GLOBEtrotter SOFTWARE, INC.
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Table of Contents
Page
Independent Auditors' Report 1
Balance Sheets 2
Statements of Operations 3
Statements of Shareholders' Equity (Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
GLOBEtrotter Software, Inc.:
We have audited the accompanying balance sheets of GLOBEtrotter Software, Inc.
(the Company) as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GLOBEtrotter Software, Inc. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
July 20, 2000
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1999 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 394 1,094
Accounts receivable, net of allowance for doubtful accounts
of $75 in 1999 and 1998 2,853 2,671
Inventories 87 160
Due from shareholders 555 --
Prepaid expenses and other current assets 30 63
------- -------
Total current assets 3,919 3,988
Property and equipment, net 176 154
Patents and other intangibles, net of accumulated amortization
of $610 and $460 as of December 31, 1999 and 1998,
respectively 744 894
------- -------
$ 4,839 5,036
======= =======
Liabilities and Shareholders' (Deficit) Equity
Current liabilities:
Accounts payable $ 177 145
Current portion of long-term debt 67 33
Accrued expenses 482 410
Incentive bonus plan 300 216
Accrued pension contribution 672 596
Taxes payable 6 18
Deferred revenue 3,723 2,613
------- -------
Total current liabilities 5,427 4,031
Long-term debt 200 255
------- -------
Total liabilities 5,627 4,286
------- -------
Commitments and contingencies (Notes 5 and 6)
Shareholders' (deficit) equity:
Common stock; no par value; 10,000,000 shares authorized;
8,000,000 shares issued and outstanding as of
December 31, 1999 and 1998 208 208
Retained earnings (deficit) (996) 542
------- -------
Total shareholders' (deficit) equity (788) 750
------- -------
$ 4,839 5,036
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Statements of Operations
Years ended December 31, 1999 and 1998
(In thousands)
1999 1998
------- -------
Net revenues $14,686 12,012
------- -------
Costs and expenses:
Cost of revenues 338 354
Research and development 1,213 1,494
Selling and marketing 3,968 3,667
General and administrative 3,830 2,816
------- -------
Total costs and expenses 9,349 8,331
------- -------
Operating income 5,337 3,681
Interest and other income, net 68 77
------- -------
Income before tax expense 5,405 3,758
Tax expense 148 91
------- -------
Net income $ 5,257 3,667
======= =======
See accompanying notes to financial statements.
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Statements of Shareholders' (Deficit) Equity
Years ended December 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Common stock Retained Shareholders'
------------------------ earnings (deficit)
Shares Amount (deficit) equity
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1998 8,000,000 $ 208 1,475 1,683
Distribution to shareholders -- -- (4,600) (4,600)
Net income -- -- 3,667 3,667
--------- --------- --------- ---------
Balances, December 31, 1998 8,000,000 208 542 750
Distribution to shareholders -- -- (6,795) (6,795)
Net income -- -- 5,257 5,257
--------- --------- --------- ---------
Balances, December 31, 1999 8,000,000 $ 208 (996) (788)
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Statements of Cash Flows
Years ended December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,257 3,667
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 235 266
Changes in operating assets and liabilities:
Accounts receivable, inventories, and
other current assets (76) (780)
Accounts payable, accrued expenses,
deferred revenue, and taxes payable 1,363 1,432
------- -------
Net cash provided by operating activities 6,779 4,585
------- -------
Cash flows used in investing activities - acquisition
of property and equipment (109) (64)
------- -------
Cash flows from financing activities:
Payments on debt (20) (33)
Loan to shareholders (555) --
Cash distributions to shareholders (6,795) (4,600)
------- -------
Net cash used by financing activities (7,370) (4,633)
------- -------
Net decrease in cash and cash equivalents (700) (112)
Cash and cash equivalents at beginning of year 1,094 1,206
------- -------
Cash and cash equivalents at end of year $ 394 1,094
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 98 104
======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GLOBEtrotter Software, Inc.
Notes to Financial Statements
December 31, 1999 and 1998
(1) The Company
GLOBEtrotter Software, Inc. (the Company) was incorporated on August 5,
1982, in the state of California and is headquartered in San Jose,
California. The Company is a supplier of business-to-business electronic
licensing and license management technology to software vendors and
corporate customers worldwide. The Company's products span the areas of
electronic software distribution, electronic licensing, license
management, software asset management, and distribution of electronic
licenses through distribution channels.
(2) Significant Accounting Policies
(a) Revenue Recognition
The Company generates revenue from the licensing of its software and
performance of services related to the support of this software. The
Company follows the provisions of Statements of Position (SOP) 97-2,
Software Revenue Recognition, and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition with Respect to Certain
Transactions.
License revenue is recognized upon the execution of a license
agreement, when the licensed product has been delivered, fees are
fixed and determinable, collection is probable, and when all other
significant obligations have been fulfilled. For license agreements
in which customer acceptance is a condition to earning the license
fees, revenue is not recognized until acceptance occurs. For
arrangements containing multiple elements, such as software license
fees, consulting services and maintenance, or multiple products and
where vendor-specific objective evidence of fair value (VSOE) exists
for all undelivered elements, the Company accounts for the delivered
elements in accordance with the "residual method" prescribed by SOP
98-9. For arrangements containing multiple elements where VSOE does
not exist, all revenue is deferred until such time that VSOE is
evidenced or all elements of the arrangement have been delivered, or
if the only undelivered element is maintenance, revenue is
recognized pro rata over the contract period.
Service revenues include consulting fees for training, support, and
other services and are recognized as revenue as the services are
performed. Maintenance and support revenues are deferred and
recognized ratably over the contract period.
(b) Cost of Revenues
Cost of revenues is comprised of the costs to purchase the hardware
products resold by the Company.
(c) Cash and Cash Equivalents
The Company considers investments purchased with a maturity period
of three months or less at the date of purchase to be cash
equivalents.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
6 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(e) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, which range
from 3 to 10 years. Significant leasehold improvements are
capitalized; maintenance and repairs are expensed as incurred.
(f) Patents
Patent costs are included in patents and other intangibles and, upon
the granting of the related patent, are amortized using the
straight-line method over the shorter of the estimated useful life
of the patent or 10 years.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
(h) Product Development Costs
Costs incurred in the development of new software products and
enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After
technological feasibility is established, and prior to general
release of the software, any additional development costs are
capitalized in accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed. To
date, the period between achieving technological feasibility and the
general release of the software has been short, and software
development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any
software development costs to date.
(i) Income Taxes
The Company is an S Corporation under the applicable provisions of
federal and state income tax statutes. As an S Corporation, all
income, deductions, and credits pass through to the Company's
shareholders with the exception of state franchise taxes.
7 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Accordingly,
actual results could differ from those estimates.
(k) Concentration of Credit Risk and Major Customer
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts
receivable. By policy, the Company places cash and other liquid
investments with high quality financial institutions. For the years
ended December 31, 1999 and 1998, sales to one customer accounted
for approximately 18% and 17% of revenues, respectively, and one
customer accounted for 20% of accounts receivable as of December 31,
1999 and 1998. The Company performs ongoing credit evaluations of
its customers' financial condition and generally does not require
collateral for accounts receivable. When required, the Company
maintains allowances for credit losses. To date, such losses have
not been material.
(l) Advertising Expense
The cost of advertising is expensed as incurred. Such costs are
included in selling and marketing expense and totaled $697,415 and
$792,549 for the years ended December 31, 1999 and 1998,
respectively.
(m) Accounting for Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for its fixed plan stock options. As
such, compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements
using the fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure-only
requirements of SFAS No. 123.
(n) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1
requires that entities capitalize certain costs related to
internal-use software once certain criteria have been met. The
Company adopted SOP 98-1 on January 1, 1999, with no material
effect.
8 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial
statements. In June 2000, the SEC issued SAB No. 101B, Amendment; Revenue
Recognition in Financial Statements. SAB No. 101B delays the
implementation date of SAB No. 101 for registrants with fiscal years that
begin between December 16, 1999 and March 15, 2000. The Company will adopt
SAB No. 101 as required in the fourth quarter of 2000, and is evaluating
the effect, if any, that such adoption might have on its financial
statements.
In March 2000, the FASB issued Interpretation (FIN) No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of
APB No. 25. FIN No. 44 clarifies (a) the definition of an employee for
purposes of applying APB No. 25; (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan; (c) the accounting
consequences of various modifications to the terms of a previously fixed
stock option or award; and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective
July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998 or January 12,
2000. The Company is currently evaluating FIN No. 44, but believes that it
will not affect its current accounting for stock-based compensation
amounts.
In June 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 138, Accounting for Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 138,
establishes accounting and reporting standards for derivative instruments
and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and
measure them at fair value. Gains and losses resulting from changes in
fair value would be accounted for based on the intended use of the
derivative and whether it is designated and qualifies for hedge
accounting. The Company will adopt SFAS No. 138 concurrently with SFAS No.
133 for its first quarter of fiscal 2001. The Company expects adoption of
SFAS Nos. 133 and 138 will not have a material effect on financial
position or results from operations.
(2) Property and Equipment
Property and equipment as of December 31, 1999 and 1998, consisted of the
following (in thousands):
1999 1998
---- ----
Machinery and equipment $407 383
Leasehold improvements 10 9
Furniture and fixtures 170 98
Software 49 39
---- ---
636 529
Less accumulated depreciation and amortization 460 375
---- ---
$176 154
==== ===
9 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(3) Long-Term Debt
Long-term debt as of December 31, 1999 and 1998, consisted of the
following (in thousands):
1999 1998
---- ----
Note payable to an unrelated corporation; secured
by patent; annual payments of $33 through
2001; annual payments of $10 from 2002 through
2011; due September 2011 $267 288
Less current portion 67 33
---- ---
$200 255
==== ===
Long-term debt maturities subsequent to 1999 are approximately as follows:
2000, $67,000; 2001, $33,000; 2002, $10,000; 2003, $10,000; 2004, $10,000;
and thereafter, $137,000.
(4) Shareholders' (Deficit) Equity
(a) Common Stock
The Company's Certificate of Incorporation provides for the issuance
of up to 10,000,000 shares of no par value common stock.
(b) Stock Option Plan
In December 1999, the Company adopted the 1999 Stock Option Plan
(the Plan) to grant selected officers, employees, directors, and
consultants of the Company an opportunity to acquire the Company's
common stock. The Plan is administered by the Board of Directors
which sets the terms and conditions of the options. The options
generally become exercisable in increments over a four-year vesting
period and expire at the end of 10 years from date of grant or
sooner if terminated by the Board of Directors. The Board of
Directors reserved 1,200,000 shares of common stock for issuance
under the Plan. As of December 31, 1999, no options were issued or
outstanding under the Plan.
(5) Commitments
(a) Leases
The Company leases its office facility and certain equipment
pursuant to noncancelable operating lease agreements. The office
facility lease is with a trust whose trustees are also the principal
shareholders of the Company.
10 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
Future minimum lease payments pursuant to these leases as of
December 31, 1999, were as follows (in thousands):
Year ended
December 31,
------------
2000 $325
2001 325
2002 320
2003 105
------
$1,075
======
Rent expense was $289,000 and $216,000 for the years ended December
31, 1999 and 1998, respectively, of which $258,000 and $150,000 were
paid to a related party as of December 31, 1999 and 1998,
respectively.
(b) Employee Benefit Plan
In 1998, the Company adopted a Money Purchase Pension Plan for all
employees meeting certain eligibility requirements. Contributions to
the Money Purchase Pension Plan are 15% of the annual compensation
of the plan participants. The participants of this plan receive
benefits upon retirement, in the event of disability or death, or as
otherwise approved by this plan's trustees. The Company adopted a
401(k) plan at the discretion of the Board of Directors.
Participants are immediately vested in the Company's contributions.
Total contribution expenses for the years ended December 31, 1999
and 1998 were $647,000 and $581,000, respectively.
(6) Contingencies
In November 1997, the Company filed a patent infringement lawsuit in the
Federal District Court alleging infringement of one of its patents and
unfair competition and trade practices. In December 1997, the Company
added Wind River Systems, a customer of Elan, to the patent infringement
suit. In March 1998, Rainbow Technologies North America, Inc. entered into
an agreement to purchase certain assets of Elan and entered into
litigation cooperation agreement with Elan regarding pending GLOBEtrotter
Software, Inc. litigation.
Wind River Systems subsequently settled the litigation with the Company in
October 1998. Under the settlement, the Company granted Wind River Systems
a license to GLOBEtrotter Software, Inc.'s patents, including the Network
Licensing Patent, and Wind River Systems agreed not to use the Elan
License Manager in new versions of all Wind River Systems products. All
other settlement terms are protected and cannot be disclosed as mutually
agreed by the parties. Wind River Systems has since entered into a license
agreement with the Company to use FLEXlm.
11 (Continued)
<PAGE>
GLOBEtrotter SOFTWARE, INC.
Notes to Financial Statements
December 31, 1999 and 1998
Rainbow Technologies North America, Inc. and Elan founder Ken Greer filed
separate counterclaims against the Company and Matthew Christiano, a
principal shareholder of the Company, alleging antitrust violations, unfair
competition, tortuous interference of business relations, and trade libel.
Rainbow Technologies North America, Inc. is seeking compensatory and
punitive damages plus injunctive relief and disgorgement of profits. Ken
Greer is seeking compensatory and punitive damages plus injunctive relief
and disgorgement of profits.
The patent infringement case has been bifurcated from the counterclaims. In
October 1999, Judge Fogel granted the motion for partial summary judgment
for non-infringement filed by Rainbow Technology North America, Inc. based
on his claim construction order. In February 2000, the Company filed an
appeal with the Federal Court of Appeals for the Ninth Circuit on the
summary judgment of the claims based on erroneous claims construction. A
trial date for the patent infringement case is scheduled for April 9, 2001.
The Company believes that it has meritorious defenses against claims that
it has infringed on the patents of others. However, there can be no
assurance that the Company will prevail in these particular cases. An
adverse outcome in these cases could have a material adverse effect on the
Company. As of December 31, 1999 and 1998, no accrual for these
contingencies has been recorded.
(7) Subsequent Events
(a) Effective January 25, 2000, 783,742 options were issued to officers
and employees of the Company. The exercise price of the options
granted was $3.00 per share with vesting periods up to four years.
Total compensation charge of $38,305,470 was recorded for the
difference between the exercise price and the market value of the
underlying stock at the date of grant. The value attributed to the
unvested options was reflected as deferred stock-based compensation
within shareholders' deficit.
(b) Effective April 21, 2000, the Company terminated the Money Purchase
Pension Plan.
(c) In June 2000, the Company signed a letter of intent to sell all of
its outstanding shares to Macrovision Corporation for approximately
8,944,550 shares of Macrovision's common stock. Macrovision designs,
develops, and markets video copy protection and rights management
technologies that provide copy protection for motion pictures and
other proprietary content stored on videocassette, DVDs, or other
media, or is transmitted by cable, utilities, microwave
transmission, or through the Internet. The acquisition closing is
subject to the approval of Macrovision's shareholders for increased
share authorization and regulatory approvals.
12
