2002
due to the continued weak digital cable and digital satellite business on a
worldwide basis. The decrease is partially offset by an increase in set-top box
licenses that had large up-front fees and an increase in set-top box royalties
tied to the initial activation of our technology in a European digital satellite
operator. Consumer Software Division revenues decreased approximately $1.0
million or 15.0% from $7.0 million in the nine months ended September 30, 2001
to $5.9 million in the nine months ended September 30, 2002 primarily due to a
reduction of titles shipped and lower per unit royalties. Revenues from our
Enterprise Software Division remained consistent with the prior year period.
Other revenue from legacy video encryption businesses decreased $524,000 or
71.3% from $735,000 in the nine months ended September 30, 2001 to $211,000 in
the nine months ended September 30, 2002.
Cost of Revenues. Cost of revenues as a percentage of net revenues
increased from 4.5% for the third quarter of 2001 to 8.8% for the third quarter
of 2002. Cost of revenues increased $1.0 million from $1.0 million in the third
quarter of 2001 to $2.0 million in the third quarter of 2002. The increase was
primarily due to higher patent defense costs relating to the Rainbow and Verance
litigation (see Note 11 of Notes to Condensed Consolidated Financial
Statements).
Cost of revenues as a percentage of net revenues increased from 6.2% for
the nine months ended September 30, 2001 to 7.8% for the nine months ended
September 30, 2002. Cost of revenues increased $1.1 million from $4.5 million in
the nine months ended September 30, 2001 to $5.6 million in the nine months
ended September 30, 2002. The increase in cost of revenues is due mainly
20
to higher patent defense costs relating to the Rainbow and Verance litigation
and increased Enterprise Software Division support costs.
Research and Development. Research and development expenses increased by
approximately $1.0 million or 53.2% from $2.0 million in the third quarter of
2001 to $3.0 million in the third quarter of 2002. The increase is primarily due
to further research and development activities in our Video Technology, Consumer
Software and Enterprise Software Divisions, including the development efforts of
programs relating to audio CD copy protection (Audio) and a secure digital media
distribution platform (MacroSafe). Research and development expenses increased
as a percentage of net revenues from 8.6% in the third quarter of 2001 to 13.0%
in the third quarter of 2002.
Research and development expenses increased by $1.6 million or 23.1% from
$6.8 million in the nine months ended September 30, 2001 to $8.4 million in the
nine months ended September 30, 2002. The increase is primarily due to further
research and development activities in our Video Technology, Consumer Software
and Enterprise Software Divisions, including the development efforts of our
Audio and MacroSafe programs. Research and development expenses increased as a
percentage of net revenues from 9.5% in the nine months ended September 30, 2001
to 11.7% in the nine months ended September 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 invest in the development of new
technologies across all our business areas.
Selling and Marketing. Selling and marketing expenses increased by $663,000
or 15.0% from $4.4 million in the third quarter of 2001 to $5.1 million in the
third quarter of 2002. This increase was primarily due to higher costs
associated with increased marketing activity associated with the Enterprise
Software Division, including increased advertising costs in conjunction with the
Division's Electronic Commerce for Software Industry symposium, and new business
development activities for our MacroSafe and Audio technologies. Selling and
marketing expenses increased as a percentage of net revenues from 19.2% in the
third quarter of 2001 to 21.7% in the third quarter of 2002.
Selling and marketing expenses increased by $1.2 million or 8.8% from $13.3
million in the nine months ended September 30, 2001 to $14.4 million in the nine
months ended September 30, 2002. The increase is mainly due to higher costs
associated with increased marketing activity with the Enterprise Software
Division and new business development activities for our MacroSafe and SafeAudio
technologies. Selling and marketing expenses increased as a percentage of net
revenues from 18.5% in the nine months ended September 30, 2001 to 20.0% in the
nine months ended September 30, 2002.
General and Administrative. General and administrative expenses increased
by $570,000 or 18.6% from $3.1 million in the third quarter of 2001 to $3.6
million in the third quarter of 2002. The increase is due primarily to higher
facilities costs associated with our new office space. General and
administrative expenses increased as a percentage of net revenues from 13.3% in
the third quarter of 2001 to 15.5% in the third quarter of 2002.
General and administrative expenses increased by $349,000 or 3.5% from
$10.0 million in the nine months ended September 30, 2001 to $10.3 million in
the nine months ended September 30, 2002. The increase is due primarily to
higher facilities costs associated with our new office space. General and
administrative expenses increased as a percentage of net revenues from 13.9% in
the nine months ended September 30, 2001 to 14.3% in the nine months ended
September 30, 2002.
21
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 $392,000 and $743,000 in the third quarters of 2002 and 2001,
respectively. For the nine months ended September 30, 2002 and 2001, we
amortized $1.5 million and $2.2 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, amortization would have been approximately $566,000 for the third
quarter of 2001 and $1.7 million for the nine months ended September 30, 2001.
We also amortize intangibles relating to the acquisition of net assets of
Productivity through Software plc ("PtS"), the European distributor for the
Enterprise Software Division, on a straight-line basis over three years based on
the expected useful lives of the existing customer base. We amortized $127,000
and $2.0 million in the third quarters of 2002 and 2001, respectively. For the
nine months ended Septemer 30, 2002 and 2001, we amortized $374,000 and $5.8
million, respectively. If we had adopted SFAS 142 in 2001, amortization would
have been approximately $121,000 for the third quarter of 2001 and approximately
$362,000 for the nine months ended September 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 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 third quarters of 2002 and 2001
were $1.2 million and $2.2 million, respectively. The amortization of the
deferred stock-based compensation for the nine months ended September 30, 2002
and 2001 was $5.3 million and $7.4 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 third quarters of 2002 and
2001, we recorded charges totaling $6.8 million and $0, respectively, relating
to other than temporary impairments in our public and private company
investments. For the nine months ended September 30, 2002 and 2001, we recorded
charges totaling $12.3 million and $3.4 million, respectively.
Interest and Other Income, Net. Interest and other income decreased
$840,000 or 34.0% from $2.5 million in the third quarter of 2001 to $1.6 million
in the third quarter of 2002. Interest and other income decreased $2.2 million
or 27.6% from $8.0 million in the nine months ended September 30, 2001 to $5.8
million in the nine months ended September 30, 2002. The decreases are due
primarily to lower interest rates.
Income Taxes. For the third quarter of 2002, we recorded income taxes of
$1.2 million, compared to income taxes for the third quarter of 2001 of $3.7
million. The effective tax rate for the third quarter of 2002 and 2001 was 42.0%
and 36.4%, respectively. The effective tax rate of 42.0% reflects our current
evaluation of our tax credit potential. The effective tax rate for the nine
months ended September 30, 2002 and 2001 was 43.1% and 42.8%, respectively. The
increase in the effective tax rate for the nine months ended September 30, 2002
compared to the nine months ended September 30, 2001 reflects our current
evaluation of our tax credit potential.
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 and as monitored by the Audit Committee of our
Board of Directors. Our repurchases of shares of common stock have
22
been recorded as treasury stock and result in a reduction of stockholders'
equity. As of September 30, 2002, treasury stock consisted of 3.0 million 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 $41.8
million and $37.0 million in the nine months ended September 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 $49.3 million in the nine months
ended September 30, 2002 and used net cash of $47.2 million in the nine months
ended September 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. Proceeds from the maturity of long and short term
marketable investments were also used to purchase 3 million shares of treasury
stock. The increase is also due to reduced activity in minority equity
investments from $17.0 million in the nine months ended September 30, 2001 to $0
in the nine months ended September 30, 2002. The increase in capital
expenditures of $1.6 million is primarily due to leasehold improvements and
furniture and fixtures for our new office space, which we moved into during
March 2002. We also paid $501,000 and $2.5 million in the nine months ended
September 30, 2002 and 2001, respectively, related to patent application costs.
Net cash (used) provided by financing activities was ($34.8) million and
$5.5 million in the nine months ended September 30, 2002 and 2001, respectively.
The decrease in net cash provided by financing activities is primarily due to
the use of $38.5 million to repurchase 3.0 million shares of treasury stock.
At September 30, 2002, we had $82.7 million in cash and cash equivalents,
$92.0 million in short-term investments and $41.3 million in long-term
marketable investment securities, which includes the fair market value of our
strategic investments in two public companies, Digimarc and TTR Technologies. At
December 31, 2001, we had $26.1 million in cash and cash equivalents, $83.5
million in short-term investments and $121.5 million in long-term marketable
investment securities. The increase in cash, cash equivalents and short term
investments 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. The decrease in
long-term marketable investment securities is due to the maturity of long term
investments mentioned above and the decrease in market value of Digimarc and TTR
Technologies. We have no material commitments for capital expenditures and
anticipate that capital expenditures for the remainder of the year will not
exceed $1.0 million. We also have future minimum lease payments of approximately
$30.0 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.
In November 2002, we signed a definitive agreement with Midbar Tech (1998)
Ltd. of Tel Aviv, Israel to acquire substantially all of their assets and
operations for approximately $17.0 million in cash. We also signed a definitive
agreement with TTR Technologies to acquire patents for approximately $5.25
million in cash. These acquisitions are both in the audio technology space and
are expected to close within the next six months. After consummation of these
acquisitions, we expect incremental revenue and operating expenses, a one-time
acquisition-related charge mostly
23
relating to in-process research and development write-off and a reduction in
interest income. The increase in operating expenses expected to result from the
Midbar transaction may cause dilution of earnings per share of one penny in the
fourth quarter of 2002.
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 September 30, 2002 were as follows (in thousands):
Operating
Leases
--------
2002 $ 723
2003 2,886
2004 2,871
2005 2,955
2006 3,058
2007 and thereafter 17,491
-------
Total $29,984
=======
Recent Accounting Pronouncements
See Note 7 of Notes to Condensed Consolidated Financial Statements.
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 $216.1 million as
of September 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 $345,000 decrease (approximately
0.3%) in the fair value of our available-for-sale securities as of September 30,
2002.
24
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 two
public companies (Digimarc and TTR Technologies), and the remainder in private
companies (Command Audio Corporation, Digital Fountain, InterActual, iVAST, NTRU
Cryptosystems, RioPort, Inc., SecureMedia and Widevine Technologies). Our public
company investments total $23.7 million and our private company investments
total $10.5 million. These investments, totaling $34.2 million, represented
10.9% of our total assets as of September 30, 2002. There is no active trading
market for the private company 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 nine months ended September 30, 2002 and 2001, we recorded charges of $12.3
million and $3.4 million, respectively, relating to other than temporary
impairments in our public and private company investments. These charges relate
to some of the investments listed above.
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure based
closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c). In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with participation of the
Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on
the foregoing, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
were effective.
(b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in legal proceedings related to certain 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 appealed this decision to the Tokyo High Court, and 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, Germany 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 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 has selected an expert and the expert opinion 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. 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
26
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. On January 18, 2002, we
filed a motion to dismiss some of the counterclaims from Rainbow et al and Judge
Fogel granted our motion to dismiss. On June 3, 2002, we filed another motion to
dismiss additional counterclaims from Rainbow et al and our motion to dismiss
was later denied. On July 22, 2002, we filed three more motions to dismiss
additional counterclaims from Rainbow et al. On August 26, 2002, Judge Fogel
granted two of our dismissal motions. On October 7, 2002, Judge Fogel held a
hearing on the third motion and a decision is currently pending. On September
30, 2002 we filed yet two more motions to dismiss all remaining counterclaims
and a request for leave to file motion for reconsideration of the patent
infringement case or in the alternative for leave to supplement the record. A
hearing was held on November 4, 2002 and a decision is pending. The trial for
the remaining counterclaims is currently scheduled for January 13, 2003 pending
the outcome of the motions to dismiss. 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
counter-claim included allegations of patent infringement and antitrust
counterclaims, including allegations that Digimarc conspired with us 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 September 26, 2002, the parties Joint Motion to Dismiss was
granted by the Court, and the action was dismissed.
As of September 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.
27
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.43 Offer letter to Dan Stickel dated August 9, 2002.*
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350, As Adopted).
99.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350, As Adopted).
* The Registrant has requested confidential treatment for certain
portions of this exhibit.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, the Company filed one report
on Form 8-K. On July 31, 2002, the Company reported on Form 8-K, its press
release concerning revenue and earnings results for the second quarter of
2002. The press release also included 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: November 12, 2002 By: /s/ William A. Krepick
------------------------------ -------------------------------------
William A. Krepick, President and
Chief Executive Officer
Principal Financial Officer and Chief Accounting Officer:
Date: November 12, 2002 By: /s/ Ian R. Halifax
------------------------------ -------------------------------------
Ian R. Halifax, Vice President,
Finance and Administration,
Chief Financial Officer and
Secretary
29
CERTIFICATIONS
I, William A. Krepick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Macrovision
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
------------------------------
/s/ William A. Krepick
----------------------------------------
William A. Krepick
Chief Executive Officer
30
I, Ian R. Halifax, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Macrovision
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
------------------------------
/s/ Ian R. Halifax
----------------------------------------
Ian R. Halifax
Chief Financial Officer
31