Back to GetFilings.com
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 March 31, 2004
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 April 30, 2004
Common stock, $0.001 par value 49,305,820
MACROVISION CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004
and December 31, 2003. 1
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 2004 and 2003. 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003. 3
Notes to Condensed Consolidated Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
-------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 62,987 $ 27,918
Short-term investments 112,642 95,563
Accounts receivable, net of allowance for doubtful accounts of
$2,491 and $2,147, respectively 32,934 30,169
Income taxes receivable 4,029 3,410
Deferred tax assets 6,613 6,599
Prepaid expenses and other current assets 5,604 5,070
-------------------- -------------------
Total current assets 224,809 168,729
Long-term marketable investment securities 104,116 146,151
Property and equipment, net 6,876 6,689
Patents, net 10,931 10,826
Goodwill 29,611 28,630
Other intangibles from acquisitions, net 7,872 8,512
Deferred tax assets 15,952 15,121
Other assets 738 908
-------------------- -------------------
$ 400,905 $ 385,566
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,954 $ 4,457
Deferred revenue 12,148 10,333
Other current liabilities 24,693 25,936
-------------------- -------------------
Total current liabilities 41,795 40,726
Other non current liabilities 953 874
-------------------- -------------------
Total liabilities 42,748 41,600
Stockholders' equity:
Common stock 52 52
Treasury stock, at cost (38,450) (38,450)
Additional paid-in-capital 295,482 292,507
Deferred stock-based compensation -- (185)
Accumulated other comprehensive income 8,291 8,028
Retained earnings 92,782 82,014
-------------------- -------------------
Total stockholders' equity 358,157 343,966
-------------------- -------------------
$ 400,905 $ 385,566
==================== ===================
See the accompanying notes to these condensed consolidated financial statements.
1
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003
----------------- -----------------
Revenues:
Licenses $ 34,823 $ 25,242
Services 3,159 2,810
----------------- -----------------
Total revenues 37,982 28,052
Cost of revenues:
License fees 1,584 939
Service fees 721 543
Amortization of intangibles from acquisitions 779 856
----------------- -----------------
Total cost of revenues 3,084 2,338
----------------- -----------------
Gross profit 34,898 25,714
Operating expenses:
Research and development 5,587 3,743
Selling and marketing 8,556 6,404
General and administrative 5,513 4,324
Amortization of deferred stock-based compensation* 185 768
----------------- -----------------
Total operating expenses 19,841 15,239
----------------- -----------------
Operating income 15,057 10,475
Impairment losses on investments (180) --
Gains on strategic investments 1,220 --
Interest and other income, net 728 1,100
----------------- -----------------
Income before income taxes 16,825 11,575
Income taxes 6,057 4,630
----------------- -----------------
Net income $ 10,768 $ 6,945
================= =================
Basic net earnings per share $ 0.22 $ 0.14
================= =================
Shares used in computing basic net earnings per share 49,244 48,514
================= =================
Diluted net earnings per share $ 0.21 $ 0.14
================= =================
Shares used in computing diluted net earnings per share 50,210 48,722
================= =================
* The allocation of the amortization of deferred stock-based compensation relates to the expense
categories as set forth below:
------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003
----------------- -----------------
Cost of revenues $ 27 $ 80
Research and development 53 138
Selling and marketing 36 347
General and administrative 69 203
----------------- -----------------
$ 185 $ 768
================= =================
See the accompanying notes to these condensed consolidated financial statements.
2
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------
2004 2003
---------------------- --------------------
Cash flows from operating activities:
Net income $ 10,768 $ 6,945
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,066 725
Amortization of goodwill and other intangibles from
acquisitions 779 856
Amortization of deferred stock-based compensation 185 768
Tax benefit from stock options exercises 618 112
Impairment losses on investments 180 --
Changes in operating assets and liabilities:
Accounts receivable, net (2,665) 3,785
Deferred revenue 1,795 1,328
Other assets (1,134) 235
Other liabilities (192) 2,751
---------------------- --------------------
Net cash provided by operating activities 11,400 17,505
Cash flows from investing activities:
Purchases of long and short-term investments (132,401) (104,231)
Sales or maturities of long and short-term investments 155,431 61,385
Acquisition of property and equipment (806) (538)
Payments for patents (318) (234)
Contingent consideration for Midbar acquisition (723) --
Other investing activities -- (314)
---------------------- --------------------
Net cash provided by (used in) investing activities 21,183 (43,932)
Cash flows from financing activities:
Proceeds from issuance of common stock from options and
stock purchase plans 2,357 1,169
---------------------- --------------------
Net cash provided by financing activities 2,357 1,169
Effect of exchange rate changes on cash and cash equivalents 129 192
---------------------- --------------------
Net increase (decrease) in cash and cash equivalents 35,069 (25,066)
Cash and cash equivalents at beginning of period 27,918 98,691
---------------------- --------------------
Cash and cash equivalents at end of period $ 62,987 $ 73,625
====================== ====================
See the accompanying notes to these condensed consolidated financial statements.
3
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. However, the Company believes the
disclosures are adequate to make the information not misleading. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are considered necessary to
present fairly the results for the 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, 2003.
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, 2004 or any other future interim period.
NOTE 2 - REVENUE RECOGNITION
The Company's revenue consists of royalty fees on copy-protected products
on a per unit basis, licenses of the Company's copy protection technology,
licenses for the Company's software products, and related maintenance and
services revenues.
ROYALTY REVENUES
Royalty revenue from the replication of videocassettes, digital versatile
discs ("DVDs"), and compact disks ("CDs") is recognized when realized or
realizable and earned. The Company relies on royalty reports from third parties
as its basis for revenue recognition. In the Company's DVD, videocassette, and
PC games product lines, it has established significant experience with certain
customers to reasonably estimate current period volume for purposes of making an
accurate revenue accrual. Accordingly, royalty revenue from these customers is
recognized as earned, provided there is persuasive evidence of an arrangement
and that collection of a fixed and determinable fee is considered probable.
Revenue from customers in pay-per-view ("PPV") and music technology is currently
recognized only as reported, due to timing of receipt of reports in PPV, and the
embryonic stage and volume volatility of the market for our music technology
products. Advanced royalty fees attributable to minimum copy quantities or
shared revenues are deferred until earned. In the case of agreements with
minimum guaranteed royalty payments with no specified volume, revenue is
recognized on a straight-line basis over the life of the agreement.
4
TECHNOLOGY LICENSING REVENUES
Technology licensing revenue, which applies principally to DVD and PC
sub-assembly manufacturers, digital PPV, cable and satellite system operators,
and set-top decoder manufacturers, is recognized upon establishment of
persuasive evidence of an arrangement, performance of all significant
obligations and determination that collection of a fixed or determinable license
fee is considered probable.
SOFTWARE LICENSING REVENUES
The Company recognizes revenue on its software products in accordance with
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by
SOP 98-9 "Modification of SOP 97-2." The Company recognizes revenue when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery of the product has occurred; no significant obligations remain; the fee
is fixed and determinable; and collectibility is probable. The Company considers
all arrangements with payment terms extending beyond six months not to be fixed
or determinable and, accordingly, revenue is recognized as payments become due
from the customer under such arrangements. The Company assesses collectibility
based on a number of factors, including the customer's past payment history and
current creditworthiness. If collectibility is not considered probable, revenue
is recognized when the fee is collected from the customer.
For license agreements in which non-standard customer acceptance clauses
are a condition to earning the license fees, revenue is not recognized until
acceptance occurs. For arrangements containing multiple elements, such as
software license fees, consulting services and maintenance, or multiple products
and where vendor-specific objective evidence of fair value ("VSOE") exists for
all undelivered elements, the Company accounts for the delivered elements in
accordance with the "residual method." Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. For arrangements containing multiple
elements where VSOE does not exist, all revenue is deferred until such time that
VSOE is evidenced or all elements of the arrangement have been delivered, or if
the only undelivered element is maintenance where VSOE exists, maintenance
revenue is recognized pro rata over the maintenance contract period. The Company
also enters into term license agreements in which the license fee is recognized
ratably over the term of the license period (generally one year).
When licenses are sold together with consulting and implementation
services, license fees are recognized upon delivery of the product provided that
(1) the above criteria have been met, (2) payment of the license fees is not
dependent upon performance of the consulting and implementation services, and
(3) the services are not essential to the functionality of the software. For
arrangements where services are essential to the functionality of the software,
both the license and services revenue are recognized in accordance with the
provisions of SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." Arrangements that allow the Company to make
reasonably dependable estimates relative to contract costs and the extent of
progress toward completion are accounted for using the percentage-of-completion
method. Arrangements that do not allow the Company to make reasonably dependable
estimates of costs and progress are accounted for using the completed-contracts
method. Because the completed-contracts method precludes recognition of
performance under the contract as the work progresses, it does not reflect
current financial performance when the contract extends beyond one accounting
period, and it therefore may result in uneven recognition of revenue and gross
margin.
5
PROFESSIONAL SERVICES REVENUES
The Company provides consulting and training services to its customers.
Revenue from such services is generally recognized as the services are
performed, except in instances where services are included in an arrangement
accounted for under SOP 81-1. Professional services revenues are included in
services revenue in the accompanying condensed consolidated financial
statements.
MAINTENANCE REVENUES
Maintenance agreements generally call for the Company to provide technical
support and unspecified software updates to customers. Maintenance revenue is
deferred and recognized ratably over the maintenance contract period (generally
one year) and included in services revenue in the accompanying condensed
consolidated financial statements.
NOTE 3 - EQUITY BASED COMPENSATION
The Company accounts for employee stock-based compensation arrangements
using the intrinsic value method. If compensation cost for the Company's
stock-based compensation plans had been determined in a manner consistent with
the fair value approach described in Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and net income per share as reported would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- -------------
Net income, as reported $ 10,768 $ 6,945
Add: stock-based employee compensation expense
included in reported net income, net of related
tax effects 118 461
Deduct: total stock-based employee compensation
expenses determined under fair-value-based
method for all rewards, net of related tax
effects (3,274) (7,814)
------------- -------------
Net income (loss), pro forma $ 7,612 $ (408)
============= =============
Basic net earnings (loss) per share As reported $ 0.22 $ 0.14
Adjusted pro forma $ 0.15 $ (0.01)
Diluted net earnings (loss) per share As reported $ 0.21 $ 0.14
Adjusted pro forma $ 0.15 $ (0.01)
Options vest over several years and new options are generally granted each
year. Because of these factors, the pro forma effect shown above may not be
representative of the pro forma effect of SFAS No. 123 for the year ending
December 31, 2004, in future years or in any future interim period.
6
The fair value of each option is estimated on the date of grant using the
Black-Scholes method with the following weighted average assumptions for the
Company's option plans and employee stock purchase plan:
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
--------------- ---------------
OPTION PLANS:
Dividends None None
Expected term 2.6 years 3.3 years
Risk free interest rate 1.7% 3.8%
Volatility rate 73.5% 77.3%
ESPP PLAN:
Dividends None None
Expected term 1.6 years 1.4 years
Risk free interest rate 2.2% 2.8%
Volatility rate 74.1% 75.9%
The weighted average fair value of options granted during the three months
ended March 31, 2004 and 2003 were $8.51 and $12.23, respectively. The weighted
average fair value of an ESPP purchase share right granted during the three
months ended March 31, 2004 and 2003 were $7.86 and $8.02, respectively.
NOTE 4 - STRATEGIC INVESTMENTS
As of March 31, 2004 and December 31, 2003, the adjusted cost of the
Company's strategic investments totaled $24.9 million and $27.0 million,
respectively. The Company's strategic investments include public and non-public
companies. Investments in public and non-public companies are classified on the
balance sheet as "Long-term marketable investment securities" and "Other
assets," respectively.
As of March 31, 2004, the adjusted cost of the Company's strategic
investments consisted of its investment in Digimarc, a publicly traded company.
In addition, the Company, holds investments in a number of other privately held
companies, which have no carrying value as of March 31, 2004.
During the quarter ended March 31, 2004, one of the Company's non-public
strategic investments was acquired by a third party. The Company received $1.2
million in cash for its interest in this investment. In fiscal year 2001, this
strategic investment had been fully impaired. Accordingly, during the quarter
ended March 31, 2004, the Company recorded a gain on strategic investments of
$1.2 million.
In the absence of quantitative valuation metrics, such as a recent
financing round, management estimates the impairment and/or the net realizable
value of the portfolio investment based on a hypothetical liquidation at book
value approach as of the reporting date. Based on these measurements, the
Company recorded $180,000 of other-than-temporary impairment losses relating to
its investment in iVast during the quarter ended March 31, 2004. As of March 31,
2004, the Company's investment in iVast had no remaining carrying value.
During the three months ended March 31, 2003, there were no charges for
other-than-temporary impairment losses.
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
potential 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, except per share data):
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------- -------------
Basic EPS - weighted average number of
common shares outstanding 49,244 48,514
Effect of dilutive potential common shares
- stock options outstanding 966 208
-------------- -------------
Diluted EPS - weighted average number of
common shares and potential common
shares outstanding 50,210 48,722
============== =============
Anti-dilutive shares excluded 2,501 4,878
============== =============
Weighted average exercise price of
anti-dilutive shares $34.76 $38.07
============== =============
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 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities - An Interpretation of Accounting Research Bulletin No. 51,"
(FIN 46R). FIN 46R requires an investor with a majority of the variable
interests (primary beneficiary) in a variable interest entity (VIE) to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A VIE is an entity in which
the voting equity investors do not have a controlling financial interest, or the
equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from other parties.
Application of FIN 46R is required in financial statements of companies that
have interests in variable interest entities or potential variable interest
entities commonly referred to as special purpose entities for periods ending
after December 15, 2003. Application by companies for all other types of
entities is required in financial statements for periods ending after March 15,
2004. The Company had no investments in variable interest entities as of March
31, 2004.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, "Revenue Recognition." SAB No. 104 updates
interpretive guidance in the codification of staff accounting bulletins to
provide consistent accounting guidance on revenue
8
recognition. The principal revisions relate to the deletion of interpretive
material no longer necessary because of private sector developments in generally
accepted accounting principles in the United States of America, and the
incorporation of certain sections of the SEC's "Revenue Recognition in Financial
Statements -- Frequently Asked Questions and Answers" document. The adoption of
SAB No. 104 has had no material impact on the Company's financial position or
results of operations.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
(revised 2003) revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This statement
retains the disclosure requirements contained in SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which it
replaces. It requires additional disclosures to those in the original SFAS No.
132 about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans.
The required information should be provided separately for pension plans and for
other postretirement benefit plans. SFAS No. 123 (revised 2003) is effective for
financial statements with fiscal years ending after December 15, 2003. The
Company adopted SFAS No. 132 (revised 2003) effective January 1, 2004 without
material effect on its financial position or results of operations.
In March 2004, the SEC issued SAB No. 105, "Loan Commitments Accounted for
as Derivative Instruments." SAB No. 105 summarizes the views of the SEC staff
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. The effective date for SAB
No. 105 is March 31, 2004. The adoption of SAB No. 105 is not expected to have a
material impact on the Company's financial position or results of operations.
NOTE 7 - COMPREHENSIVE INCOME
The components of comprehensive income, net of taxes, are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2004 2003
-------------- --------------
Net income $ 10,768 $ 6,945
Other comprehensive income (loss):
Unrealized (losses) gains on investments (1,081) 536
Foreign currency translation adjustments 1,344 (293)
-------------- --------------
Comprehensive income $ 11,031 $ 7,188
============== ==============
9
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
Segment income is based on segment revenue less the respective segment's
cost of revenues (excluding amortization of intangibles from acquisitions),
selling and marketing expenses and research and development expenses. The
following segment reporting information of the Company is provided (in
thousands):
REVENUES:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003
--------------- ---------------
Entertainment Technologies Group:
Video Technology
DVD $ 17,530 $ 13,929
Videocassette 958 1,737
Pay-Per-View 4,087 2,958
PC Games Technology 892 1,115
Music Technology 1,174 762
Other 18 8
--------------- ---------------
Total Entertainment Technologies Group 24,659 20,509
Software Technologies Group 13,323 7,543
--------------- ---------------
$ 37,982 $ 28,052
=============== ===============
INCOME BEFORE INCOME TAXES:
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003
--------------- ---------------
Entertainment Technologies Group $ 16,119 $ 14,609
Software Technologies Group 5,913 1,982
Other (498) (168)
--------------- ---------------
Segment income 21,534 16,423
General and administrative (5,513) (4,324)
Amortization of intangibles from acquisitions (779) (856)
Amortization of deferred stock-based
compensation (185) (768)
Impairment losses on investments (180) --
Gains on strategic investments, net 1,220 --
Interest and other income, net 728 1,100
--------------- ---------------
$ 16,825 $ 11,575
=============== ===============
INFORMATION ON REVENUES BY GEOGRAPHIC AREA:
THREE MONTHSENDED
MARCH 3,
---------------------------------
2004 2003
--------------- ---------------
United States $ 21,268 $ 16,836
International 16,714 11,216
--------------- ---------------
$ 37,982 $ 28,052
=============== ===============
10
Geographic area information is based upon country of destination for
products shipped and country of contract holder for royalties and license fees.
NOTE 9 - CONTINGENCIES
The Company is involved in legal proceedings related to some of its
intellectual property rights.
GLOBETROTTER V. RAINBOW TECHNOLOGIES, ELAN & KEN GREER
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, tortuous
interference with business relations, and trade libel. Rainbow Technologies and
Ken Greer were seeking compensatory damages, punitive damages, injunctive
relief, and disgorgement of profits. On August 31, 2000, the Company acquired
Globetrotter.
In 1999 and 2001, the Federal District Court granted the partial summary
judgment motions for Rainbow et al that essentially dismissed the patent
infringement case against Rainbow et al. In 2002, the Company filed a series of
summary judgment motions to dismiss some of the counterclaims from Rainbow et
al. The Federal District Court granted all of the Company's motions for summary
judgment in full and dismissed all of the claims against Globetrotter and Matt
Christiano.
On December 9, 2002, Ken Greer and Elan filed a notice to appeal the
summary judgment of all their counterclaims by Judge Fogel. In response, on
December 23, 2002, the Company filed a notice to appeal the summary judgment of
all its patent infringement claims against Ken Greer, Elan and Rainbow. On
January 2, 2003, Rainbow filed a notice to appeal the summary judgment of all of
its counterclaims. On March 5, 2003, the Company entered into a stipulated
agreement with Rainbow to dismiss all cross-appeals between Rainbow and the
Company. On March 31, 2003, Ken Greer and Elan filed an appeal brief relating to
the summary judgment of their counterclaims. In the brief, Elan indicated it was
abandoning its appeal of the summary judgment order. The Company filed an appeal
brief on May 12, 2003. Both parties subsequently filed reply briefs in July
2003. Oral arguments took place on December 3, 2003. On March 23, 2004, the
Court of Appeal of the Federal Circuit ruled in favor of the Company by finding
that the Northern California District Court was correct in dismissing the
counterclaims against the Company and Globetrotter and the District Court was
incorrect in dismissing the patent infringement against Ken Greer and Elan. The
patent infringement claim was remanded back to the District Court for
adjudication. For the counterclaims, Ken Greer and Elan may seek review by the
United States Supreme Court.
If an adverse ruling is ultimately reached on the remaining appeals and the
case is returned to a trial court, 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.
11
MACROVISION CORPORATION V. VITEC AUDIO AND VIDEO GMBH
The Company initiated a patent infringement lawsuit in the District Court
of Dusseldorf in March 1999 against ViTec Audio und Video GmbH, a German company
that manufactures what the Company believes to be a video copy protection
circumvention device. ViTec filed a reply brief arguing that its product does
not infringe the Company's patents. The case was heard in the District Court of
Dusseldorf, Germany. The District Court of Dusseldorf ruled adversely 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 would require
technical expert witnesses. The Court selected Professor Dr. Ing. M. Plantholt
as its expert witness. On January 27, 2003, Professor Plantholt submitted his
technical opinion to the Court, and an English translation was made available to
the Company on July 3, 2003. The Company is reviewing the opinion and is
considering its options. A hearing before the Court of Appeal in Dusseldorf was
scheduled for March 4, 2004, but was postponed by the Court. The new date for
the hearing will be in late 2004. In the event of an adverse ruling, the Company
may incur a corresponding decline in demand for its video copy protection
technology, which could harm the Company's business in Germany. In addition, the
Company may be obligated to pay some of ViTec's attorney fees estimated to be
$25,000.
USPTO INTERFERENCE PROCEEDINGS BETWEEN MACROVISION CORPORATION AND INTERTRUST
TECHNOLOGIES
The Company received notice on September 4, 2003 from the United States
Patent and Trademark Office ("USPTO") declaring an interference between its U.S.
Patent No. 5,845,281 (the "`281 patent") together with two of its continuation
applications, and a patent application determined to be from InterTrust
Technologies Corporation. On December 19, 2003, the Company received notice from
the USPTO declaring an additional interference between two continuation
applications related to the `281 patent and four issued U.S. patents from
InterTrust. The `281 patent and its continuation applications are in the field
of digital rights management, and are not associated with the Company's existing
copy protection business.
An interference is declared by the USPTO when two or more parties claim the
same patentable invention. An interference proceeding will be held to determine
the patentability of the involved patent and applications and who was the first
inventor, since in the United States the first party to invent is granted the
patent. The `281 patent and its continuation applications have a priority filing
date of February 1, 1995. The InterTrust application is a continuation of
application No. 08/388,107 (now abandoned) and as a consequence potentially has
a priority filing date of February 13, 1995. Because of the proximity of these
priority filing dates, the interference proceeding by the USPTO will attempt to
determine who invented first. This proceeding is still in its initial stages,
and is anticipated to take at least a year.
MACROVISION VS. 321 STUDIOS LLC
On January 7, 2004, the Company initiated a lawsuit in the Southern
District of New York against 321 Studios LLC, alleging that 321 Studios'
software products infringe the Company's patented copy protection technology and
also violates the U.S. Digital Millennium Copyright Act of 1998 ("DMCA"). The
Company is currently seeking a preliminary injunction to bar 321 Studios from
selling and marketing its products. On February 13, 2004, 321 Studios filed
responsive pleadings and counterclaims for declaratory relief challenging the
validity and enforceability of the Company's patents and the applicability of
the DMCA. On March 26, 2004, the court heard the Company's motion for
preliminary injunction, and the court's decision on the motion is pending.
12
As of March 31, 2004, it was 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, 2003 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, 2003.
OVERVIEW
Macrovision Corporation, a Delaware corporation founded in 1983, develops
and licenses copy protection, electronic licensing and rights management
technologies. Our customers include major Hollywood studios, independent video
producers, hardware and software vendors, music labels, consumer electronic, PC
and digital set-top box manufacturers and digital pay-per-view (PPV) and
video-on-demand (VOD) network operators. We provide content owners with the
means to market, distribute, manage and protect video, software and audio
content.
Our video copy protection technology is used to copy protect DVDs,
videocassettes, digital set-top box and hard drive recorder platforms. Our
SafeDisc product is used to copy protect CD-ROMs for software publishers
primarily in the PC games software market. Our music technology products are
used to copy protect music CDs. Our software products provide license management
solutions for software vendors and software asset management tools for business.
On June 17, 2003, we announced our reorganization into two business units,
effective July 1, 2003: the Entertainment Technologies Group and the Software
Technologies Group. The reorganization was done to improve customer focus,
consolidate resources, and effect synergies in sales, marketing, customer
support and research and development. The Entertainment Technologies Group
reflects the merger of the video technology and music technology product lines,
along with the SafeDisc portion of our consumer software group. The SafeDisc
product line has been renamed PC games technology. The Software Technologies
Group reflects the merger of the Enterprise Software Licensing Management
product line and the SafeCast product line that was also a part of our consumer
software group. We continue to report separate revenue results for various
product lines under the Entertainment Technologies Group (DVD, Videocassettes,
PPV, Music and PC Games) and revenue under the Software Technologies Group.
Revenues have been reclassified for prior periods to conform to the current
period presentation.
14
The following table provides net revenue information by product line
(dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003 $ CHANGE % CHANGE
--------------- ---------------- -------------- --------------
Entertainment Technologies Group:
Video Technology
DVD $ 17,530 $ 13,929 $ 3,601 25.9%
Videocassette 958 1,737 (779) (44.8)
Pay-Per-View 4,087 2,958 1,129 38.2
PC Games Technology 892 1,115 (223) (20.0)
Music Technology 1,174 762 412 54.1
Other 18 8 10 125.0
--------------- ---------------- --------------
Total Entertainment Technologies Group 24,659 20,509 4,150 20.2
Software Technologies Group 13,323 7,543 5,780 76.6
--------------- ---------------- --------------
$ 37,982 $ 28,052 $ 9,930 35.4
=============== ================ ==============
The following table provides percentage of net revenue information by
product line:
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
2004 2003
----------------- ----------------
Entertainment Technologies Group:
Video Technology
DVD 46.2% 49.7%
Videocassette 2.5 6.2
Pay-Per-View 10.8 10.5
PC Games Technology 2.3 4.0
Music Technology 3.1 2.7
Other -- --
----------------- ----------------
Total Entertainment Technologies Group 64.9 73.1
Software Technologies Group 35.1 26.9
----------------- ----------------
100.0% 100.0%
================= ================
ENTERTAINMENT TECHNOLOGIES GROUP
VIDEO TECHNOLOGY
Our customers include the home video divisions of member companies of the
MPAA, videocassette duplication and DVD replication companies and a number of
"special interest" content owners, such as independent producers of exercise,
sports, educational, documentary and corporate video programs. We typically
receive per unit royalties based upon the number of copy-protected
videocassettes or DVDs that are produced by MPAA studios or other content
owners. Royalties from MPAA studios represented 31.5% and 38.3% of our net
revenues in the quarters ended March 31, 2004 and 2003, respectively.
DVD COPY PROTECTION. Our customers for DVD copy protection have included
member companies of the MPAA and special interest rights owners. Our customers
pay per unit royalties for DVD copy protection. Additionally, we receive license
fees from DVD hardware manufacturers. DVD copy protection revenue represented
46.2% and 49.7% of our net revenues in the quarters ended March 31, 2004 and
2003, respectively. The increase in DVD copy protection revenue is due to the
increase in numbers of DVDs sold and continued strong demand for our DVD copy
protection solution. In addition,
15
during the first quarter of 2004, we recognized approximately $2.2 million of
revenue from studio volume replicated during the fourth quarter of 2003. We were
not able to record this revenue in the fourth quarter of 2003 due to delays in
payment of amounts resulting from a prolonged contract negotiation. We expect
our future DVD copy protection revenue to continue to be a significant part of
our net revenues as a result of continued growth in DVD sales, partially offset
by anticipated future declines in our DVD copy protection average unit royalties
and/or usage rates.
VIDEOCASSETTE COPY PROTECTION. The trend of MPAA studios investing
proportionally more in copy protecting their DVD titles compared to VHS releases
has continued. Videocassette copy protection revenues represented 2.5% and 6.2%
of our net revenues in the quarters ended March 31, 2004 and 2003, respectively.
We believe videocassette copy protection revenues will continue to decline as a
percentage of our revenues and in absolute terms, as the studios continue to
reduce their usage and the per unit royalties they are willing to pay for
videocassette copy protection.
PPV COPY PROTECTION. Our customers for digital PPV copy protection are
satellite and cable system operators and equipment manufacturers that supply the
satellite and cable industries. We derive a majority of our digital PPV copy
protection revenues from digital set-top box hardware royalties, and the balance
from either up-front license fees or transaction royalties associated with copy
protected PPV programming. Digital PPV copy protection revenues were 10.8% and
10.5% of our net revenues in the quarters ended March 31, 2004 and 2003,
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 increase in our PPV copy protection revenues is
due to strong demand from consumers, especially in international territories,
for digital cable and digital satellite operators' businesses. We believe that
future revenues from PPV copy protection will closely track market demand for
digital set top boxes, and will increase in absolute terms but may decline as a
percentage of our total revenues depending on the relative rates of growth of
our other products.
PC GAMES TECHNOLOGY
Customers implementing our CD-ROM copy protection technology, SafeDisc, are
primarily major PC-based game publishers. We typically receive unit royalties
based upon the number of copy protected CD-ROMs that are produced by PC game
publishers. Our PC Games Technology revenues were 2.3% and 4.0% of our revenues
in the quarters ended March 31, 2004 and 2003, respectively. The decrease in our
PC Games Technology revenue is primarily due to the increased competition,
resulting in a reduction in volumes copy protected by us as well as declining
per unit prices. We believe that, as a result of competitive pressures, future
revenues from our PC Games Technology products will likely continue to decline
as a percentage of our total revenues.
MUSIC TECHNOLOGY
Revenues from our music copy protection technology products were 3.1% and
2.7% of our net revenues in the quarters ended March 31, 2004 and 2003,
respectively. Currently, substantially all of our music copy protection
technology revenue is from international territories. Additional product
features, currently under development, may be required for the product to be
accepted in the United States. We believe that revenues from our music copy
protection technology products may increase in absolute terms as more customers
in more geographic territories adopt our technology.
SOFTWARE TECHNOLOGIES GROUP
Our software products generate revenue from licensing software and
providing services related to the support and maintenance of this software.
Revenues from software technologies were 35.1% and
16
26.9% of our revenues in the quarters ended March 31, 2004 and 2003,
respectively. Despite difficult economic conditions for software companies, our
revenues, in absolute terms, have increased from $7.5 million in the first
quarter of 2003 to $13.3 million in the first quarter of 2004. We are investing
in additional sales personnel for our software technology products and believe
that revenues from these products will continue to increase in total, but may
vary as a percentage of our total revenues. While revenues have increased in
each of the last three years, if economic conditions for software worsen or if
competitive pressures increase, demand for our software technology products
could decline.
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 of the following year, and at times in
subsequent quarters. We believe that this trend has been principally due to the
tendency of certain of our customers to manufacture and release new video,
audio, and PC games titles during the year-end holiday shopping season, while
our operating expenses are incurred more evenly throughout the year. In
addition, revenues generally have tended to be lower in the summer months,
particularly in Europe.
COSTS AND EXPENSES
Our cost of revenues consists primarily of service fees paid to licensed
duplicators and replicators that produce videocassettes, DVDs, and CDs for
content owners and costs of equipment used to apply our technology. Also
included in cost of revenues are software product support costs, direct labor
and benefit costs of employees' time spent on billable consulting or training,
patent defense costs, amortization of licensed technologies, amortization of
certain intangibles from acquisitions and patent amortization. Our research and
development expenses are comprised primarily of employee compensation and
benefits, consulting and recruiting fees, tooling and supplies and an allocation
of overhead and facilities costs. Our selling and marketing expenses are
comprised primarily of employee compensation and benefits, consulting and
recruiting fees, travel, advertising and an allocation of overhead and
facilities costs. Our general and administrative expenses are comprised
primarily of employee compensation and benefits, consulting and recruiting fees,
travel, professional fees and an allocation of overhead and facilities costs.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements. These
condensed consolidated financial statements have been prepared 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. 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, allowance for
doubtful accounts, evaluation of strategic investments, intangible assets and
income taxes. Our estimates are based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
We have identified the accounting policies below as critical to our
business operations and the understanding of our results of operations.
17
REVENUE RECOGNITION
Our revenue consists of royalty fees on copy-protected products on a per
unit basis, licenses for our copy protection technologies, licenses for our
software products, and related maintenance and services revenues.
ROYALTY REVENUES
Royalty revenue from the replication of videocassettes, DVDs, and CDs is
recognized when realized or realizable and earned. We rely on royalty reports
from third parties as our basis for revenue recognition. In our DVD,
videocassette, and PC games product lines, we have established significant
experience with certain customers to reasonably estimate current period volume
for purposes of making an accurate revenue accrual. Accordingly, royalty revenue
from these customers is recognized as earned, provided there is persuasive
evidence of an arrangement and that collection of a fixed and determinable fee
is considered probable. Revenue from our PPV and music technology products is
recognized only as reported, due to the timing of receipt of reports in PPV, and
the embryonic stage and volume volatility of the market for our music technology
products. Advanced royalty fees attributable to minimum copy quantities or
shared revenues are deferred until earned. In the case of agreements with
minimum guaranteed royalty payments with no specified volume, revenue is
recognized on a straight-line basis over the life of the agreement.
TECHNOLOGY LICENSING REVENUES
Technology licensing revenue, which applies principally to DVD and PC
sub-assembly manufacturers, digital PPV, cable and satellite system operators,
and digital set-top decoder manufacturers, is recognized upon establishment of
persuasive evidence of an arrangement, performance of all significant
obligations and determination that collection of a fixed and determinable
license fee is considered probable.
SOFTWARE LICENSING REVENUES
We recognize revenue on our software products in accordance with SOP 97-2,
"Software Revenue Recognition," as amended by SOP 98-9 "Modification of SOP
97-2." We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations remain; the fee is fixed and determinable;
and collectibility is probable. We consider all arrangements with payment terms
extending beyond six months not to be fixed or determinable and, accordingly,
revenue is recognized as payments become due from the customer under such
arrangements. We assess collectibility based on a number of factors, including
the customer's past payment history and current creditworthiness. If
collectibility is not considered probable, revenue is recognized when the fee is
collected from the customer.
For license agreements in which non-standard customer acceptance clauses
are a condition to earning the license fees, revenue is not recognized until
acceptance occurs. For arrangements containing multiple elements, such as
software license fees, consulting services and maintenance, or multiple products
and where vendor-specific objective evidence of fair value ("VSOE") exists for
all undelivered elements, we account for the delivered elements in accordance
with the "residual method." Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. For arrangements containing multiple elements
where VSOE does not exist for all undelivered elements, all revenue is deferred
until such time as VSOE for all undelivered elements is evidenced or all
elements of the arrangement have been delivered, or if the only undelivered
element is maintenance where VSOE exists, maintenance revenue is recognized pro
rata over
18
the maintenance contract period. We also enter into term license agreements in
which the license fee is recognized ratably over the term of the license period
(generally one year).
When licenses are sold together with consulting and implementation
services, license fees are recognized upon delivery of the product provided that
(1) the above criteria have been met, (2) payment of the license fees is not
dependent upon performance of the consulting and implementation services, and
(3) the services are not essential to the functionality of the software. For
arrangements where services are essential to the functionality of the software,
both the license and services revenue are recognized in accordance with the
provisions of SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." Arrangements that allow us to make
reasonably dependable estimates relative to contract costs and the extent of
progress toward completion are accounted for using the percentage-of-completion
method. Arrangements that do not allow us to make reasonably dependable
estimates of costs and progress are accounted for using the completed-contracts
method. Because the completed-contracts method precludes recognition of
performance under the contract as the work progresses, it does not reflect
current financial performance when the contract extends beyond one accounting
period, and it therefore may result in uneven recognition of revenue and gross
margin.
PROFESSIONAL SERVICES REVENUES
We provide consulting and training services to our customers. Revenue from
such services is generally recognized as the services are performed, except in
instances where services are included in an arrangement accounted for under SOP
81-1. Professional services revenues are included in services revenue in the
accompanying condensed consolidated financial statements.
MAINTENANCE REVENUES
Maintenance agreements generally call for us to provide technical support
and unspecified software updates to customers. Maintenance revenue is deferred
and recognized ratably over the maintenance contract period (generally one year)
and included in services revenue in the accompanying condensed consolidated
financial statements.
VALUATION OF STRATEGIC INVESTMENTS
As of March 31, 2004 and December 31, 2003, the adjusted cost of our
strategic investments totaled $24.9 million and $27.0 million, respectively.
This included our investments in public and non-public companies. Our
investments in public and non-public companies are classified on the balance
sheet as "Long-term marketable investment securities" and "Other assets,"
respectively.
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 of and events occurring at each
of the underlying portfolio companies during the period. For investments in
public companies, we compare our basis in the investment to the average daily
trading prices of the security over the prior six months to determine if an
other-than-temporary impairment has occurred. If the six-month average is less
than the current cost basis, we record a charge to the statement of income for
the difference between the market price at period end and the current cost
basis.
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, among other factors. 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
19
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 other-than-temporary impairment has occurred with respect to an investment in
a portfolio company, an impairment charge is recorded 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.
In the absence of quantitative valuation metrics, such as a recent
financing round, management estimates the impairment and/or the net realizable
value of the portfolio investment based on a hypothetical liquidation at book
value approach as of the reporting date. Based on these measurements, we
recorded $180,000 of other-than-temporary impairment losses relating to our
investment in iVast during the quarter ended March 31, 2004. As of March 31,
2004, our investment in iVast had no remaining carrying value. There were no
other-than-temporary impairment losses during the quarter ended March 31, 2003.
During the quarter ended March 31, 2004, one of our non-public strategic
investments was acquired by a third party. We received $1.2 million in cash for
its interest in this investment. In fiscal year 2001, this strategic investment
had been fully impaired. Accordingly, during the quarter ended March 31, 2004,
we recorded a gain on strategic investments of $1.2 million.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. We account for goodwill under the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets." Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead are tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets."
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if events
and circumstances indicate that the assets might be impaired. In the first
quarter of 2004 and fiscal year 2003, there were no triggering events that
required us to test for impairment prior to our annual impairment analysis.
In connection with our impairment analysis performed annually in our fourth
quarter, we are required to perform an assessment of whether there is an
indication that goodwill is impaired. To accomplish this, we are required to
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units. To the extent the carrying amount of a reporting unit exceeds
its fair value, we would be required to perform the second step of the
impairment analysis, as this is an indication that the reporting unit goodwill
may be impaired. In this step, we compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill.
The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, "Business Combinations." The
residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. To the extent the implied fair value of goodwill of
each reporting unit is less than its carrying amount we would be required to
recognize an impairment loss. In October 2002 and October 2003, we completed our
annual impairment analyses of goodwill. Based on the results of the
20
annual impairment analysis, we determined that no indicators of impairment
existed for our reporting units and no impairment charges were recorded for
goodwill as of December 31, 2002 and 2003. The next annual impairment analysis
is expected to be in October 2004.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset group to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset group exceeds
its estimated future cash flows, an impairment charge is recognized in the
amount by which the carrying amount of the asset group exceeds the fair value of
the asset group. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposal group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
In the first quarter of 2004 and fiscal year 2003, no impairment charges were
recorded for long-lived assets.
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, 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 history 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
We account for income taxes using the asset and liability method. As of
March 31, 2004 and December 31, 2003, deferred tax assets net of valuation
allowances, totaled $22.6 million and $21.7 million, respectively. 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 valuation allowance 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 valuation allowance would be charged to income in the period
such determination was made. Our effective tax rate is directly affected by the
relative proportions of domestic and international revenue and income before
taxes, as well as the estimated level of annual pre-tax income. We are also
subject to changing tax laws in the multiple jurisdictions in which we operate.
21
RESULTS OF OPERATIONS
The following table provides information on our results of operations
(dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003 $ CHANGE % CHANGE
---------------- ---------------- ---------------- ----------------
Revenues:
Licenses $ 34,823 $ 25,242 $ 9,581 38.0%
Services 3,159 2,810 349 12.4
---------------- ---------------- ----------------
Total revenues 37,982 28,052 9,930 35.4
Cost of revenues:
License fees 1,584 939 645 68.7
Service fees 721 543 178 32.8
Amortization of intangibles from
acquisitions 779 856 (77) (9.0)
---------------- ---------------- ----------------
Total cost of revenues 3,084 2,338 746 31.9
---------------- ---------------- ----------------
Gross profit 34,898 25,714 9,184 35.7
Operating expenses:
Research and development 5,587 3,743 1,844 49.3
Selling and marketing 8,556 6,404 2,152 33.6
General and administrative 5,513 4,324 1,189 27.5
Amortization of deferred stock
based compensation 185 768 (583) (75.9)
---------------- ---------------- ----------------
Total operating expenses 19,841 15,239 4,602 30.2
---------------- ---------------- ----------------
Operating income 15,057 10,475 4,582 43.7
Impairment losses on investments (180) -- (180) N/A
Gains on strategic investments 1,220 -- 1,220 N/A
Interest and other income, net 728 1,100 (372) (33.8)
---------------- ---------------- ----------------
Income before income taxes 16,825 11,575 5,250 45.4
Income taxes 6,057 4,630 1,427 30.8
---------------- ---------------- ----------------
Net income $ 10,768 $ 6,945 $ 3,823 55.0
================ ================ ================
NET REVENUES. Our net revenues increased 35.4% from the first quarter
of 2003 to the first quarter of 2004. This increase is primarily driven by
increased revenues in our video and software technology products. Video's DVD
copy protection revenues increased $3.6 million or 25.9% from the first quarter
of 2003 to the first quarter of 2004, due primarily to the continued strong
growth of the DVD format and continued high penetration among Hollywood studio
customers. In addition, during the first quarter of 2004, we recognized
approximately $2.2 million of revenue from studio volume replicated during the
fourth quarter of 2003. We were not able to record this revenue in the fourth
quarter of 2003 due to delays in payment of amounts resulting from a prolonged
contract negotiation. The increase in DVD revenues was partially offset by
continuing decreases in videocassette copy protection revenues. Revenues from
videocassette copy protection decreased $779,000, or 44.8% from the first
quarter of 2003 to the first quarter of 2004, reflecting the continuing trend of
Hollywood studios to discontinue copy protecting or more selectively copy
protect their VHS releases. Digital PPV copy protection revenues increased $1.1
million or 38.2% from the first quarter of 2003 to the first quarter of 2004,
due to increased demand for digital set-top boxes and an increase in usage fees.
PC Games revenues decreased $223,000 or 20.0% from the first quarter of 2003 to
the first quarter of 2004 due to decreasing volumes and per unit pricing
received from a number of customers. Music revenues have increased $412,000 or
54.1% from the first quarter of 2003 to the first quarter of 2004 due to
increased market acceptance of our CDS-100
22
and CDS-200 products by the music labels. Revenues from our software
technologies group increased $5.8 million or 76.6% from the first quarter of
2003 to the first quarter of 2004, primarily due to increased market
penetration.
LICENSE REVENUES. Our license revenues increased $9.6 million or 38.0% from
the first quarter of 2003 to the first quarter of 2004 primarily due to
increases in our revenues from our video technology products in the DVD copy
protection area and in our software technology products. This was partially
offset by decreases in our copy protection revenues for videocassettes.
SERVICE REVENUES. Our service revenues increased $349,000 or 12.4% from the
first quarter of 2003 to the first quarter of 2004 primarily due to increases in
maintenance revenues and, to a lesser extent, an increase in consulting
revenues. The increases in maintenance revenues are a result of the increased
market penetration in our software technologies group.
COST OF REVENUES - LICENSE FEES. Cost of revenues from license fees as a
percentage of license revenues increased from 3.7% for the first quarter of 2003
to 4.5% for the first quarter of 2004. Cost of revenues from license fees
increased $645,000 or 68.7% from the first quarter of 2003 to the first quarter
of 2004. This increase was primarily due to higher patent amortization costs
from the acquisition of patents from TTR in May 2003. Cost of revenues includes
items such as product costs, duplicator and replicator fees, video copy
protection processor costs, patent amortization on internally developed patents,
patent defense costs and licensing expenses.
COST OF REVENUES - SERVICE FEES. Cost of revenues from service fees as a
percentage of service revenues increased from 19.3% for the first quarter of
2003 to 22.8% for the first quarter of 2004. Cost of revenues from service fees
increased $178,000 or 32.8% from the first quarter of 2003 to the first quarter
of 2004. This increase was primarily due to the expansion of our software
customer service group to support the increased activity in our software
technologies group. We anticipate our cost of revenues from service fees may
increase as we continue to increase activity in our consulting practice and seek
to expand our customer base.
COST OF REVENUES - AMORTIZATION OF INTANGIBLES FROM ACQUISITIONS. Cost of
revenues from amortization of intangibles decreased $77,000 from the first
quarter of 2003 to the first quarter of 2004. The decrease is primarily due to
intangibles from the PtS acquisition becoming fully amortized in the third
quarter of 2003. The decrease is partially offset by the amortization of
intangibles from the acquisition of assets relating to peer-to-peer file sharing
tracking and control in August 2003.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$1.8 million or 49.3% from the first quarter of 2003 to the first quarter of
2004. The increase is primarily due to increased research and development
activities for our video technology, music technology, peer-to-peer file sharing
tracking and control and software products. Research and development expenses
increased as a percentage of net revenues from 13.3% in the first quarter of
2003 to 14.7% in the first quarter of 2004. We expect research and development
expenses to increase in absolute terms and as a percentage of revenues over the
prior year periods as a result of expected increases in research and development
activity as we develop new technologies in our entertainment and software
technologies groups.
SELLING AND MARKETING. Selling and marketing expenses increased by $2.2
million or 33.6% from the first quarter of 2003 to the first quarter of 2004.
This increase was primarily due to increased business development activities for
our software and music products and increased commission costs associated with
higher revenue levels. Selling and marketing expenses decreased slightly as a
percentage of net revenues from 22.8% in the first quarter of 2003 to
23
22.5% in the first quarter of 2004. Despite the modest decrease of selling and
marketing expenses as a percentage of revenues from the first quarter of 2003 to
the first quarter of 2004, selling and marketing expenses are expected to
increase in absolute terms and as a percentage of revenues as we continue to
expand our efforts in selling and marketing our software, music, PC Games and
other digital rights management products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $1.2 million or 27.5% from the first quarter of 2003 to the first quarter of
2004, primarily due to increased headcount and related costs to support the
overall growth of our business units. To a lesser extent, the increase is also
due to costs associated with the compliance with Sarbanes-Oxley requirements.
General and administrative expenses decreased as a percentage of net revenues
from 15.4% in the first quarter of 2003 to 14.5% in the first quarter of 2004.
We expect our general and administrative expenses to increase in absolute terms
in the near future as we continue to support the expansion of our business and
comply with the requirements of the Sarbanes-Oxley Act of 2002.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION. In connection with the
acquisition of Globetrotter in 2000, 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.
Amortization of deferred stock-based compensation decreased $583,000 or 75.9%
from the first quarter of 2003 to the first quarter of 2004 due to the
completion of the vesting schedule. The expense associated with amortization of
this stock-based compensation ended in the first quarter of 2004.
IMPAIRMENT LOSSES ON INVESTMENTS. During the first quarter of 2004, we
recorded $180,000 of impairment charges relating to an other-than-temporary
impairment of our investment in iVast. There were no impairment losses during
the first quarter of 2003.
GAINS ON STRATEGIC INVESTMENTS. During the first quarter of 2004, one of
our non-public strategic investments was acquired by a third party. We received
$1.2 million in cash for our interest in this investment. In a previous period,
this strategic investment had been written down to where there was no remaining
carrying value. Accordingly, we recorded a gain on strategic investments of $1.2
million.
INTEREST AND OTHER INCOME, NET. Interest and other income decreased
$372,000 or 33.8% from the first quarter of 2003 to the first quarter of 2004,
primarily from declining interest rates.
INCOME TAXES. Income tax expense represents combined federal and state
taxes at effective rates of 36.0% and 40.0% for the first quarters of 2004 and
2003, respectively. The decrease in the effective tax rate was primarily due to
changes in tax jurisdictions where our income was earned and the reduction in
deferred stock-based compensation that is not deductible.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from cash generated by
operations, principally our copy protection products and our enterprise license
management products. Our operating activities provided net cash of $11.4 million
and $17.5 million in the first quarters of 2004 and 2003, respectively. Cash
provided by operating activities decreased $6.1 million from the first quarter
of 2003 to the first quarter of 2004, primarily due to a significant increase in
our accounts receivable in the first quarter of 2004.
Investing activities provided (used) net cash of $21.2 million and ($43.9)
million in the first quarters of 2004 and 2003, respectively. Cash provided by
(used in) investing activities increased $65.1 million from the first quarter of
2003 to the first quarter of 2004, primarily due to an increase in net sales and
maturities of long and short-term investments. The increase in net sales and
maturities of long
24
and short-term investments is due to the reinvestment of these investments into
cash equivalents. We made capital expenditures of $806,000 and $538,000 during
the first quarter of 2004 and 2003, respectively. Capital expenditures are
primarily for computer software and hardware.
Net cash provided by financing activities was $2.4 million and $1.2 million
in the first quarters of 2004 and 2003, respectively. The net cash provided by
financing activities are from proceeds of stock option exercises and the
employee stock purchase plan. In May 2002, our Board of Directors authorized a
share repurchase program, which allows us to purchase up to 5.0 million shares
in the open market from time-to-time at prevailing market prices, through block
trades or otherwise, or in negotiated transactions off the market, at the
discretion of our management. Our repurchases of shares of common stock have
been recorded as treasury stock and resulted in a reduction of stockholders'
equity. We did not repurchase any treasury stock in the first quarters of 2004
and 2003. As of March 31, 2004, 2.0 million shares remained authorized for
repurchase.
At March 31, 2004, we had $63.0 million in cash and cash equivalents,
$112.6 million in short-term investments and $104.1 million in long-term
marketable investment securities, which includes $24.9 million in fair market
value of our holdings in Digimarc. We have no material commitments for capital
expenditures but anticipate that capital expenditures for the next 9 months will
aggregate approximately $3.9 million. We also have future minimum lease payments
of approximately $36.2 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 acquired the assets and operations of Midbar for
approximately $17.8 million in cash and related acquisition costs. In addition,
we are subject to an additional maximum payout of $8.0 million based on a
percentage of revenues derived from our sales of music technology products
through December 31, 2004. During the quarter ended March 31, 2004, we paid
$723,000 of such contingent consideration in cash relating to the second half of
2003.
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" contained in our Annual Report on Form 10-K for the year ended December
31, 2003.
CONTRACTUAL OBLIGATIONS
We lease facilities and certain equipment pursuant to non-cancelable
operating lease agreements. Future minimum lease payments pursuant to these
leases as of March 31, 2004 were as follows (in thousands):
25
Operating
Leases
------------
Remainder of 2004 $ 3,057
2005 3,826
2006 3,744
2007 3,851
2008 3,916
2009 and thereafter 17,850
------------
Total $ 36,244
============
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 6 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 investment securities of $279.7 million as
of March 31, 2004. 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 $796,000 decrease (approximately
0.4%) in the fair value of our fixed income available-for-sale securities as of
March 31, 2004. Yield risk is also reduced by targeting a weighted average
maturity of our portfolio at approximately 12 to 15 months so that the
portfolio's yield regenerates itself as portions of the portfolio mature.
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, as well
as expenses, 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 United Kingdom, Japan and
Israel 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 a
number of companies. These investments, at book value totaling $24.9 million and
$27.0 million, represented 6.2% and 7.0% of our total assets as of March 31,
2004 and December 31, 2003, respectively. As of March 31, 2004, the adjusted
cost of our strategic investments consisted of our investment in Digimarc, a
publicly traded company. In addition, we hold investments in a number of other
privately held companies, which have no
26
carrying value as of March 31, 2004. Digimarc is subject to price fluctuations
based on the public market. Because there is no active trading market for the
securities of privately held companies, our investments in them are illiquid.
During the first quarter of 2004, $180,000 of strategic investments resulting
from impairment that was other-than-temporary was charged to operations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our 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 management, including
our 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.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter
ended March 31, 2004, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in legal proceedings related to some of its intellectual
property rights.
GLOBETROTTER V. RAINBOW TECHNOLOGIES, ELAN & KEN GREER
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, tortuous
interference with business relations, and trade libel. Rainbow Technologies and
Ken Greer were seeking compensatory damages, punitive damages, injunctive
relief, and disgorgement of profits. On August 31, 2000, we acquired
Globetrotter.
In 1999 and 2001, the Federal District Court granted the partial summary
judgment motions for Rainbow et al that essentially dismissed the patent
infringement case against Rainbow et al. In 2002, we filed a series of summary
judgment motions to dismiss some of the counterclaims from Rainbow et al. The
Federal District Court granted all of our motions for summary judgment in full
and dismissed all of the claims against Globetrotter and Matt Christiano.
On December 9, 2002, Ken Greer and Elan filed a notice to appeal the
summary judgment of all their counterclaims by Judge Fogel. In response, on
December 23, 2002, we filed a notice to appeal the summary judgment of all its
patent infringement claims against Ken Greer, Elan and Rainbow. On January 2,
2003, Rainbow filed a notice to appeal the summary judgment of all of its
counterclaims. On March 5, 2003, we entered into a stipulated agreement with
Rainbow to dismiss all cross-appeals between Rainbow and us. On March 31, 2003,
Ken Greer and Elan filed an appeal brief relating to the summary judgment of
their counterclaims. In the brief, Elan indicated it was abandoning its appeal
of the summary judgment order. We filed an appeal brief on May 12, 2003. Both
parties subsequently filed reply briefs in July 2003. Oral arguments took place
on December 3, 2003. On March 23, 2004, the Court of Appeal of the Federal
Circuit ruled in our favor by finding that the Northern California District
Court was correct in dismissing the counterclaims against us and Globetrotter
and the District Court was incorrect in dismissing the patent infringement
against Ken Greer and Elan. The patent infringement claim was remanded back to
the District Court for adjudication. For the counterclaims, Ken Greer and Elan
may seek review by the United States Supreme Court.
If an adverse ruling is ultimately reached on the remaining appeals and the
case is returned to a trial court, 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.
MACROVISION CORPORATION V. VITEC AUDIO AND VIDEO GMBH
We initiated a patent infringement lawsuit in the District Court of
Dusseldorf in March 1999 against ViTec Audio und Video GmbH, a German company
that manufactures what we believe to be a
28
video copy protection circumvention device. ViTec filed a reply brief arguing
that its product does not infringe our patents. The case was heard in the
District Court of Dusseldorf, Germany. The District Court of Dusseldorf ruled
adversely 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 would require
technical expert witnesses. The Court selected Professor Dr. Ing. M. Plantholt
as its expert witness. On January 27, 2003, Professor Plantholt submitted his
technical opinion to the Court, and an English translation was made available to
us on July 3, 2003. We are reviewing the opinion and considering our options. A
hearing before the Court of Appeal in Dusseldorf was scheduled for March 4,
2004, but was postponed by the Court. The new date for the hearing will be in
late 2004. 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 addition, we may be obligated to pay some of ViTec's
attorney fees estimated to be $25,000.
USPTO INTERFERENCE PROCEEDINGS BETWEEN MACROVISION CORPORATION AND INTERTRUST
TECHNOLOGIES
We received notice on September 4, 2003 from the United States Patent and
Trademark Office ("USPTO") declaring an interference between our U.S. Patent No.
5,845,281 (the "`281 patent") together with two of our continuation
applications, and a patent application determined to be from InterTrust
Technologies Corporation. On December 19, 2003, we received notice from the
USPTO declaring an additional interference between two continuation applications
related to the `281 patent and four issued U.S. patents from InterTrust. The
`281 patent and its continuation applications are in the field of digital rights
management, and are not associated with our existing copy protection business.
An interference is declared by the USPTO when two or more parties claim the
same patentable invention. An interference proceeding will be held to determine
the patentability of the involved patent and applications and who was the first
inventor, since in the United States the first party to invent is granted the
patent. The `281 patent and its continuation applications have a priority filing
date of February 1, 1995. The InterTrust application is a continuation of
application No. 08/388,107 (now abandoned) and as a consequence potentially has
a priority filing date of February 13, 1995. Because of the proximity of these
priority filing dates, the interference proceeding by the USPTO will attempt to
determine who invented first. This proceeding is still in its initial stages,
and is anticipated to take at least a year.
MACROVISION VS. 321 STUDIOS LLC
On January 7, 2004, we initiated a lawsuit in the Southern District of New
York against 321 Studios LLC, alleging that 321 Studios' software products
infringe our patented copy protection technology and also violates the U.S.
Digital Millennium Copyright Act of 1998 ("DMCA"). We are currently seeking a
preliminary injunction to bar 321 Studios from selling and marketing its
products. On February 13, 2004, 321 Studios filed responsive pleadings and
counterclaims for declaratory relief challenging the validity and enforceability
of our patents and the applicability of the DMCA. On March 26, 2004, the court
heard our motion for preliminary injunction, and the court's decision on the
motion is pending.
29
As of March 31, 2004, it was 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 our opinion, none of these other
disputes and legal actions is expected to have a material impact on our
consolidated financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.01 Offer Letter to James Wickett dated January 29, 2004
10.02 Executive Severance and Arbitration Agreement dated February
9, 2004 between Macrovision Corporation and Daniel E. Stickel
10.03 Executive Severance and Arbitration Agreement dated February
15, 2004 between Macrovision Corporation and Steven Weinstein
31.01 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.02 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.01 Section 1350 Certification
32.02 Section 1350 Certification
----------------------------------------------------------------------
(b) Reports on Form 8-K.
Macrovision filed a report on Form 8-K on January 6, 2004 announcing the
receipt of a notice from the U.S. Patent and Trademark Office declaring a second
interference between a Macrovision patent and a patent application from
InterTrust Technologies Corporation, and included the related press release.
Macrovision filed a report on Form 8-K on March 1, 2004 announcing our financial
results for the year and quarter ended December 31, 2003 and providing initial
guidance for fiscal year 2004, and included the related press release.
30
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: May 7, 2004 By: /s/ William A. Krepick
------------------- ---------------------------------------------
William A. Krepick
President and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER:
Date: May 7, 2004 By: /s/ Ian R. Halifax
------------------- ---------------------------------------------
Ian R. Halifax
Vice President, Finance and Administration,
Chief Financial Officer and Secretary
31