<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1997
REGISTRATION NO. 333-19373
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MACROVISION CORPORATION
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7829 77-0156161
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification
No.)
</TABLE>
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
--------------------------
VICTOR A. VIEGAS
CHIEF FINANCIAL OFFICER
MACROVISION CORPORATION
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Name, Address and Telephone Number of Agent For Service)
COPIES TO:
<TABLE>
<S> <C> <C>
LAIRD H. SIMONS III, ESQ. DAVID W. HERBST, ESQ. JEFFREY D. SAPER, ESQ.
KATHERINE TALLMAN SCHUDA, ESQ. AMY L. GILSON, ESQ. PATRICK J. SCHULTHEIS, ESQ.
ERIC D. FROTHINGHAM, ESQ. SANJIV S. DHAWAN, ESQ. JAN-MARC VAN DER SCHEE, ESQ.
FENWICK & WEST LLP WISE & SHEPARD LLP WILSON SONSINI GOODRICH & ROSATI,
TWO PALO ALTO SQUARE 3030 HANSEN WAY PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94304 650 PAGE MILL ROAD
(415) 494-0600 (415) 856-1200 PALO ALTO, CA 94304
(415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per share... 2,702,500 shares $12.00 $32,430,000 $9,827.27
</TABLE>
(1) Includes 352,500 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
amount of the registration fee.
(3) The amount of $9,618.18 was paid with the original filing.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY 11, 1997
2,350,000 SHARES
[LOGO]
COMMON STOCK
OF THE 2,350,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,434,016 SHARES ARE
BEING SOLD BY MACROVISION CORPORATION ("MACROVISION" OR THE "COMPANY") AND
915,984 SHARES ARE BEING SOLD BY THE SELLING STOCKHOLDERS. THE COMPANY WILL NOT
RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING STOCKHOLDERS.
SEE "PRINCIPAL AND SELLING STOCKHOLDERS."
PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK
OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
OF THE COMMON STOCK WILL BE BETWEEN $10.00 AND $12.00 PER SHARE. SEE
"UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR
QUOTATION ON THE NASDAQ NATIONAL MARKET, UPON COMPLETION OF THIS OFFERING, UNDER
THE SYMBOL "MVSN."
SEE "RISK FACTORS" COMMENCING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE....................... $ $ $ $
TOTAL (3)....................... $ $ $ $
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT
$1,000,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO 352,500 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ AND THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE
"UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT , 1997.
-------------------
MONTGOMERY SECURITIES
HAMBRECHT & QUIST
COWEN & COMPANY
, 1997
<PAGE>
HOLLYWOOD KNOWS A GREAT PICTURE WHEN THEY SEE ONE.
[PICTURE OF TELEVISION SCREEN WITH A VERY POOR QUALITY PICTURE]
[MACROVISION LOGO]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited by its independent auditors
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited consolidated financial information.
2
<PAGE>
AND MACROVISION, EXPERTS IN VIDEO SECURITY,
KNOWS HOW TO PROVIDE IT.
[SAME PICTURE AS PREVIOUS PAGE, OF A TELEVISION SCREEN
WITH A VERY POOR QUALITY PICTURE]
The above graphic represents the picture quality of an unauthorized recording of
a copy protected digital PPV program or Digital Versatile Disc
Macrovision Corporation develops and markets a range of technologies and
products, many of which are proprietary, that address the video security needs
of Hollywood studios and other video rights owners.
TYPES OF MACROVISION LICENSEES
<TABLE>
<S> <C>
- -Hollywood Studios -Direct Broadcast Satellite Operators
- -Independent Video Producers -Cable TV Multiple System Operators
- -Commercial Video Duplicators -Digital Set-Top Decoder Manufacturers
- -Telephone Companies
</TABLE>
The Company's two primary technologies are "Copy Protection" and "Video
Scrambling." In most applications, Macrovision licenses its technologies and
receives unit- or transaction-based royalties.
COPY PROTECTION
Designed to deter VCR owners from unauthorized COPYING of prerecorded or
electronically transmitted programming, Macrovision's copy protection
technologies provide security for a variety of media.
<TABLE>
<S> <C> <C> <C>
VIDEOCASSETTES DIGITALLY DELIVERED PAY-PER- DIGITAL VERSATILE DISC (DVD) [Bar graph showing
Over 1.5 billion cassettes VIEW (PPV) With the imminent number of copy protected
worldwide have been copy Because PPV programs can be introduction of movies on video cassettes]
protected by Macrovision, easily copied, Macrovision's DVDs, Macrovision's 1992 189 million
the majority of which are copy protection technology technology will deter 1993 234 million
Hollywood releases. will be essential to protect consumers from making high 1994 344 million
studios' home video, repeat quality videocassette 1995 367 million
PPV and pay TV revenues by copies. 1996 451 million
deterring VCR owners from EVERY YEAR MORE AND MORE
making copies. VIDEOCASSETTES ARE PROTECTED
BY MACROVISION'S COPY
PROTECTION TECHNOLOGY,
SIGNIFICANTLY REDUCING
UNAUTHORIZED CONSUMER
COPYING.
</TABLE>
VIDEO SCRAMBLING
Designed to prevent unauthorized VIEWING of an electronically transmitted movie
or program,
Macrovision's video scrambling technologies offer a variety of solutions in
different markets.
<TABLE>
<S> <C> <C> <C>
CABLE TV VIDEOCINEMAS SATELLITE TV NETWORKS LAW ENFORCEMENT/ GOVERNMENT
High security, low cost CineGuard-TM- scrambled StarShaker-TM- and VES-TM- VES-TM-TM- is a portable,
PhaseKrypt-Registered videocassettes can be played products help secure video hand- held, point-to-point
Trademark- scrambling only in CineGuard-licensed programs transmitted via scrambling system for law
technology is licensed to theaters, thereby adding a satellite or land-based enforcement and broadcast
emerging international pay secure distribution channel networks for corporate, applications.
TV set-top decoder as a complement to 35 mm educational or broadcast
manufacturers. film in international television applications.
markets.
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
THE COMPANY
Macrovision designs, develops and markets video security technologies and
products that provide copy protection and video scrambling for motion pictures
and other proprietary video materials. The Company derives a substantial
majority of its net revenues from fees for the application of its copy
protection technology to deter unauthorized consumer copying of prerecorded
videocassettes of motion pictures and other copyrighted materials that are sold
or rented to consumers. The Company's technology has been used to copy protect
more than 1.5 billion videocassettes worldwide since 1985. The Company believes
that its video copy protection technologies are accepted as the DE FACTO
standard for consumer copy protection.
The Company has developed an enhanced version of its videocassette copy
protection technology for the digital Pay-Per-View ("PPV") networks that are
being developed and deployed by direct broadcast satellite and cable television
operators and the digital versatile disc ("DVD") format. The expected future
growth of digital PPV and DVD, coupled with the high picture quality of a copy
made from such formats and the relative ease of copying digital PPV and DVD
content, may increase the need for effective consumer copy protection in these
applications.
The Company has licensed its copy protection technology for digital PPV to
33 set-top decoder manufacturers and four digital PPV system operators (DIRECTV,
Galaxy Latin America, the Kirsch Group and Sky Latin America). The Company's
copy protection technology is embedded in substantially all of the approximately
four million digital set-top decoders currently in use in the United States,
Japan and a number of countries in Latin America. Currently two digital PPV
program providers in Japan have activated copy protection for digital PPV
programming.
In October 1996, a multi-industry technical working group comprised of major
motion picture studios, consumer electronics manufacturers and personal computer
hardware and software companies adopted a set of copy protection principles that
established prerequisites for commercial availability of DVD hardware and media.
The Company believes that its copy protection technology is currently the only
digital-to-analog copy protection solution that satisfies these principles. To
date, Hitachi, Ltd., Matsushita Electric Industrial Co., Ltd., Pioneer
Electronic Corporation, THOMSON Multimedia, S.A., Toshiba Corporation and seven
other consumer electronics companies have signed agreements with the Company to
incorporate the Company's DVD copy protection technology in their DVD players or
DVD ROM hardware.
The Company's video scrambling technologies prevent unauthorized viewing of
video programming. These technologies are licensed to manufacturers of analog
set-top decoders for sale to cable television system operators in developing
markets to enable cost-effective and secure transmission of video signals. The
Company has also developed products implementing video scrambling technologies
that serve growing niche markets, such as law enforcement and private networks.
Another application of the Company's video scrambling technology is the
Company's CineGuard program, a new theatrical exhibition alternative in which
motion pictures are recorded in a scrambled state on Super VHS videocassettes
and distributed primarily to small theaters in rural towns in international
markets.
The Company licenses its technologies primarily by means of a royalty-based
model. Copyright holders and videocassette duplicators typically license the
Company's videocassette copy protection technology for a per unit fee. Set-top
decoder manufacturers license the Company's copy protection technologies for an
up-front fee and a per unit hardware royalty. The Company's agreements with
digital PPV system operators entitle the Company to transaction-based royalty
payments at such time as copy protection for digital PPV programming is
activated. For the DVD market, the Company intends to implement a business model
using media-based royalties similar to that for its videocassette copy
protection business. Video scrambling technologies either are licensed or are
sold in hardware products and components.
The Company's objective is to maintain and enhance its position as a leading
provider of video security technologies and products by implementing a strategy
that includes the following key elements: (i) pursue a royalty-based licensing
model that results in a high margin, transaction-oriented business with
recurring revenues; (ii) leverage key customer relationships to broaden the use
of existing applications for the Company's technologies; (iii) increase market
penetration of the Company's copy protection business; (iv) develop new product
applications and technologies; and (v) aggressively pursue protection of the
Company's patents.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 1,434,016 shares
Common Stock offered by the Selling Stockholders............ 915,984 shares
Common Stock to be outstanding after this offering.......... 6,762,207 shares (1)
Use of proceeds............................................. For general corporate purposes,
including working capital. See "Use of
Proceeds."
Nasdaq National Market symbol............................... MVSN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues......................................................... $ 9,549 $ 13,330 $ 14,189 $ 17,080
Operating income from continuing operations.......................... 1,571 2,804 2,183 3,318
Net income from continuing operations................................ $ 665 $ 1,501 $ 1,056 $ 1,835
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share from continuing operations (2).................... $ 0.15 $ 0.29
--------- ---------
--------- ---------
Shares used in computing earnings per share (2)...................... 4,162 4,353
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
AS ADJUSTED
ACTUAL (3)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 2,409 $ 16,079
Working capital...................................................................... 2,225 15,895
Total assets......................................................................... 11,953 25,623
Long-term obligations, net of current portion........................................ 296 296
Total stockholders' equity........................................................... 6,072 19,742
</TABLE>
- --------------------------
(1) Based on shares outstanding as of December 31, 1996. Does not include
700,565 shares of Common Stock issuable upon the exercise of options
outstanding as of such date at a weighted average exercise price of $2.99
per share. Also does not include 590,216 additional shares reserved for
future grants or issuances under the Company's stock option and stock
purchase plans. See "Capitalization," "Management--Employee Benefit Plans,"
"Management--Director Compensation" and Note 5 of Notes to Consolidated
Financial Statements.
(2) For an explanation of the determination of the number of shares used in
computing earnings per share, see Note 1 of Notes to Consolidated Financial
Statements.
(3) Adjusted to reflect the sale of the 1,434,016 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price per share
of $11.00, after deducting the estimated underwriting discount and offering
expenses. See "Capitalization" and "Use of Proceeds."
--------------------------
EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS OR AS OTHERWISE
NOTED HEREIN, INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION; (II) REFLECTS THE REINCORPORATION OF THE
COMPANY AS A DELAWARE CORPORATION AND A 1-FOR-1.8 REVERSE SPLIT OF THE COMPANY'S
COMMON STOCK, BOTH OF WHICH WILL OCCUR PRIOR TO THIS OFFERING; AND (III)
REFLECTS THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO AN
AGGREGATE OF 1,376,432 SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING
OF THIS OFFERING.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
FLUCTUATIONS IN FUTURE OPERATING RESULTS; SEASONALITY
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, on an annual and quarterly
basis as a result of a number of factors. Such factors include, but are not
limited to, the timing of release of popular motion pictures on videocassettes
or digital versatile discs ("DVDs") or by digital pay-per-view ("PPV")
transmission, the degree of acceptance of the Company's copy protection
technologies by major motion picture studios, the mix of products sold and
technologies licensed, any change in product or license pricing, the seasonality
of revenues, changes in the Company's operating expenses, personnel changes, the
development of the Company's direct and indirect distribution channels, foreign
currency exchange rates and general economic conditions. The Company may choose
to reduce prices or increase spending in response to competition or new
technologies or elect to pursue new market opportunities. If new competitors,
technological advances in the industry or by existing or new competitors or
other competitive factors require the Company to invest significantly greater
resources in research and development or marketing efforts, the Company's future
operating results may be adversely affected. Because a high percentage of the
Company's operating expenses is fixed, a small variation in the timing of
recognition of revenues can cause significant variations in operating results
from period to period.
The Company has experienced significant seasonality in its business, and the
Company's financial condition and results of operations are likely to be
affected by seasonality in the future. The Company has typically experienced its
highest revenues in the fourth quarter of each calendar year followed by lower
revenues and operating income in the first quarter, and at times in subsequent
quarters, of the next year. The Company believes that this trend has been
principally due to the tendency of certain of the Company's customers to release
their more popular motion pictures on videocassettes during the Christmas
shopping season. In addition, revenues have tended to be lower in the summer
months, particularly in Europe.
Based upon the factors enumerated above, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to grow in future periods or that it will be able to
sustain its level of net revenues or its rate of revenue growth on a quarterly
or annual basis. It is likely that, in some future quarter, the Company's
operating results will be below the expectations of stock market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results of Operations."
DEPENDENCE ON VIDEOCASSETTE COPY PROTECTION TECHNOLOGY AND ADVOCACY BY MAJOR
MOTION PICTURE STUDIOS
The Company currently derives a substantial majority of its net revenues and
operating income from fees for the application of its patented video copy
protection technology to prerecorded videocassettes of motion pictures and other
copyrighted materials that are sold or rented to consumers. Such fees
represented 86.9%, 87.2% and 75.4% of the Company's net revenues during 1994,
1995 and 1996, respectively. The Company expects these fees to account for a
majority of the Company's net revenues and operating income at least through
1997. This portion of the Company's business has not grown significantly
5
<PAGE>
in recent years, and there can be no assurance that revenues from such fees will
grow significantly or at all. Any future growth in revenues from such fees will
depend on the use of the Company's copy protection technology on a larger number
of videocassettes. In order to increase or maintain its market penetration, the
Company must continue to persuade rights owners that the cost of licensing the
technology is outweighed by the increase in revenues that the rights owners and
retailers would achieve as a result of using copy protection, such as revenues
from additional sales of the copy protected material and/or subsequent revenues
from other venues. In this regard, the Company's copy protection technologies
are intended to deter consumer copying and are not effective against
professional duplication and video processing equipment.
In the event that the major motion picture studios or other customers of the
Company's copy protection technology were to determine that the benefits of
using the Company's technology did not justify the cost of licensing the
technology, demand for the Company's technology would decline. Any factor that
results in a decline in demand for the Company's copy protection technology,
including a change of copy protection policy by the major motion picture studios
or a decline in sales of prerecorded videocassettes that are encoded with the
Company's copy protection technology, would have a material adverse effect on
the Company's business, financial condition and results of operations. Moreover,
the ability of the Company to expand its markets to include additional home
entertainment venues such as digital PPV and DVDs will depend in large part on
the support of the major motion picture studios in advocating the incorporation
of copy protection into the hardware and network infrastructure required to
distribute such video programming. In the event that the motion picture industry
withdraws its support for the Company's copy protection technologies or
otherwise determines not to copy protect a significant portion of prerecorded
video on videocassettes or DVD or digital PPV programs, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Industry Background" and
"Business--Macrovision's Business, Licensed Technologies and Products."
DEPENDENCE ON KEY CUSTOMERS
The Company's customer base is highly concentrated among a limited number of
customers, primarily due to the fact that the Motion Picture Association of
America ("MPAA") studios dominate the motion picture industry. Historically, the
Company has derived a substantial majority of its net revenues from relatively
few customers. Revenues from the Company's three largest customers, Buena Vista
Home Video, Inc. ("Disney"), Twentieth Century Fox Home Entertainment, Inc.
("Fox") and Universal Studios Home Video ("Universal"), represented 45%, 44% and
37% of the Company's net revenues during 1994, 1995 and 1996, respectively. Each
of these customers is a home video supplier that uses the Company's copy
protection technology and accounted for more than 10% of the Company's net
revenues in 1994, 1995 and 1996. The Company expects that revenues from a
limited number of customers will continue to account for a substantial portion
of the Company's net revenues for the foreseeable future. In January 1997, the
Company signed a binding letter of intent with Disney, extending its prior
agreement for a three-year term and granting the right to apply the Company's
video copy protection technology to its videocassettes. In February 1997 the
Company signed binding letters of intent with Fox, extending its prior
agreement, and Universal, each for a term of one year, granting the right to
apply the Company's video copy protection technology to their videocassettes. In
addition, the letters of intent allow each of these studios to use the Company's
DVD copy protection technology should any such studio decide to release
copy-protected motion pictures in the DVD format. The Company expects to enter
into definitive agreements with these three customers in the next several
months. However, there can be no assurance that the Company will enter into
these definitive agreements. Further, there can be no assurance that, when these
agreements expire, they will be renewed, or new contracts will be entered into,
on terms favorable to the Company, or at all. The failure of any of these
customers to renew their contracts or enter into new contracts with the Company
on terms that are favorable to the Company would likely result in a substantial
decline in the Company's net revenues and operating income, and would have a
material adverse effect on the Company's business, financial condition and
results of operations. Most of the Company's other videocassette copy protection
customers license the Company's technology on a title-by-
6
<PAGE>
title basis. There can be no assurance that the Company's current customers will
continue to use the Company's technology at current or increased levels, if at
all, or that the Company will be able to obtain new customers. The loss of, or
any significant reduction in revenues from, a key customer would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Macrovision's Business, Licensed Technologies and
Products," "Business--Customers" and Note 1 of Notes to Consolidated Financial
Statements.
EVOLVING MARKET FOR DVD AND DIGITAL PPV COPY PROTECTION
The Company's future growth and operating results will depend to a large
extent on the successful introduction, marketing and commercial viability of
DVDs and digital PPV programming that utilize the Company's copy protection
technologies. A number of factors will affect the Company's ability to derive
revenues from DVD and digital PPV copy protection. These factors include the
cost and effectiveness of the Company's copy protection technology in its
various applications, the development of alternative technologies or standards
for DVD copy protection, the ability of the Company to obtain commitments from
the motion picture studios to require copy protection on DVD media and digital
PPV transmissions and the relative ease of copying, as well as the quality of
the copies of, unprotected video materials distributed in new digital formats.
Because of their early stages of development, demand for and market acceptance
of DVD and digital PPV, as well as demand for associated copy protection, are
subject to a high level of uncertainty. Much of the DVD and digital PPV
technology and infrastructure is unproven, and it is difficult to predict with
any assurance whether, or to what extent, these evolving markets will grow. In
this regard, the Company's future growth would be adversely affected if DVD
players and digital PPV set-top decoders that do not include the Company's copy
protection components achieve market acceptance.
While the Company's copy protection capability is embedded in approximately
four million digital set-top decoders manufactured by certain of the leading
set-top decoder manufacturers, only one cable or satellite subscription
television ("Pay TV") operator, a program provider in Japan, has activated copy
protection for digital PPV programming. There can be no assurance that any of
the MPAA studios will require copy protection for any of their PPV motion
pictures. Moreover, consumers may react negatively to copy protected PPV
programming because, to date, they have routinely copied for later viewing
analog cable and satellite-delivered Pay TV and PPV programs, as well as free
broadcast programming. In addition, there can be no assurance that certain
television sets or combinations of VCRs and television sets will not exhibit
impaired pictures while displaying a copy protected DVD or digital PPV program.
If there is consumer dissatisfaction that cannot be managed, or if there are
technical compatibility problems, the Company's business, financial condition
and results of operations would be materially adversely affected. If the market
for DVD or digital PPV copy protection fails to develop or develops more slowly
than expected, or if the Company's solution does not achieve or sustain market
acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business--Macrovision's
Business, Licensed Technologies and Products."
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon its proprietary
technologies. The Company relies primarily on a combination of patent,
trademark, copyright and trade secret laws, nondisclosure and other contractual
provisions, and technical measures to protect its intellectual property rights.
The Company holds 29 United States patents and has 37 United States patent
applications pending, of which seven are allowed. In addition, the Company has
103 foreign patents and 127 foreign patent applications pending. There can be no
assurance that any patent, trademark or copyright owned by the Company will not
be challenged and invalidated or circumvented, that patents will issue from any
of the Company's pending or future patent applications or that any claims in
issued patents or pending patent applications will be of sufficient scope or
strength or be issued in all countries where the Company's products can be sold
or its technologies can be licensed to provide meaningful protection or any
commercial advantage to the Company. There can be no assurance that the
expiration of any of the Company's patents will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Further,
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there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technologies, duplicate the Company's
technologies or design around the patents owned by the Company. Effective
intellectual property protection may be unavailable or limited in certain
foreign countries. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise use aspects of the
Company's processes and devices that the Company regards as proprietary.
Policing unauthorized use of the Company's proprietary information is difficult,
and there can be no assurance that the steps taken by the Company will prevent
misappropriation of its technologies. In the event that the Company's
intellectual property protection is insufficient to protect the Company's
intellectual property rights, the Company could face increased competition in
the market for its products and technologies, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
From time to time, the Company has received claims from third parties that
the Company's technologies and products infringe the intellectual property
rights of such third parties, and the Company may receive similar claims in the
future. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, cause product shipment delays or require
the Company to cease utilizing the infringing technology unless it can enter
into royalty or licensing agreements. Such royalty or licensing agreements might
not be available on terms acceptable to the Company, or at all, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company has six United States and 17 foreign patents
covering a number of processes and devices that unauthorized parties could use
to circumvent the Company's copy protection technologies. The Company uses these
patents to limit the proliferation of devices intended to circumvent the
Company's copy protection technologies. The Company has initiated a number of
patent infringement disputes against manufacturers and distributors of such
devices. No lawsuits of this type are pending currently, but litigation may be
necessary in the future to limit the sale of defeat technologies, to enforce the
Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity.
There can be no assurance that any such litigation will be successful. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations, whether or not such litigation is
determined adversely to the Company. In the event of an adverse ruling in any
such litigation, the Company may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringed
technology. The failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, such an adverse
ruling could result in the increased proliferation of devices that defeat the
Company's copy protection technology, which could result in a decline in demand
for the Company's technologies. See "--Risks of Defeat Technologies,"
"Business--Research and Development" and "Business--Intellectual Property
Rights."
RAPID TECHNOLOGICAL CHANGE
The video security industry in which the Company competes, and in which its
technologies and products are utilized, is characterized by rapid technological
change, frequent product introductions and enhancements, changes in customer
demands and evolving industry standards. The emergence of new industry standards
and the introduction of new technologies or products embodying new technologies
can render existing technologies or products obsolete and unmarketable. For
example, new industry standards for VCRs or television sets could adversely
affect the effectiveness or transparency of the Company's copy protection
technology. The Company's videocassette copy protection technology exploits the
automatic gain control ("AGC") circuit in VHS VCRs. While most VCR manufacturers
use a standard AGC circuit that responds to the Company's copy protection
process, there can be no assurance that VCR manufacturers will not use
alternative AGC circuits that do not respond to the Company's copy protection
technology, thereby lessening the effectiveness of the Company's consumer copy
protection solution over time as new VCRs are sold into the market. Moreover,
there can be no assurance that television manufacturers will continue to design
television sets that are transparent to the Company's copy protection
technologies when
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they display original, copy protected videocassettes, DVDs and digital PPV
programming. The success of the Company's PhaseKrypt video scrambling technology
will depend upon the growth of analog cable Pay TV networks in the Pacific Rim
and other developing countries and the ability of the Company's licensees to
sell into those markets. The development of lower cost digital video scrambling
systems could result in a transition from analog to digital scrambling systems
in the developing cable Pay TV markets and a reduction in demand for the
Company's PhaseKrypt video scrambling technology.
The Company's future success will depend in large part on its ability to
enhance its current technologies and products in a timely, cost-effective manner
and to develop new technologies and products that meet changing market
conditions, which include emerging industry standards, changing customer
demands, new competitive product offerings and changing technology. There can be
no assurance that the Company will be successful in developing and marketing, on
a timely and cost-effective basis or at all, fully functional and integrated
product enhancements or new technologies or products that respond to
technological change, updates or enhancements to other consumer electronics
products, changes in customer requirements or evolving industry standards; that
the Company will not experience difficulties that delay or prevent the
successful development, introduction and license or sale of such enhancements,
technologies or products; or that any such enhancements, technologies or
products will adequately meet the requirements of the marketplace and achieve
market acceptance. Any failure by the Company to anticipate or to respond
adequately to changing market conditions, or any significant delays in
technology or product development or introduction, could cause customers to
delay or decide against licensing or purchasing the Company's technologies or
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Research and
Development" and "Business--Legislative and Technology Initiatives."
RISKS OF DEFEAT TECHNOLOGIES
Attempts by third parties to defeat the Company's copy protection
technologies have been and are expected to be a persistent problem. To
anticipate such attempts, the Company has developed and patented a number of
processes and devices that could be used by unauthorized parties to circumvent
its copy protection technologies. The Company has then attempted to use these
patents as barriers to the manufacture and sale of such devices by others.
Notwithstanding the Company's patent position, a number of devices have been
available, and currently are available, that defeat copy protection. Moreover,
the Company's copy protection technologies are not effective against
professional duplication and video processing equipment. There can be no
assurance that third parties will not be able to develop defeat technologies
that do not infringe the Company's patents or that the Company will be able to
obtain patents on defeat technologies developed in the future. A number of
factors could cause copyright holders to choose not to use the Company's copy
protection technology, including a perception that the inability of the
Company's technology to deter professional pirates renders the Company's
technology less useful, the commercial availability of products that defeat the
Company's copy protection technology, or any significant reduction in the
effectiveness of the Company's copy protection technology in deterring consumer
copying. Any reduction in demand for the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "--Dependence on Proprietary Technology,"
"Business--Technology," "Business--Research and Development" and
"Business--Intellectual Property Rights."
DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS
The Company depends upon third-party manufacturers and suppliers for
components, subassemblies and printed circuit boards used in its VES products,
StarShaker products, PhaseKrypt encoders, PhaseKrypt decoder components and
videocassette copy protection processors. The Company's product designs are
proprietary but generally incorporate industry-standard hardware components that
are obtainable from multiple sources. The Company's ability to deliver its
products in a timely manner depends upon the availability of quality components
and subassemblies used in these products and, in part, on the ability of
subcontractors to manufacture, assemble and deliver certain items in a timely
and satisfactory manner.
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The Company obtains certain electronic components and subassemblies from a
single source or a limited number of sources. For example, Atmel Corporation is
currently the Company's sole source of integrated circuits for the Company's
PhaseKrypt decoders and BARCO N.V. is currently the sole source of integrated
decoders for CineGuard video projectors. The reliance on third-party
manufacturers and sole or limited suppliers involves a number of risks,
including a potential inability to obtain an adequate supply of required
components, subassemblies and printed circuit boards and reduced control over
pricing, quality and timely delivery of components, subassemblies and printed
circuit boards. A significant interruption in the delivery of any such items or
any other circumstance that would require the Company to seek alternative
sources of supply could result in the inability of the Company to deliver
certain of its products on a timely basis, which in turn could result in a
deterioration of the Company's customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."
NEED TO ESTABLISH AND MAINTAIN LICENSING RELATIONSHIPS
The Company's future success will depend in part upon its ability to
establish and maintain licensing relationships with companies in related
business fields, including videocassette duplicators, international distributors
of videocassettes, DVD authoring houses and replicators, semiconductor and
equipment manufacturers, operators of digital PPV systems, consumer electronics
hardware manufacturers and video cinema exhibitors. The Company believes that
these current and future relationships can allow the Company greater access to
manufacturing, sales and distribution resources. However, the amount and timing
of resources to be devoted to these activities by such other companies are not
within the Company's control. There can be no assurance that the Company will be
able to maintain its existing relationships or enter into beneficial
relationships in the future, that other parties will perform their obligations
as expected or that the Company's reliance on others for the development,
manufacturing and distribution of its technologies and products will not result
in unforeseen problems. Substantially all of the Company's license agreements
are non-exclusive, and therefore such licensees are free to enter into similar
agreements with third parties, including the Company's current or potential
competitors. There can be no assurance that the Company's licensees will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing or marketing products targeted by the collaborative programs and by
the Company's products. The failure of any of the Company's current or future
collaboration efforts could have a material adverse effect on the Company's
ability to introduce new products or applications and therefore could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Macrovision's Business, Licensed
Technologies and Products" and "Business--Customers."
RISKS ASSOCIATED WITH CINEGUARD
The Company's CineGuard program has only recently been launched and is
subject to a high degree of risk and uncertainty. The success of CineGuard will
depend in part on the ability of the Company's licensees to launch and operate
video cinemas to supplement film theaters. The exhibition infrastructure
supporting CineGuard must be built and developed. The Company does not have
written contractual commitments from the motion picture studios to provide films
for exhibition in CineGuard theaters. There can be no assurance that the studios
will make major motion pictures available on scrambled videocassettes for
exhibition in CineGuard theaters at the same time that film prints are available
in other theaters, or at all. It is difficult to predict with any assurance
whether CineGuard will prove to be a viable business, or whether demand for
CineGuard licenses will increase in the future. In addition, the market is new
and evolving and it is difficult to predict the future growth of this market.
There can be no assurance that video cinema markets will be sustainable or
develop as the Company hopes. If markets fail to develop or develop more slowly
than expected, or if CineGuard does not achieve or sustain market acceptance,
the Company's business, financial condition and results of operations would be
materially adversely affected. See "Business--Macrovision's Business, Licensed
Technologies and Products."
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COMPETITION
The Company believes that it has had no significant videocassette copy
protection competitor for the last five years other than companies that have
occasionally developed hardware based on the Company's technology in foreign
countries where the Company does not have patents issued. It is possible,
however, that a competitive copy protection technology could be developed in the
future. For example, the Company's customers could attempt to promote
competition by supporting the development of alternative copy protection
technologies or solutions, including solutions that deter professional
duplication. Increased competition would be likely to result in price reductions
and loss of market share, either of which could materially adversely affect the
Company's business, financial condition and results of operations.
The market for video scrambling products is highly competitive. The Company,
as a recent entrant into these markets, competes directly or through licensed
manufacturers with many companies, including Scientific-Atlanta, Inc., General
Instrument Corporation, Leitch Technology International, Inc., Zenith
Electronics Corporation and Toshiba Corporation. These companies have
substantially greater name recognition, larger installed customer bases and
market share and significantly greater financial, technical, marketing and other
resources than the Company and its licensees, many of which are manufacturing
and selling addressable set-top decoders for the first time. There can be no
assurance that the Company and its licensees will be able to compete
successfully in the video scrambling systems markets, that the Company will be
able to make technological advances necessary to improve or even maintain its
competitive position or that the Company's products will achieve market
acceptance. In addition, there can be no assurance that technological changes or
development efforts by the Company's competitors will not render the Company's
video scrambling products obsolete or uncompetitive.
The Company is not aware of any technology that competes directly with
CineGuard. Competition for CineGuard may come from film cinemas located near
CineGuard theaters. CineGuard theaters could be at a competitive disadvantage
compared to film, because film typically has better picture quality and a larger
projected image than video. Motion picture distributors might also give
programming priority to competing film cinemas or withdraw programming entirely
from CineGuard theaters in competition with film cinemas. Additionally,
competitors might attempt to develop or acquire competing technologies that
could provide the necessary security for video cinema applications. Potential
competitors include large multinational video projector manufacturers or other
consumer electronic products companies. In particular, several large
corporations have announced digital video projectors that could replace film in
cinemas. This development or any other development that presents a
cost-effective, secure and high quality alternative to film for cinema
projection would compete against CineGuard. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL AND EXPORT SALES
In 1994, 1995 and 1996, international and export sales together represented
38.9%, 33.2% and 37.9%, respectively, of the Company's net revenues. The Company
expects that such sales will continue to represent a substantial portion of its
net revenues for the foreseeable future. The Company's future growth will depend
to a large extent on worldwide deployment of addressable analog cable television
systems, as well as digital PPV programming, DVDs and CineGuard. To the extent
that foreign governments impose restrictions on importation of programming,
technology or components from the United States, the requirement for copy
protection and video scrambling in these markets would diminish. Any limitation
on the growth of these markets or the Company's ability to sell its products or
license its technologies into these markets would have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States, which increases the risk of unauthorized use of the Company's
technologies and the ready availability or use of defeat technologies.
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Such laws also may not be conducive to copyright protection of video materials
and digital media, which reduces the need for the Company's copy protection and
video scrambling technologies.
Due to its reliance on international and export sales, the Company is
subject to the risks of conducting business internationally, including foreign
government regulation and general geopolitical risks such as political and
economic instability, potential hostilities and changes in diplomatic and trade
relationships. International and export sales are subject to other risks, such
as changes in, or imposition of, regulatory requirements, tariffs or taxes and
other trade barriers and restrictions, foreign government regulations,
fluctuations in currency exchange rates, interpretations or enforceability of
local patent or other intellectual property laws, longer payment cycles,
difficulty in collecting accounts receivable, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws,
difficulty in staffing and managing foreign operations and political and
economic instability. For example, under the United States Export Administration
Act of 1979, as amended, and regulations promulgated thereunder, encryption
algorithms such as those used in the Company's video scrambling technologies are
classified as munitions and subject to stringent export controls. Any changes to
the statute or the regulations with respect to export of encryption technologies
could require the Company to redesign its products or technologies or prevent
the Company from selling its products and licensing its technologies
internationally. While international and export sales are typically denominated
in United States dollars, fluctuations in currency exchange rates could cause
the Company's products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. There can be no assurance that the Company's future results of
operations will not be materially adversely affected by currency fluctuations.
There can be no assurance that foreign markets will continue to develop or that
the Company will receive additional orders to supply its products for use in
foreign transmission systems. The Company's business and operating results could
be materially adversely affected if foreign markets do not continue to develop,
or if the Company does not receive additional orders to supply its technologies
or products for use in foreign prerecorded video, PPV and Pay TV networks and
other applications requiring the Company's video security solutions. See
"Business--Sales, Marketing and Customer Support" and Note 9 of Notes to
Consolidated Financial Statements.
MANAGEMENT OF GROWTH
The growth of the Company's business has placed, and is expected to continue
to place, significant demands on the Company's personnel, management and other
resources. The Company's future results of operations will depend in part on the
ability of its officers and other key employees to continue to implement and
expand its operational, customer support and financial control systems and to
expand, train and manage its employee base. In order to manage its future
growth, if any, successfully, the Company will be required to hire additional
personnel and to augment its existing financial and management systems or to
implement new such systems. There can be no assurance that management will be
able to augment or to implement such systems efficiently or on a timely basis,
and the failure to do so could have a material adverse effect on the Company's
business, financial condition or results of operations. There can be no
assurance that the Company will be able to manage any future expansion
successfully, and any inability to do so would have a material adverse effect on
the Company's business, financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized nature of the Company's business, the Company's
future performance is highly dependent upon the continued service of members of
the Company's senior management and other key research and development and sales
and marketing personnel. The loss of any of such persons could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company does not have employment contracts for a fixed term with
any of its employees in the United States. The Company believes that its future
success will depend upon its continuing ability to identify, attract, train and
retain other highly skilled managerial, technical, sales and marketing
personnel. Hiring for such personnel is competitive. There can be no assurance
that the Company will be able to continue to
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attract, assimilate and retain the qualified personnel necessary for the
development of its business. The failure to recruit additional key personnel in
a timely manner, or the failure to retain new or current personnel, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Employees" and "Management."
TRANSACTIONS WITH COMPANY AFFILIATES
The Company is a party to a number of transactions with affiliated entities.
Victor Company of Japan, Limited ("JVC"), the parent of a principal stockholder
of the Company, licenses and utilizes various technologies of the Company
pursuant to several agreements. Matsushita Electric Industrial Co., Ltd., which
owns approximately 51% of JVC, also is a party to three agreements with the
Company. In addition, the Company has certain agreements with a former
subsidiary in which it currently has a 19.8% interest. See "Certain
Transactions" and Note 4 of Notes to Consolidated Financial Statements.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Immediately following this offering, the Company's principal stockholders,
officers, directors and their affiliates will, in the aggregate, beneficially
own approximately 49.9% of the Company's outstanding Common Stock (47.5% if the
Underwriters' over-allotment option is exercised in full). As a result, such
persons, acting together, will have the ability to control the vote on all
matters submitted to the stockholders of the Company for approval (including
election of directors and any merger, consolidation or sale of all or
substantially all of the Company's assets) and to control the management and
affairs of the Company. Accordingly, such concentration of ownership may have
the effect of delaying, deferring or preventing a change in control of the
Company, impede a merger, consolidation, takeover or other business combination
involving the Company or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the Company. In addition, a
principal stockholder of the Company has the right to purchase a pro rata
portion (proportionate to its ownership interest in the Company) of any equity
securities offered by the Company, subject to certain exceptions. Such right
could have the effect of making it more difficult for the Company to effect
financing transactions in the future. See "Management," "Certain Transactions"
and "Principal and Selling Stockholders."
MANAGEMENT'S DISCRETION OVER PROCEEDS OF THE OFFERING
The Company expects to use the net proceeds of this offering, over time, for
general corporate purposes, including working capital. However, the Company has
no current specific plans for the net proceeds of this offering. As a result,
the Company's management will have the discretion to allocate the net proceeds
to uses that stockholders may not deem desirable. There can be no assurance that
the net proceeds can or will be invested to yield a significant return. See "Use
of Proceeds."
LITIGATION RISK
In October 1995, Joseph Swyt, a former officer and director of the Company,
filed suit against the Company in the Superior Court of the State of California
alleging monetary damages suffered as a result of alleged fraud,
misrepresentation and other malfeasance in connection with the Company's grant
of stock options to him. Mr. Swyt maintains that the Company induced him to
accept employment by falsely representing to him that the options granted to him
eventually would have substantial value. Between August 1990 and December 1993,
the Company granted to him options to purchase approximately 200,000 shares with
per-share exercise prices of $2.25 or $2.70. Substantially all of these options
expired unexercised within three months following his departure from the Company
in June 1995. In December 1996, the court ordered this matter to binding
arbitration in accordance with a written agreement between the Company and Mr.
Swyt. The arbitration agreement contains limitations on the types of damages
available to Mr. Swyt and expressly precludes punitive damages. The Company
believes that the case is without merit and intends to contest it vigorously.
However, a decision against the Company could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business-- Legal Proceedings" and Note 8 of Notes to Consolidated Financial
Statements.
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EFFECT OF ANTI-TAKEOVER PROVISIONS
Immediately after the closing of this offering, the Company's Board of
Directors will have the authority to issue up to 5,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may delay, defer or prevent a change in control of the Company. The
Company has no present plans to issue shares of Preferred Stock; however, in the
future the Company plans to consider the adoption of a stockholder rights plan
in order to protect the Company's stockholders from coercive or abusive takeover
tactics and to afford the Company's Board of Directors more negotiating leverage
in dealing with potential acquirors. Additionally, the Company's charter
documents contain a provision eliminating the ability of the Company's
stockholders to take action by written consent effective upon the closing of
this offering. This provision is designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal, to maintain independent
ownership and control of the Company's copy protection technologies and to
render the use of stockholder written consent unavailable as a tactic in a proxy
fight. However, such provision could have the effect of discouraging others from
making tender offers for the Company's shares, thereby inhibiting increases in
the market price of the Company's shares that could result from actual or
rumored takeover attempts. Such provision also may have the effect of preventing
changes in the management of the Company. Further, the Company's Bylaws limit
the ability of stockholders of the Company to raise matters at a meeting of
stockholders without giving advance notice thereof. In addition, Section 203 of
the Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. The statute may delay, defer or prevent a change in control of the
Company. See "Description of Capital Stock--Change of Control Provisions" and
"Description of Capital Stock--Delaware Anti-Takeover Law."
Pursuant to the terms of a Copy Protection Technology Agreement (the
"Technology Agreement") between the Company and Victor Company of Japan, Limited
("JVC"), the Company has agreed to continue to license its copy protection
technologies to third parties in the event of the acquisition of the Company by
a party other than JVC. Further, the Company has granted to JVC the right to
sublicense the Company's copy protection technologies in the event that the
Company fails to make its copy protection technologies generally available for
licensing to third parties following an acquisition of the Company. The
Technology Agreement could have the effect of making the Company less attractive
to third parties as an acquisition candidate. See "Certain
Transactions--Transactions with Pacific Media Development, Inc. and Victor
Company of Japan, Limited."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options) in the public market or the
prospect of such sales could adversely affect the market price of the Company's
Common Stock. Such sales also might make it more difficult for the Company to
sell equity or equity-related securities in the future at a time and price that
the Company deems appropriate. In addition to the 2,350,000 shares of Common
Stock offered hereby (assuming no exercise of the Underwriters' over-allotment
option), as of the effective date of the Registration Statement for this
offering (the "Effective Date"), there will be approximately 4,412,207 shares of
Common Stock outstanding, all of which are restricted shares ("Restricted
Shares") under the Securities Act of 1933, as amended (the "Securities Act"). As
of the Effective Date, 95,495 Restricted Shares will be eligible for immediate
sale in the public market in addition to the shares offered hereby.
Approximately 204 additional Restricted Shares will be eligible for sale in the
public market pursuant to Rule 701 beginning 90 days after the Effective Date.
All of the remaining Restricted Shares will be available for sale in the public
market following the expiration of 180-day lock-up agreements with the
Representatives of the Underwriters. Montgomery Securities may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements. In addition, beginning six months
after the Effective Date,
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the holders of 2,081,488 Restricted Shares will be entitled to certain rights
with respect to registration of such shares for sale in the public market.
Upon the effectiveness of this offering or shortly thereafter, the Company
intends to register approximately 1,290,781 shares of Common Stock reserved for
issuance under its Stock Option Plan, its 1996 Equity Incentive Plan, its 1996
Directors Stock Option Plan and its 1996 Employee Stock Purchase Plan. As of
December 31, 1996, options to purchase a total of 700,565 shares of the
Company's Common Stock were outstanding (although 694,112 of the shares issuable
upon exercise of such options will be subject to lock-up restrictions on sale
for 180 days after the Effective Date) and 590,216 shares of Common Stock were
reserved for future issuance under the Company's 1996 Equity Incentive Plan,
1996 Directors Stock Option Plan and 1996 Employee Stock Purchase Plan. See
"Management--Employee Benefit Plans," "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
NO PRIOR MARKET FOR COMMON STOCK
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined through
negotiations among the Company, the Selling Stockholders and the Representatives
of the Underwriters. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. There can be no
assurance that an active public market will develop or be sustained after this
offering or that the market price of the Common Stock will not decline below the
public offering price. The Company intends to add two independent directors to
the Board of Directors within 60 days after this offering. In the event that the
Company fails to appoint such directors within 90 days after this offering, the
Nasdaq National Market could terminate the listing of the Company's Common Stock
on the Nasdaq National Market, which would have a material adverse effect on the
liquidity and trading price of the Common Stock. See "Management."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock is likely to be highly
volatile and could be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technical innovations, new products or new contracts by the Company, its
competitors or their customers, governmental regulatory action, developments
with respect to patents or proprietary rights, changes in financial estimates by
securities analysts, general market conditions and other factors, certain of
which could be unrelated to, or outside the control of, the Company. In
addition, announcements by the MPAA or its members, satellite television
operators, cable television operators, government agencies or others regarding
motion picture distribution, business combinations or other developments could
cause the market price of the Company's Common Stock to fluctuate substantially.
The stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. Further, the
trading prices of many technology companies' stocks are at or near historical
highs and reflect price/earnings ratios substantially above historical levels.
There can be no assurance that these trading prices and price/earnings ratios
will be sustained. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation often has
been initiated against such company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
settlement or adverse determination in such litigation could also subject the
Company to significant liability, which could have a material adverse effect on
the Company's business, financial condition and results of operations. These
market price fluctuations, as well as general economic, political and market
conditions such as recessions or international currency fluctuations, may
adversely affect the market price of the Common Stock.
15
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in this offering will suffer immediate and
substantial dilution of $8.25 per share in the net tangible book value per share
of the Common Stock from the initial public offering price, at an assumed
initial public offering price of $11.00 per share and after deducting the
estimated underwriting discount and offering expenses. To the extent that
outstanding options to purchase the Company's Common Stock are exercised, there
will be further dilution. See "Dilution."
THE COMPANY
The Company was incorporated in California in January 1983. It operated as a
corporation until 1985 and as a limited partnership from 1985 until its
incorporation as Macrovision Corporation in 1987. The Company will reincorporate
in Delaware prior to this offering. As used in this Prospectus, references to
the "Company" and "Macrovision" refer to Macrovision Corporation, its
predecessors and its consolidated subsidiaries. The Company's principal
executive offices are located at 1341 Orleans Drive, Sunnyvale, California
94089. The Company's telephone number is (408) 743-8600.
Macrovision-Registered Trademark-, PhaseKrypt-Registered Trademark- and
Protecting Your Image-Registered Trademark- are registered trademarks of the
Company. CineGuard-TM-, Colorstripe-TM-, StarShaker-TM-, VES-TM- and VES-TM-TM-
are trademarks of the Company. All other trademarks or trade names referred to
in this Prospectus are the property of their respective owners.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,434,016 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$13,670,000 ($17,276,000 if the Underwriters' over-allotment option is exercised
in full), after deducting the estimated underwriting discount and offering
expenses. The Company expects to use the net proceeds for general corporate
purposes, including working capital. However, the Company has not allocated any
specific portion of the net proceeds to such purposes and management will have
the ability to allocate such proceeds at its discretion. From time to time in
the ordinary course of business, the Company evaluates the acquisition of
products, businesses and technologies that complement the Company's business,
for which a portion of the net proceeds may be used. Currently, however, the
Company does not have any understandings, commitments or agreements with respect
to any such acquisitions. Pending use of the net proceeds for the above
purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment-grade securities. The Company will not receive any
proceeds from the sale of shares by the Selling Stockholders. See "Risk
Factors--Management's Discretion Over Proceeds of the Offering."
DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and the
general financial condition of the Company, general business conditions and
contractual restrictions on payment of dividends, if any.
Pursuant to a contractual arrangement, the Company distributed to its common
stockholders other than Pacific Media Development, Inc. a cash dividend of
approximately $0.22 per share in each of 1992, 1993 and 1994. In addition, the
Company has paid or declared a cash dividend of $0.135 per share of Series A
Preferred Stock in every quarter since the third quarter of 1991. The accrued
Series A Preferred Stock dividend for the quarter ending March 31, 1997 will be
paid pro rata for the portion of the quarter prior to conversion of the Series A
Preferred Stock into Common Stock.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996: (i) the actual
capitalization of the Company; (ii) the capitalization of the Company on a pro
forma basis to give effect to the conversion into Common Stock of all
outstanding shares of Preferred Stock upon the closing of this offering; and
(iii) the pro forma capitalization of the Company as adjusted to give effect to
the sale and issuance of the 1,434,016 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $11.00 per share,
after deducting the estimated underwriting discount and offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease liability, net of current portion (1)........................... $ 296 $ 296 $ 296
--------- ----------- -----------
--------- ----------- -----------
Stockholders' equity (2):
Preferred stock, par value $0.001 per share:
Authorized, 5,000,000 shares (5,000,000 shares pro forma and as adjusted);
issued and outstanding, 1,376,432 shares (no shares pro forma or as
adjusted)............................................................... 1 -- --
Common stock, par value $0.001 per share:
Authorized, 100,000,000 shares (50,000,000 shares pro forma and as
adjusted), issued and outstanding, 3,951,759 shares (5,328,191 shares
pro forma and 6,762,207 shares as adjusted) (3)......................... 4 5 7
Additional paid-in capital.................................................. 9,530 9,530 23,198
Stockholder notes receivable................................................ (157) (157) (157)
Deferred stock compensation................................................. (240) (240) (240)
Accumulated deficit......................................................... (2,931) (2,931) (2,931)
Accumulated translation adjustment.......................................... (135) (135) (135)
--------- ----------- -----------
Total stockholders' equity.............................................. 6,072 6,072 19,742
--------- ----------- -----------
Total capitalization.................................................. $ 6,368 $ 6,368 $ 20,038
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) See Note 5 of Notes to Consolidated Financial Statements.
(3) The numbers of shares of Common Stock issued and outstanding do not include
700,565 shares of Common Stock issuable at a weighted average exercise price
of $2.99 per share upon exercise of stock options outstanding as of December
31, 1996 under the Company's Stock Option Plan, 90,216 additional shares
reserved for future grants under the Stock Option Plan, 300,000 shares
reserved for future grants under the 1996 Equity Incentive Plan, 60,000
shares reserved for future grants under the 1996 Directors Stock Option Plan
or 140,000 shares reserved for future issuance under the 1996 Employee Stock
Purchase Plan. See "Management--Director Compensation" and "Management--
Employee Benefit Plans" and Note 5 of Notes to Consolidated Financial
Statements.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of December 31, 1996, assuming
the conversion of all outstanding shares of Preferred Stock, was $4,911,000 or
$0.92 per share of Common Stock. Net tangible book value per share represents
the amount of the Company's total tangible assets less total liabilities divided
by the number of shares of Common Stock outstanding at that date. After giving
effect to the sale of the 1,434,016 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $11.00 per share
and after deducting the estimated underwriting discount and offering expenses),
the pro forma net tangible book value of the Company as of December 31, 1996
would have been approximately $18,581,000 or $2.75 per share. This represents an
immediate increase in net tangible book value of $1.83 per share to existing
stockholders and an immediate dilution of $8.25 per share to new investors in
this offering. The following table illustrates the per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 11.00
Pro forma net tangible book value per share as of December 31,
1996............................................................ $ 0.92
Increase in pro forma net tangible book value per share
attributable to new investors................................... 1.83
---------
Pro forma net tangible book value per share after the offering...... 2.75
---------
Net tangible book value dilution per share to new investors......... $ 8.25
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders and by the new investors purchasing shares in this
offering (before deducting the estimated underwriting discount and offering
expenses), based upon an assumed initial public offering price of $11.00 per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ -------------------------- PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).................. 5,328,191 78.8% $ 9,025,000 36.4% $ 1.69
New investors.............................. 1,434,016 21.2 15,774,000 63.6 11.00
----------- ----- ------------- -----
Totals............................... 6,762,207 100.0% $ 24,799,000 100.0%
----------- ----- ------------- -----
----------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Sales by the Selling Stockholders of 915,984 shares in this offering will
reduce the number of shares of Common Stock held by existing stockholders to
4,412,207, or 65.2% of the total number shares of Common Stock outstanding
immediately after this offering, and will increase the number of shares of
Common Stock held by new investors to 2,350,000, or 34.8% of the total
number of shares of Common Stock outstanding immediately after this
offering. See "Principal and Selling Stockholders."
The foregoing table assumes: (i) the conversion of all outstanding shares of
Preferred Stock into Common Stock; (ii) no exercise of the Underwriters'
over-allotment option; and (iii) no exercise of stock options outstanding as of
December 31, 1996. As of December 31, 1996, there were options outstanding to
purchase a total of 700,565 shares of Common Stock at a weighted average
exercise price of $2.99 per share. To the extent that any of these options are
exercised, there will be further dilution to new investors. See
"Capitalization," "Management--Employee Benefit Plans," "Description of Capital
Stock" and Note 5 of Notes to Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1995 and 1996 are derived from consolidated financial
statements of the Company that have been audited by KPMG Peat Marwick LLP,
independent auditors. The selected consolidated financial data presented below
as of and for the years ended December 31, 1992, 1993 and 1994 are derived from
consolidated financial statements of the Company that have been audited by Ernst
& Young LLP, independent auditors. The consolidated financial statements as of
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996 and the reports thereon are included elsewhere in this
Prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues......................................................... $ 8,807 $ 9,549 $ 13,330 $ 14,189 $ 17,080
Costs and expenses:
Cost of revenues................................................... 1,761 1,578 2,067 2,457 2,579
Research and development........................................... 1,135 1,639 2,355 2,161 2,527
Selling, general and administrative................................ 4,411 4,761 6,104 7,388 8,656
--------- --------- --------- --------- ---------
Total costs and expenses......................................... 7,307 7,978 10,526 12,006 13,762
--------- --------- --------- --------- ---------
Operating income from continuing operations.......................... 1,500 1,571 2,804 2,183 3,318
Interest and other expense, net...................................... 103 (462) (417) (433) (260)
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes............ 1,603 1,109 2,387 1,750 3,058
Provision for income taxes........................................... 425 444 886 694 1,223
--------- --------- --------- --------- ---------
Net income from continuing operations............................ 1,178 665 1,501 1,056 1,835
Loss from discontinued operations, net of tax benefit (1)........... -- -- -- (125) (827)
--------- --------- --------- --------- ---------
Net income....................................................... $ 1,178 $ 665 $ 1,501 $ 931 $ 1,008
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations.............................................. $ 0.15 $ 0.29
Discontinued operations (1)........................................ (0.03) (0.19)
--------- ---------
Net income....................................................... $ 0.12 $ 0.10
--------- ---------
--------- ---------
Shares used in computing earnings per share (2)...................... 4,162 4,353
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................... $ 3,429 $ 3,397 $ 3,851 $ 3,486 $ 2,409
Working capital...................................................... 3,783 3,599 3,860 3,848 2,225
Total assets......................................................... 6,597 7,076 9,240 10,943 11,953
Convertible note..................................................... 3,038 3,038 3,038 3,038 --
Long-term obligations, net of current portion (3).................... 4 -- -- 554 296
Total stockholders' equity........................................... 2,163 1,867 2,388 2,846 6,072
</TABLE>
- ------------------------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) For an explanation of the determination of the number of shares used in
computing earnings (loss) per share, see Note 1 of Notes to Consolidated
Financial Statements.
(3) See Note 7 of Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE EXCHANGE ACT. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
Macrovision was founded in 1983 to develop video security solutions for
major motion picture studios and independent video producers. Since that time,
the Company has derived most of its revenues and operating income from licensing
its video copy protection technologies. The Company expects such license fees to
account for a majority of the Company's net revenues and operating income at
least through 1997. The Company's videocassette copy protection customers have
included the home video divisions of the eight members of the Motion Picture
Association of America ("MPAA") and HBO Home Video. The Company also has a
variety of special interest videocassette copy protection customers, including
more than 125 videocassette duplication companies and a number of rights
holders, such as independent producers of exercise, sports and educational
videocassettes. The Company typically receives license fees for videocassette
copy protection based upon the number of copy protected videocassettes that are
produced by MPAA studios or other rights holders. License fees from MPAA studios
represented a majority of such fees in 1994, 1995 and 1996.
In 1993, the Company began licensing its digital PPV video copy protection
technologies to satellite and cable television system operators and to the
equipment manufacturers that supply the satellite and cable television
industries. These manufacturers include in their digital set-top decoders
integrated circuits incorporating the Company's copy protection technologies
that can be activated to apply video copy protection to digital PPV
transmissions. Through December 31, 1996, all of the Company's digital PPV copy
protection revenues had been derived from up-front license fees and hardware
royalties. Digital PPV up-front license fees and hardware royalties increased to
12.2% of the Company's net revenues in 1996 from 5.6% in 1995. The Company's
agreements with digital PPV system operators entitle the Company to
transaction-based royalty payments at such time as copy protection for digital
PPV programming is activated.
In 1994, the Company began licensing and selling its PhaseKrypt video
scrambling technology to manufacturers of analog set-top decoders for sale to
cable television system operators in developing cable television markets. The
Company also sells encoder and decoder hardware that incorporates PhaseKrypt to
private analog satellite networks for business communications, education and
special interest entertainment. In addition, the Company sells other analog
scrambling systems to television broadcasters for securing incoming contribution
circuits to network control centers and outbound rebroadcast circuits to
affiliate and regional stations. Finally, the Company sells specialized analog
video scrambling systems in the government, military and law enforcement
markets, primarily for covert surveillance applications. Video scrambling
revenues increased to 12.1% of the Company's net revenues in 1996 from 7.1% in
1995. Gross margins on sales of the Company's video scrambling products have
been significantly lower than on its licenses of copy protection or video
scrambling technologies because of the hardware product costs associated with a
more traditional manufacturing environment, and the Company expects this to
continue for the foreseeable future.
In 1995, the Company introduced PhaseKrypt video scrambling technology for
use in motion picture theaters using large-screen video projectors and scrambled
Super VHS videocassettes as a complement to film projectors and 35mm film
prints. CineGuard, the Company's new theatrical exhibition alternative, is
intended for small theaters in rural towns in international markets where the
population is not large enough to support traditional film theaters or where
exhibitors must wait long periods of time to receive
20
<PAGE>
film prints of first-run motion pictures. To date, the Company has licensed
CineGuard theaters in Poland and Ireland and has master licensees in the
Philippines and South Africa. Revenues from CineGuard theaters have been
insignificant to date.
In October 1995, Command Audio Corporation ("CAC") was incorporated as a
wholly-owned subsidiary of the Company to commercialize a distinct and new
audio-on-demand technology. CAC's operations, technology and employee base were
discrete and separate from those of the Company. During 1996, the Company
recognized that its technological, sales and marketing core competencies would
not be sufficient to develop the CAC technology fully or to exploit the market
opportunities for it. In June 1996, the Board of Directors of the Company
approved the discontinuation of the Company's involvement in CAC. In August
1996, the Company divested itself of all but 19.8% of its ownership in CAC. As a
result, the financial results of CAC have been treated as discontinued
operations.
The Company's cost of revenues consists primarily of manufacturing costs
associated with the Company's video scrambling product revenues and service fees
paid to licensed duplicators that apply the Company's videocassette copy
protection whenever rights owners license the technology directly from the
Company. Also included in cost of revenues are patent amortization costs and
legal costs associated with the Company's efforts to prevent the sale of devices
that attempt to circumvent the Company's video copy protection technologies. See
"Risk Factors--Risks of Defeat Technologies." The Company's research and
development expenses are comprised primarily of employee compensation and
benefits, consulting fees, tooling and supplies and an allocation of facilities
costs. The Company's selling, general and administrative expenses are comprised
primarily of employee compensation and benefits, consulting and recruiting fees,
travel, advertising, professional fees and an allocation of facilities costs.
The Company has experienced significant seasonality in its business, and the
Company's financial condition and results of operations are likely to be
affected by seasonality in the future. The Company has typically experienced its
highest revenues in the fourth quarter of each calendar year followed by lower
revenues and operating income in the first quarter, and at times in subsequent
quarters, of the next year. The Company believes that this trend has been
principally due to the tendency of certain of the Company's customers to release
their more popular motion pictures on videocassettes during the Christmas
shopping season. In addition, revenues have tended to be lower in the summer
months, particularly in Europe. See "--Quarterly Results of Operations" and
"Risk Factors--Fluctuations in Future Operating Results; Seasonality."
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statement of income
data expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues...................................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues................................................................ 15.5 17.3 15.1
Research and development........................................................ 17.7 15.2 14.8
Selling, general and administrative............................................. 45.8 52.1 50.7
--------- --------- ---------
Total costs and expenses...................................................... 79.0 84.6 80.6
--------- --------- ---------
Operating income from continuing operations................................... 21.0 15.4 19.4
Interest and other expense, net................................................... (3.1) (3.1) (1.5)
--------- --------- ---------
Income from continuing operations before income taxes......................... 17.9 12.3 17.9
Provision for income taxes........................................................ 6.6 4.9 7.2
--------- --------- ---------
Net income from continuing operations......................................... 11.3 7.4 10.7
Loss from discontinued operations................................................. -- (0.9) (4.8)
--------- --------- ---------
Net income.................................................................... 11.3% 6.5% 5.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
21
<PAGE>
NET REVENUES. The Company's net revenues increased 6.4% from $13.3 million
in 1994 to $14.2 million in 1995 and an additional 20.4% to $17.1 million in
1996. The increase from 1994 to 1995 was principally the result of a $590,000
increase in videocassette copy protection revenues, primarily internationally,
and a $449,000 increase in digital PPV copy protection license fees, relating
primarily to up-front license fees from new licenses to digital PPV system
operators and up-front license fees and royalties from digital PPV set-top
decoder manufacturers. The increase from 1995 to 1996 was primarily the result
of: (i) an increase in digital PPV copy protection license fees and royalties of
$1.3 million primarily up-front license fees from new licenses to digital PPV
system operators and up-front license fees and royalties from digital PPV
set-top decoder manufacturers; (ii) an increase of $1.1 million in video
scrambling license fees and product sales; and (iii) an increase of $500,000 in
videocassette copy protection revenues. Due primarily to the growth in the
Company's digital PPV copy protection and video scrambling businesses in the
United States, videocassette copy protection revenues from the MPAA studios
declined as a percentage of net revenues, representing 42.7%, 41.3% and 33.4% of
the Company's net revenues for 1994, 1995 and 1996, respectively. See "Risk
Factors--Dependence on Key Customers" and "Business--Customers."
In 1994, 1995 and 1996, the Company's international and export revenues
totaled $5.2 million, $4.7 million and $6.5 million, respectively, representing
38.9%, 33.2% and 37.9%, respectively, of the Company's net revenues during those
periods. International and export revenues grew primarily as a result of
increased usage of videocassette copy protection technology by the MPAA studios
in international markets and increased growth in PhaseKrypt component sales and
licensing fees from new geographic areas. The Company expects that international
and export revenues will continue to represent a significant portion of its net
revenues and that its future growth will depend to a large extent on continued
increases in international and export revenues. See "Risk Factors--Risks
Associated with International and Export Sales," "Business--Sales, Marketing and
Customer Support" and Note 9 of Notes to Consolidated Financial Statements.
COST OF REVENUES. Cost of revenues as a percentage of net revenues was
15.5% in 1994, 17.3% in 1995 and 15.1% in 1996. The variations in cost of
revenues as a percentage of net revenues were primarily due to changes in
revenue mix between product sales, which have a relatively high cost of
revenues, and licensing revenues, which have a relatively low cost of revenues.
In the event that revenues from video scrambling products increase as a
percentage of net revenues, cost of revenues as a percentage of net revenues
will continue to increase. See Note 1 of Notes to Consolidated Financial
Statements.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.4
million, $2.2 million and $2.5 million, which represented 17.7%, 15.2% and 14.8%
of net revenues, in 1994, 1995 and 1996, respectively. The decrease from 1994 to
1995 was principally due to a decrease in consulting fees not fully offset by
the Company's hiring of additional employees. The dollar increase from 1995 to
1996 was primarily due to activity in support of the introduction of the
Company's Colorstripe technology for use in DVD and digital PPV applications.
The Company believes that research and development expenses will increase in
dollar amount in the future, but may decline as a percentage of net revenues.
There can be no assurance, however, that net revenues will grow more rapidly
than research and development expenses. See "Business--Research and
Development."
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $6.1 million, $7.4 million and $8.7 million, which represented
45.8%, 52.1% and 50.7% of net revenues, in 1994, 1995 and 1996, respectively.
The increases from 1994 to 1995 were primarily a result of the hiring of
additional employees, increased compensation and benefits, and legal fees
associated with the Company's arbitration proceeding with a prior employee. The
dollar increase from 1995 to 1996 was primarily a result of increased
compensation and benefits, as well as facilities costs associated with the
Company's move to a larger facility. The Company believes that the dollar amount
of selling, general and administrative expenses will increase in the future as
the Company incurs the significant additional costs related to being a public
company, but may decline as a percentage of net revenues. There can be no
assurance, however, that net revenues will grow more rapidly than selling,
general and administrative expenses.
22
<PAGE>
INTEREST AND OTHER EXPENSE, NET. Interest and other expense, net, consists
primarily of interest expense on a convertible note, bank debt and capitalized
equipment leases, net of interest income. Interest expense and other was
$503,000, $568,000 and $327,000 in 1994, 1995 and 1996, respectively. The
decrease in interest expense from 1995 to 1996 was principally attributable to
the conversion of a $3.0 million convertible note into Preferred Stock in July
1996. Interest income was $86,000, $135,000 and $67,000 in 1994, 1995 and 1996,
respectively, due to interest earned on cash and cash equivalents. See Notes 2
and 3 of Notes to Consolidated Financial Statements.
PROVISION FOR INCOME TAXES. The Company's effective rate of taxation was
37.1%, 39.7% and 40.0% in 1994, 1995 and 1996, respectively. The provision for
income taxes consists primarily of federal income taxes, state taxes and
international taxes withheld on foreign revenue. The increase in such rate from
1994 to 1995 was primarily due to an increase in foreign taxes, partially offset
by an increase in exempt interest. See Note 6 of Notes to Consolidated Financial
Statements.
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued operations
was $125,000 in 1995 and $827,000 in 1996, net of income tax benefit. There was
no loss from discontinued operations in 1994. The loss represents the
administration and development costs of CAC, which was incorporated as a wholly-
owned subsidiary of the Company in October 1995, to commercialize a distinct and
new audio-on-demand technology. CAC's operations, technology and employee base
were discrete and separate from those of the Company. From its inception until
separation, CAC generated no revenues and concentrated exclusively on research
and development activities. In the third quarter of 1996, the Company divested
itself of all but 19.8% of its ownership in CAC. See "Business--Interest in
Command Audio Corporation," "Certain Transactions" and Note 4 of Notes to
Consolidated Financial Statements.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly unaudited consolidated
financial data for the periods indicated, as well as the percentage of the
Company's net revenues represented by such data. These data have been derived
from the Company's unaudited consolidated financial statements that, in the
opinion of management, have been prepared on the same basis as the audited
consolidated financial statements, and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such data.
Such data should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
The results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1995 1996
-------------------------------------------------- -------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $ 2,984 $ 3,242 $ 3,765 $ 4,198 $ 3,583 $ 3,737 $ 4,380
Costs and expenses:
Cost of revenues.................. 621 710 540 586 594 707 525
Research and development.......... 569 516 452 624 642 679 594
Selling, general and
administrative.................. 1,667 1,946 1,731 2,044 1,842 2,171 2,296
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses........ 2,857 3,172 2,723 3,254 3,078 3,557 3,415
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income from continuing
operations.................... 127 70 1,042 944 505 180 965
Interest and other expense, net..... (97) (80) (122) (134) (120) (109) (13)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income
taxes......................... 30 (10) 920 810 385 71 952
Provision (benefit) for income
taxes.............................. 12 (4) 365 321 192 62 331
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) from
continuing operations......... 18 (6) 555 489 193 9 621
Loss from discontinued operations... -- -- -- (125) (195) (632) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 18 $ (6) $ 555 $ 364 $ (2) $ (623) $ 621
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31
-----------
<S> <C>
Net revenues........................ $ $5,381
Costs and expenses:
Cost of revenues.................. 752
Research and development.......... 612
Selling, general and
administrative.................. 2,348
-----------
Total costs and expenses........ 3,712
-----------
Operating income from continuing
operations.................... 1,669
Interest and other expense, net..... (19)
-----------
Income (loss) from continuing
operations before income
taxes......................... 1,650
Provision (benefit) for income
taxes.............................. 638
-----------
Net income (loss) from
continuing operations......... 1,012
Loss from discontinued operations... --
-----------
Net income (loss)............... $ 1,012
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
1995 1996
-------------------------------------------------- -------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.................. 20.8 21.9 14.3 14.0 16.6 18.9 12.0
Research and development.......... 19.1 15.9 12.0 14.8 17.9 18.2 13.6
Selling, general and
administrative.................. 55.9 60.0 46.0 48.7 51.4 58.1 52.4
----- ----- ----- ----- ----- ----- -----
Total costs and expenses........ 95.7 97.8 72.3 77.5 85.9 95.2 78.0
----- ----- ----- ----- ----- ----- -----
Operating income from continuing
operations.................... 4.3 2.2 27.7 22.5 14.1 4.8 22.0
Interest and other expense, net..... (3.3) (2.5) (3.3) (3.2) (3.3) (2.9) (0.3)
----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income
taxes......................... 1.0 (0.3) 24.4 19.3 10.8 1.9 21.7
Provision (benefit) for income
taxes.............................. 0.4 (0.1) 9.7 7.6 5.4 1.7 7.5
----- ----- ----- ----- ----- ----- -----
Net income (loss) from
continuing operations......... 0.6 (0.2) 14.7 11.6 5.4 0.2 14.2
Loss from discontinued operations... -- -- -- (3.0) (5.4) (16.9) --
----- ----- ----- ----- ----- ----- -----
Net income (loss)............... 0.6% (0.2)% 14.7% 8.6% (0.0)% (16.7)% 14.2%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
DEC. 31
-----------
<S> <C>
Net revenues........................ 100.0%
Costs and expenses:
Cost of revenues.................. 14.0
Research and development.......... 11.4
Selling, general and
administrative.................. 43.6
-----
Total costs and expenses........ 69.0
-----
Operating income from continuing
operations.................... 31.0
Interest and other expense, net..... (0.3)
-----
Income (loss) from continuing
operations before income
taxes......................... 30.7
Provision (benefit) for income
taxes.............................. 11.9
-----
Net income (loss) from
continuing operations......... 18.8
Loss from discontinued operations... --
-----
Net income (loss)............... 18.8%
-----
-----
</TABLE>
24
<PAGE>
The Company has experienced significant seasonality in its business, and the
Company's financial condition and results of operations are likely to be
affected by seasonality in the future. The Company has typically experienced its
highest revenues in the fourth quarter of each calendar year followed by lower
revenues and operating income in the first quarter, and at times in subsequent
quarters, of the next year. As a result of seasonality, the Company's net
revenues increased 16.1% from the second quarter of 1995 to the third quarter of
1995 and 11.5% from the third quarter of 1995 to the fourth quarter of 1995, but
decreased 14.7% from the fourth quarter of 1995 to the first quarter of 1996.
Revenues increased 22.8% from the third quarter of 1996 to the fourth quarter of
1996 primarily as a result of a $900,000 increase in digital PPV set-top decoder
royalties.
The Company's cost of revenues is subject not only to seasonal and quarterly
fluctuations due to changes in net revenues but also to fluctuations resulting
from shifts in revenue mix between the Company's product sales and licensing
revenues. Sales of video scrambling products were significantly higher as a
percentage of net revenues in the first and second quarters of 1995 than they
were in the third and fourth quarters of 1995. As a result, the Company's total
cost of revenues in the first two quarters of 1995 was higher as a percentage of
net revenues. In the second quarter of 1996, the Company experienced a higher
cost of revenues due to a writedown of certain obsolete inventory.
The Company's research and development expenses fluctuate quarterly
depending on the stages of various projects, the use of consultants and
temporary employees, and the utilization of prototype materials. As an example,
the increase from the third quarter of 1995 to the fourth quarter of 1995 is
attributable to increased use of consultants and increased purchasing of
prototype materials for one project.
Selling, general and administrative expenses increased from the first
quarter of 1995 to the second quarter of 1995 primarily due to increased
consulting and advertising expenses. The increase from the third quarter of 1995
to the fourth quarter of 1995 was attributable primarily to consulting costs and
legal costs connected to a legal proceeding with a former employee. See
"Business--Legal Proceedings." The increase from the first quarter of 1996 to
the second quarter of 1996 was primarily due to increased compensation,
advertising and legal expenses. The increase from the second quarter of 1996 to
the third quarter of 1996 was primarily due to an increase in the allowance for
doubtful accounts.
Interest expense decreased in the third quarter of 1996 primarily due to the
conversion of a convertible note into Series A Preferred Stock in July 1996.
The Company's operating results have fluctuated in the past, and are
expected to continue to fluctuate in the future, on an annual and quarterly
basis as a result of a number of factors. Such factors include, but are not
limited to, the timing of release of popular motion pictures on videocassettes
or DVDs or by digital PPV transmission, the degree of acceptance of the
Company's copy protection technologies by major motion picture studios, the mix
of products sold and technologies licensed, any change in product or license
pricing, the seasonality of revenues, changes in the Company's operating
expenses, personnel changes, the development of the Company's direct and
indirect distribution channels, foreign currency exchange rates and general
economic conditions. The Company may choose to reduce prices or increase
spending in response to competition or new technologies or elect to pursue new
market opportunities. If new competitors, technological advances in the industry
or by existing or new competitors or other competitive factors require the
Company to invest significantly greater resources in research and development or
marketing efforts, the Company's future operating results may be adversely
affected. Because a high percentage of the Company's operating expenses is
fixed, a small variation in the timing of recognition of revenues can cause
significant variations in operating results from period to period.
Based upon the factors enumerated above, the Company believes that its
quarterly and annual revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to grow in future periods or that it will be able to
sustain its level of net revenues or its rate of revenue growth on a quarterly
or annual basis. It is likely that, in some future
25
<PAGE>
quarter, the Company's operating results will be below the expectations of stock
market analysts and investors. In such event, the price of the Company's Common
Stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from cash generated by
operations, principally by its videocassette copy protection business, and, to a
lesser extent, from bank borrowings. The Company's operating activities provided
net cash of $2.3 million, $1.0 million and $1.7 million in 1994, 1995 and 1996,
respectively. In each of these periods, net cash was provided primarily by net
income, increases in accounts payable, accrued liabilities and deferred revenue
and depreciation and amortization, partially offset by increases in accounts
receivable and inventories. See Note 2 of Notes to Consolidated Financial
Statements.
The Company made capital expenditures of $634,000, $1.4 million and $476,000
in 1994, 1995 and 1996, respectively. The Company also paid $207,000, $185,000
and $343,000, respectively, for patents and other intangibles during those
periods. In addition, the Company paid cash dividends of $969,000, $450,000 and
$401,000 in 1994, 1995 and 1996, respectively, although in 1995 the Company had
net cash provided by financing activities as a result of borrowing $708,000
under a long-term borrowing arrangement. Upon the closing of this offering, all
shares of Series A Preferred Stock will automatically convert into Common Stock,
and the Company will no longer be required to pay cash dividends with respect to
such stock. See "Dividend Policy."
The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its existing cash and cash equivalents and any
cash provided by operating activities, will be sufficient to meet its working
capital and capital expenditure requirements for at least the next 12 months. At
December 31, 1996, the Company had $2.4 million in cash and cash equivalents.
The Company anticipates that capital expenditures for 1997 will aggregate
approximately $1.0 million. In the future, the Company may elect to purchase
additional stock in CAC to maintain its 19.8% equity ownership in CAC. See
"Certain Transactions--Capitalization and Spinoff of Command Audio Corporation."
To the extent that the Company experiences growth in the future, the Company
anticipates that its operating and investing activities may use cash.
Consequently, any such growth may require the Company to obtain additional
equity or debt financing. There can be no assurance that any necessary
additional financing will be available to the Company on commercially reasonable
terms, if at all. Management intends to invest the Company's excess cash in
short-term, interest bearing, investment grade securities. Although there are no
present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, from time to time in
the ordinary course of business, the Company evaluates potential acquisitions of
businesses, products or technologies that are complementary to those of the
Company and may in the future use a portion of the Company's cash to acquire or
invest in complementary businesses or products or obtain the right to use
complementary technologies. See "Use of Proceeds."
26
<PAGE>
BUSINESS
The Company designs, develops and markets video security technologies and
products that provide copy protection and video scrambling for motion pictures
and other proprietary video materials that are stored on videocassettes, DVDs or
other media or are transmitted by means of cable, satellite or microwave
transmission. The Company's two primary technologies, copy protection and video
scrambling, are distinct in their application, but can be complementary in their
ability to protect copyright holders' video programming.
The Company's copy protection technologies enable consumers to view
programming stored on prerecorded videocassettes and DVDs or transmitted as
digital PPV programs via cable and satellite, but deter unauthorized consumer
copying of such programming. The Company believes that approximately one-third
of all commercial videocassettes produced worldwide during 1996 were copy
protected, and that substantially all of those copy protected videocassettes
incorporated the Company's technology. All of the MPAA studios, including
Disney, Fox and Universal, have used the Company's copy protection technology to
protect some or all of their videocassettes in one or more countries around the
world. The Company believes that its video copy protection technologies are
accepted as the DE FACTO standard for consumer copy protection. The Company has
developed an enhanced version of its videocassette copy protection technology
for the DVD format and for digital PPV networks.
The Company's video scrambling technologies are used by cable and satellite
television system operators in connection with analog PPV and Pay TV
programming, as well as by businesses, governments and other organizations to
provide for the secure transmission of video signals. Another application of the
Company's video scrambling technology is the Company's CineGuard program, a new
theatrical exhibition alternative in which motion pictures are recorded in a
scrambled state on Super VHS videocassettes and distributed primarily to small
theaters in rural towns in international markets.
INDUSTRY BACKGROUND
Motion picture studios generally release major motion pictures to various
venues (E.G., theaters, hotels/airlines or home video) in a series of "release
windows" in order to maximize revenues from each venue. The chart below shows
the typical major motion picture release windows in the United States and
indicates the studios' aggregate United States revenues from each venue in 1995,
as estimated by entertainment media analyst Paul Kagan Associates, Inc. ("Paul
Kagan").
[CHART]
In the past few years, home video has surpassed the theatrical box office as
the largest source of revenues for the motion picture industry. With production
costs continually growing, studio profitability has become increasingly
dependent on the development of new venues, such as home video and digital PPV.
Theatrical box office release in foreign countries generally follows theatrical
box office release in the United States by at least four months. There has
generally been no distinction between PPV and Pay TV
27
<PAGE>
release windows in foreign countries, where both PPV and Pay TV releases
generally follow home video release in a particular foreign country by
approximately 12 months.
COPY PROTECTION
Copyright holders wish to maximize the economic value from each feature film
or other video program over its copyright life, currently 75 years. When
consumers make copies of motion pictures, whether from hotel, airline, home
video or PPV releases, independent studies show that studios and video retailers
lose video sales and rental revenues. Paul Kagan estimates that 30.6 million
households in the United States (approximately 39% of all households with VCRs)
owned two or more VCRs in September 1996, and thus were capable of making
unauthorized copies of prerecorded videocassettes. Based on a 1996
Macrovision-sponsored national survey, the Company estimates that consumer video
piracy costs the industry approximately $370 million in annual lost revenues. To
protect their revenues in the home video and subsequent release venues, many
studios are attempting to prevent unauthorized copies of motion pictures from
entering the marketplace. Other copyright holders, such as independent video
producers, governments, businesses and institutions, also benefit from
preventing unauthorized copying of special interest, educational and other
prerecorded video programming.
Emerging trends in the PPV market are also increasing the need for effective
copy protection technologies. PPV television, which enables consumers to view
motion pictures and other programming in their homes via their existing cable or
satellite television systems for an additional fee for each viewing, has
generated to date only a small fraction of the revenues generated by home video.
However, motion picture studios typically receive revenue each time a consumer
views a motion picture on PPV, which results in higher profit margins than home
video, for example, in which the studios generate revenues only from the
one-time sale of videocassettes. Analog cable television systems provide few PPV
channels, which limits the number of available motion pictures and the frequency
of viewing times. In addition, the studios, in an effort to protect their home
video revenues, typically release a motion picture on PPV one to three months
after it is released on videocassette. Digital PPV, however, provides consumers
with the benefits of more channels, a greater variety of motion pictures and
more frequent motion picture viewing times. However, viewers can copy PPV motion
pictures in their homes with a single VCR. When the transmission is digital,
copy quality is better than that of copies made from videocassettes or analog
cable television. It is not economically feasible to retrofit the analog cable
television systems currently in place in the United States with copy protection
technology. As a result, the opportunity to introduce effective copy protection
for PPV is expected to grow only to the extent that digital PPV replaces
existing analog systems.
DVD hardware and media are expected to become commercially available in the
United States in 1997. The introduction of DVDs presents serious concerns to the
studios. Without effective copy protection, any one of the approximately 400
million VCRs in use today, when combined with a DVD player, will be able to make
unlimited videocassette copies of a non-copy protected DVD that are nearly equal
in quality to a professionally prerecorded videocassette. Because of their
superior picture quality, lower manufacturing cost, relative ease of use and
smaller size, DVDs are expected to supplant videocassettes over time as the
preferred home video distribution medium. As a result, the need for reliable
copy protection is expected to become more important as DVDs become more
available.
VIDEO SCRAMBLING
Cable and satellite television system operators require secure video
scrambling technology to prevent unauthorized viewing of PPV and Pay TV
programming. Unauthorized or "pirate" descramblers for existing analog PPV and
Pay TV scrambling systems are readily available to consumers at low cost,
allowing them to view programming without paying the system operator. Based on a
1992 survey of cable television system operators, the National Cable Television
Association's Office of Cable Signal Theft reported that unauthorized viewing of
cable television premium channels and PPV translated into an estimated $4.7
billion per year in potentially lost revenues to system operators and motion
picture studios. However, the substantial installed base of analog set-top
decoders makes the cost of providing a new, more secure analog scrambling system
in the United States prohibitive.
28
<PAGE>
Although system operators in the United States and Western Europe are
upgrading their networks with digital compression, analog cable and microwave
systems continue to be built, particularly in developing countries, because
analog systems are less expensive to build than digital systems and these
emerging markets do not require the range of programming and channel capacity
that digital compression provides. Industry publications have projected that the
market for addressable analog Pay TV decoders will be approximately $2 billion
annually by the year 2000. MPAA studios are increasingly requiring international
cable operators to install effective and secure scrambling systems as a
precondition to receiving their motion pictures. International system operators
now offer premium and PPV channels that require new addressable analog systems
that provide security against signal theft, are cost effective, can support a
variety of program tiers and can be authorized remotely by the system operator.
THE MACROVISION SOLUTION
Macrovision offers copy protection and video scrambling technologies and
products that address the video security needs of motion picture studios and
other copyright holders, program distributors, cable and satellite Pay TV and
PPV system operators, governments, businesses and equipment manufacturers.
COPY PROTECTION
The Company's copy protection technologies allow consumers to view
programming stored on prerecorded videocassettes or DVDs or transmitted as
digital PPV programs via cable or satellite, but deter unauthorized consumer
copying of such programming. Videocassettes are encoded with the Company's copy
protection process as they are manufactured. In digital PPV and DVD
applications, the Company's copy protection is implemented by a copy protection
signal generator circuit embedded within the cable or satellite digital set-top
decoder or the DVD player. The diagram below illustrates the various means of
implementing the Company's copy protection technologies.
[GRAPHIC]
VIDEO SCRAMBLING
The Company's video scrambling technologies prevent unauthorized viewing of
video programming unless the viewer has paid for, or otherwise has received, the
right to view such programming. The video
29
<PAGE>
signals are scrambled using a combination of analog video scrambling and digital
encryption. This provides a high level of security against signal theft and low
decoder cost. For cable, satellite and microwave television applications of the
Company's PhaseKrypt technology, the scrambled picture is decoded using a secure
analog technology that partially relies on the electronics of the television set
to make the image viewable. For CineGuard, PhaseKrypt-scrambled motion pictures
are recorded in a scrambled state on Super VHS videocassettes and distributed
primarily to small theaters in rural towns in international markets. The
recorded copy is later descrambled by an authorized decoder integrated into a
video projector. The Company has also developed products implementing other
video scrambling technologies that serve growing niche markets, such as law
enforcement and private networks. The diagram below illustrates implementation
of the Company's video scrambling technologies in a transmission environment.
[GRAPHIC]
THE MACROVISION STRATEGY
The Company is dedicated to providing advanced video security technologies
and products to its customers. The Company intends to maintain and enhance its
position as a leading provider of these technologies and products by focusing on
the following key strategies:
PURSUE ROYALTY-BASED LICENSING MODEL. The Company is pursuing a
royalty-based licensing model that results in a high margin,
transaction-oriented business with recurring revenues. As the sole provider of
copy protection for prerecorded videocassettes to the MPAA studios, the Company
typically licenses its technology pursuant to volume-based pricing schedules.
Royalties and other fees are currently paid by copyright holders, commercial
duplicators, hardware manufacturers and program distributors. The Company
intends whenever feasible to continue to license its technologies to third
parties for volume or transaction-based royalties and fees.
LEVERAGE KEY CUSTOMER RELATIONSHIPS. Over the past ten years, the Company
has developed strong relationships with its customers, including the major
Hollywood studios and key members of the video duplication industry, as well as
the cable and satellite television system operators and the equipment
manufacturers that serve these customers. The Company attempts to develop
strategic relationships with its customers, to broaden the use of existing
applications for its technologies and to enhance the security of its customers'
video properties.
INCREASE MARKET PENETRATION OF COPY PROTECTION BUSINESS. The Company
estimates that it has penetrated approximately one-third of the worldwide
videocassette copy protection market, which leaves a large potential
opportunity, even as digital PPV and DVDs begin to displace analog
videocassettes. To maximize its market penetration over time, the Company
licenses its technology royalty-free to DVD hardware manufacturers that build
VCRs that respond to copy protected video signals. The Company intends to
30
<PAGE>
make its copy protection technology available and affordable to all video
copyright holders in all prerecorded packaged media and digital PPV venues and
seeks to have its technology specified by all PPV system operators, digital
set-top decoder manufacturers and DVD hardware manufacturers.
DEVELOP NEW PRODUCT APPLICATIONS AND TECHNOLOGIES. The Company intends to
continue to expand the applications for its copy protection and video scrambling
technologies as they apply to current as well as new markets. For example, the
Company has used its PhaseKrypt video scrambling technology to develop
CineGuard. The Company also has developed video scrambling products to meet the
video security needs of law enforcement organizations and private networks. The
Company intends to expand its technological base, either through internal
development or potential acquisitions.
PROTECT PATENT POSITION. The Company believes that its future success will
depend, in part, on the continued protection of its proprietary technologies.
The Company has obtained patents to protect its copy protection and video
scrambling technologies and intends to continue to pursue patent protection
aggressively. The Company has invested substantial resources in developing and
obtaining patents covering a number of processes and devices that unauthorized
parties could use to circumvent the Company's consumer copy protection
technologies. The Company uses these patents to limit the proliferation of such
devices and has initiated a number of disputes relating to infringement of these
patents. The Company intends to continue to protect and defend its patented
technologies aggressively through both further technological innovation and
legal action.
MACROVISION'S BUSINESS, LICENSED TECHNOLOGIES AND PRODUCTS
The Company's technologies are either licensed or sold, depending upon the
particular application or product. For videocassette copy protection, copyright
holders and licensed duplicators typically pay the Company a per unit licensing
fee for the right to use the Company's technology. For digital PPV, cable and
satellite television system operators pay the Company a one-time license fee for
the right to incorporate the Company's copy protection technology into their
networks and have entered into agreements with the Company pursuant to which the
Company is entitled to transaction-based royalty payments at such time as copy
protection for digital PPV programming is activated. Set-top decoder
manufacturers also license the Company's copy protection and video scrambling
technologies for an up-front fee and a per unit hardware royalty. In addition,
semiconductor manufacturers pay the Company a small one-time service fee for the
right to embed the Company's copy protection technologies in integrated circuits
for set-top decoders. For the DVD market, the Company offers royalty-free
licenses to consumer electronics and personal computer manufacturers and intends
to implement a business model using media-based royalties similar to that for
its videocassette copy protection business. The Company also sells a line of
products based on its various video scrambling technologies for applications in
television broadcasting and niche markets such as law enforcement and private
networks. See "Risk Factors--Need to Establish and Maintain Licensing
Relationships."
COPY PROTECTION
The Company's copy protection technologies are designed to allow motion
picture studios and other copyright holders to protect their copyrighted and
proprietary video material from unauthorized consumer copying. The Company's
copy protection technologies for videocassettes and DVDs generally are priced as
low as a few pennies per unit, depending upon the annual volume commitment made
by the copyright holder. The Company believes that copyright holders justify the
decision to pay for the Company's technology through a combination of increased
videocassette sales, increased revenues from downstream venues, stronger
relationships with retailers and a favorable return on investment compared to
equivalent advertising expenditures.
The Company's copy protection technology is "applied" electronically to
videocassettes at the time of duplication at over 257 commercial duplication
facilities in 32 countries. Company-owned copy protection equipment is installed
and maintained by the Company in each duplication facility. The Company licenses
commercial duplicators to act as distributors and sales agents in return for a
share of the copy protection
31
<PAGE>
fees duplicators receive from their customers. In cases in which the rights
owner licenses the technology directly from the Company, the Company pays
service fees to the commercial duplicators. The Company's copy protection
technology has been applied to more than 1.5 billion videocassettes worldwide
since 1985, and was applied to more than 450 million videocassettes in 1996. All
MPAA studios have used the Company's copy protection technologies to protect
some or all of their videocassettes in one or more countries around the world.
In 1996, three of these studios applied the Company's technology to virtually
every videocassette they produced. In addition, the Company believes that more
than 1,500 corporate, educational and special interest copyright holders have
contracted with the Company's licensed duplicators to apply the Company's copy
protection process to their videocassettes. See "Risk Factors--Dependence on Key
Customers."
The Company has developed an enhanced version of its videocassette copy
protection technology for the DVD format and for the digital PPV networks that
are being developed and deployed by direct broadcast satellite and cable
television operators. This enhanced copy protection technology is "applied" by
an integrated circuit that is embedded within the DVD player or digital set-top
decoder and that can later be activated by copy protection control codes in the
video program or PPV network access control system. Upon activation, the
embedded integrated circuit generates the Company's copy protection signal and
applies it to the program material at the analog output port of the DVD player
or digital set-top decoder. See "Risk Factors--Evolving Market for DVD and
Digital PPV Copy Protection."
The Company has licensed its copy protection technology for digital PPV to
33 set-top decoder manufacturers and four digital PPV system operators (DIRECTV,
Galaxy Latin America, the Kirsch Group and Sky Latin America). Currently two
digital PPV program providers in Japan have activated copy protection for
digital PPV programming. The Company's copy protection technology is embedded in
substantially all of the approximately four million digital set-top decoders
currently in use in the United States, Japan and a number of countries in Latin
America, for which the Company has received license fees and royalties from the
digital set-top decoder manufacturers.
In October 1996, a multi-industry technical working group comprised of major
motion picture studios, consumer electronics manufacturers and personal computer
hardware and software companies adopted a set of copy protection principles that
established prerequisites for commercial availability of DVD hardware and media.
The Company believes that its copy protection technology is currently the only
digital-to-analog copy protection solution that satisfies these principles. To
date, Hitachi, Ltd., Matsushita Electric Industrial Co., Ltd., Pioneer
Electronic Corporation, THOMSON Multimedia, S.A., Toshiba Corporation and seven
other consumer electronics companies have signed agreements with the Company to
incorporate the Company's DVD copy protection technology in their DVD players or
DVD ROM hardware.
Consumers routinely make videocassette copies of premium cable television
and free television broadcasts. The Company does not license its technology for
use in deterring consumer copying of such programming.
Copy protection represented 91.0%, 92.8% and 87.5% of the Company's net
revenues in 1994, 1995 and 1996, respectively. The chart below summarizes the
types and sources of the Company's current and expected future copy protection
revenues. See "Risk Factors--Dependence on Videocassette Copy Protection
Technology and Advocacy by Major Motion Picture Studios."
32
<PAGE>
<TABLE>
<CAPTION>
PROGRAMMING ROYALTIES PER UNIT/PER TRANSACTION
UP-FRONT PER UNIT -----------------------------------------------
LICENSING HARDWARE VIDEOCASSETTE DIGITAL PPV
CUSTOMER GROUP FEES ROYALTIES (1) DVD (2)(3) PROGRAMMING (3)(4)
- -------------------------------------- ----------- ----------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Major Motion Picture Studios.......... -- -- Current Future Future
Other Video Copyright Holders......... -- -- Current Future Future
Commercial Duplicators................ Current -- Current Future --
Digital Set-Top Decoder
Manufacturers....................... Current Current -- -- --
Digital PPV System Operators.......... Current -- -- -- Future
</TABLE>
- --------------------------
(1) Individual license agreements vary with regard to the term, minimum annual
revenue commitment, minimum volume guarantees, percentage of total
production that includes copy protection and other factors.
(2) The Company intends to implement a DVD business model using media-based
royalties similar to that of its videocassette business.
(3) There can be no assurance that any revenues will be realized from any
customer group.
(4) The Company's license agreements provide for payment of transaction-based
royalties by either the copyright holder or the system operator.
VIDEO SCRAMBLING
The Company's video scrambling technologies scramble a picture generated by
an original video signal to prevent unauthorized viewing of video content. These
technologies are used in PPV, Pay TV, business television and other private
networks, broadcast television and government, military and law enforcement
markets.
The Company's PhaseKrypt video scrambling technology is a relatively secure,
easy to use, low cost alternative to other widely used analog scrambling
systems. PhaseKrypt is intended for use in Pay TV and PPV applications in
developing cable television markets such as South America, South Korea, Taiwan,
the People's Republic of China and the Philippines. Analog set-top decoder
manufacturers either license PhaseKrypt for an up-front fee and a per unit
hardware royalty or purchase encoder hardware and decoder components from the
Company. Cable television operators purchase PhaseKrypt-enabled set-top decoders
and encoder hardware from Macrovision licensees for installation in their
systems.
The Company sells StarShaker, a PhaseKrypt-based, low-cost, industrial
quality analog satellite scrambling system that is available in NTSC (the
principal video display format in North America, Japan and portions of South
America) and PAL (the principal video display format in Europe, China,
Australia/ New Zealand and portions of South America) versions and that utilizes
PC-based network control for individual and group decoder addressability. The
Company sells StarShaker encoders and set-top decoders to system integrators,
primarily for private and direct-to-home or direct-to-office analog satellite
networks for business television, special interest entertainment and education
or training programs.
The Company's video encryption system ("VES") technology is incorporated
into a variety of professional and near-professional broadcast quality
scrambling products that the Company sells rather than licenses. The Company's
VES products are professional, broadcast-quality video scrambling systems that
are available in NTSC and PAL versions. Primary applications include broadcast
television distribution to network affiliate stations and retransmission
facilities, programming delivery to cable television headends, programming
contribution circuits and backhauls. One of the VES products is a miniaturized
portable scrambling system primarily for covert law enforcement, military
surveillance and broadcast television news gathering applications.
Video scrambling represented 9.0%, 7.1% and 12.1% of the Company's net
revenues in 1994, 1995 and 1996, respectively.
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CINEGUARD
CineGuard utilizes the Company's PhaseKrypt video scrambling technology to
distribute motion pictures on Super VHS videocassettes primarily to small
theaters in rural towns in international markets. Although there are
approximately 100,000 movie theaters worldwide, motion picture studios typically
make only 800 to 3,000 film prints for each major film release due, in part, to
the high cost of producing each print. As a result, theaters in developing
international markets typically do not receive a motion picture until after the
studio's marketing efforts are exhausted or at or after home video release. The
Company's PhaseKrypt technology allows motion pictures to be recorded on
videocassettes in a scrambled state and descrambled by the Company's decoder
integrated into the video projector located at the CineGuard theater. This
deters unauthorized parties from copying the motion picture from the
videocassette. As a result, studios would be able to distribute motion pictures
to small theaters concurrently with their release to major film exhibitors at a
cost of approximately $40 per videocassette compared to approximately $1,500 for
a film print.
CineGuard exhibitors currently show motion pictures on scrambled
videocassettes from Columbia TriStar Pictures, Disney, New Line Cinema,
Paramount, United International Pictures, Universal and numerous independent and
national producers. The Company licenses CineGuard decoders directly to
international exhibitors for an initial fee and a royalty based on box office
receipts or anticipated annual ticket sales. In most geographical markets, the
Company intends to license CineGuard to master licensees that, in turn, will
license the local exhibitors. Exhibitors contract directly with the local motion
picture distributor for titles. The Company has licensed cinemas in Poland and
Ireland and has master licensees in the Philippines and South Africa. The
Company intends to expand CineGuard in these markets and to enter new markets,
including Brazil and Mexico. Revenues from CineGuard have been insignificant to
date. See "Risk Factors--Risks Associated with CineGuard."
CUSTOMERS
The Company's videocassette copy protection technology is used by the
following major motion picture studios and home video suppliers and by the
following commercial videocassette duplicators, each of which accounted for at
least $75,000 of the Company's net revenues during 1996:
<TABLE>
<CAPTION>
COMMERCIAL VIDEOCASSETTE
HOME VIDEO SUPPLIERS DUPLICATORS
- -------------------------------------------------------- ----------------------------------
<S> <C>
BMG Entertainment Allied Digital Technologies
Buena Vista Home Video, Inc. (Disney) Vaughn Communications, Inc.
Columbia House
Columbia TriStar Home Video (Sony Pictures
Entertainment)
HBO Home Video
MGM/UA Home Entertainment, Inc.
New Line Home Video
Turner Home Entertainment, Inc.
Twentieth Century Fox Home Entertainment, Inc.
Universal Studios Home Video
Warner Home Video
Westcott Communications
</TABLE>
Revenues from the Company's three largest customers, Disney, Fox and
Universal, represented 45%, 44% and 37% of the Company's net revenues during
1994, 1995 and 1996, respectively. Each of these customers is a home video
supplier that uses the Company's copy protection technology and accounted for
more than 10% of the Company's net revenues in 1994, 1995 and 1996. The Company
expects that revenues from a limited number of customers will continue to
account for a substantial portion of the Company's net revenues for the
foreseeable future. In January 1997, the Company signed a binding letter of
intent with Disney, extending its prior agreement for a three-year term and
granting the right to apply the Company's video copy protection technology to
its videocassettes. In February 1997 the Company
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<PAGE>
signed binding letters of intent with Fox, extending its prior agreement, and
Universal, each for a term of one year, granting the right to apply the
Company's video copy protection technology to their videocassettes. In addition,
the letters of intent allow each of these studios to use the Company's DVD copy
protection technology should any such studio decide to release copy-protected
motion pictures in the DVD format. The Company expects to enter into definitive
agreements with these three customers in the next several months. However, there
can be no assurance that the Company will enter into these definitive
agreements. Further, there can be no assurance that, when these agreements
expire, they will be renewed, or new contracts will be entered into, on terms
favorable to the Company, or at all. The failure of any of these customers to
renew their contracts or enter into new contracts with the Company on terms that
are favorable to the Company would likely result in a substantial decline in the
Company's net revenues and operating income, and would have a material adverse
effect on the Company's business, financial condition and results of operations.
Most of the Company's other videocassette copy protection customers license the
Company's technology on a title-by-title basis. There can be no assurance that
the Company's current customers will continue to use the Company's technology at
current or increased levels, if at all, or that the Company will be able to
obtain new customers. The loss of, or any significant reduction in revenues
from, a key customer would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Dependence on Key Customers" and Note 1 of Notes to Consolidated
Financial Statements.
The Company also licenses its videocassette copy protection technology to
special interest customers that include independent video producers and
corporations. Licensed commercial duplicators act as distributors of the
Company's videocassette copy protection technology to special interest
customers. Revenues from special interest customers accounted for approximately
15.6%, 15.6% and 17.2% of the Company's copy protection revenues in 1994, 1995
and 1996, respectively.
The Company has licensed its digital PPV copy protection technology for
incorporation into the networks of the following system operators: DIRECTV,
Galaxy Latin America, the Kirsch Group and Sky Latin America. These system
operators have paid a one-time license fee to the Company and have entered into
agreements with the Company pursuant to which the Company is entitled to
transaction-based royalty payments at such time as copy protection for digital
PPV programming is activated. Other system operators require Macrovision-capable
set-top decoders in their networks or have signed agreements with the Company to
test its digital PPV copy protection technology on a limited basis. These system
operators include Americast, Bell Atlantic Network Services, Inc., British
Telecom, Echostar Communication Corporation, Perfectv!, PRIMESTAR Partners,
L.P., Singapore Telecom, Sprint-United Management Company, Tee-Comm Electronics
Incorporated, Tele-TV and Time Warner Cable.
The Company has licensed its copy protection technology to 33 digital
set-top decoder manufacturers, including Echostar Communications Corporation,
General Instrument Corporation, Hughes Network Systems, Inc., Pace Micro
Technology, Ltd., Philips Consumer Electronics, Scientific-Atlanta, Inc., Sony
Corporation, Thomson Consumer Electronics (RCA brand) and Zenith Electronics
Corporation. The Company generally receives an up-front fee and a per unit
royalty from each digital set-top decoder manufacturer that licenses its
technology. The Company has also authorized 26 companies to incorporate the
Company's technology in their semiconductor designs. These companies include
Analog Devices Corporation, Brooktree Division of Rockwell Corporation, Crystal
Semiconductor, Inc., GEC Plessey Semiconductors, Inc., Mitsubishi Electric
Corporation, Motorola, Inc., NEC Corporation, OKI Electric Industry, Co., Ltd.,
Philips Semiconductors International, B.V., Raytheon Company, Samsung
Electronics Co., Ltd., Sony Electronics Inc., Texas Instruments and VLSI
Technology, Inc. These companies generally pay a small one-time service fee for
limited rights to include the Company's copy protection technology in
digital-to-analog application specific integrated circuits ("ASICs") that are
embedded in digital set-top decoders and DVD players. They are authorized to
sell the Macrovision-capable ASICs to Macrovision-licensed DVD hardware
manufacturers (to date, Hitachi, Ltd., Matsushita Electric Industrial Co., Ltd.,
Pioneer Electronic Corporation, THOMSON Multimedia, S.A., Toshiba Corporation
and seven other consumer electronics companies) and to Macrovision-licensed
digital set-top decoder manufacturers.
35
<PAGE>
The Company's customers for video scrambling Pay TV components and licenses
are cable television system hardware manufacturers that sell their products into
developing markets. These customers purchase encoder hardware and decoder
components from the Company or pay the Company a volume-based royalty for
encoder and decoder components when they manufacture such components under
license from the Company. The following is a representative list of the
Company's video scrambling customers, each of which accounted for at least
$25,000 of the Company's net revenues during 1996:
<TABLE>
<CAPTION>
VES CUSTOMERS PAY TV COMPONENTS AND LICENSES
- ------------------------------------------ ------------------------------------------------
<S> <C>
Drug Enforcement Agency Eastern Electronics Co., Ltd. (Taiwan)
Federal Bureau of Investigation Efforts Development International, Ltd. (Hong
Kong)
Government of Israel Microelectronics Technology, Inc. (Taiwan)
Integrated Telecommunications Systems Pacific Satellite International, Ltd. (Hong
Kong)
(Canada) Taihan Electric Wire Co., Ltd. (South Korea)
News Sports Microwave, Inc.
Satellite Information Systems (United
Kingdom)
SIM Security and Electronic (Germany)
</TABLE>
SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets its videocassette copy protection and digital PPV and
DVD copy protection technologies directly to the MPAA studios and certain major
independent rights owners and video producers. The Company also provides ongoing
technical support to the three major duplicators that manufacture most of the
videocassettes for the MPAA studios. The Company supplements its direct sales
efforts with a variety of marketing initiatives, including trade show
participation, trade advertisements, industry education and newsletters. The
Company provides technical support to its licensed duplicators, including
hardware installation assistance and quality control. In addition, the Company
supports licensed duplicator sales personnel by providing sales training and
sales incentive programs and literature and by participating in trade shows.
The Company markets its video scrambling technologies through a combination
of direct sales, distributors, sales representatives and licensing in the United
States and internationally. The Company has a total of 18 distributors, sales
representatives and licensees serving 30 countries that sell products based on
the Company's video scrambling technologies. The Company is working with three
systems integrators in the United States to sell and service its StarShaker
product line. The Company licenses its PhaseKrypt technology and sells encoder
hardware and decoder components directly to manufacturers of analog set-top
decoders. Technical support is provided from the Company's Sunnyvale
headquarters.
The Company markets its copy protection technologies internationally from
its Sunnyvale headquarters, through its subsidiaries in Japan and the United
Kingdom and through exclusive licensing arrangements with third parties in
Egypt, Hungary and South Korea. International and export sales together
represented 38.9%, 33.2% and 37.9% of net revenues in 1994, 1995 and 1996,
respectively. The Company expects that international and export sales will
continue to represent a substantial portion of its net revenues for the
foreseeable future. Due to its reliance on international and export sales, the
Company is subject to the risks of conducting business internationally. See
"Risk Factors--Risks Associated with International and Export Sales" and Note 9
of Notes to Consolidated Financial Statements.
As of December 31, 1996, the Company employed 23 sales and marketing
personnel and nine additional employees assisted in customer technical support.
The Company believes that its ability to attract, train and retain qualified
sales and marketing personnel is essential to the success of its business. The
market for such personnel is highly competitive, and the Company's sales and
marketing activities could be adversely affected if the Company were
unsuccessful in attracting, training and retaining skilled personnel. See "Risk
Factors--Dependence on Key Personnel."
36
<PAGE>
TECHNOLOGY
COPY PROTECTION
Effective copy protection systems are difficult to develop because of the
need to address the dual requirements of playability and effectiveness.
Consumers must be able to view the copy protected content using a consumer VCR
and a television set without the need for any intervening devices, while, at the
same time, the quality of an unauthorized copy must be reduced to such an extent
that it loses its entertainment value. The extent to which the entertainment
value is reduced varies, depending on the VCR model that made, and the VCR and
television combination that plays, the unauthorized copy. To prevent VCRs from
making good copies, the copy protected video must differ in some manner from the
standard video signal because, by design, all VCRs will make good copies from
standard video signals. Television sets are designed to play standard or
near-standard video signals. As a result, there is a risk that making a video
signal non-standard in order to prevent copying will decrease playability by
causing some television sets to generate impaired or distorted pictures. In the
tradeoff between effectiveness and playability, designers of copy protection
systems must favor playability while maintaining effectiveness.
The Company's videocassette copy protection technology involves the patented
technique of inserting a series of electronic pulses in the vertical blanking
interval ("VBI") of a standard video signal. The VBI is the blank space between
the video fields on television sets that are refreshed at a rate of 60 fields
per second. The copy protection pulses are embedded electronically in the
prerecorded content of the videocassettes in the process of videocassette
manufacturing. The electronic pulses are not visible in the television picture.
The pulses are intended to affect the automatic gain control ("AGC") circuit in
the recording system of most VHS videocassette recorders, but not to affect a
similar circuit in the television set. Therefore, when the consumer plays a copy
protected prerecorded videocassette, the picture is clean and crisp, but when
the consumer plays an unauthorized consumer-made copy of that same
videocassette, the picture typically has substantially reduced entertainment
value. The Company's copy protection technology is effective against most
consumer copying, but generally does not deter professional pirates who use
professional duplication and video processing equipment. In the event that the
major motion picture studios or other rights holders determine that the
inability of the Company's technology to deter professional piracy renders the
Company's technology less useful, demand for the Company's copy protection
products could decline, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Risks of Defeat Technologies."
The DVD and digital PPV versions of the Company's copy protection
technologies employ both the electronic pulses used in videocassettes and a
second patented copy protection process called Colorstripe. Colorstripe affects
the color playback circuit of a VCR causing colored horizontal stripes to appear
in the picture of an unauthorized copy. The combination of the two processes
provides a higher level of effectiveness than that provided by either process
alone. In addition, Colorstripe is more effective against circumvention by
currently available professional duplication equipment. Copy protection is
implemented in DVD and digital PPV applications by embedding a copy protection
signal generator integrated circuit within the DVD player or digital set-top
decoder. The integrated circuit is activated by copy protection control codes,
which are integrated into the DVD media or the PPV transmission. Once the
integrated circuit is activated, it adds the copy protection signal to the
analog output of the DVD player or digital set-top decoder. As with
videocassette copy protection, consumers are able to see a clear picture on
their television sets, but generally cannot make a usable copy.
VIDEO SCRAMBLING
The Company's PhaseKrypt technology utilizes a combination of digital
encryption techniques and analog video scrambling to scramble video signals. The
resulting scrambled picture oscillates at random rates, which makes it almost
impossible to watch. Because the encoding or scrambling technique is digitally
controlled, the level of security against signal theft can be increased by
increasing the number of bits that are used in the encryption algorithm. The
Company's technology uses the largest number of bits currently allowable by law
for export products. The scrambled picture is decoded using the secure
PhaseKrypt analog technology that partially relies on the electronics of the
television set to make the image viewable.
37
<PAGE>
The combination of the digital encoding process, which provides security, and
the analog decoding technology, which is inexpensive, makes PhaseKrypt a
cost-effective solution for analog-based cable and satellite television set-top
decoders in developing countries. PhaseKrypt video scrambling is often
accompanied by one of Macrovision's patented audio scrambling technologies.
CINEGUARD
CineGuard utilizes the Company's PhaseKrypt video scrambling technology. The
Company licenses duplicators to record the scrambled video picture on high
resolution Super VHS videocassettes for distribution to CineGuard-licensed
cinemas. The authorization codes for a particular video program and a specific
decoder unit are encrypted and carried in the video program. Scrambled
videocassettes are descrambled by an authorized decoder integrated into the
video projector located at the CineGuard theater. The scrambled video program
can be descrambled only during a limited playdate window that is electronically
controlled, so that the program cannot be descrambled, even by an authorized
decoder, if the current date is outside the authorized window. The decoder is
protected by an intrusion detection system and the descrambled video stream is
marked with a fingerprint unique to each decoder.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on developing
enhancements to existing products, new applications for the Company's current
technologies and new patentable technologies related to the video security
market. The Company's core technological competencies are in video engineering,
which involves the generation and modification of electronic signals in both
digital and analog form and the transformation of such signals between digital
and analog forms, and in ASIC design. Such technologies are primarily hardware
based. The Company also has expertise in developing software security codes,
which are used to restrict access to encoding and decoding devices.
For its copy protection technologies, the Company supports the efforts of
television, VCR and DVD hardware manufacturers to design hardware that is
compatible with the Company's technologies. The Company also assists
semiconductor manufacturers in incorporating the Company's copy protection
technologies into digital video-based ASICs for digital to analog converters.
The Company regularly tests the effectiveness and transparency of its copy
protection technologies on representative samples of consumer televisions and
VCRs to determine whether modifications or enhancements may be necessary.
For its video scrambling technologies, the Company's primary focus is the
development of enhancements to its PhaseKrypt-based Pay TV encoder and decoder
products. For example, the Company recently reengineered its decoder chip set to
a single integrated circuit in order to comply with current United States
regulations for the export of these components to the Peoples' Republic of
China. Engineering development for CineGuard has focused on support for the
integration of the CineGuard decoder electronics into BARCO N.V. video
projectors, development of an electronic "web" to prevent unauthorized access to
the clear video signal, improved manufacturing techniques for the encoder and
investigation into future digital implementation of the CineGuard technology.
The Company works closely with its customers to identify problems in the
video security market and to develop products and technologies that address
those problems. Projects currently under development include: a video
multiplexor to complement one of the VES products to enable customers to monitor
multiple video channels simultaneously; enhancements to the PhaseKrypt Pay TV
encoder, which, for a given cable television operator, will increase the number
of addressable set-top decoders as well as the number of individually
addressable scrambled channels; and modifications to the DVD and digital PPV
copy protection specifications for the PAL video format.
As of December 31, 1996, the Company's research and development staff
consisted of 10 engineers and four technical support personnel. The Company
believes that its ability to attract, train and retain qualified development
personnel is essential to the success of its development programs. The market
for such personnel is highly competitive, and the Company's development
activities could be adversely affected if the Company were unsuccessful in
attracting, training and retaining skilled engineering
38
<PAGE>
personnel. In 1994, 1995 and 1996, the Company's expenses for research and
development were $2.4 million, $2.2 million and $2.5 million, respectively. See
"Risk Factors--Dependence on Key Personnel."
The video security industry in which the Company competes, and in which its
technologies and products are utilized, is characterized by rapid technological
change, frequent product introductions and enhancements, changes in customer
demands and evolving industry standards. The emergence of new industry standards
and the introduction of new technologies or products embodying new technologies
can render existing technologies or products obsolete and unmarketable. The
Company's future success will depend in large part on its ability to enhance its
current technologies and products in a timely, cost-effective manner and to
develop new technologies and products that meet changing market conditions,
which include emerging industry standards, changing customer demands, new
competitive product offerings and changing technology. Any failure by the
Company to anticipate or to respond adequately to changing market conditions, or
any significant delays in technology or product development or introduction,
could cause customers to delay or decide against licensing or purchasing the
Company's technologies or products and would have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Rapid Technological Change."
INTELLECTUAL PROPERTY RIGHTS
The Company holds 29 United States patents and has 37 United States patent
applications pending, of which seven are allowed. Of the issued United States
patents, 17 relate to the Company's copy protection technologies, eight relate
to video scrambling and four relate to audio scrambling. The Company's issued
United States patents expire between June 2000 and March 2015. The Company also
has 103 foreign patents and 127 foreign patent applications pending, covering
its copy protection technologies in 38 countries, its video scrambling
technologies in 33 countries and its audio scrambling technologies (pending
applications only) in 13 countries. In addition, the Company has six United
States and 17 foreign patents covering a number of processes and devices that
unauthorized parties could use to circumvent the Company's copy protection
technologies. The Company uses these patents to limit the proliferation of
devices intended to circumvent the Company's copy protection technologies. The
Company also has eight United States and 17 foreign patent applications pending
that include defeat technologies.
The Company's success is heavily dependent upon its proprietary
technologies. The Company relies primarily on a combination of patent,
trademark, copyright and trade secret laws, nondisclosure and other contractual
provisions, and technical measures to protect its intellectual property rights.
There can be no assurance that any patent, trademark or copyright owned by the
Company will not be challenged and invalidated or circumvented, that patents
will issue from any of the Company's pending or future patent applications or
that any claims in issued patents or pending patent applications will be of
sufficient scope or strength or be issued in all countries where the Company's
products can be sold or its technologies can be licensed to provide meaningful
protection or any commercial advantage to the Company. There can be no assurance
that the expiration of any of the Company's patents will not have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technologies,
duplicate the Company's technologies or design around the patents owned by the
Company. Effective intellectual property protection may be unavailable or
limited in certain foreign countries. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
use aspects of the Company's processes and devices that the Company regards as
proprietary. Policing unauthorized use of the Company's proprietary information
is difficult, and there can be no assurance that the steps taken by the Company
will prevent misappropriation of its technologies. In the event that the
Company's intellectual property protection is insufficient to protect the
Company's intellectual property rights, the Company could face increased
competition in the market for its products and technologies, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
From time to time, the Company has received claims from third parties that
the Company's technologies and products infringe the intellectual property
rights of such third parties, and the Company
39
<PAGE>
may receive similar claims in the future. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, cause
product shipment delays or require the Company to cease utilizing the infringing
technology unless it can enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has initiated a number of patent infringement disputes against manufacturers and
distributors of devices intended to circumvent the Company's copy protection
technologies. No lawsuits of this type are pending currently, but litigation may
be necessary in the future to limit the sale of defeat technologies, to enforce
the Company's patents and other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity.
There can be no assurance that any such litigation will be successful. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations, whether or not such litigation is
determined adversely to the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringed
technology. The failure of the Company to develop or license a substitute
technology could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, such an adverse
ruling could result in the increased proliferation of devices that defeat the
Company's copy protection technology, which could result in a decline in demand
for the Company's technologies. See "Risk Factors--Dependence on Proprietary
Technology" and "Risk Factors--Risks of Defeat Technologies."
COMPETITION
COPY PROTECTION
The Company believes that it has had no significant videocassette copy
protection competitor for the last five years other than companies that have
occasionally developed hardware based on the Company's technology in foreign
countries where the Company does not have patents issued. The Company's copy
protection technologies are proprietary and have broad international patent
coverage. As a result, none of the Company's competitors has been successful in
the past. It is possible, however, that a competitive copy protection technology
could be developed in the future. For example, the Company's customers could
attempt to promote competition by supporting the development of alternative copy
protection technologies or solutions, including solutions that deter
professional duplication. Increased competition would be likely to result in
price reductions and loss of market share, either of which could materially
adversely affect the Company's business, financial condition and results of
operations.
VIDEO SCRAMBLING
The market for video scrambling products is highly competitive. The Company,
as a recent entrant into these markets, competes directly or through licensed
manufacturers with many companies, including Scientific-Atlanta, Inc., General
Instrument Corporation, Leitch Technology International, Inc., Zenith
Electronics Corporation and Toshiba Corporation. These companies have
substantially greater name recognition, larger installed customer bases and
market share and significantly greater financial, technical, marketing and other
resources than the Company and its licensees, many of which are manufacturing
and selling addressable set-top decoders for the first time. There can be no
assurance that the Company and its licensees will be able to compete
successfully in the video scrambling systems markets, that the Company will be
able to make technological advances necessary to improve or even maintain its
competitive position or that the Company's products will achieve market
acceptance. In addition, there can be no assurance that technological changes or
development efforts by the Company's competitors will not render the Company's
video scrambling products obsolete or uncompetitive. The Company believes that
the principal competitive factors affecting these markets include the level of
security provided, price, quality, product reputation, customer service and
support, the effectiveness of sales and marketing efforts and company
40
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reputation. There can be no assurance that the Company can compete successfully
against current and potential competitors, especially against those with
significantly greater financial, marketing, service, support, technical and
other resources.
CINEGUARD
The Company is not aware of any technology that competes directly with
CineGuard. Competition for CineGuard may come from film cinemas located near
CineGuard theaters. CineGuard theaters could be at a competitive disadvantage
compared to film, because film typically has better picture quality and a larger
projected image than video. Motion picture distributors might also give
programming priority to competing film cinemas or withdraw programming entirely
from CineGuard theaters in competition with film cinemas. Additionally,
competitors might attempt to develop or acquire competing technologies that
could provide the necessary security for video cinema applications. Potential
competitors include large multinational video projector manufacturers or other
consumer electronic products companies. In particular, several large
corporations have announced digital video projectors that could replace film in
cinemas. This development or any other development that presents a
cost-effective, secure and high quality alternative to film for cinema
projection would compete against CineGuard. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Risk Factors--Competition."
MANUFACTURING
The Company's manufacturing strategy is to license its technologies to third
parties that manufacture products incorporating those technologies. The Company
generates royalty revenues from these licenses, generally in the form of an
up-front fee and a per unit royalty. For example, licensees of the Company's
PhaseKrypt technology can either manufacture PhaseKrypt decoder components or
purchase such components from the Company. In addition, BARCO N.V., a video
projector manufacturer, incorporates the CineGuard video decoder technology into
the projectors that are sold to CineGuard licensed exhibitors. Authorized BARCO
N.V. distributors worldwide import, market, sell, install and maintain BARCO
N.V. projectors including the integrated CineGuard decoder.
The Company's manufacturing operations are limited to low volume products
that require significant quality control efforts by the Company, such as the VES
and StarShaker products, PhaseKrypt encoders and videocassette copy protection
processors used by commercial videocassette duplicators. These manufacturing
operations consist primarily of component procurement, final assembly and test,
and quality control of subassemblies and systems. The Company generally uses
domestic independent contractors to manufacture and assemble printed circuit
boards, which enables the Company to configure the hardware and software in
combinations to meet a wide variety of customer requirements. The Company has an
OEM agreement with one of its Pay TV licensees for the manufacture of StarShaker
decoders in Taiwan. The Company installs its software into electronically
programmable read-only memory to maintain quality control and security. The
Company utilizes "burn-in" procedures, functional and system integration testing
and comprehensive inspections to assure quality and reliability of its products.
The Company depends upon third-party manufacturers and suppliers for
components, subassemblies and printed circuit boards used in its VES products,
StarShaker products, PhaseKrypt encoders, PhaseKrypt decoder components and
videocassette copy protection processors. The Company's product designs are
proprietary but generally incorporate industry-standard hardware components that
are obtainable from multiple sources. The Company's ability to deliver its
products in a timely manner depends upon the availability of quality components
and subassemblies used in these products and, in part, on the ability of
subcontractors to manufacture, assemble and deliver certain items in a timely
and satisfactory manner.
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<PAGE>
The Company obtains certain electronic components and subassemblies from a
single source or a limited number of sources. For example, Atmel Corporation is
currently the Company's sole source of integrated circuits for the Company's
PhaseKrypt decoders, and BARCO N.V. is currently the sole source of integrated
decoders for CineGuard video projectors. The reliance on third-party
manufacturers and sole or limited suppliers involves a number of risks,
including a potential inability to obtain an adequate supply of required
components, subassemblies and printed circuit boards and reduced control over
pricing, quality and timely delivery of components, subassemblies and printed
circuit boards. A significant interruption in the delivery of any such items or
any other circumstance that would require the Company to seek alternative
sources of supply could result in the inability of the Company to deliver
certain of its products on a timely basis, which in turn could result in a
deterioration of the Company's customer relationships and have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Dependence on Suppliers and Third-Party
Manufacturers."
LEGISLATIVE AND TECHNOLOGY INITIATIVES
For the past two years, the Company has worked with major motion picture
studios, consumer electronics manufacturers and personal computer hardware and
software companies to develop comprehensive copy protection solutions for DVD
and other digital formats. The Company presented its proprietary
digital-to-analog copy protection solutions to the National Information
Infrastructure task force, a government-sponsored group, which recommended that
changes be made to the federal copyright laws to include new copyright
protection requirements for digital media and digital hardware and to outlaw
copy protection circumvention devices.
In a related initiative, the Company has also been an active participant in
a DVD Copy Protection Technical Working Group that recently adopted a set of
copy protection principles that established prerequisites for commercial
availability of DVD hardware and media. The Company believes that adoption of
these principles will result in worldwide copy protection standards for DVD
players and media. The Technical Working Group is comprised of representatives
from the following associations and their respective member companies: MPAA,
Consumer Electronics Manufacturers Association, Information Technology
Industries Council, Business Software Alliance, Recording Industry Association
of America, Home Recording Rights Coalition, Interactive Multimedia Association
and DVD Manufacturers Consortium. The Company believes that its copy protection
technology is currently the only digital-to-analog copy protection solution that
satisfies these principles. The Technical Working Group has recommended that
legislation be drafted and enacted in 1997 that would support the technical
design principles by outlawing copy protection circumvention devices. Such
legislation, if introduced and enacted into law, would assist the Company in
controlling proliferation of circumvention devices. However, there can be no
assurance that such legislation will be introduced in the United States Congress
or the legislature of any other country, or if it is introduced that it will
ever be enacted or that all DVD and PC manufacturers will follow industry design
principles and applicable technology-based copy protection schemes.
INTEREST IN COMMAND AUDIO CORPORATION
In October 1995, CAC was incorporated as a wholly-owned subsidiary of the
Company to commercialize a distinct and new audio-on-demand technology. In June
1996, the Board of Directors of the Company approved the discontinuation of the
Company's involvement in CAC. In August 1996, the Company divested itself of all
but 19.8% of the outstanding stock of CAC. CAC is developing an audio-on-demand
system consisting of a program center that provides continuously updated news
and information on a subscription basis and a hand-held portable receiver that
stores the information. The system allows consumers to control the timing and
content of the program playback. The Company has no plans to increase its
ownership above the 19.8% minority position, but does have a right of first
refusal to acquire additional stock to maintain its 19.8% ownership if and when
CAC offers additional stock, subject to certain exceptions. Additionally, the
Company assigned to CAC all rights in certain technology and released its
reversion rights in technology that the Company had previously assigned to CAC.
In consideration of such assignment and release, CAC agreed to pay to the
Company royalties equal to 2.0%
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<PAGE>
of CAC's gross revenues for 12 years, beginning when CAC has operating revenues
from certain sources or, at the election of the Company, at any time prior
thereto. See "Certain Transactions" and Note 4 of Notes to Consolidated
Financial Statements.
EMPLOYEES
As of December 31, 1996, the Company had 79 employees, including 10 in
manufacturing, 14 in research, engineering and development, nine in technical
support, 23 in sales and marketing and 23 in general and administrative
capacities. Ten of these employees are based outside of the United States. None
of the Company's employees is covered by a collective bargaining agreement or is
represented by a labor union with respect to employment by the Company. The
Company has not experienced any organized work stoppages and considers its
relations with its employees to be good.
The Company's future performance is highly dependent upon the continued
service of members of the Company's senior management and other key research and
development and sales and marketing personnel. The Company believes that its
future success will also depend upon its continuing ability to identify,
attract, train and retain other highly skilled managerial, technical, sales and
marketing personnel. Hiring for such personnel is competitive, and there can be
no assurance that the Company will be able to retain its key employees or
attract, assimilate or retain the qualified personnel necessary for the
development of its business. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal operations are located in a 43,960 square foot
building in Sunnyvale, California. The Company's lease for this building expires
on June 30, 2002. The Company also leases space for sales, marketing and
technical support operations near London, England and in Tokyo, Japan. The
Company believes that its existing facilities are adequate to meet its current
needs. See Note 7 of Notes to Consolidated Financial Statements.
LEGAL PROCEEDINGS
In October 1995, Joseph Swyt, a former officer and director of the Company,
filed suit against the Company in the Superior Court of the State of California
alleging monetary damages suffered as a result of alleged fraud,
misrepresentation and other malfeasance in connection with the Company's grant
of stock options to him. Mr. Swyt maintains that the Company induced him to
accept employment by falsely representing to him that the options granted to him
eventually would have substantial value. Between August 1990 and December 1993,
the Company granted to him options to purchase approximately 200,000 shares with
per-share exercise prices of $2.25 or $2.70. Substantially all of these options
expired unexercised within three months following his departure from the Company
in June 1995. In December 1996, the court ordered this matter to binding
arbitration in accordance with a written agreement between the Company and Mr.
Swyt. The arbitration agreement contains limitations on the types of damages
available to Mr. Swyt and expressly precludes punitive damages. The Company
believes that the case is without merit and intends to contest it vigorously.
While the outcome of this case cannot be determined with certainty, the Company
does not believe that the resolution of this case will have a material adverse
effect on the Company's financial condition or results of operations. However, a
decision against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is not a party to any other litigation that would have a material adverse effect
on the Company or its business and results of operations. See "Risk
Factors--Litigation Risk" and Note 8 of Notes to Consolidated Financial
Statements.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, and their ages and
positions, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
John O. Ryan............................. 51 Chairman of the Board of Directors, Chief Executive
Officer and Secretary
William A. Krepick....................... 51 President, Chief Operating Officer and Director
Victor A. Viegas......................... 39 Vice President, Finance and Administration and Chief
Financial Officer
Mark S. Belinsky......................... 39 Vice President, Worldwide Theatrical and Pay-Per-View
Copy Protection
Patrice J. Capitant...................... 48 Vice President, Engineering
Brian R. Dunn............................ 40 Vice President, CineGuard Business Development
Whit T. Jackson.......................... 36 Vice President, Video Encryption Technologies
Richard S. Matuszak...................... 53 Vice President, Special Interest Copy Protection and
Director
</TABLE>
MR. RYAN is a co-founder of the Company and an inventor of its core copy
protection and video scrambling technologies. He has served as Chairman of the
Board of Directors and Secretary of the Company since June 1991 and Chief
Executive Officer of the Company since June 1995. He has been a director of the
Company since June 1987 and served as Vice-Chairman of the Board of Directors
from 1987 until June 1991. He also served as General Partner of the partnership
predecessor of the Company from 1985 to 1987 and as President and Secretary of
the corporate predecessor of the Company from 1983 to 1985. Prior to founding
Macrovision, Mr. Ryan was Director of Research and Development of Ampex
Corporation's broadcast camera group. Mr. Ryan holds more than 30 patents and
has 17 patent applications pending in the fields of video copy protection, video
scrambling and television camera technology. Mr. Ryan took undergraduate courses
in Physics and Math at the University of Galway in Ireland and received a Full
Technological Certificate in Telecommunications from the City and Guilds
Institute of London.
MR. KREPICK has served as a director of the Company since November 1995 and
as President and Chief Operating Officer of the Company since July 1995. He has
been with the Company since November 1988, and served as Vice President, Sales
and Marketing of the Company until June 1992 and Senior Vice President,
Theatrical Copy Protection from July 1992 to June 1995. Prior to joining
Macrovision, Mr. Krepick held several executive marketing management positions
over a ten-year period with ROLM Corporation, a telecommunications equipment
manufacturing company. He holds a B.S. degree in Mechanical Engineering from
Rensselaer Polytechnic Institute and an M.B.A. from Stanford University.
MR. VIEGAS has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since June 1996. From October 1986 to
June 1996, he served as Vice President of Finance and Chief Financial Officer at
Balco Incorporated, a manufacturer of advanced automotive service equipment,
and, since May 1991, a subsidiary or division of Snap-On Tools. He holds a B.S.
degree in Accounting and an M.B.A. from Santa Clara University. Mr. Viegas is
also a certified public accountant.
MR. BELINSKY has served as Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company since he joined the Company in
October 1995. Between June and September 1995, he was a consultant to various
companies in the Internet services and electronic commerce fields, and, between
June 1995 and August 1995, he was Chief Operating Officer of the McKinley Group,
Inc., an Internet directory services company. From May 1993 to June 1995, Mr.
Belinsky was Vice President and General Manager of the Electronic Marketplace
Systems Division of International Data Group, a developer of online shopping
malls for personal computer and software products. He was an independent
consultant
44
<PAGE>
between February and May 1993, and, from October 1988 to January 1993, he was
Vice President and General Manager of the Interop Company, a division of
Ziff-Davis Publishing Company. He holds a B.A. degree in Business Administration
from Wayne State University and an M.B.A. from Harvard Business School.
DR. CAPITANT has served as Vice President, Engineering of the Company since
October 1996. He joined the Company in October 1995 as Director of Engineering.
He served as Manager of Video Engineering at Radius, Inc., a computer equipment
manufacturer, from December 1994 to September 1995. Dr. Capitant held
engineering positions at Compression Labs, Inc., a telecommunications equipment
manufacturer, from September 1993 to December 1994 and Sony Corporation of
America, Advanced Video Technology Center, from September 1989 to September
1993. He completed his undergraduate and post graduate work in engineering and
automatic control at Institut Industrial du Nord, Lille, France and University
of Lille. He holds a Ph.D. degree in Electrical Engineering from Stanford
University.
MR. DUNN has served as Vice President, CineGuard Business Development of the
Company since January 1995. From January 1989 to December 1994, he served as
Vice President, Operations, Corporate Counsel and Chief Financial Officer of
Phase 2 Automation, a factory automation company. Mr. Dunn holds a B.A. degree
in Accounting from the University of Notre Dame and a J.D. degree from Santa
Clara University School of Law. He is a certified public accountant and a member
of the California bar.
MR. JACKSON has served as Vice President, Video Encryption Technologies of
the Company since September 1992. He joined the Company in August 1990 as Sales
Manager for the Company's line of encryption products. From January 1989 to
August 1990, Mr. Jackson managed the satellite service business for the
Galaxy/Westar satellite fleet of Hughes Communications, Inc., a satellite
communications company. He holds a B.A. degree in International Relations from
Northwestern University and an M.B.A. from the J.L. Kellogg Graduate School of
Management at Northwestern University.
MR. MATUSZAK has served as Vice President, Special Interest Copy Protection
of the Company since June 1992, and as a director of the Company since May 1992.
He joined the Company in August 1985 and held various sales and marketing
positions from August 1985 to June 1992. From June 1984 to August 1985, Mr.
Matuszak was a Sales Manager for the Broadcast Products Division of Hitachi
Corporation. He holds an Associate degree in Applied Technologies and
Electronics from DeVry Institute of Technology.
Each director holds office until the next annual meeting of stockholders of
the Company or until his successor is duly elected and qualified. Officers are
chosen by, and serve at the discretion of, the Board of Directors (the "Board").
There are no family relationships among the directors and officers of the
Company.
The Company intends to add two independent directors to the Board of
Directors within 60 days of this offering, and to name such independent
directors as members of the Compensation Committee. In addition, the Company
intends to establish an Audit Committee comprised of at least two independent
directors. In the event that the Company fails to appoint such directors within
90 days after this offering, the Nasdaq National Market could terminate the
listing of the Company's Common Stock on the Nasdaq National Market, which would
have a material adverse effect on the liquidity and trading price of the Common
Stock. See "Risk Factors--No Prior Public Market for Common Stock."
DIRECTOR COMPENSATION
Mr. Matuszak receives a fee of $1,000 for each Board meeting he attends. No
other member of the Company's Board currently receives a fee for attending Board
meetings.
The Company's 1996 Directors Stock Option Plan (the "Directors Plan") was
adopted by the Board in December 1996 and is expected to be approved by the
Company's stockholders in February 1997. A total of 60,000 shares of the
Company's Common Stock is reserved for issuance under the Directors Plan.
Members of the Board who are not employees of the Company are eligible to
participate in the Directors Plan. Each eligible director who first becomes a
member of the Board after the Effective Date of the
45
<PAGE>
Registration Statement for this offering will be granted a nonqualified option
to purchase 5,000 shares (the "Initial Grant") of the Company's Common Stock,
effective as of the date such director joins the Board. Also, at each
anniversary of the Initial Grant, each eligible director who has served
continuously as a member of the Board since the date of the director's Initial
Grant will be granted a subsequent nonqualified option to purchase 3,000 shares.
Options granted to directors under the Directors Plan will vest as to 2.08% of
the shares on the last day of each month following the grant date of such
options, so long as the eligible director continues to serve on the Board on
such date. In the event of a merger, consolidation or similar corporate
transaction, the vesting of all outstanding options under the Directors Plan
will be accelerated so that all outstanding options are vested and exercisable
in full prior to the consummation of such transaction. If such options are not
exercised prior to the consummation of such transaction, and are not assumed or
replaced by the successor entity, such options will terminate. The exercise
price of all options granted under the Directors Plan will be the fair market
value of the Common Stock on the date of the grant. The Directors Plan will
terminate in December 2006, unless terminated earlier in accordance with the
provisions of the Directors Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves compensation and
benefits for the Company's key executive officers, administers the Company's
stock purchase and stock option plans and makes recommendations to the Board
regarding such matters. The Compensation Committee is currently comprised of
John O. Ryan and William A. Krepick, each of whom is an executive officer of the
Company. David W. Herbst, the Company's outside legal counsel, also served on
the Compensation Committee until February 1997. No member of the Compensation
Committee serves as a member of the board of directors or compensation committee
of any entity that has one or more executive officers serving as a member of the
Board or Compensation Committee. The Board expects to appoint independent
directors to the Compensation Committee within 60 days following the date of
this Prospectus.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth all compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during 1996 by the Company's chief executive officer and the
Company's four other most highly compensated executive officers who were serving
as executive officers at the end of 1996 (together, the "Named Officers").
46
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------------
AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING OPTIONS OTHER
NAME AND PRINCIPAL POSITION SALARY (1) BONUS (2) (3) COMPENSATION (4)
- -------------------------------------------------- ---------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
John O. Ryan...................................... $ 200,000 $ 68,510 -- 4,886
Chief Executive Officer
William A. Krepick................................ 200,000 55,263 -- 6,002
President and Chief Operating Officer
Brian R. Dunn..................................... 131,204 23,168 -- 5,321
Vice President, CineGuard Business Development
Mark S. Belinsky.................................. 127,026 -- 8,333 2,189
Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection
Patrice J. Capitant............................... 112,337 -- 27,776 2,558
Vice President, Engineering
</TABLE>
- ------------------------
(1) Victor A. Viegas, who joined the Company in June 1996 as Vice President,
Finance and Administration and Chief Financial Officer, is compensated at an
annual salary rate of $135,000. Mr. Viegas also purchased an aggregate of
58,333 shares of Common Stock at a price of $2.70 per share. See "--
Employment Agreement."
(2) Represents bonuses paid in 1996 for services rendered in 1995. Bonuses are
paid pursuant to the Executive Incentive Plan. Pursuant to the Executive
Incentive Plan, the total amount available for bonuses to key employees of
the Company for services rendered in 1996 is $307,000. The amount of the
bonus payable to each Named Officer will be determined in February 1997. See
"--Employee Benefit Plans."
(3) Options granted to the named officers were granted at fair market value as
determined by the Board of Directors based on all factors available to them
on the grant date.
(4) Includes Company contributions to the 401(k) Plan in the amount of $1,900
for each Named Officer. Also includes life insurance premiums in the
following amount for each Named Officer: Mr. Ryan-- $2,108; Mr.
Krepick--$2,102; Mr. Dunn--$463; Mr. Belinsky--$289; and Mr. Capitant--$658.
The remainder represents reimbursement for one-third of the difference
between business class and coach class air travel up to a maximum of $1,000
for each business trip traveled in coach class. The amount of such
reimbursement is as follows: Mr. Ryan--$878; Mr. Krepick--$2,000; and Mr.
Dunn--$2,958.
In August 1996, the Company distributed to its employees as bonuses an
aggregate of 208,782 shares of Command Audio Corporation ("CAC") common stock,
which represented approximately 10.4% of the then outstanding voting stock of
CAC. Of these shares, 50% were to vest on December 31, 1996 and the remaining
50% will vest on December 31, 1997, subject to the employee's continuing in the
Company's employment through such dates. Upon termination of employment, the
Company has the right to repurchase the former employee's unvested shares at a
price of $0.01 per share. The number of shares of CAC common stock distributed
as a bonus to each Named Officer was as follows: John O. Ryan--36,000 shares;
William A. Krepick--36,000 shares; Brian R. Dunn--7,200 shares; Mark S.
Belinsky--12,000 shares; and Patrice J. Capitant--3,600 shares. In addition,
10,102 shares were distributed to Victor A. Viegas.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth further
information regarding option grants pursuant to the Company's Stock Option Plan
during 1996 to each of the Named Officers. In accordance with the rules of the
Securities and Exchange Commission, the table sets forth the hypothetical gains
or "option spreads" that would exist for the options at the end of their
respective ten-year terms.
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<PAGE>
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted to the end of
the option term.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------- RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED (1) 1996 PER SHARE DATE 5% 10%
- ------------------------------------ ----------- ------------- --------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John O. Ryan........................ -- -- -- -- -- --
William A. Krepick.................. -- -- -- -- -- --
Brian R. Dunn....................... -- -- -- -- -- --
Mark S. Belinsky.................... 8,333 6.0% $ 2.70 6/7/06 $ 14,149 $ 35,857
13,888 10.1 2.70 3/12/06 23,582
Patrice J. Capitant................. 5,555 4.0 2.70 6/7/06 9,432 23,904
8,333 6.0 7.20 10/29/06 37,732 95,621
</TABLE>
- ------------------------
(1) Options granted under the Stock Option Plan in 1996 were incentive stock
options or non-qualified stock options that were granted at fair market
value and that vest over a three-year vesting period. Options expire ten
years from the date of grant.
(2) The 5% and 10% assumed annual rates of stock price appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future Common Stock prices.
On the day following this offering, the Company will grant to Mr. Viegas an
option to purchase 22,222 shares of Common Stock at an exercise price equal to
the fair market value of such shares on the date of the grant.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES. The following table sets forth the number of shares acquired
upon the exercise of stock options during 1996 and the number of shares covered
by both exercisable and unexercisable stock options held by each of the Named
Officers at December 31, 1996. Also reported are values of "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of December 31, 1996 ($9.00) as determined by the Board.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John O. Ryan................... -- -- -- -- -- --
William A. Krepick............. 11,111 $ 69,999 62,962 55,555 $ 396,661 $ 349,997
Brian R. Dunn.................. -- -- 5,092 25,463 32,080 160,417
Mark S. Belinsky............... -- -- 4,629 31,481 29,163 198,330
Patrice J. Capitant............ -- -- -- 27,776 -- 137,490
</TABLE>
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement with Mr. Viegas in June
1996, in connection with Mr. Viegas' employment as Vice President, Finance and
Administration and Chief Financial Officer
48
<PAGE>
of the Company. Under the employment agreement, Mr. Viegas receives an annual
salary of $135,000 and is eligible to participate in the Company's Executive
Incentive Plan. The employment agreement may be terminated by the Company or by
Mr. Viegas at any time for any reason. Pursuant to the employment agreement, the
Company sold to Mr. Viegas 58,333 shares of the Company's Common Stock at a
price of $2.70 per share. Mr. Viegas purchased the shares with a full recourse
promissory note secured by the shares. The largest aggregate amount of
indebtedness outstanding under the note during 1996 was $157,500. Interest at
the rate of 6.58% per year is paid monthly. The loan is due in five years or
earlier on termination of Mr. Viegas' employment with the Company. The shares
vest over a three-year period, with one-sixth vesting in June 1997, an
additional one-third vesting in June 1998 and the balance vesting in June 1999.
The Company has the right to repurchase unvested shares at the original sale
price in the event that Mr. Viegas ceases to be an employee of the Company.
Under the employment agreement, on the day following this offering, the Company
will grant Mr. Viegas an option to acquire an additional 22,222 shares of the
Company's Common Stock, at the fair market value of such shares on the grant
date, and such options will vest and become exercisable over a three-year
period. If the Company terminates Mr. Viegas' employment without cause, all of
his unvested shares and stock options will have the benefit of one additional
year of vesting and Mr. Viegas will be entitled to severance benefits under the
Company's severance pay plan. If the Company terminates Mr. Viegas' employment
without cause or if Mr. Viegas terminates his employment for good reason within
either three months before or twelve months after a change in control of the
Company, all of his unvested shares and stock options will immediately vest.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN. The Company's Stock Option Plan (the "Option Plan"),
covering 972,222 shares of Common Stock, was adopted by the Board in September
1988 and approved by the Company's stockholders in November 1988. As of December
31, 1996, options to purchase 181,441 shares had been exercised under the Option
Plan, 700,565 shares were subject to outstanding options under the Option Plan
and 90,216 shares were available for future grants under the Option Plan.
Options granted under the Option Plan before its termination will remain
outstanding in accordance with their terms, but no further options will be
granted under the Option Plan after the Company's Delaware reincorporation. See
Note 5 of Notes to Consolidated Financial Statements.
1996 EQUITY INCENTIVE PLAN. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") was adopted by the Board in December 1996 and is
expected to be approved by the stockholders in February 1997. The Equity
Incentive Plan will serve as the successor incentive program to the Company's
Option Plan after the effective date of the Registration Statement. The Company
has reserved 300,000 shares of the Company's Common Stock for issuance under the
Equity Incentive Plan. In addition, any shares of Common Stock authorized for
issuance under the Option Plan that are not subject to options outstanding on
the Effective Date of the Registration Statement or are subject to options
outstanding on the Effective Date that thereafter expire or become unexercisable
for any reason without having been exercised in full will be available for grant
and issuance pursuant to the Equity Incentive Plan. The Equity Incentive Plan
provides for the grant of stock options, stock appreciation rights and
restricted stock awards by the Company to its employees, directors, consultants
and other individuals providing services to the Company. No person will be
eligible to receive stock options or stock appreciation rights with respect to
more than 150,000 shares of Common Stock under the Equity Incentive Plan in any
calendar year. Shares that are subject to an award granted under the Equity
Incentive Plan but are forfeited, canceled, reacquired by the Company, satisfied
without the issuance of shares of Common Stock or otherwise terminated other
than by exercise, will again be available for grant or issuance under the Equity
Incentive Plan. The Equity Incentive Plan will be administered by the Board or
the Compensation Committee of the Board (the "Committee"), which within 60 days
of this offering will consist of two persons who are "outside directors" as that
term is defined under the Exchange Act and Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The Equity Incentive Plan permits
the Committee to grant options that are either incentive stock options (as
defined in Section 422 of the Code) or nonqualified stock options, on terms
(including vesting schedules) determined by the Committee, subject to certain
statutory and other limitations in the Equity Incentive Plan. The exercise price
of options
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granted under the Equity Incentive Plan will be determined by the Committee,
subject to the requirements that the exercise price of incentive stock options
must not be less than the fair market value of the Common Stock on the date the
option is granted and the exercise price of nonqualified options granted under
the Equity Incentive Plan must not be less than 85% of such fair market value.
Options granted under the Equity Incentive Plan must be exercised within three
months after termination of the optionee's status as an employee or consultant
of the Company (or such later date, not to exceed 60 months, as specified by the
Committee) or within 12 months after the optionee's termination by death,
disability or retirement, except that options held by any optionee whose
employment or other business relationship with the Company is terminated for
cause will terminate immediately upon termination of the optionee's status (or
such later date, not to exceed 30 days, as determined by the Committee).
In addition to, or in tandem with, awards of stock options, the Committee
may grant participants stock appreciation rights with an exercise price of no
less than the fair market value of the Company's Common Stock on the date the
stock appreciation right is granted or, in the case of stock appreciation rights
granted in tandem with stock options, with an exercise price no less than the
option exercise price per share. The Committee may grant participants restricted
stock awards under the Equity Incentive Plan to purchase an aggregate of up to
125,000 shares of the Company's Common Stock at such purchase price as
determined by the Committee (but no less than 85% of the fair market value of
the Company's Common Stock on the date of the award) and upon such terms,
including vesting schedule, as the Committee may determine. Under the Equity
Incentive Plan, restricted stock awards may be awarded for the satisfaction of
performance goals established in advance.
In the event of a merger, consolidation, reverse merger or similar corporate
transaction, any or all outstanding awards under the Equity Incentive Plan may
be assumed, converted, replaced or substituted by the successor corporation (if
any), which assumption, conversion, replacement or substitution will be binding
on all participants in the Equity Incentive Plan. In the event such successor
corporation (if any) does not assume or substitute awards, such awards will
expire in connection with such transaction at such time and on such conditions
as determined by the Board. The Equity Incentive Plan has no termination date,
except that no incentive stock options will be granted under the Equity
Incentive Plan after December 2006. The Equity Incentive Plan may be terminated
at any time by the Board or otherwise in accordance with the provisions of the
Equity Incentive Plan.
1996 EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board in December 1996 and is
expected to be approved by the stockholders in February 1997. A total of 140,000
shares of the Company's Common Stock is reserved for issuance under the Purchase
Plan. The Purchase Plan will become effective on the Effective Date. The
Purchase Plan permits eligible employees to acquire shares of the Company's
Common Stock through payroll deductions. The Purchase Plan is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Code.
Eligible employees may select a rate of payroll deduction between 1% and 20% of
their compensation, up to an aggregate payroll deduction not to exceed $21,250
in any calendar year. Each offering under the Purchase Plan will be for a period
of 24 months (the "Offering Period") commencing, except for the first Offering
Period, on the first day of February and August of each year. Each Offering
Period will consist of four six-month purchase periods (each a "Purchase
Period"). The Board has the power to change the duration of Offering Periods or
Purchase Periods without stockholder approval, provided that the change is
announced at least 15 days prior to the scheduled beginning of the first
Offering Period or Purchase Period to be affected. The first Offering Period
will begin on the Effective Date and will end on January 31, 1999, unless
otherwise determined by the Board. The purchase price for the Company's Common
Stock purchased under the Purchase Plan is 85% of the lesser of the fair market
value of the Company's Common Stock on the first day of the applicable Offering
Period or the last day of the respective Purchase Period. The Purchase Plan will
terminate on the earlier of termination by the Board, issuance of all the shares
reserved under the Purchase Plan or ten years from the date the Purchase Plan
was adopted by the Board.
401(K) PLAN. The Company's 401(k) Plan (the "401(k) Plan") is a defined
contribution 401(k) profit sharing plan intended to qualify under Section 401 of
the Code. Employees of the Company are eligible to
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participate in the 401(k) Plan on the first day of the month coinciding with or
immediately following completion of three months of employment. A participating
employee, by electing to defer a portion of his or her compensation, may make
pre-tax contributions to the 401(k) Plan, subject to limitations under the Code,
of a percentage of his or her total compensation. Employee contributions and the
investment earnings thereon are fully vested at all times. The Company is not
required to contribute to the 401(k) Plan and had made no voluntary
contributions through 1995. In 1996, the Company made matching contributions to
the 401(k) Plan equal to 20% of each participating employee's contribution, up
to a maximum annual matching contribution of $1,900. Matching contributions
aggregated $60,419 for 1996 and will be fully vested after three years.
EXECUTIVE INCENTIVE PLAN. The Company's Executive Incentive Plan ("EIP")
provides for payment of annual bonuses to key employees of the Company based on
the Company's overall financial performance and the participant's achievement of
individual financial, strategic and tactical goals. For 1996, the EIP covered 12
officers and key employees, who, given that the Company's 1996 operating income
from continuing operations exceeded a predetermined target amount, will receive
bonuses, if any, in February 1997. Each participant's individual performance
will be rated between 0% and 200% based upon the achievement of or the failure
to achieve individual performance goals established at the beginning of the
year. A participant with an individual performance rating of 100% (satisfactory
completion of all individual goals) for 1996 would receive a bonus of
approximately 22.6% of annual base salary.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that: (i) the Company is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law; (ii) the Company may, in its discretion, indemnify other
persons as set forth in the Delaware General Corporation Law; (iii) the Company
is required to advance expenses, as incurred, to its directors and officers in
connection with a legal proceeding (subject to certain exceptions); (iv) the
rights conferred in the Bylaws are not exclusive; and (v) the Company is
authorized to enter into indemnification agreements with its directors,
officers, employees and agents.
The Company intends to enter into Indemnification Agreements with each of
its current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification set
forth in the Company's Bylaws and to provide additional procedural protections.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director except for liability: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the director derived an improper personal
benefit. The Company, with approval of the Board, has applied for, and expects
to obtain, directors and officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be required
or permitted. The Company is not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the Common Stock of the
Company had or will have a direct or indirect material interest other than (i)
compensation agreements, which are described, where required, in "Management,"
and (ii) the transactions described below.
TRANSACTIONS WITH PACIFIC MEDIA DEVELOPMENT, INC. AND VICTOR COMPANY OF JAPAN,
LIMITED
The following transactions involve Victor Company of Japan, Limited ("JVC")
and entities that are owned by JVC. Through a wholly-owned subsidiary, JVC owns
100% of Pacific Media Development, Inc. ("Pacific Media"). JVC is a beneficial
owner of the shares of the Company's Common Stock that are held of record by
Pacific Media and represent more than 5% of the Company's Common Stock.
In May 1991, the Company and one of its stockholders entered into a Stock
and Convertible Note Purchase Agreement (the "Purchase Agreement") with a
trustee for Pacific Media pursuant to which Pacific Media acquired beneficial
ownership of shares of the Company's Common Stock and Series A Preferred Stock
and a promissory note in the principal amount of approximately $3.0 million (the
"Convertible Note"), which was convertible into Series A Preferred Stock. In
July 1996, Pacific Media, acting through the trustee, acquired 543,099 shares of
the Company's Series A Preferred Stock upon the conversion of the Convertible
Note. Pursuant to the Purchase Agreement, Pacific Media has a right to purchase
a pro rata portion (proportionate to its ownership interest in the Company) of
any equity securities offered by the Company, excluding: (i) shares issued in
this offering; (ii) shares issued pursuant to certain equity compensation
arrangements; and (iii) provided that Pacific Media's interest in the Company
would not thereby be reduced below 25%, shares issued by Macrovision in
connection with any acquisition by it of another company. In addition, pursuant
to the Purchase Agreement, Pacific Media acquired rights to purchase from
persons who were stockholders or option holders of the Company in June 1991 all
of their Common Stock at a formula-determined price upon the Company's filing of
a registration statement for an initial public offering. In January 1997, the
Company and Pacific Media entered into a Waiver Agreement, pursuant to which
Pacific Media waived its rights to purchase shares of the Company's Common Stock
from stockholders and option holders triggered by the filing of the registration
statement for this offering and any pre-effective amendments thereto filed prior
to April 1, 1997. Upon the completion of this offering, all rights of Pacific
Media to purchase Common Stock of the Company from such persons will expire.
Pursuant to the Purchase Agreement, the Company may not divide or assign any
rights to its patents that were existing or pending in June 1991, without the
prior written consent of Pacific Media, which consent may not be unreasonably
withheld.
In January 1997, the Company and JVC entered into a Copy Protection
Technology Agreement (the "Technology Agreement"), pursuant to which the Company
agreed to license its copy protection technologies to JVC for use in territories
in which the Company has issued patents, on terms and conditions comparable to
those provided under agreements between the Company and parties situated
similarly to JVC. Additionally, the Company agreed to continue to make its copy
protection technologies generally available for license to third parties on
terms commercially reasonable to the Company in the venues and for the purposes
that the Company currently licenses such technologies. The Technology Agreement
gives JVC the right to sublicense the Company's copy protection technologies to
certain third parties on terms and conditions comparable to those provided in
similar agreements previously entered into by the Company, with 95% of the
royalties from such sublicenses payable to the Company or its successor, in the
event that a party other than JVC acquires a majority interest in the Company or
acquires the Company's copy protection business or patents, and following such
acquisition the Company or its successor refuses to continue to license the
Company's copy protection technologies on a nondiscriminatory basis to its
current customers and similarly situated parties. See "Risk Factors--Effect of
Anti-Takeover Provisions."
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The Company and JVC are parties to a Technology Application Agreement dated
November 29, 1988 (the "Application Agreement"), a Duplicator Agreement dated
June 1, 1988 (the "Duplicator Agreement") and an Agreement dated July 15, 1994
(the "Video Agreement"). Pursuant to the Application Agreement, JVC has applied
the Company's copy protection process to prerecorded videocassettes manufactured
and distributed in Japan by JVC. Pursuant to the Duplicator Agreement, JVC has
applied the Company's copy protection process to prerecorded videocassettes
manufactured and distributed in Japan by certain of the Company's licensees.
Pursuant to the Video Agreement, JVC developed a prototype of equipment to apply
a copy protection process to prerecorded videocassettes, and granted the Company
exclusive rights to purchase such equipment from JVC for resale and to
sublicense the copy protection technology for use with the equipment. Between
January 1, 1994 and December 31, 1996, the Company recognized revenue from JVC
of approximately $41,694 under the Application Agreement. During the same
period, the Company recognized revenue from JVC of approximately $165,750 in
license fees and the Company incurred $45,203 in service fees payable to JVC,
both under the Duplicator Agreement, and the Company paid JVC $23,914 under the
Video Agreement.
The Company, Victor Technobrain Co., Ltd. ("Techno"), a wholly-owned
subsidiary of JVC, and Video Culture Institute, Inc. ("VCI") are parties to a
License Agreement dated September 26, 1995, as amended June 30 and September 30,
1996, pursuant to which Techno and VCI license the Company's copy protection and
PhaseKrypt technologies for development of equipment for electronic motion
picture distribution and exhibition. The license granted to Techno is
nonexclusive for the development and manufacture of the products to be sold to
VCI in Japan. The Company has paid to Techno a development fee of $50,000 under
this agreement and owes an additional $50,000 to Techno after the Company
receives certain fees from VCI.
The Company's Japanese subsidiary ("Macrovision Japan") and Techno are
parties to a Technical Consulting Agreement dated as of July 1, 1996 (the
"Consulting Agreement"), pursuant to which Techno agreed to provide technical
consulting services as assigned by certain officers of the Company or
Macrovision Japan in connection with technical support to licensed duplicators,
rights owners and system operators, set-top decoder manufacturers and
semiconductor companies that provide integrated circuits for set-top decoders in
certain Asian countries. The Consulting Agreement provides for Macrovision Japan
to pay a consulting fee of approximately $85 per hour, subject to a minimum
consulting fee of approximately $1,700 per quarter, and to reimburse Techno for
its expenses in performing services under the Consulting Agreement. During 1996,
the Company paid Techno an initial training fee of approximately $3,300 and a
total of approximately $5,800 in consulting fees. (Amounts paid and payable
under the Consulting Agreement are denominated in yen, and the dollar
equivalents stated above are based on current exchange rates).
AGREEMENTS WITH MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD.
The following transactions involve Matsushita Electric Industrial Co., Ltd.
("Matsushita"), which owns approximately 51% of JVC and, in one instance, also a
subsidiary of Matsushita.
In November 1996, the Company entered into a Digital Versatile Disc
Player/Digital Video Cassette Recorder License Agreement for Anticopy Technology
with Matsushita, pursuant to which Matsushita is authorized to include
integrated circuits incorporating the Company's copy protection technology in
DVD players and digital VCRs that it manufactures. The terms and conditions of
this agreement, pursuant to which Matsushita must choose between (i) a
royalty-free license for which it must make the VCRs or television sets that it
manufactures compatible with the Company's copy protection technology or
(ii) payment of an up-front fee of $100,000 and an additional $5.00 (or, if
greater, 2% of the wholesale price) per unit, are not more favorable to
Matsushita than the terms and conditions of the Company's license agreements
with other manufacturers of DVD players and digital VCRs.
In July 1996, the Company entered into a Copy Protection Technology License
Agreement with Matsushita, pursuant to which Matsushita and its subsidiaries are
authorized to include integrated circuits incorporating the Company's copy
protection technology in digital set-top decoders they manufacture. The
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terms and conditions of this agreement, pursuant to which Matsushita has paid
the Company an initial fee of $50,000 and is obligated to pay an additional
$0.60 per unit, are not more favorable to Matsushita than the terms and
conditions of the Company's license agreements with 33 other digital set-top
decoder manufacturers.
In August 1992, the Company entered into a License, Development and
Marketing Agreement with Matsushita and its wholly-owned subsidiary, Matsushita
Avionics Development Corporation ("MADC"). Under this agreement, MADC has the
right to include the descrambling component of the Company's PhaseKrypt video
scrambling technology in MADC's commercial airline passenger entertainment and
cabin management systems. MADC is obligated to pay the Company $500 for each
videocassette player containing such descrambling component that is installed in
an airplane. To date, MADC has not installed any such equipment and the Company
has not been paid any amounts pursuant to this agreement.
CAPITALIZATION AND SPINOFF OF COMMAND AUDIO CORPORATION
CAC was incorporated in October 1995 as a wholly-owned subsidiary of the
Company. The Company initially acquired 1,000,000 shares of CAC common stock for
technology and other assets with a historical cost of $200,000 and 250,000
shares of CAC Series A preferred stock for $500,000 in cash in November 1995.
The Company acquired an additional 250,000 shares of CAC Series A preferred
stock for $500,000 in cash in April 1996.
On July 31, 1996, the Company and CAC entered into a Recapitalization and
Stock Purchase Agreement pursuant to which the Company purchased from CAC
604,000 shares of CAC common stock and 396,000 shares of CAC Series B preferred
stock for the aggregate consideration of $1.0 million paid in August 1996 in
cash and in September 1996 pursuant to a secured promissory note, 194,444 shares
of the Company's Common Stock, subject to the terms and conditions of a
Restricted Stock Acquisition Agreement and the surrender and delivery to CAC of
500,000 shares of CAC Series A preferred stock. Pursuant to the Restricted Stock
Acquisition Agreement, as amended as of November 29, 1996 and January 29, 1997,
the 194,444 shares of the Company's Common Stock owned by CAC are vested. CAC
has agreed to sell all of such shares in this offering. As a result of the
recapitalization and after the dividend described below, the Company holds 19.8%
of the voting stock of CAC. CAC also granted to the Company a right of first
refusal to purchase additional CAC stock to maintain its 19.8% ownership if and
when CAC offers additional stock, subject to certain exceptions. John O. Ryan,
Chairman of the Board and Chief Executive Officer of the Company, is a director
of CAC. See Note 4 of Notes to Consolidated Financial Statements.
The Company and CAC also entered into a Technology Transfer and Royalty
Agreement dated as of July 31, 1996 and amended as of November 29, 1996,
pursuant to which the Company assigned to CAC all rights in certain technology
and released its reversion rights in technology that the Company had previously
assigned to CAC. In consideration of such assignment and release, CAC agreed to
pay to the Company royalties equal to 2.0% of CAC's gross revenues (as defined
in the agreement) for 12 years, beginning when CAC has operating revenues from
certain sources or, at the election of the Company, at any time prior thereto.
In addition, CAC owes the Company a total of $328,948 for allocated facilities
and services costs and other expenses that the Company incurred on behalf of
CAC. Pursuant to an unsecured promissory note, CAC has agreed to pay this amount
to the Company, plus interest at the rate of 9% per annum, on July 1, 1998.
In August 1996, the Company distributed to its stockholders as a dividend an
aggregate of 1,395,218 shares of common stock of CAC, which represented
approximately 69.8% of the then outstanding voting stock of CAC. All
stockholders on July 12, 1996 participated in such dividend distribution in
proportion to the number of shares of the Company's Common and Series A
Preferred Stock then held. At the same time, the Company also distributed to its
employees as bonuses an aggregate of 208,782 shares of common stock of CAC,
which represented approximately 10.4% of the then outstanding voting stock of
CAC. See "Management--Executive Compensation" and Note 4 of Notes to
Consolidated Financial Statements.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of December 31,
1996, and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, by: (i) each person known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock; (ii) each of the Company's
directors; (iii) each Named Officer (see "Management--Executive Compensation");
(iv) all executive officers and directors as a group; and (v) each Selling
Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR TO THE OWNERSHIP AFTER THE
OFFERING(1) NUMBER OF OFFERING(1)(2)
------------------------- SHARES BEING -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------------------ ---------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Victor Company of Japan, Limited (3)............ 2,637,043 49.5% 555,555 2,081,488 30.8%
John O. Ryan (4)................................ 699,672 13.1 -- 699,672 10.3
Carol Ann Farrow (5)............................ 372,722 7.0 -- 372,722 5.5
Command Audio Corporation....................... 194,444 3.6 194,444 -- --
William A. Krepick (6).......................... 119,946 2.2 -- 119,946 1.8
Brian T. and Linda J. Prinn, Trustees (7)....... 92,082 1.7 28,192 63,890 *
Richard S. Matuszak (8)......................... 74,406 1.4 74,406 1.1
Robert J. Lowe.................................. 54,166 1.0 22,222 31,944 *
Whit T. Jackson (9)............................. 49,999 * 2,499 47,500 *
Brian R. Dunn (10).............................. 10,647 * 5,000 5,647 *
Mark S. Belinsky (11)........................... 4,629 * -- 4,629 *
Patrice J. Capitant (12)........................ -- -- -- -- --
Twenty-four other selling stockholders as a
group (each individually owning less than 1%
of the Company's Common Stock) (13)........... 350,130 6.5 108,072 242,078 3.6
All executive officers and directors as a group
(8 persons) (14).............................. 1,017,632 18.5 7,499 1,010,133 14.5
</TABLE>
- ------------------------
* Less than 1%.
(1) Assumes conversion of all of the Company's outstanding shares of Preferred
Stock into Common Stock. Unless otherwise indicated below, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days of December 31, 1996 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
352,500 shares from the Company is not exercised.
(3) These shares are held of record by Pacific Media, an indirect, wholly owned
subsidiary of JVC. From June 12, 1991 until conversion of the Convertible
Note in July 1996, Pacific Media elected two directors of the Company. The
address of JVC is 12, 3-chome, Moriya-cho, Kanagawa-ku, Yokohama 221, Japan.
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(4) Represents 555,555 shares held of record by a trust of which Mr. Ryan and
his wife are the trustees, 103,289 shares held of record by Mr. Ryan, 29,162
shares held of record by Mr. Ryan as custodian for various family members
and 11,666 shares held of record by one of his daughters. Mr. Ryan is the
Chairman of the Board of Directors, Chief Executive Officer and Secretary of
the Company. His address is 1341 Orleans Drive, Sunnyvale, California 94089.
(5) Includes 322,722 shares held of record by Ms. Farrow as Trustee of the
Farrow Trust U/T/D December 18, 1990. The address of Ms. Farrow is P.O. Box
789, Geyserville, California 95441.
(6) Includes 2,777 shares held of record by Mr. Krepick's son. Also includes
90,740 shares subject to options exercisable within 60 days of December 31,
1996. Mr. Krepick is President, Chief Operating Officer and a director of
the Company.
(7) Represents 80,972 shares held of record by Brian T. and Linda J. Prinn as
Trustees of the Prinn Family Trust, of which 25,416 shares are being
offered, and 5,555 shares held of record by each of the Erin M. Prinn Trust
and the Ian T. Prinn Trust, of which each such trust is offering 1,388
shares.
(8) Represents 28,085 shares held of record by Mr. Matuszak, 15,766 shares as
to which Mr. Matuszak shares beneficial ownership and 30,555 shares subject
to options exercisable within 60 days of December 31, 1996. Mr. Matuszak is
Vice President, Special Interest Copy Protection and a director of the
Company. His address is 1341 Orleans Drive, Sunnyvale, California 94089.
(9) Total shares beneficially owned prior to the offering includes 49,166
shares subject to options exercisable within 60 days of December 31, 1996.
Total shares beneficially owned after the offering represents shares subject
to options exercisable within 60 days of December 31, 1996. Mr. Jackson is
Vice President, Video Encryption Technologies of the Company.
(10) Represents shares subject to options exercisable within 60 days of December
31, 1996. Mr. Dunn is Vice President, CineGuard Business Development of the
Company.
(11) Represents shares subject to options exercisable within 60 days of December
31, 1996. Mr. Belinsky is Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company.
(12) Mr. Capitant is Vice President, Engineering of the Company.
(13) Includes 37,887 shares subject to options exercisable within 60 days of
December 31, 1996.
(14) Represents the shares referenced in footnotes (4), (6) and (8) through (12)
and 58,333 additional outstanding shares.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, $0.001 par value,
6,762,207 of which will be outstanding, and 5,000,000 shares of Preferred Stock,
$0.001 par value, none of which will be outstanding. As of December 31, 1996,
and assuming the conversion of each outstanding share of Preferred Stock into
Common Stock, there were outstanding 5,328,191 shares of Common Stock held of
record by approximately 130 stockholders, and options to purchase 700,565 shares
of Common Stock. See Note 5 of Notes to Consolidated Financial Statements.
COMMON STOCK
Subject to preferences that may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and in
such amounts as the Board may from time to time determine. Each stockholder is
entitled to one vote for each share of Common Stock held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not authorized by the Company's Certificate of Incorporation, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. The Common Stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock and any participating Preferred Stock outstanding at
that time after payment of liquidation preferences, if any, on any outstanding
Preferred Stock and payment of other claims of creditors. Each outstanding share
of Common Stock is, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
(the "Convertible Preferred") will be converted into shares of Common Stock. See
Note 5 of Notes to Consolidated Financial Statements for a description of the
Convertible Preferred. The Board is authorized, subject to any limitations
prescribed by Delaware law, to provide for the issuance of additional shares of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding), without any further vote or action by the stockholders. The
Board may authorize the issuance of Preferred Stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Preferred Stock; however, in
the future the Company plans to consider the adoption of a stockholder rights
plan in order to protect the Company's stockholders from coercive or abusive
takeover tactics and to afford the Company's Board more negotiating leverage in
dealing with potential acquirors.
CHANGE OF CONTROL PROVISIONS
Effective upon the closing of this offering, the Company's Certificate of
Incorporation contains a provision eliminating the ability of the Company's
stockholders to take action by written consent. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal,
to maintain independent ownership and control of the Company's copy protection
technologies and to render the use of stockholder written consent unavailable as
a tactic in a proxy fight. However, such provision could have the effect of
discouraging others from making tender offers for the Company's shares, thereby
inhibiting increases in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provision also may have
the effect of preventing changes in the management of
57
<PAGE>
the Company. Furthermore, the Company's Bylaws limit the ability of stockholders
of the Company to raise matters at a meeting of stockholders without giving
advance notice thereof.
DELAWARE ANTI-TAKEOVER LAW
Upon the closing of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the
"Anti-Takeover Law") regulating corporate takeovers. The Anti-Takeover Law
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination" (which includes a merger or sale of
more than 10% of the corporation's assets) with any "interested stockholder" (a
stockholder who owns 15% or more of the corporation's outstanding voting stock)
for three years following the date that such stockholder became an "interested
stockholder." A Delaware corporation may "opt out" of the Anti-Takeover Law with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of the
Anti-Takeover Law.
REGISTRATION RIGHTS
Beginning six months after this offering, the holders of 2,081,488 shares of
Common Stock (the "Registrable Securities") will have certain rights to register
those shares under the Securities Act. If requested by the holders of more than
40% of such Registrable Securities with an aggregate proposed offering price of
at least $10,000,000, the Company must file a registration statement under the
Securities Act covering all Registrable Securities requested to be included by
all holders of such Registrable Securities. This right expires in June 2001. The
Company may not be required to effect more than one such registration pursuant
to these demand registration rights. The expenses incurred in connection with
such registrations (other than underwriters' or brokers' discounts and
commissions) will be borne by the Company and the holders of Registrable
Securities pro rata.
In addition, if the Company proposes to register any of its securities under
the Securities Act, other than in connection with a Company employee benefit
plan or a corporate reorganization, the holders of Registrable Securities may
require the Company to include all or a portion of their shares in such
registration, although the managing underwriter of any such offering has certain
rights to limit the number of shares in such registration. All expenses incurred
in connection with such registrations (other than underwriters' discounts and
commissions) will be borne by the Company. These registration rights expire five
years after the Effective Date.
Further, holders of Registrable Securities may require the Company to
register all or any portion of their Registrable Securities on Form S-3 when
such form becomes available to the Company, subject to certain conditions and
limitations. The Company may be required to effect up to one such registration
per year. All expenses incurred in connection with such registrations (other
than underwriters' or brokers' discounts and commissions) will be borne by the
Company. These registration rights expire five years after the Effective Date.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is The First
National Bank of Boston.
LISTING
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market, upon completion of this offering, under the trading symbol
"MVSN."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. No prediction can be made as to the effect, if any, that market sales
of shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect market prices
prevailing from time to time.
Upon completion of this offering, the Company will have outstanding
approximately 6,762,207 shares of Common Stock. Of these shares, the 2,350,000
shares sold in this offering will be freely tradable without restriction under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act. The remaining 4,412,207 shares
of Common Stock held by existing stockholders were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act. The Company's executive officers, directors and
principal stockholders and certain other of the Company's stockholders, who
following the offering together will hold an aggregate of approximately
4,323,174 shares of the Company's Common Stock, have entered into lock-up
agreements providing that they will not, without the prior written consent of
Montgomery Securities, offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of the shares of Common Stock owned by them or
that could be purchased by them through the exercise of options to purchase
Common Stock of the Company until 180 days after the date of this Prospectus, or
such earlier date as may be agreed to by Montgomery Securities in its sole
discretion.
As a result of the foregoing lock-up agreements and securities law
restrictions, 95,495 shares of the Company's Common Stock will be eligible for
resale without restriction on the Effective Date pursuant to Rule 144(k),
approximately 204 shares of the Company's Common Stock will be eligible for
resale pursuant to Rule 701 beginning 90 days after the Effective Date and the
remaining shares of the Company's Common Stock will be eligible for resale,
pursuant to either Rule 701 or Rule 144, beginning 180 days after the Effective
Date.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two years (including
the holding period of any prior owner except an affiliate) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 67,600 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares to be sold for at least three years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with the holding period requirements of Rule 144. Any employee,
officer or director of or consultant to the Company who purchased his or her
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. Each holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.
59
<PAGE>
Shortly after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's Option Plan or reserved for issuance
under the Equity Incentive Plan, Directors Plan or Purchase Plan. Based upon the
number of shares subject to outstanding options or reserved for issuance at
December 31, 1996 under all such plans, such registration statement would cover
approximately 1,290,781 shares. This registration statement will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to lockup agreements and Rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market immediately.
60
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Hambrecht & Quist LLC and Cowen & Company (the "Representatives"),
have severally agreed, subject to the terms and conditions in the Underwriting
Agreement (the "Underwriting Agreement") by and among the Company, the Selling
Stockholders and the Underwriters, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities............................................................
Hambrecht & Quist LLC............................................................
Cowen & Company..................................................................
----------
Total.......................................................................... 2,350,000
----------
----------
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the shares of Common Stock to
the public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than
$ per share; and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. After the offering, the offering price and other selling terms may be
changed by the Representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 352,500 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,350,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The holders of an aggregate of 4,323,174 of the outstanding shares of Common
Stock of the Company have agreed, subject to certain limited exceptions, that
they will not, without the prior written consent of Montgomery Securities (which
consent may be withheld in its sole discretion), directly or indirectly, sell,
offer, contract or grant any option to sell, make any short sale (including
without limitation any "short vs. the box"), pledge, transfer, establish an open
"put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for or
convertible
61
<PAGE>
into shares of Common Stock, currently owned or hereafter acquired (excluding
any shares of Common Stock purchased on the open market), either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act) by such party, or
publicly announce such party's intention to do any of the foregoing, for a
period of 180 days after the date of this Prospectus. The Company has agreed in
the Underwriting Agreement that, during the period of 180 days after the date of
this Prospectus, without the prior written consent of either Montgomery
Securities or each of the Representatives (which consent may be withheld at the
sole discretion of Montgomery Securities or the Representatives, as the case may
be), it will not issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with the Company's Common Stock or other equity
security, subject to certain limited exceptions. See "Shares Eligible for Future
Sale."
The Representatives have advised the Company that the Underwriters will not
confirm sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiations among the Company, the Selling
Stockholders and the Representatives. Among the factors expected to be
considered in such negotiations are the history of, and prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, its past and present operations and financial performance, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
offering and the market prices of and demand for publicly traded common stocks
of comparable companies in recent periods and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company and the Selling Stockholders by Fenwick &
West LLP, Palo Alto, California. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, P.C., Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of and for the years
ended December 31, 1995 and 1996 have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements, excluding the consolidated balance
sheet, of the Company for the year ended December 31, 1994, have been included
herein in reliance upon the report of Ernst & Young LLP, independent auditors,
appearing elsewhere herein, given upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and exhibits. Statements
contained in this Prospectus regarding the contents of any contract or any other
document to which reference is made are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal
62
<PAGE>
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information filed electronically with the
Commission. The address of the site is http://www.sec.gov.
CHANGE IN INDEPENDENT AUDITORS
At a meeting on November 3, 1995, the Board approved the retention of KPMG
Peat Marwick LLP as the independent auditors for the Company after the Company's
former auditors, Ernst & Young LLP, chose not to stand for reappointment. The
former auditors' report with respect to the Company's consolidated financial
statements for the year ended December 31, 1994, which report is included in
this Prospectus, does not contain an adverse opinion or a disclaimer of an
opinion or qualification or modification as to uncertainty, audit scope or
accounting principles. During such period and extending to the date the former
auditors chose not to stand for reappointment, there were no disagreements with
the former auditors on any matters of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure that, if not
resolved to the satisfaction of the former auditors, would have been referred to
in the auditors' report. Prior to retaining KPMG Peat Marwick LLP, the Company
had not consulted with KPMG Peat Marwick LLP regarding the application of
accounting principles or the form of audit opinion to be issued on the Company's
financial statements.
63
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................................. F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Income....................................... F-5
Consolidated Statements of Stockholders' Equity......................... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon the completion
of the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 1 of Notes to Consolidated
Financial Statements.
KPMG Peat Marwick LLP
February 10, 1997
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Macrovision Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Macrovision
Corporation and subsidiaries (the Company) as of December 31, 1995 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Macrovision
Corporation and subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
San Jose, California
February 7, 1997
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Macrovision Corporation
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Macrovision Corporation for the year ended December 31,
1994. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, at December 31, 1994 and the consolidated results of
operations of Macrovision Corporation and its cash flows for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
March 7, 1995
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 10 of Notes to Consolidated
Financial Statements.
/s/ Ernst & Young LLP
January 7, 1997
F-3
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL STOCKHOLDERS'
------------- --------- EQUITY
-------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 2,286 $ 2,409
Short-term investments............................................. 1,200 --
Accounts receivable, net of allowance for doubtful accounts of $280
and $267 as of December 31, 1995 and 1996, respectively.......... 2,568 3,376
Inventories........................................................ 826 550
Deferred tax assets................................................ 463 929
Prepaid expenses and other current assets.......................... 141 186
Net assets of discontinued operations.............................. 524 --
------------- ---------
Total current assets........................................... 8,008 7,450
Property and equipment, net.......................................... 1,833 2,017
Patents and other intangibles, net of accumulated amortization of
$209 and $401 as of December 31, 1995 and 1996, respectively....... 1,010 1,161
Receivable from related party........................................ -- 329
Other assets......................................................... 92 996
------------- ---------
$ 10,943 $ 11,953
------------- ---------
------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 638 $ 1,073
Accrued expenses................................................... 2,346 2,713
Deferred revenue................................................... 428 749
Income taxes payable............................................... 606 585
Current portion of capital lease liability......................... -- 105
Current portion of long-term debt.................................. 142 --
------------- ---------
Total current liabilities...................................... 4,160 5,225
Capital lease liability, net of current portion...................... -- 296
Long-term debt....................................................... 554 --
Convertible note..................................................... 3,038 --
Deferred tax liabilities............................................. 345 360
------------- ---------
8,097 5,881
Commitments and contingencies
Stockholders' equity:
Preferred stock, actual--$.001 par value, 5,000,000 shares
authorized; issuable in series; 1,376,432 shares designated
Series A convertible preferred stock; 833,333 shares issued and
outstanding as of December 31, 1995; 1,376,432 shares issued and
outstanding as of December 31, 1996; pro forma--no shares issued
and outstanding.................................................. 1 1 $ --
Common stock, actual--$.001 par value; 100,000,000 shares
authorized; 3,632,719 and 3,951,759 shares issued and outstanding
as of December 31, 1995 and 1996, respectively; pro
forma--50,000,000 shares authorized; 5,328,191 shares issued and
outstanding...................................................... 4 4 5
Additional paid-in capital......................................... 5,058 9,530 9,530
Stockholder notes receivable....................................... -- (157) (157)
Deferred stock compensation........................................ (240) (240)
Accumulated deficit................................................ (2,099) (2,931) (2,931)
Accumulated translation adjustment................................. (118) (135) (135)
------------- --------- -------
Total stockholders' equity..................................... 2,846 6,072 $ 6,072
------------- ---------
-------
-------
$ 10,943 $ 11,953
------------- ---------
------------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net revenues............................................................... $ 13,330 $ 14,189 $ 17,080
Costs and expenses:
Cost of revenues......................................................... 2,067 2,457 2,579
Research and development................................................. 2,355 2,161 2,527
Selling, general, and administrative..................................... 6,104 7,388 8,656
----------- ---------- ----------
Total costs and expenses............................................. 10,526 12,006 13,762
----------- ---------- ----------
Operating income from continuing
operations............................................................... 2,804 2,183 3,318
Interest and other expense, net............................................ (417) (433) (260)
----------- ---------- ----------
Income from continuing operations before income taxes................ 2,387 1,750 3,058
Provision for income taxes................................................. 886 694 1,223
----------- ---------- ----------
Net income from continuing
operations......................................................... 1,501 1,056 1,835
Discontinued operations:
Loss from operations of CAC business, net of income tax benefit of $80
and $204 as of December 31, 1995 and 1996, respectively................ -- (125) (663)
Provision for operating losses during holding period, net of income tax
benefit of $45 as of December 31, 1996................................. -- -- (164)
----------- ---------- ----------
Net income........................................................... $ 1,501 $ 931 $ 1,008
----------- ---------- ----------
----------- ---------- ----------
Computation of earnings per share:
Net income from continuing operations.................................... $ 1,056 $ 1,835
Preferred stock dividends................................................ (450) (587)
---------- ----------
Adjusted net income from continuing operations........................... 606 1,248
Discontinued operations.................................................. (125) (827)
---------- ----------
Earnings applicable to common stock...................................... $ 481 $ 421
---------- ----------
---------- ----------
Earnings (loss) per share:
Continuing operations.................................................... $ .15 $ .29
Discontinued operations.................................................. (.03) (.19)
---------- ----------
Net income........................................................... $ .12 $ .10
---------- ----------
---------- ----------
Shares used in computing earnings per share................................ 4,162,000 4,353,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
---------------------- ---------------------- PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
--------- ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1993................... 833,333 $ 1 3,620,113 $ 4 $ 5,035 $ --
Issuance of common stock upon exercise of
options........................................ -- -- 66 -- -- --
Cash dividends of $.22 per share paid on
2,359,568 shares of common stock............... -- -- -- -- -- --
Cash dividends of $.54 per share paid on
preferred stock................................ -- -- -- -- -- --
Translation adjustment........................... -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
--------- ----- --------- ----- ----------- -----
Balances as of December 31, 1994................... 833,333 1 3,620,179 4 5,035 --
Issuance of common stock upon exercise of
options........................................ -- -- 12,540 -- 23 --
Cash dividends of $.54 per share paid on
preferred stock................................ -- -- -- -- -- --
Translation adjustment........................... -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
--------- ----- --------- ----- ----------- -----
Balances as of December 31, 1995................... 833,333 1 3,632,719 4 5,058 --
Issuance of common stock upon exercise of
options........................................ -- -- 66,263 -- 171 --
Issuance of common stock in exchange for
stockholder note receivable.................... -- -- 58,333 -- 157 (157)
Issuance of common stock in connection with
recapitalization of Command Audio
Corporation.................................... -- -- 194,444 -- 875 --
Conversion of note into 543,099 shares of Series
A preferred stock.............................. 543,099 -- -- -- 3,038 --
Cash dividends of $.405 per share paid on 833,333
shares of preferred stock, $.117 per share paid
on 543,099 shares of preferred stock, and $.135
per share declared on 1,376,432 shares of
preferred stock ............................... -- -- -- -- -- --
Deferred stock compensation related to stock
option grants.................................. -- -- -- -- 231 --
Spin-off of Command Audio Corporation, including
deferred stock compensation.................... -- -- -- -- -- --
Amortization of deferred stock compensation...... -- -- -- -- -- --
Translation adjustment........................... -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
--------- ----- --------- ----- ----------- -----
Balances as of December 31, 1996................... 1,376,432 $ 1 3,951,759 $ 4 $ 9,530 $ (157)
--------- ----- --------- ----- ----------- -----
--------- ----- --------- ----- ----------- -----
<CAPTION>
ACCUMULATED TOTAL
DEFERRED STOCK ACCUMULATED TRANSLATION STOCKHOLDERS'
COMPENSATION DEFICIT ADJUSTMENT EQUITY
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1993................... $ -- $ (3,112) $ (62) $ 1,866
Issuance of common stock upon exercise of
options........................................ -- -- -- --
Cash dividends of $.22 per share paid on
2,359,568 shares of common stock............... -- (519) -- (519)
Cash dividends of $.54 per share paid on
preferred stock................................ -- (450) -- (450)
Translation adjustment........................... -- -- (10) (10)
Net income....................................... -- 1,501 -- 1,501
----- ------------- ----- -------------
Balances as of December 31, 1994................... -- (2,580) (72) 2,388
Issuance of common stock upon exercise of
options........................................ -- -- -- 23
Cash dividends of $.54 per share paid on
preferred stock................................ -- (450) -- (450)
Translation adjustment........................... -- -- (46) (46)
Net income....................................... -- 931 -- 931
----- ------------- ----- -------------
Balances as of December 31, 1995................... -- (2,099) (118) 2,846
Issuance of common stock upon exercise of
options........................................ -- -- -- 171
Issuance of common stock in exchange for
stockholder note receivable.................... -- -- -- --
Issuance of common stock in connection with
recapitalization of Command Audio
Corporation.................................... -- -- -- 875
Conversion of note into 543,099 shares of Series
A preferred stock.............................. -- -- -- 3,038
Cash dividends of $.405 per share paid on 833,333
shares of preferred stock, $.117 per share paid
on 543,099 shares of preferred stock, and $.135
per share declared on 1,376,432 shares of
preferred stock ............................... -- (587) -- (587)
Deferred stock compensation related to stock
option grants.................................. (231) -- -- --
Spin-off of Command Audio Corporation, including
deferred stock compensation.................... (189) (1,253) -- (1,442)
Amortization of deferred stock compensation...... 180 -- -- 180
Translation adjustment........................... -- -- (17) (17)
Net income....................................... -- 1,008 -- 1,008
----- ------------- ----- -------------
Balances as of December 31, 1996................... $ (240) $ (2,931) $ (135) $ 6,072
----- ------------- ----- -------------
----- ------------- ----- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................................... $ 1,501 $ 931 $ 1,008
Adjustments to reconcile net income to net cash provided by continuing operations:
Depreciation and amortization.............................................................. 549 572 1,002
Deferred income taxes...................................................................... (300) 194 (451)
Amortization of deferred stock compensation................................................ -- -- 180
Discontinued operations.................................................................... -- 125 827
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets............................... (1,077) (648) (577)
Accounts payable, accrued liabilities, deferred revenue, and income taxes payable........ 1,610 516 916
Other.................................................................................... 16 (46) (17)
--------- --------- ---------
Net cash provided by continuing operations............................................. 2,299 1,644 2,888
Net cash used in discontinued operations............................................... -- (649) (1,227)
--------- --------- ---------
Net cash provided by operating activities.............................................. 2,299 995 1,661
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments.......................................................... (1,800) -- --
Sales of short-term investments.............................................................. 300 600 1,200
Acquisition of property and equipment........................................................ (634) (1,412) (476)
Payments for patents and other intangibles................................................... (207) (185) (343)
Receivable from related party................................................................ -- -- (329)
Other, net................................................................................... (31) (32) (4)
--------- --------- ---------
Net cash (used in) provided by investing activities.................................... (2,372) (1,029) 48
--------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations........................................................ (4) -- (117)
Proceeds from long-term debt................................................................. -- 708 --
Payments on long-term debt................................................................... -- (12) (696)
Proceeds from issuance of common stock....................................................... -- 23 171
Payments of deferred offering costs.......................................................... -- -- (543)
Cash dividends............................................................................... (969) (450) (401)
--------- --------- ---------
Net cash (used in) provided by financing activities.................................... (973) 269 (1,586)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........................................... (1,046) 235 123
Cash and cash equivalents at beginning of year................................................. 3,097 2,051 2,286
--------- --------- ---------
Cash and cash equivalents at end of year....................................................... $ 2,051 $ 2,286 $ 2,409
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest................................................................................... $ 508 $ 536 $ 296
--------- --------- ---------
--------- --------- ---------
Income taxes............................................................................... $ 1,074 $ 155 $ 1,446
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Macrovision Corporation (the Company), which was formed in 1983, designs,
develops, and markets video security technologies and products that provide copy
protection and video scrambling for motion pictures and other proprietary video
materials. The Company is headquartered in Sunnyvale, California and has
subsidiaries in the United Kingdom and Japan.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks, money market funds and mutual
funds. All other liquid investments are classified as short-term investments.
Short-term investments consisted of auction rate preferred stock and municipal
debt in 1995.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 1995 and 1996, all investment securities
were designated as "available-for-sale." Available-for-sale securities are
carried at fair value based on quoted market prices, with unrealized gains and
losses, if material, reported in stockholders' equity.
Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in the
consolidated statements of operations. There have been no such inclusions
through December 31, 1996. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash equivalents:
Money market funds......................................................... $ 1,595 $ 803
Mutual funds............................................................... -- --
--------- ---------
1,595 803
--------- ---------
Short-term investments:
Auction rate preferred stock............................................... 900 --
Municipal debt............................................................. 300 --
--------- ---------
1,200 --
--------- ---------
$ 2,795 $ 803
--------- ---------
--------- ---------
</TABLE>
F-8
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Through December 31, 1996, the difference between the fair value and the
amortized cost of available-for-sale securities was insignificant; therefore, no
unrealized gains or losses have been recorded in stockholders' equity. As of
December 31, 1996, the average portfolio duration and contractual maturity was
less than three months.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are carried on
the balance sheet at cost. The Company computes depreciation for all property
and equipment using the straight-line method. The estimated useful lives of
assets range from three to five years. Amortization of equipment recorded under
capital leases is computed over the shorter of the lease term or the estimated
useful life of the equipment.
PATENTS
Patent application costs of $727,000 and $604,000 as of December 31, 1995
and 1996, respectively, are included in patents and other intangibles and, upon
the granting of the related patent, are amortized using the straight-line method
over the shorter of the estimated useful life of the patent or 17 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted 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 the
Company to review the recoverability of the carrying amount of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount
of patents or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to fair value is required.
Fair value may be determined by reference to discounted future cash flows over
the remaining useful life of the related asset. Such an adoption did not have a
material effect on the Company's consolidated financial position or results of
operations.
REVENUE RECOGNITION
Advanced license fees attributable to minimum copy quantities are deferred
until earned. Revenue from the duplication of videocassettes is earned based
upon reported volume of duplication or, in the case of agreements with minimum
guaranteed payments with no specified volume, on a straight-line basis over the
life of the agreement. Retroactive rebate credits on certain duplication
agreements that contain volume pricing adjustments are accrued based upon
anticipated unit volume. Nonrefundable license fees received from licensed
duplicators are recognized upon the delivery of processors allowing duplicators
the ability to
F-9
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
apply the Company's video copy protection process. Technology licensing revenue,
which applies principally to digital pay-per-view (PPV), cable and satellite
system operators, and set-top decoder manufacturers, is recognized upon release
of the rights to the technology and performance of all significant obligations.
Royalty revenue associated with technology licenses is recognized when earned
based upon reported unit sales, transaction based fees, or box office receipts.
Revenues from the sales of encoders, decoders, and systems incorporating the
Company's video copy protection and scrambling technologies are recognized upon
shipment provided that the Company has no significant additional performance
obligations.
COST OF REVENUES
The Company has agreements with certain licensed duplicators utilized by
customers of the Company's video copy protection technology. The Company has
agreed to pay these duplicators a specified fee per unit duplicated utilizing
the Company's video copy protection technology. Such amounts are charged to cost
of revenues when incurred and were $618,000, $583,000, and $596,000 as of
December 31, 1994, 1995, and 1996, respectively.
Video copy protection technology has stimulated the development of "black
boxes" to defeat the video copy protection process. The Company owns patents
that it believes are infringed by these "black box" manufacturers. The Company
has successfully settled legal actions against a number of companies that
produced and distributed "black boxes." These companies have agreed to cease and
desist from manufacturing, distributing, and/or selling the infringing products.
The legal costs associated with protecting these patents amounted to $83,000,
$78,000, and $30,000 as of December 31, 1994, 1995, and 1996, respectively, and
are included in cost of revenues as incurred. Cost of revenues also includes
amortization of patents.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. The translation of foreign currencies into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenues and expense accounts using a
weighted average exchange rate for the respective periods. The gains or losses
resulting from such translation are included in stockholders' equity.
Gains or losses resulting from foreign currency transactions included in the
consolidated statements of operations were not material in any of the periods
presented.
F-10
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Actual results could differ from those estimates.
BUSINESS AND CONCENTRATION OF CREDIT RISK
The Company sells its video scrambling products and licenses its video copy
protection and video scrambling technologies to customers in the home
videocassette, pay-per-view, cable, satellite, and corporate communication
markets primarily in United States, Europe, Japan, and the Far East. Most of the
Company's business is attributed to the licensing of its video copy protection
technology through Motion Picture Association of America movie studios. The
Company also licenses its digital PPV video copy protection technologies to
satellite and cable television operators and to the equipment manufacturers that
supply the satellite and cable television industries. The Company's video
scrambling technology is licensed to manufacturers of analog cable Pay TV
set-top decoders in developing cable television markets. The Company sells
encoders and decoders that incorporate the scrambling technology to private
analog satellite networks for business communications, education, and special
interest entertainment. The Company also sells specialized video scrambling
systems in the government, military, and law enforcement markets.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents, and
trade accounts receivable. The Company places its cash and cash equivalents
primarily in money market funds.
The Company performs ongoing credit evaluations of its customers and to date
has not experienced any material losses. Revenues from three significant
customers aggregated 45%, 44%, and 37% for the years ended December 31, 1994,
1995, and 1996, respectively. At December 31, 1996, receivables from these
customers aggregated 11% of net accounts receivable.
NET INCOME PER SHARE
Net income per share is computed using net income and is based on the
weighted average number of outstanding shares of common stock and, when
dilutive, convertible preferred stock and convertible debt on an "as if
converted" basis, and common equivalent shares from stock options and warrants
outstanding using the treasury stock method. Pursuant to the rules of the
Securities and Exchange Commission (SEC), all common and common equivalent
shares issued within 12 months of the initial filing of the registration
statement have been included in the computation as if they were outstanding for
all periods presented using the treasury stock method and the anticipated
initial public offering (IPO) price of $11.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 is effective for
fiscal years beginning after December 15, 1995, and requires that the Company
either recognize in its consolidated financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, or make
F-11
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
pro forma disclosures of such costs in a footnote to the consolidated financial
statements. The Company has elected to continue to use the intrinsic value-based
method of Accounting Principles Board (APB) Opinion No. 25, as allowed under
SFAS No. 123, to account for all of its employee stock-based compensation plans.
The adoption of SFAS No. 123 did not have a material effect on the Company's
consolidated financial position or results of operations.
REGISTRATION STATEMENT
In December 1996, the Board of Directors authorized the filing of a
registration statement with the SEC permitting the Company and certain
stockholders of the Company to sell shares of the Company's common stock in
connection with a proposed IPO. If the offering is consummated under the terms
presently anticipated, all the currently outstanding shares of preferred stock
will automatically convert into 1,376,432 shares of common stock upon the
closing of the IPO. The conversion of the preferred stock has been reflected in
the accompanying unaudited pro forma stockholders' equity as of December 31,
1996.
REINCORPORATION
In December 1996, the Board of Directors approved the Company's
reincorporation in the state of Delaware which will become effective prior to
the effectiveness of the proposed IPO. The Certificate of Incorporation of the
Delaware successor corporation authorizes 50,000,000 shares of common stock,
$.001 par value per share and 5,000,000 shares of preferred stock, $.001 par
value per share. The Board of Directors also approved a 1 for 1.8 reverse stock
split of common and preferred stock. The accompanying consolidated financial
statements have been retroactively restated to give effect to the
reincorporation and reverse stock split.
(2) FINANCIAL STATEMENT DETAILS
INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Raw materials................................................................. $ 238 $ 260
Work in progress.............................................................. 344 73
Finished goods................................................................ 244 217
--------- ---------
$ 826 $ 550
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Machinery and equipment.................................................... $ 2,106 $ 2,977
Leasehold improvements..................................................... 892 913
Furniture and fixtures..................................................... 327 429
--------- ---------
3,325 4,319
Less accumulated depreciation and amortization............................. 1,492 2,302
--------- ---------
$ 1,833 $ 2,017
--------- ---------
--------- ---------
</TABLE>
Equipment recorded under capital leases aggregated $518,000 with related
accumulated amortization of $130,000 as of December 31, 1996.
OTHER ASSETS
Other assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
----- ---------
<S> <C> <C>
Deferred offering costs........................................................ $ -- $ 543
Investment in CAC.............................................................. -- 357
Deposits and other assets...................................................... 92 96
--- ---------
$ 92 $ 996
--- ---------
--- ---------
</TABLE>
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Accrued compensation....................................................... $ 590 $ 1,069
Accrued lease commitments.................................................. 74 49
Interest payable........................................................... 128 --
Accrued property and sales taxes........................................... 113 157
Accrued professional fees.................................................. 265 234
Accrued rebates............................................................ 524 595
Other accrued liabilities.................................................. 652 609
--------- ---------
$ 2,346 $ 2,713
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net, consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income................................................... $ 86 $ 135 $ 67
Interest expense.................................................. (503) (536) (284)
Other............................................................. -- (32) (43)
--------- --------- ---------
$ (417) $ (433) $ (260)
--------- --------- ---------
--------- --------- ---------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information related to noncash investing and
financing activities is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Acquisition of equipment under capital lease.................... $ -- $ -- $ 518
--------- --------- ---------
--------- --------- ---------
Issuance of common stock in exchange for stockholder notes
receivable.................................................... $ -- $ -- $ 157
--------- --------- ---------
--------- --------- ---------
Conversion of convertible note into preferred stock............. $ -- $ -- $ 3,038
--------- --------- ---------
--------- --------- ---------
Deferred stock compensation related to stock option grants...... $ -- $ -- $ 231
--------- --------- ---------
--------- --------- ---------
Issuance of common stock in connection with recapitalization.... $ -- $ -- $ 875
--------- --------- ---------
--------- --------- ---------
Pro rata stock dividend distribution in connection with
spin-off...................................................... $ -- $ -- $ 1,253
--------- --------- ---------
--------- --------- ---------
Deferred stock compensation related to spin-off................. $ -- $ -- $ 189
--------- --------- ---------
--------- --------- ---------
</TABLE>
(3) DEBT
CONVERTIBLE NOTE
The Company issued to Pacific Media Development, Inc. (Pacific Media), an
indirect, wholly owned subsidiary of JVC and the holder of the Series A
convertible preferred stock (see Note 5), a convertible note with a principal
value of $3,038,000, which bore interest at a rate of 16.38% per annum payable
quarterly. The note was due in June 2001 and could have been extended for an
additional 10 years upon the mutual agreement of Pacific Media and the Company.
At the option of Pacific Media, the note was convertible into 543,099 shares of
Series A convertible preferred stock, subject to adjustment based upon certain
provisions of the note agreement. The note entitled Pacific Media to voting
rights equal to one vote for each share of common stock into which the note
could be converted, and the note entitled the holder to
F-14
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(3) DEBT (CONTINUED)
representation on the Company's Board of Directors. In July 1996, the note was
converted into 543,099 shares of Series A convertible preferred stock.
TERM LOAN AND LINE OF CREDIT
In June 1995, the Company entered into a Loan and Security Agreement that
included a $1,500,000 line of credit to support the issuance of commercial and
standby letters of credit and a $1,500,000 term facility, both bearing interest
at the prime rate (8.5% as of December 31, 1995). The Company terminated this
line of credit and term facility in June 1996.
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES
DISCONTINUED OPERATIONS
In October 1995, Command Audio Corporation (CAC) was incorporated as a
wholly-owned subsidiary of the Company to commercialize a distinctly new
audio-on-demand technology. On June 28, 1996, the Board of Directors approved
the discontinuation of the Company's involvement in CAC. CAC's operations,
technology, and employee base were discrete and separate from those of the
Company. From its inception until separation, CAC generated no revenues and
concentrated exclusively on research and development activities. In conjunction
with this decision, the Company entered into a Recapitalization and Stock
Purchase Agreement whereby the Company invested an additional $1,000,000 into
CAC, provided 194,444 shares of the Company's common stock to CAC pursuant to a
Restricted Stock Acquisition Agreement, and surrendered the Company's 500,000
shares of CAC's Series A preferred stock in exchange for 604,000 shares of CAC
common stock and 396,000 shares of CAC Series B preferred stock. Additionally,
the Company assigned to CAC all rights in certain technology and released its
reversion rights in technology that the Company had previously assigned to CAC.
In consideration of such assignment and release, CAC agreed to pay to the
Company royalties equal to 2% of CAC's gross revenues for 12 years, beginning
when CAC has operating revenues from certain sources or, at the election of the
Company, at any time prior thereto. No amounts have been paid to the Company
under this arrangement.
On December 6, 1996, the Company offered to repurchase 55,555 shares of its
common stock issued to CAC pursuant to a Restricted Stock Acquisition Agreement
for $9.00 per share and CAC released their demand registration rights. The offer
was subsequently rescinded and the Company agreed to allow CAC to sell its
shares of the Company in the IPO.
In August 1996, the Company distributed a portion of the 1,604,000 shares of
CAC common stock to the Company's stockholders on a pro rata basis as a dividend
and the remainder of the CAC common stock to the Company's employees as a stock
bonus while retaining the 396,000 shares of CAC Series B preferred stock,
representing a 19.8% interest in CAC. The CAC Common Stock that was distributed
to the Company's employees resulted in the recognition of $189,000 of deferred
compensation expense. This amount is being amortized over the 17 month vesting
period. The net assets of CAC included in the
F-15
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
accompanying consolidated balance sheet as of December 31, 1995, are summarized
as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Current assets..................................................... $ 461
Long-term assets................................................... 173
---------
634
Liabilities:
Current liabilities................................................ 110
---------
Net assets....................................................... $ 524
---------
---------
</TABLE>
Information relating to discontinued operations is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Costs and expenses.............................................. $ (205) $ (1,081)
----- -------------
Operating loss.............................................. (205) (1,081)
Other income, net............................................... -- 5
----- -------------
Loss before income taxes.................................... (205) (1,076)
Income tax benefit, net......................................... 80 249
----- -------------
Net loss.................................................... $ (125) $ (827)
----- -------------
----- -------------
</TABLE>
Included in income tax benefit, net for the year ended December 31, 1996, is
a write-off of the deferred tax asset attributable to CAC of $203,000.
CAC maintained its own set of accounts and identified expenses directly
attributable to CAC's operations. Where the Company provided services to CAC and
the specific identification of the related expenses was not practicable, the
expenses were recorded based upon an allocation of such items. This allocation
was based upon the proportional benefit received by CAC and, in management's
opinion, represents a fair and reasonable estimate of expenses incurred by CAC.
Amounts receivable from CAC related to such services are included in the
accompanying consolidated balance sheet as of December 31, 1996, as receivable
from related party.
The Company has recorded its investment in CAC based upon its historical
cost adjusted for losses incurred by CAC. The Company intends to hold this
investment for the long-term and monitors the recoverability of this investment
based on management's estimates of the fair value of CAC based on the
achievements of milestones specified in CAC's business plan. In the future, the
Company expects to evaluate the recoverability of this investment based on
successive rounds of third-party financing obtained by CAC. The investment is
classified in other assets in the accompanying consolidated balance sheet as of
December 31, 1996. The Company is not obligated by contract to provide future
funding to CAC and does not have the ability to exert significant influence over
the financial and operating policies of CAC. The Company accounts for this
investment by the cost method.
F-16
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
TRANSACTIONS WITH RELATED PARTIES
The Company and JVC are parties to a Technology Application Agreement dated
November 29, 1988 (the Application Agreement), a Duplicator Agreement dated June
1, 1988 (the Duplicator Agreement) and an Agreement dated July 15, 1994 (the
Video Agreement). Pursuant to the Application Agreement, JVC has applied the
Company's copy protection process to prerecorded videocassettes manufactured and
distributed in Japan by JVC. Pursuant to the Duplicator Agreement, JVC has
applied the Company's copy protection process to prerecorded videocassettes
manufactured and distributed in Japan by certain of the Company's licensees.
Pursuant to the Video Agreement, JVC developed a prototype of equipment to apply
a copy protection process to prerecorded videocassettes, and granted the Company
exclusive rights to purchase such equipment from JVC for resale and to
sublicense the copy protection technology for use with the equipment. Between
January 1, 1994 and December 31, 1996, the Company recorded revenue from JVC of
approximately $208,000 and the Company recorded expenses payable to JVC of
approximately $69,000 under these agreements.
In connection with a license agreement dated September 26, 1995 between the
Company, Victor Technobrain Co., Ltd. (Techno), a wholly owned subsidiary of
JVC, and an unrelated party, the Company has paid Techno a development fee of
$50,000 which has been recorded as an offset to the revenue recognized from the
unrelated party. An additional $50,000 is owed to Techno as of December 31, 1996
upon receipt of the final license payment from the unrelated party.
In July 1996, the Company entered into a Copy Protection Technology License
Agreement with Matsushita, which owns approximately 51% of JVC, pursuant to
which Matsushita and its subsidiaries are authorized to include integrated
circuits incorporating the Company's copy protection technology in digital
set-top decoders they manufacture. The terms and conditions of this agreement,
pursuant to which Matsushita has paid the Company an initial fee of $50,000 and
is obligated to pay an additional $0.60 per unit, are not more favorable to
Matsushita than the terms and conditions of the Company's license agreements
with 32 other digital set-top decoder manufacturers. The Company recorded
royalty revenue from Matsushita of approximately $6,000 during the year ended
December 31, 1996.
In January 1997, the Company and JVC entered into a Copy Protection
Technology Agreement (the Technology Agreement), pursuant to which the Company
agreed to license its copy protection technologies to JVC for use in territories
in which the Company has issued patents, on terms and conditions comparable to
those provided under agreements between the Company and parties situated
similarly to JVC. Additionally, the Company agreed to continue to make its copy
protection technologies generally available for license to third parties on
terms commercially reasonable to the Company in the venues and for the purposes
that the Company currently licenses such technologies. The Technology Agreement
gives JVC the right to sublicense the Company's copy protection technologies to
certain third parties on terms and conditions comparable to those provided in
similar agreements previously entered into by the Company, with 95% of the
royalties from such sublicenses payable to the Company or its successor, in the
event that a party other than JVC acquires a majority interest in the Company or
acquires the Company's copy protection business or patents, and following such
acquisition the Company or its successor refuses to continue to license the
Company's copy protection technologies on a nondiscriminatory basis to its
current customers and similarly situated parties.
F-17
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(5) STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
The Company's Certificate of Incorporation provide for the issuance of up to
5,000,000 shares of preferred stock, of which 1,376,432 shares have been
designated as Series A. In June 1991, the Company issued to Pacific Media
833,333 shares of Series A convertible preferred stock for gross proceeds of
$4,500,000. The shares are convertible into the Company's common stock on a
one-for-one basis at the option of the holder or automatically upon a qualifying
IPO. Each share of Series A convertible preferred stock entitles its holder to
one vote for each share of common stock into which such shares could be
converted, not to exceed voting rights equivalent to 49% of the outstanding
voting stock. Cumulative dividends at the rate of $.54 per share per year are
payable quarterly to the holder of the Series A convertible preferred stock. The
holder of the Series A convertible preferred stock is entitled to $5.40 per
share in the event of any liquidation, dissolution, or winding up of the
Company, plus an amount equal to all declared but unpaid dividends, prior and in
preference to any distribution to the holders of common stock.
In conjunction with the issuance of the Series A convertible preferred stock
and the convertible note, the Company agreed to grant certain rights to the
purchaser of such securities, which included a first right to purchase a pro
rata share of any equity offering of the Company excluding shares issued for (a)
an IPO and (b) an acquisition of another corporation, if such exclusions will
not reduce the purchaser's pro rata ownership share of the Company below 25%,
(c) stock dividend or splits, and (d) stock compensation plans. Further, the
purchaser has entered into an agreement with the holders of common stock and
optionees of the Company as of June 12, 1991, giving the purchaser the right to
acquire all of their shares of common stock and options at a predetermined price
upon notice from the Company that it has filed a registration statement in
connection with an IPO. In January 1997, the Company and Pacific Media entered
into a Waiver Agreement, pursuant to which Pacific Media waived its right to
purchase shares of the Company's common stock from stockholders and
optionholders triggered by the filing of the registration statement in
connection with the IPO and any pre-effective amendments thereto filed prior to
April 1, 1997. Upon the completion of the Offering, all rights of Pacific Media
to purchase common stock of the Company from such persons will expire.
STOCK OPTIONS
The Company's stock option plan (the Option Plan) gives selected employees,
directors, and consultants of the Company an opportunity to acquire the
Company's common stock. Nonstatutory stock options and incentive stock options
are exercisable at prices not less than 85% and 100%, respectively, of the fair
value of the Company's common stock on the date of grant, as determined by the
Company's Board of Directors. The options are generally exercisable over a
3-year vesting period and expire 5 to 10 years from
F-18
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(5) STOCKHOLDERS' EQUITY (CONTINUED)
date of grant. The Board of Directors has reserved 972,222 shares of common
stock for issuance pursuant to the Option Plan. A summary of stock option
activity follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balances as of December 31, 1993...................... 188,235 681,415 1.80 - 2.70
Granted............................................... (44,444) 44,444 2.70
Canceled.............................................. 50,832 (50,832) 2.70
Exercised............................................. -- (66) 2.25
---------- ---------- --------------
Balances as of December 31, 1994...................... 194,623 674,961 1.80 - 2.70
Granted............................................... (356,743) 356,743 2.70
Canceled.............................................. 311,275 (311,275) 2.70
Exercised............................................. -- (12,540) 1.80
---------- ---------- --------------
Balances as of December 31, 1995...................... 149,155 707,889 1.80 - 2.70
Granted............................................... (142,050) 142,050 2.70 - 9.00
Canceled.............................................. 83,111 (83,111) 1.80 - 2.70
Exercised............................................. -- (66,263) 2.25 - 2.70
---------- ---------- --------------
Balances as of December 31, 1996...................... 90,216 700,565 $2.25 - 9.00
---------- ----------
---------- ----------
</TABLE>
1996 EQUITY INCENTIVE PLAN
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
Equity Incentive Plan) and reserved 300,000 shares of common stock for issuance
thereunder. The Equity Incentive Plan will become effective upon the Company's
proposed IPO and will serve as the successor equity incentive program to the
Company's Option Plan. The Equity Incentive Plan provides for the grant of stock
options, stock appreciation rights, and restricted stock awards by the Company
to employees, officers, directors, consultants, independent contractors, and
advisers of the Company. The Company expects the approval of the Equity
Incentive Plan by stockholders in February 1997.
1996 EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the Purchase Plan) and reserved 140,000 shares of common stock for issuance
thereunder. The Purchase Plan will become effective upon the Company's proposed
IPO. The Purchase Plan permits eligible employees to purchase common stock,
through payroll deductions of between 1% and 20% of the employee's compensation,
at a price equal to 85% of the fair market value of the common stock at either
the beginning or the end of each offering period, whichever is lower. The
Company expects the approval of the Purchase Plan by stockholders in February
1997.
1996 DIRECTORS STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Directors Stock Option Plan
(the Directors Plan) and reserved 60,000 shares of common stock for issuance
thereunder. The Directors Plan provides for the initial grant of a nonqualified
option to purchase 5,000 shares of common stock on the date the eligible
director first becomes a director and the additional grant of a nonqualified
option to purchase 3,000 shares
F-19
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(5) STOCKHOLDERS' EQUITY (CONTINUED)
of Common Stock annually thereafter. Each eligible director on the effective
date of the Company's proposed IPO will be granted a nonqualified option to
purchase 3,000 shares of Common Stock each year beginning on the first
anniversary of the effective date of the Company's proposed IPO, provided that
such director continues to serve on the Board. Options will vest at the rate of
2.08% per month so long as the director continues to serve on the Board on such
dates. The Company expects the approval of the Directors Plan by stockholders in
February 1997.
RESTRICTED STOCK
On June 7, 1996, the Company issued 58,333 shares of common stock at a price
of $2.70 per share pursuant to a restricted stock purchase agreement to an
officer of the Company in exchange for a full recourse promissory note secured
by the shares in the principal amount of $157,000. Interest accrues at the rate
of 6.58% per annum. Principal and accrued interest, if any, are due and payable
on June 7, 2001. The Company has the right to repurchase the stock at the
original sales price upon the termination of the purchaser's employment with the
Company. The repurchase right lapses at a rate of 1/6 after June 7, 1997, 1/3
after June 7, 1998, and 1/2 after June 7, 1999. As of December 31, 1996, all of
the shares were subject to the repurchase right.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Company has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for all of its employee stock-based compensation
plans. Accordingly, no compensation cost has been recognized in the accompanying
consolidated financial statements for the Option Plan because the exercise price
of each option equals or exceeds the fair value of the underlying common stock
as of the grant date for each stock option, except for options and restricted
stock granted in May and June 1996. With respect to the options and restricted
stock granted in May and June 1996, the Company has recorded deferred stock
compensation of $231,000 for the difference at the grant date between the
exercise price and the fair value, as determined by an independent valuation, of
the restricted stock and the common stock underlying the options. This amount is
being amortized on a straight-line basis over the vesting period of the
individual options and restricted stock, generally three years.
The Company has adopted the pro forma disclosure provisions of SFAS No. 123.
Had compensation cost for the Company's stock-based compensation plans been
determined in a manner consistent with the fair value approach described in SFAS
No. 123, the Company's net income and net income per share as reported would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C> <C>
Net income As reported $ 931 $ 1,008
Adjusted pro forma 874 931
Net income per share As reported .12 .10
Adjusted pro forma .10 .08
</TABLE>
F-20
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(5) STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted average assumptions: no
dividends, an expected life of four years, and risk-free interest rates of 5.75%
for the year ended December 31, 1995, and 5.82% for the year ended December 31,
1996.
A summary of the status of the Company's options for the year ended December
31, 1996, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
FIXED OPTIONS NUMBER EXERCISE PRICE
- ----------------------------------------------------------------- --------- -----------------
<S> <C> <C>
Outstanding at beginning of year................................. 707,889 $ 2.66
Granted.......................................................... 142,050 4.26
Canceled......................................................... (83,111) 2.69
Exercised........................................................ (66,263) 2.57
---------
Outstanding at end of year....................................... 700,565 2.99
---------
---------
Options exercisable at period-end................................ 365,258
---------
---------
Weighted average fair value of options granted during the
period......................................................... $ .88
---------
---------
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINNG WEIGHTED AS OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- ------------------- ------------ -------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$1.80 - 2.70 653,065 7.65 years $ 2.67 365,258 $ 2.66
$7.20 - 9.00 47,500 9.83 7.33 -- --
------------ -------------- ----- ------------ -----
700,565 7.80 2.99 365,258 2.66
------------ -------------- ----- ------------ -----
------------ -------------- ----- ------------ -----
</TABLE>
F-21
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(6) INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 740 $ 83 $ 1,146
Foreign.......................................................... 207 269 71
State............................................................ 239 68 208
--------- --------- ---------
Total current.................................................. 1,186 420 1,425
--------- --------- ---------
Deferred:
Federal.......................................................... (242) 168 (305)
State............................................................ (58) 26 (146)
--------- --------- ---------
Total deferred................................................. (300) 194 (451)
--------- --------- ---------
$ 886 $ 614 $ 974
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total tax expense (benefit) has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Continuing operations.............................................. $ 886 $ 694 $ 1,223
Discontinued operations............................................ -- (80) (249)
--------- --------- ---------
$ 886 $ 614 $ 974
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's effective tax rate differs from the statutory federal tax rate
as shown in the following table (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense....................................... $ 812 $ 525 $ 674
State tax expenses, net of federal benefit............................ 120 93 98
Tax credits........................................................... (80) (57) (45)
Foreign taxes......................................................... 10 72 15
Exempt interest....................................................... (21) (33) (13)
Write-off of discontinued operations deferred tax asset............... -- -- 203
Other................................................................. 45 14 42
--------- --------- ---------
$ 886 $ 614 $ 974
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-22
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(6) INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of 1995 and 1996, are
presented below (in thousands):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves........................................... $ 131 $ 598
Allowance for doubtful accounts............................................ 94 106
Depreciation and amortization.............................................. 102 338
Deferred revenue........................................................... 129 238
Other...................................................................... 35 32
--------- ---------
Total gross deferred tax assets.......................................... 491 1,312
--------- ---------
Deferred tax liabilities:
Patents.................................................................... 366 743
Other...................................................................... 7 --
--------- ---------
Total gross deferred tax liabilities..................................... 373 743
--------- ---------
Net deferred tax assets.................................................. $ 118 $ 569
--------- ---------
--------- ---------
</TABLE>
(7) COMMITMENTS
LEASES
The Company leases its facilities and certain equipment pursuant to
noncancelable operating lease agreements. Additionally, the Company leases
certain equipment pursuant to a capital lease agreement.
Future minimum lease payments pursuant to these leases as of December 31,
1996, were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----------- -----------
<S> <C> <C>
1997................................................................... $ 116 $ 520
1998................................................................... 116 438
1999................................................................... 116 428
2000................................................................... 78 413
2001 and thereafter.................................................... -- 681
----- -----------
Total.................................................................. 426 $ 2,480
-----------
-----------
Less amounts representing interest..................................... 25
-----
Present value of minimum capital lease payments........................ 401
Less current portion of capital lease liability........................ 105
-----
Capital lease liability, net of current portion........................ $ 296
-----
-----
</TABLE>
Rent expense was $443,000, $491,000, and $441,000 as of December 31, 1994,
1995, and 1996, respectively.
F-23
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(7) COMMITMENTS (CONTINUED)
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation, which contribution was limited to $9,240 in
1995. Employee contributions and earnings thereon vest immediately. The Company
is not required to contribute to the 401(k) plan and had made no voluntary
contributions through 1995. In 1996, the Company made matching contributions to
the 401(k) plan equal to 20% of each participating employee's contribution, up
to a maximum annual matching contribution of $1,900. Matching contributions
aggregated $60,419 for the year ended December 31, 1996, and will be fully
vested after three years.
(8) CONTINGENCIES
In October 1995, a former officer and director of the Company filed suit
against the Company in the Superior Court of the State of California alleging
monetary damages suffered as a result of alleged fraud, misrepresentation, and
other malfeasance in connection with the Company's grant of stock options to
him. Mr. Swyt maintains that the Company induced him to accept employment by
falsely representing to him that the options granted to him eventually would
have substantial value. Between August 1990 and December 1993, the Company
granted to him options to purchase approximately 200,000 shares of the Company's
common stock with per share exercise prices of $2.25 or $2.70. Substantially all
of these options expired unexercised within three months following his departure
from the Company in June 1995. In December 1996, the court ordered this matter
to binding arbitration in accordance with a written agreement between him and
the Company. The arbitration agreement contains limitations on the types of
damages available to him and expressly precludes punitive damages. The Company
believes that the case is without merit and intends to contest it vigorously. In
the opinion of counsel, it is not possible to determine with precision the
probable outcome or the amount of liability, if any, under this lawsuit;
however, in the opinion of the Company, the disposition of this lawsuit will not
have a materially adverse affect on the consolidated financial statements of the
Company.
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment and is engaged in developing
and licensing or selling its video copy protection and video scrambling
technologies to customers in the home videocassette, pay-per-view, cable,
satellite, and corporate communications markets primarily in the United States,
Europe,
F-24
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994, 1995, AND 1996
(9) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Japan and the Far East. The distribution of revenues, operating income, and
assets by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
United States.............................................. $ 12,172 $ 12,790 $ 15,823
Foreign operations......................................... 1,158 1,399 1,257
--------- --------- ---------
Total revenues........................................... $ 13,330 $ 14,189 $ 17,080
--------- --------- ---------
--------- --------- ---------
Operating income from
continuing operations:
United States.............................................. $ 2,727 $ 1,910 $ 3,064
Foreign operations......................................... 77 273 254
--------- --------- ---------
Total operating income................................... $ 2,804 $ 2,183 $ 3,318
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
United States.............................................. $ 8,671 $ 9,782 $ 10,844
Foreign operations......................................... 675 1,267 1,215
--------- --------- ---------
Subtotal identifiable assets............................. 9,346 11,049 12,059
Eliminations............................................... (106) (106) (106)
--------- --------- ---------
Total identifiable assets................................ $ 9,240 $ 10,943 $ 11,953
--------- --------- ---------
--------- --------- ---------
</TABLE>
United States revenue includes export sales to the following geographic
areas (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Europe....................................................... $ 1,623 $ 1,704 $ 2,166
Japan........................................................ 562 1,010 1,099
Rest of world................................................ 1,840 591 1,947
--------- --------- ---------
$ 4,025 $ 3,305 $ 5,212
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
WE COULDN'T HAVE SAID IT
BETTER OURSELVES.
[Picture shows a copy of two New Line Home Video advertisements.
One reads as follows: "Gluttony Envy Greed Lust Wrath Sloth Pride. The 8th
Deadly Sin: Video Copying. New Line Home Video Protects Your Profits With The
Exclusive Macrovision-Registered Trademark-Copy Protection Process." The other
has a picture of a dragon and reads as follows: "New Line Home Video Declares
Mortal Kombat on Video Copying! We're Protecting Your Bottom Line with Copy-
Protection! To assure maximum profitability, every Mortal Kombat-Registered
Trademark- videocassette will be encoded with the Macrovision anticopy process.
Make sure your videos-- and your business-- carry the shield of Copy Protection.
Because your profits are something worth fighting for."]
One Macrovision customer, New Line Home Video, initiated a marketing program
promoting the use of Macrovision copy protection technology in order to protect
the profits of New Line's video retailer customers. New Line ads featured
Macrovision copy protection of the videos MORTAL KOMBAT and SEVEN. Retailer
response to this campaign was positive as retailers reported that they would
increase their purchases of videos by an average of 18% IF THE VIDEOS WERE COPY
PROTECTED.
Macrovision, PhaseKrypt and Protecting Your Image are registered trademarks, and
CineGuard, Colorstripe, StarShaker, VES and VES-TM are trademarks of Macrovision
Corporation.
------------------------------------------------
Video frame and graphics courtesy of New Line Home Video and WMS Industries,
Inc.
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME, SUBSEQUENT TO THE DATE HEREOF.
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 5
THE COMPANY............................................................... 16
USE OF PROCEEDS........................................................... 16
DIVIDEND POLICY........................................................... 16
CAPITALIZATION............................................................ 17
DILUTION.................................................................. 18
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 20
BUSINESS.................................................................. 27
MANAGEMENT................................................................ 44
CERTAIN TRANSACTIONS...................................................... 52
PRINCIPAL AND SELLING STOCKHOLDERS........................................ 55
DESCRIPTION OF CAPITAL STOCK.............................................. 57
SHARES ELIGIBLE FOR FUTURE SALE........................................... 59
UNDERWRITING.............................................................. 61
LEGAL MATTERS............................................................. 62
EXPERTS................................................................... 62
ADDITIONAL INFORMATION.................................................... 62
CHANGE IN INDEPENDENT AUDITORS............................................ 63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
</TABLE>
----------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,350,000 SHARES
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
MONTGOMERY SECURITIES
HAMBRECHT & QUIST
COWEN & COMPANY
, 1997
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of
the Registrant provide that: (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law; (ii) the Registrant may, in its discretion, indemnify other
officers, employees and agents as set forth in the Delaware General Corporation
Law; (iii) upon receipt of an undertaking to repay such advances if
indemnification is determined to be unavailable, the Registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with a proceeding; (iv) the rights conferred in the Bylaws are not
exclusive and the Registrant is authorized to enter into indemnification
agreements with its directors, officers, employees and agents; (v) the
Registrant may not retroactively apply any amendment of the Bylaw provisions
relating to indemnity; and (vi) to the fullest extent permitted by the Delaware
General Corporation Law, a director or executive officer will be deemed to have
acted in good faith if his or her action is based on the records or books of
account of the Registrant or on information supplied to him or her by officers
of the Registrant in the course of their duties or on the advice of legal
counsel for the Registrant or on information or records given or reports made to
the Registrant by independent certified public accountants or appraisers or
other experts.
The Registrant intends to enter into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that directors and executive officers will be indemnified and held harmless to
the fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts actually
and reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise when
they are serving in such capacities at the request of the Registrant.
The indemnification agreement requires a director or executive officer to
reimburse the Registrant for expenses advanced only to the extent that it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, his or her indemnification agreement or
otherwise to be indemnified for such expenses. The indemnification agreement
provides that it is not exclusive of any rights a director or executive officer
may have under the Certificate of Incorporation, Bylaws, other agreements, any
vote of the stockholders or vote of directors or otherwise.
The indemnification provision in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act.
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Registrants Board of Directors, has applied for, and expects to obtain,
directors and officers liability insurance with a per claim and annual aggregate
coverage limit of up to $5,000,000.
II-1
<PAGE>
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Underwriting Agreement....................................................... 1.01
Registrant's Certificate of Incorporation.................................... 3.02
Registrant's Bylaws.......................................................... 3.04
Form of Indemnification Agreement............................................ 10.08
</TABLE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered hereby.
All amounts are estimates except for the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 9,827
NASD filing fee............................................... 3,743
Nasdaq National Market filing fee.............................
Accounting fees and expenses..................................
Legal fees and expenses.......................................
Printing and engraving expenses...............................
Road show expenses............................................
Blue sky fees and expenses....................................
Transfer agent, registrar and custodian fees and expenses.....
Miscellaneous.................................................
------------
Total................................................. $1,000,000
------------
------------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock, Preferred Stock and options of the Registrant issued to
stockholders of Macrovision Corporation, a California corporation, in connection
with the reincorporation into Delaware were not deemed "sold" as a result of
Rule 145(a)(2) promulgated under the Securities Act. The following table sets
forth information regarding all securities sold by the Registrant's California
predecessor since December 1, 1993.
<TABLE>
<CAPTION>
TITLE OF NUMBER OF AGGREGATE FORM OF
CLASS OF PURCHASERS DATE OF SALE SECURITIES SHARES PURCHASE PRICE CONSIDERATION
- --------------------------------- ----------------- ---------------- ----------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Victor A Viegas.................. June 7, 1996 Common Stock 58,333 $157,500 Promissory Note
Pacific Media Development, Inc., Series A
acting through a trustee....... July 12, 1996 Preferred Stock 543,099 $3,037,994 Conversion of Note
Recapitalization
Command Audio Corporation........ July 30, 1996 Common Stock 194,444 $874,998 (1)
Exercise of options by 32
optionees, including three
officers and one former
officer........................ July 6, 1994 - Common Stock 85,536 $ 199,247 Cash
January 20, 1997
</TABLE>
- ------------------------------
(1) On July 31, 1996, the Company and Command Audio Corporation ("CAC") entered
into a Recapitalization and Stock Purchase Agreement pursuant to which the
Company purchased from CAC 604,000 shares of CAC common stock and 396,000
shares of CAC Series B preferred stock for the aggregate consideration of
$1.0 million paid in August 1996 in cash and in September 1996 pursuant to a
secured promissory note, 194,444 shares of the Company's Common Stock,
subject to the terms and conditions of a Restricted Stock Acquisition
Agreement, and the surrender and delivery to CAC of 500,000 shares of CAC
Series A preferred stock.
II-2
<PAGE>
The sale of Common Stock to Victor A. Viegas and all sales of Common Stock
made pursuant to the exercise of stock options granted under the stock option
plans of the Registrant (or its predecessor) were made pursuant to an exemption
from the registration requirements of the Securities Act afforded by either
Section 4(2) or Rule 701 promulgated under the Securities Act. All other sales
were made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. These latter sales were made without
general solicitation or advertising. The purchasers were sophisticated investors
with access to all relevant information necessary to evaluate the investment who
represented to the Registrant that the shares were being acquired for
investment.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement.
2.01 -- Form of Merger Agreement by and between the Registrant and Macrovision Corporation, a California
corporation.*
3.01 -- Registrant's Certificate of Incorporation.*
3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation.
3.03 -- Registrant's Bylaws.
3.04 -- Form of Registrant's Amended and Restated Bylaws*
4.01 -- Registration Rights Agreement dated June 12, 1991.*
5.01 -- Opinion of Fenwick & West regarding legality of the securities being issued.
10.01 -- Registrant's Stock Option Plan and related documents.*
10.02 -- Registrant's 1996 Equity Incentive Plan and related documents.
10.03 -- Registrant's 1996 Directors Stock Option Plan and related documents.
10.04 -- Registrant's 1996 Employee Stock Purchase Plan and related documents.
10.05 -- Registrant's Executive Incentive Plan.**
10.06 -- Employment Agreement dated as of June 5, 1996, between Registrant and Victor A. Viegas.*
10.07 -- Restricted Stock Purchase Agreement dated as of June 7, 1996, between Registrant and Victor A.
Viegas and related documents, including Promissory Note and Stock Pledge Agreement.*
10.08 -- Form of Indemnification Agreement to be entered into by Registrant with each of its directors and
executive officers.*
10.09 -- Recapitalization and Stock Purchase Agreement dated as of July 31, 1996, between Registrant and
Command Audio Corporation.*
10.10 -- Restricted Stock Acquisition Agreement dated as of July 31, 1996, between Registrant and Command
Audio Corporation, and First Amendment dated as of November 29, 1996.*
10.11 -- Technology Transfer and Royalty Agreement dated as of July 31, 1996, between Registrant and
Command Audio Corporation, and First Amendment dated as of November 29, 1996.*
10.12 -- Letter dated December 6, 1996 from Registrant to Command Audio Corporation.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
10.13 -- License Agreement dated September 26, 1995, among Registrant, Victor Technobrain Co., Ltd. and
Video Culture Institute, Inc., Amendment Number One dated June 30, 1996 and Amendment Number Two
dated September 30, 1996.*
10.14 -- Duplicator Agreement dated as of June 1, 1988, by and between Registrant and Victor Company of
Japan, Limited.*
10.15 -- Technology Application Agreement dated November 29, 1988, by and between Registrant and Victor
Company of Japan, Limited.*
10.16 -- Agreement dated July 15, 1994, by and between Registrant and Victor Company of Japan, Limited.**
10.17 -- Copy Protection Technology Agreement dated as of January 7, 1997, between Registrant and Victor
Company of Japan, Limited.*
10.18 -- Waiver Agreement dated as of January 6, 1997, between Registrant and Pacific Media Development,
Inc.*
10.19 -- Stock and Convertible Note Purchase Agreement dated as of May 24, 1991, among Registrant, a
trustee for Pacific Media Development, Inc. and A. Victor Farrow and Carol Ann Farrow as Trustees
of the Farrow Family Trust U/T/D December 18, 1990.
10.20 -- Lease Agreement dated April 21, 1995, by and between Registrant and Caribbean Geneva Investors.*
10.21 -- Standard Sublease dated September 21, 1995, by and between Registrant and Deutsch Technology
Research, together with Lease Agreement dated May 26, 1992, by and between Registrant and
Crossroads Investment Group.*
10.22 -- Letter Agreement dated January 14, 1997 by and between Registrant and Buena Vista Home Video.**
10.23 -- Technical Consulting Agreement dated as of July 1, 1996 by and between Registrant and Victor
Technobrain Co., Ltd.
10.24 -- Second Amendment to Restricted Stock Acquisition Agreement dated as of January 29, 1997 by and
between Registrant and Command Audio Corporation.
10.25 -- Letter dated February 10, 1997 from Registrant to Command Audio Corporation.
10.26 -- Promissory Note dated January 7, 1997 executed by Command Audio Corporation.
11.01 -- Statement regarding computation of earnings (loss) per share.
16.01 -- Letter regarding change in certifying accountant.*
21.01 -- List of Registrant's subsidiaries.*
23.01 -- Consent of Fenwick & West (included in Exhibit 5.01).
23.02 -- Consent of KPMG Peat Marwick LLP.
23.03 -- Consent of Ernst & Young LLP.
24.01 -- Power of Attorney.*
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
** Confidential treatment has been requested with respect to certain portions
of these Exhibits. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in the
City of Sunnyvale, State of California, on February 10, 1997.
MACROVISION CORPORATION
By: *
-----------------------------------------
John O. Ryan
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act, this Amendment to
the Registration Statement was signed by the following persons in the capacities
and on the date stated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
PRINCIPAL EXECUTIVE OFFICER:
Chairman of the Board of
* Directors, Chief
- ------------------------------ Executive Officer and a February 10, 1997
John O. Ryan Director
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING
OFFICER:
/s/ VICTOR A. VIEGAS Vice President, Finance
- ------------------------------ and Administration and February 10, 1997
Victor A. Viegas Chief Financial Officer
ADDITIONAL DIRECTORS:
*
- ------------------------------ President, Chief Operating February 10, 1997
William A. Krepick Officer and Director
*
- ------------------------------ Director February 10, 1997
Richard S. Matuszak
<TABLE>
<S> <C>
/s/ VICTOR A. VIEGAS
--------------------------------------
Victor A. Viegas
*By: ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement.
2.01 -- Form of Merger Agreement by and between the Registrant and Macrovision Corporation, a California
corporation.*
3.01 -- Registrant's Certificate of Incorporation.*
3.02 -- Form of Registrant's Amended and Restated Certificate of Incorporation.
3.03 -- Registrant's Bylaws.
3.04 -- Form of Registrant's Amended and Restated Bylaws*
4.01 -- Registration Rights Agreement dated June 12, 1991.*
5.01 -- Opinion of Fenwick & West regarding legality of the securities being issued.
10.01 -- Registrant's Stock Option Plan and related documents.*
10.02 -- Registrant's 1996 Equity Incentive Plan and related documents.
10.03 -- Registrant's 1996 Directors Stock Option Plan and related documents.
10.04 -- Registrant's 1996 Employee Stock Purchase Plan and related documents.
10.05 -- Registrant's Executive Incentive Plan.**
10.06 -- Employment Agreement dated as of June 5, 1996, between Registrant and Victor A. Viegas.*
10.07 -- Restricted Stock Purchase Agreement dated as of June 7, 1996, between Registrant and Victor A.
Viegas and related documents, including Promissory Note and Stock Pledge Agreement.*
10.08 -- Form of Indemnification Agreement to be entered into by Registrant with each of its directors and
executive officers.*
10.09 -- Recapitalization and Stock Purchase Agreement dated as of July 31, 1996, between Registrant and
Command Audio Corporation.*
10.10 -- Restricted Stock Acquisition Agreement dated as of July 31, 1996, between Registrant and Command
Audio Corporation, and First Amendment dated as of November 29, 1996.*
10.11 -- Technology Transfer and Royalty Agreement dated as of July 31, 1996, between Registrant and
Command Audio Corporation, and First Amendment dated as of November 29, 1996.*
10.12 -- Letter dated December 6, 1996 from Registrant to Command Audio Corporation.*
10.13 -- License Agreement dated September 26, 1995, among Registrant, Victor Technobrain Co., Ltd. and
Video Culture Institute, Inc., Amendment Number One dated June 30, 1996 and Amendment Number Two
dated September 30, 1996.*
10.14 -- Duplicator Agreement dated as of June 1, 1988, by and between Registrant and Victor Company of
Japan, Limited.*
10.15 -- Technology Application Agreement dated November 29, 1988, by and between Registrant and Victor
Company of Japan, Limited.*
10.16 -- Agreement dated July 15, 1994, by and between Registrant and Victor Company of Japan, Limited.**
10.17 -- Copy Protection Technology Agreement dated as of January 7, 1997, between Registrant and Victor
Company of Japan, Limited.*
10.18 -- Waiver Agreement dated as of January 6, 1997, between Registrant and Pacific Media Development,
Inc.*
10.19 -- Stock and Convertible Note Purchase Agreement dated as of May 24, 1991, among Registrant, a
trustee for Pacific Media Development, Inc. and A. Victor Farrow and Carol Ann Farrow as Trustees
of the Farrow Family Trust U/T/D December 18, 1990.
10.20 -- Lease Agreement dated April 21, 1995, by and between Registrant and Caribbean Geneva Investors.*
10.21 -- Standard Sublease dated September 21, 1995, by and between Registrant and Deutsch Technology
Research, together with Lease Agreement dated May 26, 1992, by and between Registrant and
Crossroads Investment Group.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
10.22 -- Letter Agreement dated January 14, 1997 by and between Registrant and Buena Vista Home Video.**
10.23 -- Technical Consulting Agreement dated as of July 1, 1996 by and between Registrant and Victor
Technobrain Co., Ltd.
10.24 -- Second Amendment to Restricted Stock Acquisition Agreement dated as of January 29, 1997 by and
between Registrant and Command Audio Corporation.
10.25 -- Letter dated February 10, 1997 from Registrant to Command Audio Corporation.
10.26 -- Promissory Note dated January 7, 1997 executed by Command Audio Corporation.
11.01 -- Statement regarding computation of earnings (loss) per share.
16.01 -- Letter regarding change in certifying accountant.*
21.01 -- List of Registrant's subsidiaries.*
23.01 -- Consent of Fenwick & West (included in Exhibit 5.01).
23.02 -- Consent of KPMG Peat Marwick LLP.
23.03 -- Consent of Ernst & Young LLP.
24.01 -- Power of Attorney.*
27.01 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
** Confidential treatment has been requested with respect to certain portions
of these Exhibits. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.01
2,350,000 Shares
MACROVISION CORPORATION
Common Stock
UNDERWRITING AGREEMENT
______________, __, 1997
MONTGOMERY SECURITIES
HAMBRECHT & QUIST LLC
COWEN & COMPANY
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
SECTION 1
INTRODUCTORY
Macrovision Corporation, a Delaware corporation (the "Company"),
proposes to issue and sell 1,434,016 shares of its authorized but unissued
Common Stock, par value $0.001 per share (the "Common Stock"), and certain
stockholders of the Company named in Schedule B annexed hereto (the "Selling
Stockholders") propose to sell an aggregate of 915,984 shares of the
Company's issued and outstanding Common Stock to the several underwriters
named in Schedule A annexed hereto (the "Underwriters"), for whom you are
acting as Representatives. These 2,350,000 shares together are herein called
the "Firm Common Shares." In addition, the Company proposes to grant to the
Underwriters an option to purchase up to 352,500 additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 5 hereof. The
Firm Common Shares and, to the extent such option is exercised, the Optional
Common Shares are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions
of the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is
advisable.
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with respect to the purchase of the Common Shares by
the Underwriters as follows:
<PAGE>
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the several Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-19373) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"),
and the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, and has been filed
with the Commission. The Company has prepared and has filed or proposes to
file prior to the effective date of such registration statement an amendment
or amendments to such registration statement, which amendment or amendments
have been or will be similarly prepared. There have been delivered to you two
signed copies of such registration statement and amendments, together with
two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits) and of the
related preliminary prospectus have been delivered to you in such reasonable
quantities as you have requested for each of the Underwriters. The Company
will next file with the Commission one of the following: (i) prior to
effectiveness of such registration statement, a further amendment thereto,
including the form of final prospectus, or (ii) a final prospectus in
accordance with Rules 430A and 424(b) of the Rules and Regulations. As
filed, such amendment and form of final prospectus, or such final prospectus,
shall include all Rule 430A Information and, except to the extent that you
shall agree to a modification, shall be in all substantive respects in the
form furnished to you prior to the date and time that this Agreement was
executed and delivered by the parties hereto, or, to the extent not completed
at such date and time, shall contain only such specific additional
information and other changes (beyond that contained in the latest
Preliminary prospectus) as the Company shall have previously advised you
would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event that any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall
also mean such registration statement as so amended; provided, however, that
such term shall also include (i) all Rule 430A Information deemed to be
included in such registration statement at the time such registration
statement becomes effective as provided by Rule 430A of the Rules and
Regulations and (ii) a registration statement, if any, filed pursuant to Rule
462(b) of the Rules and Regulations relating to the Common Shares. The term
"Preliminary Prospectus" shall mean any preliminary prospectus referred to in
the preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule 430A
Information. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Common Shares in the form in which it is first
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final prospectus included in
the Registration Statement at the time such registration statement becomes
effective. The term "Rule 430A Information" means information with respect
to the Common Shares and the offering thereof permitted to be omitted from
the
-2-
<PAGE>
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; and at the time the Registration Statement
becomes effective, and at all times subsequent thereto up to and including
each Closing Date hereinafter mentioned, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, will contain all
material statements and information required to be included therein by the
Act and the Rules and Regulations and will in all material respects conform
to the requirements of the Act and the Rules and Regulations, and neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, no representation or
warranty contained in this subsection 2(b) shall be applicable to information
contained in or omitted from any Preliminary Prospectus, the Registration
Statement, the Prospectus or any such amendment or supplement in reliance
upon and in conformity with written information furnished to the Company by
or on behalf of any Underwriter, directly or through the Representative,
specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 21.01 to the Registration Statement. The Company and each of its
subsidiaries have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their properties and conduct their respective
businesses as described in the Prospectus; the Company owns all of the
outstanding capital stock of its subsidiaries free and clear of all claims,
liens, charges and encumbrances; the Company and each of its subsidiaries are
in possession of and operating in compliance with all authorizations,
licenses, permits, consents, certificates and orders material to the conduct
of their respective businesses, all of which are valid and in full force and
effect; the Company and each of its subsidiaries are duly qualified to do
business and in good standing as foreign corporations in each jurisdiction in
which the ownership or leasing of properties or the conduct of their
respective businesses requires such qualification, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect
upon the Company and its subsidiaries, taken as a whole; and no proceeding
has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification.
(d) As of December 31, 1996, the Company had an authorized and
outstanding capital stock as set forth under the heading "Capitalization" in
the Prospectus, subject to the assumptions set forth therein; the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights
-3-
<PAGE>
to subscribe for or purchase securities, and conform in all material respects
to the description thereof contained in the Prospectus. All issued and
outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any
options to purchase, or any preemptive rights or other rights to subscribe
for or to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock or any
such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be validly issued, fully paid and nonassessable, and
will conform in all material respects to the description thereof contained in
the Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares by
the Company pursuant to this Agreement. No stockholder of the Company has
any right which has not been waived to require the Company to register the
sale of any shares owned by such stockholder under the Act in the public
offering contemplated by this Agreement. No further approval or authority of
the stockholders or the Board of Directors of the Company will be required
for the transfer and sale of the Common Shares to be sold by the Selling
Stockholders or the issuance and sale of the Common Shares to be sold by the
Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with
its terms. The making and performance of this Agreement by the Company and
the consummation of the transactions herein contemplated will not violate any
provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries, and will
not conflict with, result in the breach or violation of, or constitute,
either by itself or upon notice or the passage of time or both, a default
under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
any of its respective properties may be bound or affected, any statute or any
authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body
applicable to the Company or any of its subsidiaries or any of their
respective properties, which breach, violation or default could have a
material adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. No
consent, approval, authorization or other order of any court, regulatory
body, administrative agency or other governmental body is required for the
execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement, except for compliance with the
Act, the Securities Exchange Act of 1934, as
-4-
<PAGE>
amended (the "Exchange Act"), the Blue Sky laws applicable to the public
offering of the Common Shares by the several Underwriters and the clearance
of such offering with the National Association of Securities Dealers, Inc.
(the "NASD").
(g) KPMG Peat Marwick LLP and Ernst & Young LLP, who have expressed
their opinions with respect to the consolidated financial statements filed
with the Commission as a part of the Registration Statement and included in
the Prospectus and in the Registration Statement, are independent accountants
as required by the Act and the Rules and Regulations. The Company maintains
a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparations of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(h) The consolidated financial statements of the Company and its
subsidiaries, and the related notes thereto, included in the Registration
Statement and the Prospectus present fairly in all material respects the
financial position of the Company and its subsidiaries as of the respective
dates of such financial statements, and the results of operations and changes
in financial position of the Company and its subsidiaries for the respective
periods covered thereby. Such statements and related notes have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis as certified by the independent accountants named in
subsection 2(g). No other financial statements or schedules are required to
be included in the Registration Statement. The consolidated financial data
set forth in the Prospectus under the captions "Summary Consolidated
Financial Data," "Capitalization" and "Selected Consolidated Financial Data"
fairly present in all material respects the information set forth therein on
the basis stated in the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to violations,
defaults or breaches which individually or in the aggregate would not be
material to the Company and its subsidiaries, taken as a whole, neither the
Company nor any of its subsidiaries is in violation or default of any
provision of its certificate of incorporation or bylaws, or other
organizational documents, or is in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it
is a party or by which it or any of its properties are bound; and there does
not exist any state of facts which constitutes an event of default on the
part of the Company or any such subsidiary as defined in such documents or
which, with notice or lapse of time or both, would constitute such an event
of default.
(j) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
described or filed as required. The contracts so described in the Prospectus
are in full force and effect on the date hereof; and neither the Company nor
any of its
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subsidiaries, nor to the best of the Company's knowledge, any
other party is in breach of or default under any of such contracts.
(k) Except as described in the Registration Statement and the
Prospectus, there are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or of which property
owned or leased by the Company or any of its subsidiaries is or may be the
subject, or related to environmental or discrimination matters, which
actions, suits or proceedings might, individually or in the aggregate,
prevent or adversely affect the transactions contemplated by this Agreement
or result in a material adverse change in the condition (financial or
otherwise), properties, business or results of operations of the Company and
its subsidiaries, taken as a whole; and no labor disturbance by the employees
of the Company or any of its subsidiaries exists or is imminent which might
be expected to affect materially and adversely such condition, properties,
business or results of operations. Neither the Company nor any of its
subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not
adversely affect the use made and proposed to be made of such property by the
Company and its subsidiaries. The Company or the applicable subsidiary holds
its leased properties under valid and binding leases, with such exceptions as
are not materially significant in relation to the business of the Company and
its subsidiaries, taken as a whole. Except as disclosed in the Prospectus,
the Company owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course of
business or which could result in a material reduction in the future net
income of the Company and its subsidiaries, taken as a whole; (ii) the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company and its
subsidiaries are not in default in the payment of principal or interest on
any outstanding material debt obligations; (iv) there has not been any change
in the capital stock (other than upon the sale of the Common Shares
hereunder) or indebtedness material to the Company and its subsidiaries,
taken as a whole (other than in the ordinary course of business); and (v)
there has not been any material adverse change in the condition (financial or
otherwise), business, properties or results of operations of the Company and
its subsidiaries, taken as a whole.
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(n) The Company and its subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade
names, mask works, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by it or necessary to conduct
their businesses as now conducted. As of the date the Registration
Statement became effective, the descriptions of the patents and patent
applications set forth in the Registration Statement and the Prospectus under
the captions "Risk Factors - Dependence on Proprietary Technology" and
"Business - Intellectual Property Rights" do not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. Except as otherwise set forth in the Registration
Statement and the Prospectus, the expiration of any patent rights,
trademarks, trade names, mask works, copyrights, licenses would not have a
material adverse effect on the condition (financial or otherwise), business
or results of operations of the Company or its subsidiaries, taken as a
whole. The Company has no knowledge of any infringement or other violation
by it or its subsidiaries of any patent rights, trademark, trade name rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its
subsidiaries regarding any patent, trademark, trade name, mask work,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business
or results of operations of the Company and its subsidiaries, taken as a
whole.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations; except where failure to be so in compliance would not materially
adversely affect the condition (financial or otherwise), business or results
of operations of the Company and its subsidiaries, taken as a whole.
(p) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes
shown as due thereon; and the Company has no knowledge of any tax deficiency
which has been or might be asserted or threatened against the Company or its
subsidiaries which could materially and adversely affect the business,
operations or properties of the Company and its subsidiaries, taken as a
whole.
(q) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the offering
and sale of the Common Shares other than the Prospectus, the Registration
Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
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<PAGE>
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public
or quasi-public duties, other than payments required or permitted by the laws
of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
SECTION 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE SELLING STOCKHOLDERS
(a) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing Date
hereinafter mentioned will have, good and marketable title to the Common
Shares proposed to be sold by such Selling Stockholder hereunder on such
Closing Date and full right, power and authority to enter into this Agreement
and to sell, assign, transfer and deliver such Common Shares hereunder, free
and clear of all voting trust arrangements, liens, encumbrances, equities,
security interests, restrictions and claims whatsoever; and upon delivery of
and payment for such Common Shares hereunder, the Underwriters will acquire
good and valid title thereto, free and clear of all liens, encumbrances,
equities, claims, restrictions, security interests, voting trusts or other
defects of title whatsoever, provided that the Underwriters are purchasing
such Common Shares in good faith and without notice of any adverse claim.
(ii) Such Selling Stockholder has executed and delivered a Power
of Attorney and a Custody Agreement (hereinafter collectively referred to as
the "Stockholders Agreement") and in connection herewith such Selling
Stockholder further represents, warrants and agrees that such Selling
Stockholder has deposited in custody, under the Stockholders Agreement, with
the agent named therein (the "Agent") as custodian, certificates in
negotiable form for the Common Shares to be sold hereunder by such Selling
Stockholder, for the purpose of further delivery pursuant to this Agreement.
Such Selling Stockholder agrees that the Common Shares to be sold by such
Selling Stockholder on deposit with the Agent are subject to the interests of
the Company and the Underwriters, that the arrangements made for such custody
are to that extent irrevocable, and that the obligations of such Selling
Stockholder hereunder shall not be terminated, except as provided in this
Agreement or in the Stockholders Agreement, by any act of such Selling
Stockholder, by operation of law, by the death or incapacity of such Selling
Stockholder or by the occurrence of any other event. If the Selling
Stockholder should die or become incapacitated, or if any other event should
occur, before the delivery of the Common Shares hereunder, the documents
evidencing Common Shares
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<PAGE>
then on deposit with the Agent shall be delivered by the Agent in accordance
with the terms and conditions of this Agreement as if such death, incapacity
or other event had not occurred, regardless of whether or not the Agent shall
have received notice thereof. This Agreement and the Stockholders Agreement
have been duly executed and delivered by or on behalf of such Selling
Stockholder and the form of such Stockholders Agreement has been delivered to
you.
(iii) The performance of this Agreement and the Stockholders
Agreement and the consummation of the transactions contemplated hereby and by
the Stockholders Agreement will not result in a breach or violation by such
Selling Stockholder of any of the terms or provisions of, or constitute a
default by such Selling Stockholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise,
license or other agreement or instrument to which such Selling Stockholder is
a party or by which such Selling Stockholder or any of its properties is
bound, any statute, or any judgment, decree, order, rule or regulation of any
court or governmental agency or body applicable to such Selling Stockholder
or any of its properties, in which such breach, violation or default would
adversely affect the ability to such Selling Stockholder to perform its
obligations pursuant to this Agreement or the Stockholders Agreement or could
otherwise have a material adverse effect on such Selling Stockholder.
(iv) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Shares.
(v) Such Selling Stockholder has reviewed the Registration
Statement and Prospectus, and, although such Selling Stockholder has not
independently verified the accuracy or completeness of the information
contained therein (other than the information regarding such Selling
Stockholder and its affiliates, if any, set forth under the captions
"Management,""Certain Transactions" and "Principal and Selling
Stockholders"), nothing has come to the attention of such Selling Stockholder
that would lead such Selling Stockholder to believe that (A) on the effective
date thereof the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading
or (B) on the date of the Prospectus, the Prospectus contained and, on the
Closing Date, contains any untrue statement of a material fact or omitted or
omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(vi) Such Selling Stockholder's decision to sell the Common
Shares that may be sold by it pursuant to this Agreement is not prompted by
any adverse information regarding the Company which is not disclosed in the
Registration Statement and the Prospectus.
(b) Each of the Selling Stockholders agrees with the Company and the
Underwriters not to directly or indirectly, sell, offer, contract or grant
any option to sell, make any short sale (including without limitation any
"short vs. the box"), pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange
Act of 1934, as
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<PAGE>
amended, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3
under Securities Exchange Act of 1934, as amended) by the such Selling
Stockholder, or publicly announce such Selling Stockholder's intention to do
any of the foregoing, for a period commencing on the date hereof and
continuing to a date 180 days after the first date any of the Common Shares
are released by you for sale to the public, except that, each of the Selling
Stockholders may sell or otherwise transfer shares of Common Stock (i)
pursuant to this Agreement or (ii) as A BONA FIDE gift or gifts, provided
that undersigned provides prior written notice of such gift or gifts to you,
and the donee or donees thereof agree to be bound by the restrictions set
forth herein. Each of the Selling Stockholders also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of any of the Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS
The Representatives, on behalf of the several Underwriters, represent
and warrant to the Company and to the Selling Stockholders that the
information set forth (i) on the cover page of the Prospectus with respect to
price, underwriting discounts and commissions and terms of offering and (ii)
under "Underwriting" in the Prospectus was furnished to the Company by and on
behalf of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. The Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
SECTION 5
PURCHASE, SALE AND DELIVERY OF COMMON SHARES
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, (i) the
Company agrees to issue and sell to the Underwriters 1,434,016 of the Firm
Common Shares and (ii) the Selling Stockholders agree, severally and not
jointly, to sell to the Underwriters in the respective amounts set forth in
Schedule B hereto, an aggregate of 915,984 of the Firm Common Shares. The
Underwriters agree, severally and not jointly, to purchase from the Company
and the Selling Stockholders, respectively, the number of Firm Common Shares
described below. The purchase price per share to be paid by the several
Underwriters to the Company and to the Selling Stockholders, respectively,
shall be $_____ per share.
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The obligation of each Underwriter to the Company shall be to purchase
from the Company that number of full shares which (as nearly as practicable,
as determined by you) bears to 1,434,016 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Stockholders shall be to purchase from the Selling
Stockholders that number of full shares which (as nearly as practicable, as
determined by you) bears to 915,984 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters shall be made as directed by Representatives and payment
therefor shall be made at the offices of Fenwick & West LLP, Two Palo Alto
Square, Palo Alto, California (or such other place as may be agreed upon by
the Company and the Representatives) at such time and date, not later than
the third (or, if the Firm Common Shares are priced as contemplated by Rule
15c6-1(c) of the Exchange Act, after 4:30 p.m. Washington, D.C. time, the
fourth) full business day following the first date that any of the Common
Shares are released by you for sale to the public, as you shall designate by
at least 48 hours prior notice to the Company (or at such other time and
date, not later than one week after such third or fourth, as the case may be,
full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that
any of the Common Shares are released by you for sale to the public or the
date that is 48 hours after the date that the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or
on behalf of the Company and the Selling Stockholders to you, for the
respective accounts of the Underwriters with respect to the Firm Common
Shares to be sold by the Company and by the Selling Stockholders against
payment by you, for the accounts of the several Underwriters, of the purchase
price therefor by certified or official bank checks payable to the order of
the Company and of the Agent in proportion to the number of Firm Common
Shares to be sold by the Company and the Selling Stockholders, respectively.
The certificates for the Firm Common Shares shall be registered in such names
and denominations as you shall have requested at least two full business days
prior to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location
in New York, New York, as may be designated by you. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to 352,500 Optional Common Shares at
the purchase price per share to be paid for the Firm Common Shares, for use
solely in covering any over-allotments made by you for the account of the
Underwriters in the sale and distribution of the Firm Common Shares. In the
event that the Underwriters elect to purchase less than all of the Optional
Common Shares, the number of Optional Common Shares to be purchased by each
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Underwriter shall be determined by multiplying the aggregate number of
Optional Common Shares to be sold by the Company pursuant to such notice of
exercise by a fraction, the numerator of which is the number of Firm Common
Shares to be purchased by such Underwriter as set forth opposite its name in
SCHEDULE A and the denominator of which is 2,350,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). The option granted hereunder may be exercised at any
time (but not more than once) within 30 days after the first date that any of
the Common Shares are released by you for sale to the public, upon notice by
you to the Company setting forth the aggregate number of Optional Common
Shares as to which the Underwriters are exercising the option, the names and
denominations in which the certificates for such shares are to be registered
and the time and place at which such certificates will be delivered. Such
time of delivery (which may not be earlier than the First Closing Date),
being herein referred to as the "Second Closing Date," shall be determined by
you, but if at any time other than the First Closing Date shall not be
earlier than the third (or, if the Firm Common Shares are priced as
contemplated by Rule 15c6-1(c) of the Exchange Act, after 4:30 p.m.
Washington, D.C. time, the fourth) full business day after delivery of such
notice of exercise. Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by
you. The manner of payment for and delivery of the Optional Common Shares
shall be the same as for the Firm Common Shares purchased from the Company as
specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such
cancellation to the Company. If the option is canceled or expires
unexercised in whole or in part, the Company will deregister under the Act
the number of Optional Common Shares as to which the option has not been
exercised.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Common Shares, to
make payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but
any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the
judgment of the Representatives is advisable and at the public offering price
set forth on the cover page of and on the terms set forth in the Prospectus.
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SECTION 6
COVENANTS OF THE COMPANY
The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing
of the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed,
pursuant to the applicable paragraph of Rule 424(b) of the Rules and
Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly advise
you in writing (i) of the receipt of any comments of the Commission, (ii) of
any request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information, (iii)
when the Registration Statement shall have become effective and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or of the institution of any proceedings for that
purpose. If the Commission shall enter any such stop order at any time, the
Company will use its best efforts to obtain the lifting of such order at the
earliest possible moment. The Company will not file any amendment or
supplement to the Registration Statement (either before or after it becomes
effective), any Preliminary Prospectus or the Prospectus of which you have
not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and
the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, a registration statement pursuant to Rule 462(b) of the
Rules and Regulations related to the Common Shares and any amendments or
supplements to the Registration Statement or the Prospectus which in your
judgment may be necessary or advisable to enable the several Underwriters to
continue the distribution of the Common Shares and will use its best efforts
to cause the same to become effective as promptly as possible. The Company
will fully and completely comply with the provisions of Rule 430A of the
Rules and Regulations with respect to information omitted from the
Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares
is required to be delivered under the Act any event occurs, as a result of
which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Prospectus,
including any amendments or supplements, to comply with the Act or the Rules
and Regulations, the Company will promptly advise you thereof and will
promptly prepare and file with the Commission, at its own expense, an
amendment or supplement which will correct such statement or omission or an
amendment or supplement which will effect such compliance and
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will use its best efforts to cause the same to become effective as soon as
possible; and, in case any Underwriter is required to deliver a prospectus
after such nine-month period, the Company upon request, but at the expense of
such Underwriter, will promptly prepare such amendment or amendments to the
Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of
the Act.
(d) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company,
at its expense, but only for the nine-month period referred to in Section
10(a) (3) of the Act, will furnish to you and the Selling Stockholders or
mail to your order copies of the Registration Statement, the Prospectus, the
Preliminary Prospectus and all amendments and supplements to any such
documents in each case as soon as available and in such quantities as you and
the Selling Stockholders may reasonably request, for the purposes
contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any such jurisdiction where it is not presently qualified or where
it would be subject to taxation as a foreign corporation. The Company will
advise you promptly of the suspension of the qualification or registration of
(or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending
such qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will furnish
to the Representatives and, upon request of the Representatives, to each of
the other Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report to Stockholders of the Company
containing the balance sheet of the Company as of the close of such fiscal
year and statements of income, stockholders' equity and cash flows for the
year then ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies of
each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form
10-Q, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any other report or communication of the Company mailed
generally to holders of its Common Stock.
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(h) During the period of 180 days after the first date that any of the
Common Shares are released by you for sale to the public, without the prior
written consent of either Montgomery Securities or each of the
Representatives (which consent may be withheld at the sole discretion of
Montgomery Securities or the Representatives, as the case may be), the
Company will not issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security other than (i) the Company's (1) issuance of Common Stock upon the
exercise of warrants and stock options that are presently outstanding and
described as such in the Prospectus or which may be issued hereafter under
the option plans described in the Registration Statement and the Prospectus
and (2) grant of options pursuant to the option plans described in the
Registration Statement and the Prospectus, (ii) the Company's issuance of
Common Stock under the employee stock purchase plan described in the
Registration Statement and the Prospectus and (iii) the Company's issuance of
shares of Common Stock in an acquisition of another corporation or entity
provided that (1) such shares represent less than 20% of the Company's then
outstanding shares of Common Stock and (2) the individuals or entities to
whom such shares are issued agree that such shares may not be resold during
the 180 days following the first date that any of the shares of Common Stock
are released by the Underwriters for sale to the public.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the Common
Stock in California), will comply with such Blue Sky laws and will continue
such qualifications, registrations and exemptions in effect for a period of
five years after the date hereof.
(k) The Company will use its best efforts to designate the Common Stock
for quotation as a national market system security on the NASD Automated
Quotation System.
You, on behalf of the Underwriters, may, in your sole discretion, waive
in writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
SECTION 7
PAYMENT OF EXPENSES
Whether or not the transactions contemplated hereunder are consummated
or this Agreement becomes effective or is terminated, the Company and, unless
otherwise paid by the Company, the Selling Stockholders agree to pay in such
proportions as they may agree upon among themselves all costs, fees and
expenses incurred in connection with the performance of their obligations
hereunder and in connection with the transactions contemplated hereby,
including without limiting the generality
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of the foregoing, (i) all expenses incident to the issuance and delivery of
the Common Shares (including all printing and engraving costs), (ii) all fees
and expenses of the registrar and transfer agent of the Common Stock, (iii)
all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement,
each Preliminary Prospectus and the Prospectus (including all exhibits and
financial statements) and all amendments and supplements provided for herein,
this Agreement, the Agreement Among Underwriters, the Selected Dealers
Agreement, the Underwriters' Questionnaire, the Underwriters' Power of
Attorney and the Blue Sky memorandum, (vi) all filing fees, reasonable
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for
offer and sale under the state or Canadian Blue Sky laws, (vii) the filing
fee, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with the National Association of Securities Dealers, Inc. and
(viii) all other fees, costs and expenses referred to in Item 25 of the
Registration Statement. The Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees and expenses to be paid by
the Company and by the Selling Stockholders. Except as provided in this
Section 7, Section 9 and Section 11 hereof, the Underwriters shall pay all of
their own expenses, including the fees and disbursements of their counsel
(excluding those relating to qualification, registration or exemption under
the Blue Sky laws and the Blue Sky memorandum referred to above). This
Section 7 shall not affect any agreements relating to the payment of expenses
between the Company and the Selling Stockholders.
The Selling Stockholders will pay (directly or by reimbursement) all
fees and expenses incident to the performance of their obligations under this
Agreement which are not otherwise specifically provided for herein, including
but not limited to (i) any fees and expenses of counsel for any Selling
Stockholders other than Fenwick & West LLP and Wise & Shepard LLP and (ii)
all expenses and taxes incident to the sale and delivery of the Common Shares
to be sold by such Selling Stockholders to the Underwriters hereunder.
SECTION 8
CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS
The obligations of the several Underwriters to purchase and pay for the
Firm Common Shares on the First Closing Date and the Optional Common Shares
on the Second Closing Date shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the accuracy
of the statements of Company officers and the Selling Stockholders made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder, and to the
following additional conditions:
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(a) The Registration Statement shall have become effective not later
than 5:00 p.m. (or in the case of a registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10:00 p.m.), Washington, D.C. Time, on the date of this Agreement,
or at such later time as shall have been consented to by you; if the filing
of the Prospectus, or any supplement thereto, is required pursuant to Rule
424(b) of the Rules and Regulations, the Prospectus shall have been filed in
the manner and within the time period required by Rule 424(b) of the Rules
and Regulations; and prior to such Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending
or, to the knowledge of the Company, the Selling Stockholders or you, shall
be contemplated by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement, or
otherwise, shall have been complied with to your reasonable satisfaction.
(b) You shall be reasonably satisfied that since the respective dates
as of which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital stock of
the Company or any of its subsidiaries or any material change in the
indebtedness (other than in the ordinary course of business) of the Company
or any of its subsidiaries other than as set forth in or contemplated by the
Registration Statement and the Prospectus, (ii) except as set forth in or
contemplated by the Registration Statement or the Prospectus, no material
verbal or written agreement or other transaction shall have been entered into
by the Company or any of its subsidiaries, which is not in the ordinary
course of business or which could result in a material reduction in the
future earnings of the Company and its subsidiaries, taken as a whole, (iii)
no loss or damage (whether or not insured) to the property of the Company or
any of its subsidiaries shall have been sustained which materially and
adversely affects the condition (financial or otherwise), business or results
of operations of the Company and its subsidiaries, taken as a whole, (iv) no
legal or governmental action, suit or proceeding affecting the Company or any
of its subsidiaries which is materially adverse to the Company and its
subsidiaries, taken as a whole, or which adversely affects or may affect the
transactions contemplated by this Agreement shall have been instituted or
threatened and (v) there shall not have been any material adverse change in
the condition (financial or otherwise), business, management or results of
operations of the Company and its subsidiaries, taken as a whole, which makes
it impractical or inadvisable in the reasonable judgment of the
Representatives to proceed with the public offering or purchase the Common
Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance reasonably
satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of Wise & Shepard LLP, counsel for the Company,
addressed to the Underwriters and dated the First Closing Date, or the
Second Closing Date, as the case may be, to the effect that:
(1) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its
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jurisdiction of incorporation, is duly qualified to do business as
a foreign corporation and is in good standing in all other
jurisdictions where the ownership or leasing of properties or the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Company and its subsidiaries, and
has full corporate power and authority to own its properties and
conduct its business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in
the Prospectus; all necessary and proper corporate proceedings have
been taken in order to authorize validly such authorized Common
Stock; all outstanding shares of Common Stock (including the Firm
Common Shares and any Optional Common Shares) have been duly and
validly issued, are fully paid and nonassessable, were issued in
compliance with federal and state securities laws, to such
counsel's knowledge were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase
any securities and conform in all material respects to the
description thereof contained in the Prospectus; without limiting
the foregoing, to such counsel's knowledge there are no preemptive
or other rights to subscribe for or purchase any of the Common
Shares to be sold by the Company hereunder;
(3) All of the issued and outstanding shares of the Company's
subsidiaries have been duly and validly authorized and issued, are
fully paid and nonassessable and are owned beneficially by the
Company free and clear of all liens, encumbrances, equities,
claims, security interests, voting trusts or other defects of title
whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware law,
and when duly countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order against payment
of the agreed consideration therefor in accordance with the
provisions of this Agreement, the Common Shares represented thereby
will be duly authorized and validly issued, fully paid and
nonassessable, will not have been issued in violation of or subject
to any preemptive rights or other rights known to such counsel to
subscribe for or purchase securities and will conform in all
respects to the description thereof contained in the Prospectus;
(5) Except as disclosed in or specifically contemplated by
the Prospectus, to such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the
issuance of, and no commitments, plans or arrangements to issue,
any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company;
(6) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or
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both, a default under, any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument
known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or any of its or their property may be bound or
affected which is material to the Company and its subsidiaries, or
violate any of the provisions of the certificate of incorporation
or bylaws, or other organizational documents, of the Company or any
of its subsidiaries or, so far as is known to such counsel, violate
any statute, judgment, decree, order, rule or regulation of any
court or governmental body having jurisdiction over the Company or
any of its subsidiaries or any of its or their property;
(7) Neither the Company nor any subsidiary is in violation of
its certificate of incorporation or bylaws, or other organizational
documents, or to such counsel's knowledge, in breach of or default
with respect to any provision of any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other
instrument known to such counsel to which the Company or any such
subsidiary is a party or by which it or any of its properties may
be bound or affected, except where such default would not
materially adversely affect the Company and its subsidiaries;
(8) To such counsel's knowledge, no holders of securities of
the Company have rights which have not been waived or satisfied to
the registration of shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company
or the offering contemplated hereby;
(9) The information set forth in the Prospectus under the
captions "Risk Factors - Factors Inhibiting Takeover," "Risk
Factors - Shares Eligible for Future Sale," "Capitalization,"
"Business - Intellectual Property Rights," "Management -Executive
Compensation," "Management - Director Compensation," "Management
- Employee Benefit Plans," "Management - Indemnification of
Directors and Executive Officers and Limitation of Liability,"
"Certain Transactions," "Principal and Selling Stockholders,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale," insofar as such information relates to issuances of
securities of the Company or purports to summarize provisions of
any contract, plan or law, fairly describes such issuances or
provisions.
In rendering such opinion, such counsel may rely as to matters of
local law or the laws of a state other than California or the corporate
law of the State of Delaware, on opinions of local counsel, and as to
matters of fact, on certificates of officers of the Company and of
governmental officials, without verification except as specified, in
which case their opinion is to state that they are so doing and that
the Underwriters and their counsel are justified in relying on such
opinions or certificates. Such counsel shall also include a statement
to the effect that nothing has come to such counsel's attention that
would lead such counsel to believe that either at the effective date of
the Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus, or any such amendment or
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supplement, contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(ii) An opinion of Fenwick & West LLP, special counsel to the
Company and the Selling Stockholders (other than Selling Stockholders
Pacific Media Development, Inc. ("Pacific Media") and Command Audio
Corporation ("CAC")), addressed to the Underwriters and dated the First
Closing Date, or the Second Closing Date, as the case may be, to the
effect that:
(1) The Registration Statement has become effective under
the Act, and, to such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement or preventing the
use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated by the
Commission; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) of the Rules and
Regulations has been made in the manner and within the time period
required by such Rule 424(b);
(2) The Registration Statement, the Prospectus and each
amendment or supplement thereto (except for the financial
statements included therein and the financial data derived
therefrom, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the
Act and the Rules and Regulations;
(3) To such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required
to be disclosed in the Registration Statement or Prospectus or to
be filed as exhibits to the Registration Statement which are not
disclosed or filed, as required;
(4) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened
against the Company which are required to be described in the
Prospectus which are not described as required;
(5) The Company has full right, power and authority to
enter into this Agreement and to sell and deliver the Common Shares
to be sold by it to the several Underwriters; this Agreement has
been duly and validly authorized by all necessary corporate action
by the Company, has been duly and validly executed and delivered by
and on behalf of the Company, and is a valid and binding agreement
of the Company in accordance with its terms, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be expressed; and
no approval, authorization, order, consent, registration, filing,
qualification, license or permit of or with any court, regulatory,
administrative or other governmental body is required for the
execution and delivery of this Agreement by the
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Company or the performance by the Company of its obligations
pursuant to this Agreement, except such as have been obtained and
are in full force and effect under the Act and such as may be
required under applicable Blue Sky laws in connection with the
purchase and distribution of the Common Shares by the Underwriters
and the clearance of such offering with the NASD;
(6) To such counsel's knowledge, (a) this Agreement and
the Stockholders Agreement have been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders
(other than Pacific Media) and (b) the Agent has been duly and
validly authorized to act as the custodian of the Common Shares to
be sold by each such Selling Stockholder; and (c) the performance
by the Selling Stockholders (other than Pacific Media) of their
respective obligations pursuant to this Agreement and the
Stockholders Agreement will not result in a breach of, or
constitute a default under, any material indenture, mortgage, deed
of trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument known to such
counsel to which any of the Selling Stockholders (other than
Pacific Media) is a party or by which any of the Selling
Stockholders (other than Pacific Media) or any of their properties
may be bound, or violate any statute, judgment, decree, order, rule
or regulation known to such counsel of any court or governmental
body having jurisdiction over any of the Selling Stockholders
(other than Pacific Media) or any of their properties if such
breach or violation would adversely affect a Selling Stockholder's
ability to perform such Selling Stockholder's obligations pursuant
to this Agreement or the Stockholders Agreement; and to such
counsel's knowledge, no approval, authorization, order or consent
of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of
this Agreement or the Stockholders Agreement or the consummation by
the Selling Stockholders (other than Pacific Media) of the
transactions contemplated by this Agreement, except such as have
been obtained and are in full force and effect under the Act and
such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common Shares
by the Underwriters and the clearance of such offering with the
NASD;
(7) To such counsel's knowledge, the Selling Stockholders
(other than Pacific Media) have full right, power and authority to
enter into this Agreement and the Stockholders Agreement and to
sell, transfer and deliver the Common Shares to be sold on such
Closing Date by such Selling Stockholders hereunder and upon
delivery of and payment for the Common Shares to be sold by the
Selling Stockholders (other than Pacific Media) as provided in this
Agreement and upon registration of such Common Shares in the names
of the Underwriters (or their nominees) in the stock records of the
Company, the Underwriters will be the owners of such Common Shares,
free and clear of any adverse claim, provided that the Underwriters
are purchasing such Common Shares in good faith and without notice
of any adverse claim; and
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(8) To such counsel's knowledge, this Agreement and the
Stockholders Agreement are valid and binding agreements of each of
the Selling Stockholders (other than Pacific Media) in accordance
with their terms except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and
except with respect to those provisions relating to indemnities or
contributions for liabilities under the Act, as to which no opinion
need be expressed.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States, of the
State of California or the corporate laws of the State of Delaware upon
opinions of local or foreign counsel satisfactory in form and scope to
counsel for the Underwriters. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the
opinions of such local counsel. Counsel may base the opinions set
forth in paragraphs (6)-(8) above solely upon the representations and
warranties contained in this Agreement, or Stockholders Agreements
executed by each Selling Securityholder, provided that such counsel
confirms that it has no reason to believe that such representations or
warranties are materially inaccurate.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that,
although it has not independently verified the accuracy or completeness
of the statements in the Registration Statement and the Prospectus,
nothing has come to the attention of such counsel that causes it to
believe that the Registration Statement (except as to the financial
statements and the financial data derived therefrom, as to which such
counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (except as to
the financial statements and the financial data derived therefrom, as
to which such counsel need not express any opinion or belief) at the
Effective Date contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and the financial
data derived therefrom, as to which such counsel need not express any
opinion or belief) as of its date or at the Closing Date (or, if there
is a second closing, any later date on which Option Stock is
purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to
make the statement therein, in the light of the circumstances under
which they were made, not misleading. With respect to such statement,
counsel may state that its belief is based upon the procedures set
forth therein, but is without independent check or verification.
(iii) An opinion of George Hohnsbeen, Esq., counsel to Pacific
Media, addressed to the Underwriters and dated the First Closing Date
to the effect that:
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(1) To such counsel's knowledge, (a) this Agreement and
the Stockholders Agreement have been duly authorized, executed and
delivered by or on behalf of Pacific Media and (b) the Agent has
been duly and validly authorized to act as the custodian of the
Common Shares to be sold by Pacific Media; and the performance by
Pacific Media of its obligations pursuant to this Agreement and the
Stockholders Agreement will not result in a breach of, or
constitute a default under, any material indenture, mortgage, deed
of trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument known to such
counsel to which Pacific Media is a party or by which Pacific Media
or any of its properties may be bound, or violate any statute,
judgment, decree, order, rule or regulation known to such counsel
of any court or governmental body having jurisdiction over Pacific
Media or any of its properties if such breach or violation would
adversely affect a Pacific Media's ability to perform such Pacific
Media's obligations pursuant to this Agreement or the Stockholders
Agreement; and to such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required for
the execution and delivery of this Agreement or the Stockholders
Agreement or the consummation by the Pacific Media of the
transactions contemplated by this Agreement, except such as have
been obtained and are in full force and effect under the Act and
such as may be required under the rules of the NASD and applicable
Blue Sky laws;
(2) To such counsel's knowledge, Pacific Media has full
right, power and authority to enter into this Agreement and the
Stockholders Agreement and to sell, transfer and deliver the Common
Shares to be sold on such Closing Date by Pacific Media hereunder
and upon delivery of and payment for the Common Shares to be sold
by Pacific Media as provided in this Agreement and upon
registration of such Common Shares in the names of the Underwriters
(or their nominees) in the stock records of the Company, the
Underwriters will be the owners of such Common Shares, free and
clear of any adverse claim, provided that the Underwriters are
purchasing such Common Shares in good faith and without notice of
any adverse claim; and
(3) To such counsel's knowledge, this Agreement and the
Stockholders Agreement are valid and binding agreements of Pacific
Media in accordance with their terms except as enforceability may
be limited by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except with respect to those provisions
relating to indemnities or contributions for liabilities under the
Act, as to which no opinion need be expressed.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States, of the
State of California or the corporate laws of the State of Delaware upon
opinions of local or foreign counsel satisfactory in form and scope to
counsel for the Underwriters. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state
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that counsel knows of no reason the Underwriters are not entitled to
rely upon the opinions of such local counsel.
(iv) An opinion of Brobeck, Phleger & Harrison, counsel to CAC,
addressed to the Underwriters and dated the First Closing Date, to the
effect that:
(1) To such counsel's knowledge, (a) this Agreement and
the Stockholders Agreement have been duly authorized, executed and
delivered by or on behalf of CAC and (b) the Agent has been duly
and validly authorized to act as the custodian of the Common Shares
to be sold by CAC; and the performance by CAC of its obligations
pursuant to this Agreement and the Stockholders Agreement will not
result in a breach of, or constitute a default under, any material
indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or
instrument known to such counsel to which CAC is a party or by
which CAC or any of its properties may be bound, or violate any
statute, judgment, decree, order, rule or regulation known to such
counsel of any court or governmental body having jurisdiction over
CAC or any of its properties if such breach or violation would
adversely affect a CAC's ability to perform such CAC's obligations
pursuant to this Agreement or the Stockholders Agreement; and to
such counsel's knowledge, no approval, authorization, order or
consent of any court, regulatory body, administrative agency or
other governmental body is required for the execution and delivery
of this Agreement or the Stockholders Agreement or the consummation
by the CAC of the transactions contemplated by this Agreement,
except such as have been obtained and are in full force and effect
under the Act and such as may be required under the rules of the
NASD and applicable Blue Sky laws;
(2) To such counsel's knowledge, CAC has full right, power
and authority to enter into this Agreement and the Stockholders
Agreement and to sell, transfer and deliver the Common Shares to be
sold on such Closing Date by CAC hereunder and upon delivery of and
payment for the Common Shares to be sold by CAC as provided in this
Agreement and upon registration of such Common Shares in the names
of the Underwriters (or their nominees) in the stock records of the
Company, the Underwriters will be the owners of such Common Shares,
free and clear of any adverse claim, provided that the Underwriters
are purchasing such Common Shares in good faith and without notice
of any adverse claim; and
(3) To such counsel's knowledge, this Agreement and the
Stockholders Agreement are valid and binding agreements of CAC in
accordance with their terms except as enforceability may be limited
by general equitable principles, bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors'
rights generally and except with respect to those provisions
relating to indemnities or contributions for liabilities under the
Act, as to which no opinion need be expressed.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States, of the
State of California or the corporate laws of the State of Delaware upon
opinions of local or foreign counsel satisfactory in form and scope to
counsel
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for the Underwriters. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the
opinions of such local counsel.
(v) An opinion of Skjerven, Morrill, MacPherson, Franklin &
Friel, for the Company's intellectual property counsel, addressed to
the Underwriters and dated the First Closing Date or the Second Closing
Date, as the case may be, to the effect that:
(1) To such counsel's knowledge, the Company owns all
patents, trademarks, trademark registrations, service marks, service
mark registrations, trade names, maskworks, copyrights, licenses,
inventions, trade secrets and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business, and
such counsel is not aware of any claim to the contrary or any challenge
by any other person to the ownership rights of the Company with respect
to the foregoing;
(2) No fact has come to such counsel's attention that would
lead such counsel to believe that the patents presently issued and held
by the Company are not valid and enforceable.
(3) Such counsel is not aware of any material fact with
respect to the patent applications of the Company presently on file
that (a) would preclude the issuance of patents with respect to such
applications or (b) would lead such counsel to believe that such
patents when issued would not be valid and enforceable.
(4) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company alleging that the
Company has infringed or currently is infringing or otherwise violating
any patents rights, trademarks, service marks, trade name rights,
maskworks, copyrights, licenses, inventions, trade secrets and similar
rights owned by any other person or entity and no fact has come to such
counsel's attention that any of the Company's present or proposed
products or processes described in the Prospectus have infringed or
currently infringe any patents, trademarks, trademark registrations,
service marks, service mark registrations, trade names, maskworks,
copyrights, licenses, inventions, trade secrets and rights owned by any
other person or entity.
(5) Such counsel has reviewed the descriptions of patents
and patent applications under the captions "Risk Factors - Dependence
on Proprietary Technology" and "Business - Intellectual Property
Rights" in the Registration Statement and Prospectus, and, to the
extent they constitute matters of law or legal conclusions, these
descriptions are true and correct in all material respects and fairly
present the patent situation of the Company; and
(6) Nothing has come to such counsel's attention that
causes such counsel to believe that, as of the date the Registration
Statement became effective and as of the date of such opinion, the
statements set forth under the captions "Risk Factors - Dependence on
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Proprietary Technology" and "Business - Intellectual Property Rights"
in the Registration Statement and Prospectus contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
(vi) Such opinion or opinions of Wilson, Sonsini, Goodrich &
Rosati PC, counsel for the Underwriters dated the First Closing Date or
the Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require, and
the Company and the Selling Stockholders shall have furnished to such
counsel such documents and shall have provided to them such papers and
records as they may reasonably request for the purpose of enabling them
to pass upon such matters. In connection with such opinions, such
counsel may rely on representations or certificates of officers of the
Company and governmental officials.
(vii) A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of
the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of the
date of this Agreement and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) To their knowledge (a) the Commission has not issued
any order preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; (b) no stop order suspending
the effectiveness of the Registration Statement has been issued;
and (c) no proceedings for that purpose have been instituted or are
pending or contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the best of his knowledge, neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material fact
or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or
event has occurred which is required to be set forth in an
amendment to the Registration Statement or in a supplement to or
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amendment of any prospectus which has not been disclosed in such a
supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except
as disclosed in or contemplated by the Prospectus, (a) there has
not been any material adverse change or a development involving a
material adverse change in the condition (financial or otherwise),
business, properties, results of operations or management of the
Company and its subsidiaries, taken as a whole, (b) no legal or
governmental action, suit or proceeding is pending or threatened
against the Company or any of its subsidiaries which is material to
the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement, (c) neither the Company nor any of its subsidiaries has
entered into any verbal or written agreement or other transaction
which is not in the ordinary course of business or which could
result in a material reduction in the future net income of the
Company and its subsidiaries, taken as a whole, or incurred any
material liability or obligation, direct, contingent or indirect,
made any change in its capital stock, made any material change in
its short-term debt or funded debt or repurchased or otherwise
acquired any of the Company's capital stock, and (d) the Company
has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to the First Closing Date or
Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company and
its subsidiaries have not sustained a material loss or damage by
strike, fire, flood, windstorm, accident or other calamity (whether
or not insured).
(viii) On the First Closing Date or the Second Closing Date,
as the case may be, a certificate, dated such Closing Date and
addressed to you, signed by or on behalf of each of the Selling
Stockholders to the effect that the representations and warranties of
such Selling Stockholder in Section 3 of this Agreement are true and
correct, as if made at and as of the First Closing Date or the Second
Closing Date, as the case may be, and that such Selling Stockholder has
complied with all the agreements and satisfied all the conditions on
his part to be performed or satisfied prior to the First Closing Date
or the Second Closing Date, as the case may be.
(ix) On the date on which this Agreement is executed and also
on the First Closing Date and the Second Closing Date a letter
addressed to you, as Representatives of the Underwriters, from KPMG
Peat Marwick, independent accountants, the first one to be dated the
date of this Agreement, the second one to be dated the First Closing
Date and the third one (in the event of a Second Closing) to be dated
the Second Closing Date, in form and substance reasonable satisfactory
to you.
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(x) On or before the First Closing Date, letters from each of
the Selling Stockholders, each holder of _____ percent or more of the
Company's Common Stock and each director and officer of the Company, in
form and substance satisfactory to you, confirming the undersigned will
not, without the prior written consent of Montgomery Securities (which
consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract or grant any option to sell, make any
short sale (including without limitation any "short vs. the box"),
pledge, transfer, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934,
as amended, or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as
defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the
date hereof and continuing to a date 180 days after the first date any
of the Common Stock to be sold in the Offering is released by you for
sale to the public.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably
satisfactory to you and to Wilson, Sonsini, Goodrich & Rosati, counsel for
the Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
reasonably request. Any certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters
as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company and the Selling Stockholders without liability
on the part of any Underwriter or the Company, the Company or the Selling
Stockholders except for the expenses to be paid or reimbursed by the Company
and by the Selling Stockholders pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof.
SECTION 9
REIMBURSEMENT OF UNDERWRITERS' EXPENSES
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 8, or if the sale to the Underwriters
of the Common Shares at the First Closing is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse you and the other Underwriters upon
demand for all out-of-pocket expenses that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the
sale of the Common Shares, including, but not limited to, reasonable fees and
disbursements of counsel, printing expenses, travel expenses, postage,
telegraph charges and telephone charges relating
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directly to the offering contemplated by the Prospectus. Any such
termination shall be without liability of any party to any other party except
that the provisions of this Section, Section 7 and Section 11 shall at all
times be effective and shall apply.
SECTION 10
EFFECTIVENESS OF REGISTRATION STATEMENT
You, the Company and the Selling Stockholders will use your, its and
their respective best efforts to cause the Registration Statement to become
effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be
issued, to obtain as soon as possible the lifting thereof.
SECTION 11
INDEMNIFICATION
(a) The Company, Pacific Media, Whit T. Jackson, Brian R. Dunn and CAC
(each of Pacific Media, Whit T. Jackson, Brian R. Dunn and CAC may be
referred to herein as an "Indemnifying Stockholder" and collectively they may
be referred to as the "Indemnifying Stockholders"), severally and not
jointly, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or
several, to which such Underwriter or such controlling person may become
subject, under the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company and a majority
in interest of the Indemnifying Stockholders) insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated
therein or necessary to make the statements in any of them not misleading, or
arise out of or are based in whole or in part, in the case of the Company, on
any inaccuracy in the representations and warranties of the Company contained
herein or any failure of the Company to perform its obligations hereunder or
under law or, in the case of an Indemnifying Stockholder, on any inaccuracy
in the representations or warranties of such Indemnifying Stockholder
contained herein or any failure of such Indemnifying Stockholder to perform
its obligations hereunder or under law; and will reimburse each Underwriter
and each such controlling person for any legal and other expenses as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that neither the Company nor an Indemnifying Stockholder will be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an
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untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with the information furnished to the Company pursuant to Section
4 hereof; and provided further that, with respect to any untrue statement or
omission or alleged untrue statement or omission made in any Preliminary
Prospectus, the indemnity agreement contained in this subsection (a) shall
not inure to the benefit of any Underwriter from whom the person asserting
any such loss, claim, damage or liability purchased Common Shares (or to the
benefit of any such person controlling such Underwriter) to the extent that
any such loss, claim, damage, liability or expense of such Underwriter or
controlling person results from the fact that a copy of the Prospectus was
not sent or given to such person at or prior to the written confirmation of
the sale of such Common Shares to such person as required by the Act, and if
the untrue statement or omission concerned has been corrected in the
Prospectus, unless such failure is the result of noncompliance by the Company
with Section 6(e) hereof. Notwithstanding the foregoing, the Indemnifying
Stockholders shall not be required to provide indemnification pursuant to
this Section 11(a) unless the Underwriter or controlling person seeking
indemnification shall have first made a written demand for payment to the
Company with respect to any losses, claims, damages, liabilities or expenses
for which the Company and the Indemnifying Stockholders are required to
indemnify the Underwriters pursuant to this Section 11(a) and the Company
shall have failed to make such demanded payment within one hundred twenty
(120) days after receipt thereof. The Company and the Indemnifying
Stockholders may agree, as among themselves and without limiting the rights
of the Underwriters under this Agreement, as to their respective amounts of
such liability for which they each shall be responsible. [The Company and
Pacific Media confirm that they have so agreed pursuant to a Registration
Right Agreement dated as of June 12, 1991.] In addition to its other
obligations under this Section 11(a), the Company and the Indemnifying
Stockholders, severally and not jointly, agree that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, or any inaccuracy in the representations and
warranties of the Company (in the case of the Company) or an Indemnifying
Stockholder (in the case of such Indemnifying Stockholder) herein or failure
to perform its obligations hereunder, all as described in this Section 11(a)
and subject to the limitations set forth in this Section 11(a), they will
reimburse each Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety
and enforceability of the Company's or the Indemnifying Stockholders'
obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company or the Indemnifying Stockholders as
applicable, together with interest, compounded daily, determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Bank of America
NT&SA, San Francisco, California (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter within 30 days of
a request for reimbursement, shall bear interest at the Prime Rate from, in
the case of the Company, the date of such request and, in the case of the
Indemnifying Stockholders, one hundred twenty (120) days after the date of
such request. This indemnity
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agreement will be in addition to any liability which the Company or the
Indemnifying Stockholders may otherwise have.
(b) Each of the Selling Stockholders other than the Indemnifying
Stockholders, severally and not jointly, agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims,
damages, liabilities or expenses, joint or several, to which such Underwriter
or such controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law
or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Selling Stockholders holding a
majority of the Common Shares being sold by the Selling Stockholders other
than the Indemnifying Stockholders pursuant to this Agreement), insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required
to be stated therein or necessary to make the statements in any of them not
misleading in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto in reliance upon and in
conformity with information furnished by such Selling Stockholder, or (ii)
arise out of or are based in whole or in part, on any inaccuracy in the
representations or warranties of such Selling Stockholder contained herein or
any failure of such Selling Stockholder to perform its obligations hereunder
or under law; and will reimburse each Underwriter and each such controlling
person for any legal and other expenses as such expenses are reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that, with
respect to any untrue statement or omission or alleged untrue statement or
omission made in any Preliminary Prospectus, the indemnity agreement
contained in this subsection (b) shall not inure to the benefit of any
Underwriter from whom the person asserting any such loss, claim, damage or
liability purchased Common Shares (or to the benefit of any such person
controlling such Underwriter) to the extent that any such loss, claim,
damage, liability or expense of such Underwriter or controlling person
results from the fact that a copy of the Prospectus was not sent or given to
such person at or prior to the written confirmation of the sale of such
Common Shares to such person as required by the Act, and if the untrue
statement or omission concerned has been corrected in the Prospectus, unless
such failure is the result of noncompliance by the Company with Section 6(e)
hereof. In addition to its other obligations under this Section 11(b), each
Selling Stockholder other than the Indemnifying Stockholders, severally and
not jointly, agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any such statement or omission, or any alleged statement or
omission, or any inaccuracy in the representations and warranties of any
Selling Stockholder (in the case of such Selling Stockholder) herein or
failure to perform its obligations hereunder, all as described in this
Section 11(b) and subject to the limitations set forth in this Section 11(b),
they will reimburse each Underwriter on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
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notwithstanding the absence of a judicial determination as to the propriety
and enforceability of the Selling Stockholder's obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have
been improper, each Underwriter shall promptly return it to the Selling
Stockholders, as applicable, together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
the Selling Stockholders may otherwise have.
(c) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the
Act, against any losses, claims, damages, liabilities or expenses, joint or
several, to which the Company, or any such director, officer, Selling
Stockholder or controlling person may become subject, under the Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar
as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof as contemplated below) arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof; and will
reimburse the Company, or any such director, officer, Selling Stockholder or
controlling person for any legal and other expenses as such expenses are
reasonably incurred by the Company, or any such director, officer, Selling
Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under this
Section 11(c), each Underwriter severally agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 11(c) which relates
to information furnished to the Company pursuant to Section 4 hereof, it will
reimburse the Company (and, to the extent applicable, each officer, director,
Selling Stockholder or controlling person) on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Underwriters' obligation to reimburse the
Company (and, to the extent applicable, each officer, director, Selling
Stockholder or controlling person) for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Company (and, to the extent
applicable, each officer, director, Selling Stockholder or controlling
person) shall
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promptly return it to the Underwriters together with interest, compounded
daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company (and, to the extent
applicable, each officer, director, controlling person or Selling
Stockholder) within 30 days of a request for reimbursement, shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against an indemnifying party under
this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in
this Section or to the extent that it is not prejudiced as a proximate result
of such failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with all other indemnifying
parties similarly notified, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party
and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have employed such
counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel, approved by the Representatives in the case
of paragraph (a) or (b), representing the indemnified parties who are parties
to such action) or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of
the action, in each of which cases the reasonable fees and expenses of
counsel shall be at the expense of the indemnifying party.
(e) If the indemnification provided for in this Section 11 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b)
or (c) in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then each applicable indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of any
losses, claims, damages, liabilities or expenses referred to herein (i) in
such proportion as is appropriate to reflect the relative benefits received
by the
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Company and the Selling Stockholders, on the one hand, and the Underwriters,
on the other hand, from the offering of the Common Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Stockholders, on the one hand, and the Underwriters,
on the other hand, in connection with the statements or omissions or
inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received
by the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same
proportion, in the case of the Company and the Selling Stockholders, as the
total price paid to the Company and to the Selling Stockholders,
respectively, for the Common Shares sold by them to the Underwriters (net of
underwriting commissions but before deducting expenses), and in the case of
the Underwriters as the underwriting commissions received by them bears to
the total of such amounts paid to the Company and to the Selling Stockholders
and received by the Underwriters as underwriting commissions. The relative
fault of the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact or the
inaccurate or the alleged inaccurate representation and/or warranty relates
to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in subparagraph (d) of this
Section 11, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
provisions set forth in subparagraph (d) of this Section 11 with respect to
notice of commencement of any action shall apply if a claim for contribution
is to be made under this subparagraph (e); provided, however, that no
additional notice shall be required with respect to any action for which
notice has been given under subparagraph (d) for purposes of indemnification.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 11
were determined solely by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in
the immediately preceding paragraph. Notwithstanding the provisions of this
Section 11, no Underwriter shall be required to contribute any amount in
excess of the amount of the total underwriting commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 11 are several in proportion to their respective underwriting
commitments and not joint.
(f) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 11(a), 11(b) and
11(c) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the
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Board of Governors of the New York Stock Exchange, Inc. or pursuant to the
Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the
event that the party demanding arbitration does not make such designation of
an arbitration tribunal in such demand or notice, then the party responding
to said demand or notice is authorized to do so. Such an arbitration would
be limited to the operation of the interim reimbursement provisions contained
in Sections 11(a), 11(b) and 11(c) hereof and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse expenses which is
created by the provisions of such Sections 11(a), 11(b) and 11(c) hereof.
(g) The liability of a Selling Stockholder for a breach of a
representation or warranty set forth in Section 3 hereof or pursuant to the
indemnity, contribution, reimbursement and other provisions of this Section
11 shall be limited to an amount equal to the product obtained by multiplying
the number of shares sold by such Selling Stockholder pursuant to this
Agreement by the price set forth in Section 5 above.
SECTION 12
DEFAULT OF UNDERWRITERS
It shall be a condition to this Agreement and the obligation of the
Company and the Selling Stockholders to sell and deliver the Common Shares
hereunder, and of each Underwriter to purchase the Common Shares in the
manner as described herein, that, except as hereinafter in this paragraph
provided, each of the Underwriters shall purchase and pay for all the Common
Shares agreed to be purchased by such Underwriter hereunder upon tender to
the Representatives of all such shares in accordance with the terms hereof.
If any Underwriter or Underwriters default in their obligations to purchase
Common Shares hereunder on either the First or Second Closing Date and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not
exceed 10% of the total number of Common Shares which the Underwriters are
obligated to purchase on such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Common Shares which such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of Common Shares with
respect to which such default occurs is more than the above percentage and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Common Shares by other persons are not made within 48 hours
after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Stockholders except for the expenses to be paid by the Company and the
Selling Stockholders pursuant to Section 7 hereof and except to the extent
provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties,
the Representatives or the Company shall have the right to postpone the First
or Second Closing Date, as the case may be, for not more than five
-35-
<PAGE>
business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability
for its default.
SECTION 13
EFFECTIVE DATE
This Agreement shall become effective immediately as to Sections 7, 9,
11, 13, 14 and 16 and, as to all other provisions, (i) if at the time of
execution of this Agreement the Registration Statement has not become
effective, at 2:00 p.m., California time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been
declared effective, at 2:00 p.m., California time, on the first full business
day following the date of execution of this Agreement; but this Agreement
shall nevertheless become effective at such earlier time after the
Registration Statement becomes effective as you may determine on and by
notice to the Company or by release of any of the Common Shares for sale to
the public. For the purposes of this Section 13, the Common Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Common Shares or upon the release by
you of telegrams (i) advising Underwriters that the Common Shares are
released for public offering or (ii) offering the Common Shares for sale to
securities dealers, whichever may occur first.
SECTION 14
TERMINATION
Without limiting the right to terminate this Agreement pursuant to any
other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall be
without liability on the part of the Company or the Selling Stockholders to
any Underwriter (except for the expenses to be paid or reimbursed by the
Company and the Selling Stockholders pursuant to Sections 7 and 9 hereof and
except to the extent provided in Section 11 hereof) or of any Underwriter to
the Company or the Selling Stockholders (except to the extent provided in
Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices
shall have been generally established on the New York Stock Exchange or on
the American
-36-
<PAGE>
Stock Exchange or in the Nasdaq National Market, or trading in securities
generally shall have been suspended on either such Exchange or in the Nasdaq
National Market, or a general banking moratorium shall have been established
by federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred or
shall have accelerated or escalated to such an extent, as, in the reasonable
judgment of the Representatives, to affect materially and adversely the
marketability of the Common Shares, (iii) if any adverse event shall have
occurred or shall exist which makes untrue or incorrect in any material
respect any statement or information contained in the Registration Statement
or Prospectus or which is not reflected in the Registration Statement or
Prospectus but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect, or (iv)
if there shall be any action, suit or proceeding pending or threatened, or
there shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or any
of its subsidiaries or the transactions contemplated by this Agreement,
which, in the reasonable judgment of the Representatives, may materially and
adversely affect the business or net income of the Company and its
subsidiaries, taken as a whole, and makes it impracticable or inadvisable to
offer or sell the Common Shares. Any termination pursuant to this subsection
(b) shall without liability on the part of any Underwriter to the Company or
the Selling Stockholders or on the part of the Company or the Selling
Stockholders to any Underwriter (except for expenses to be paid or reimbursed
by the Company and the Selling Stockholders pursuant to Sections 7 and 9
hereof and except to the extent provided in Section 11 hereof).
SECTION 15
FAILURE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER
If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by
such Selling Stockholders at the First Closing Date under the terms of this
Agreement, then the Underwriters may at their option, by written notice from
you to the Company and the Selling Stockholders, either (i) terminate this
Agreement without any liability on the part of any Underwriter or, except as
provided in Sections 7, 9 and 11 hereof, the Company or the Selling
Stockholders, or (ii) purchase the shares which the Company and other Selling
Stockholders have agreed to sell and deliver in accordance with the terms
hereof. In the event of a failure by one or more of the Selling Stockholders
to sell and deliver as referred to in this Section, either you or the Company
shall have the right to postpone the Closing Date for a period not exceeding
seven business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected.
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<PAGE>
SECTION 16
REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers, of the Selling Stockholders
and of the several Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any
of its or their partners, officers or directors or any controlling person, or
the Selling Stockholders, as the case may be, and will survive delivery of
and payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 17
NOTICES
All communications hereunder shall be in writing and, (a) if sent to the
Representatives shall be mailed, delivered or telegraphed and confirmed to
you at 600 Montgomery Street, San Francisco, California 94111, Attention: Mr.
Frank M. Dunlevy, with a copy to Wilson, Sonsini, Goodrich & Rosati PC, at
650 Page Mill Road, Palo Alto, California 94304-1050, Attention: Jeffrey D.
Saper, Esq.; and (b) if sent to the Company shall be mailed, delivered or
telegraphed and confirmed to the Company at 1341 Orleans Drive, Sunnyvale,
California 94089, Attention: Mr. Victor A. Viegas with a copy to Fenwick &
West LLP, at Two Palo Alto Square, Palo Alto, California 94306, Attention:
Laird H. Simons III, Esq. and (c) if sent to the Selling Stockholders shall
be mailed, delivered or telegraphed and confirmed to (i) the Company at 1341
Orleans Drive, Sunnyvale, California 94089, Attention: Mr. Victor A. Viegas
with a copy to Fenwick & West LLP, at Two Palo Alto Square, Palo Alto,
California 94306, Attention: Laird H. Simons III, Esq. and (ii) Pacific
Media Development, Inc., c/o Victor Company of Japan, Limited, 12, 3-chome,
Moriya-cho, Kanagawa-ku Yokohama 221, Japan, Attention: _________ with a
copy to George H. Hohnsbeen II, Esq., 314 Lytton Avenue, Suite 200, Palo
Alto, California 94301. The Company, the Selling Stockholders or you may
change the address for receipt of communications hereunder by giving notice
to the others.
SECTION 18
SUCCESSORS
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 12
hereof, and to the benefit of the officers and directors and controlling
persons referred to in Section 11, and in each case their respective
successors, personal representatives and assigns, and no other person will
have any right or obligation hereunder. No such assignment shall relieve any
party of its obligations hereunder. The term
-38-
<PAGE>
"successors" shall not include any purchaser of the Common Shares as such
from any of the Underwriters merely by reason of such purchase.
SECTION 19
REPRESENTATION OF UNDERWRITERS
You will act as Representatives for the several Underwriters in
connection with all dealings hereunder, and any action under or in respect of
this Agreement taken by you jointly or by Montgomery Securities, as
Representatives, will be binding upon all the Underwriters.
SECTION 20
PARTIAL UNENFORCEABILITY
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability
of any other Section, paragraph or provision hereof. If any Section,
paragraph or provision of this Agreement is for any reason determined to be
invalid or unenforceable, there shall be deemed to be made such minor changes
(and only such minor changes) as are necessary to make it valid and
enforceable.
SECTION 21
APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
internal laws (and not the laws pertaining to conflicts of laws) of the State
of California.
SECTION 22
GENERAL
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings and negotiations with respect to the subject
matter hereof. This Agreement may be executed in several counterparts, each
one of which shall be an original, and all of which shall constitute one and
the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties
-39-
<PAGE>
only and will not affect the construction or interpretation of this
Agreement. This Agreement may be amended or modified, and the observance of
any term of this Agreement may be waived, only by a writing signed by the
Company, the Selling Stockholders and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Stockholders represents by so doing that he has been duly
appointed as Attorney-in-fact by such Selling Stockholders pursuant to a
validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this Agreement
by any of the Attorneys-in-fact will be binding on all the Selling
Stockholders.
-40-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters including you, all in accordance
with its terms.
Very truly yours,
MACROVISION CORPORATION
By: ____________________________
John O. Ryan, Chairman of the
Board of Directors and Chief
Executive Officer
SELLING STOCKHOLDERS
By: ____________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
HAMBRECHT & QUIST LLC
COWEN & COMPANY
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By: ______________________________
-41-
<PAGE>
SCHEDULE A
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Montgomery Securities. . . . . . . . . . . . . .
Hambrecht & Quist LLC. . . . . . . . . . . . . .
Cowen & Company. . . . . . . . . . . . . . . . .
_________
TOTAL. . . . . . . . . . . . . . . . . 2,350,000
A-1
<PAGE>
SCHEDULE B
Number of Firm Common
Shares to be Sold by
Name of Selling Stockholder Selling Stockholders
- --------------------------- ------------------------
Pacific Media Development, Inc.. . . . . . . 555,555
Command Audio Corporation. . . . . . . . . . 194,444
Brian T. and Linda J. Prinn as Trustees of
the Prinn Family Trust . . . . . . . . . . . 25,416
Erin M. Prinn Trust . . . . . . . . . . . . 1,388
Ian T. Prinn Trust . . . . . . . . . . . . . 1,388
Robert J. Lowe . . . . . . . . . . . . . . . 22,222
Whit T. Jackson . . . . . . . . . . . . . . 2,499
Brian R. Dunn . . . . . . . . . . . . . . . 5,000
[list others]
__________
TOTAL. . . . . . . . . . . . . . . . . . 915,984
__________
__________
B-1
<PAGE>
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF
MACROVISION CORPORATION
Macrovision Corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Macrovision Corporation.
SECOND: The date on which the Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware is
December 2, 1996, under the name of Macrovision Corporation.
THIRD: That the Board of Directors of this Corporation, pursuant to
Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware, adopted resolutions amending and restating the Certificate of
Incorporation to read in full as follows:
"ARTICLE I
The name of this Corporation is Macrovision Corporation.
ARTICLE II
The address of the registered office of this Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at that address is The Corporation Trust
Company.
ARTICLE III
The purpose of this Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
A. CLASSES OF STOCK. This Corporation is authorized to issue two classes
of stock to be designated, respectively, "Preferred Stock" and "Common Stock".
The total number of shares which the Corporation is authorized to issue is
fifty-five million (55,000,000) shares. Fifty million (50,000,000) shares shall
be Common Stock, par value One Tenth of One Cent ($0.001) per share (the "Common
Stock"), and five million (5,000,000) shares shall be Preferred Stock, par value
One Tenth of One Cent ($0.001) per share (the "Preferred Stock"). Each one and
eight-tenths (1.8) shares of the Corporation's Common Stock and each one and
eight-tenths (1.8) shares of the Corporation's Series A Preferred Stock
outstanding on the date of filing of this Amended and Restated Certificate of
Incorporation shall be combined and converted,
1
<PAGE>
respectively, into and reconstituted as one (1) share of Common Stock; provided,
however, that all resulting fractional shares shall be rounded down to the
nearest whole share.
B. POWERS, PREFERENCES, RIGHTS QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS OF PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors is hereby authorized to fix
or alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
ARTICLE V
A. EXCULPATION.
1. CALIFORNIA. Prior to the date upon which the Corporation is no
longer subject to Section 2215 of the California Corporations Code (the "Record
Date"), and to the extent California law applies, the liability of each and
every director of this Corporation for monetary damages shall be eliminated to
the fullest extent permissible under California law.
2. DELAWARE. A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is amended
after approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
B. INDEMNIFICATION.
1. CALIFORNIA Prior to the Record Date and to the extent California
law applies, this corporation is authorized to indemnify the directors and
officers of the corporation to the fullest extent permissible under California
law. Moreover, this corporation is authorized to provide indemnification of
(and advancement of expenses to) agents (as defined in Section 317 of the
California Corporation Code) through Bylaw provisions, agreements with agents,
vote of shareholders or disinterested directors or otherwise, in excess of
indemnification and advancement otherwise permitted by Section 317 of the
California Corporations Code, subject
2
<PAGE>
only to applicable limits set forth in Section 204 of the California
Corporations Code, with respect to actions for breach of duty to the corporation
and its shareholders.
2. DELAWARE. To the extent permitted by applicable law, this
corporation is also authorized to provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
this corporation to provide indemnification) through Bylaw provisions,
agreements with such agents or other person, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or nonstatutory), with respect to actions for breach of duty to the
corporation, its stockholders, and others.
C. EFFECT OF REPEAL OR MODIFICATION. Any repeal or modification of the
foregoing paragraph by the stockholders of the Corporation shall be prospective
only and shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the corporation with respect to any acts or
omissions of such director occurring prior to the time of such repeal or
modification.
ARTICLE VI
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Restated Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE VII
The Board of Directors may from time to time make, amend, supplement or
repeal the Bylaws; provided, however, that the stockholders may change or repeal
any Bylaw adopted by the Board of Directors; and provided, further, that no
amendment or supplement to the Bylaws adopted by the Board of Directors shall
vary or conflict with any amendment or supplement adopted by the stockholders.
ARTICLE VIII
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of stockholders called in accordance with the
Bylaws, and no action shall be taken by the stockholders by written consent."
FOURTH: That thereafter, pursuant to resolution of the Board of Directors,
the Amended and Restated Certificate of Incorporation, as so amended, was
submitted to the stockholders for their approval, which approval was given by
written consent of a majority of the stockholders pursuant to Section 228 of the
General Corporation Law of the State of Delaware.
3
<PAGE>
FIFTH: That prompt written notice was duly given pursuant to Section 228
of the General Corporation Law of the State of Delaware to those stockholders
who did not approve the Amended and Restated Certificate of Incorporation by
written consent.
SIXTH: That said Amended and Restated Certificate of Incorporation was
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Macrovision corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and attested
to by its Secretary this _______ day of ____________, 1997.
MACROVISION CORPORATION
------------------------
President
ATTEST:
- ------------------------------
Secretary
4
<PAGE>
AMENDED BYLAWS OF
MACROVISION CORPORATION
Adopted on December 2, 1996
Amended on February 5, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - Offices
Section 1 Registered Office. . . . . . . . . . . . . . . . . 1
Section 2 Other Offices. . . . . . . . . . . . . . . . . . . 1
ARTICLE II - Meetings of Shareholders
Section 1 Place of Meetings. . . . . . . . . . . . . . . . . 1
Section 2 Annual Meetings of Shareholders. . . . . . . . . . 1
Section 3 Special Meetings . . . . . . . . . . . . . . . . . 1
Section 4 Notice of Shareholders' Meetings . . . . . . . . . 2
Section 5 Manner of Giving Notice; Affidavit of Notice . . . 2
Section 6 Quorum . . . . . . . . . . . . . . . . . . . . . . 2
Section 7 Adjourned Meeting and Notice Thereof . . . . . . . 3
Section 8 Voting.. . . . . . . . . . . . . . . . . . . . . . 3
Section 9 Waiver of Notice or Consent by Absent
Shareholders. . . . . . . . . . . . . . . . . . . 3
Section 10 Shareholder Action by Written Consent Without
a Meeting . . . . . . . . . . . . . . . . . . . . 4
Section 11 Record Date for Shareholder Notice,
Voting, and Giving Consents . . . . . . . . . . . 4
Section 12 Proxies. . . . . . . . . . . . . . . . . . . . . . 5
Section 13 Inspectors of Election . . . . . . . . . . . . . . 5
Section 14 List of Shareholders Entitled to Vote. . . . . . . 6
ARTICLE III - Directors
Section 1 Powers . . . . . . . . . . . . . . . . . . . . . . 6
Section 2 Number of Directors. . . . . . . . . . . . . . . . 7
Section 3 Election and Term of Office of Directors . . . . . 7
Section 4 Vacancies. . . . . . . . . . . . . . . . . . . . . 7
Section 5 Place of Meetings and Telephonic Meetings. . . . . 8
Section 6 Annual Meetings. . . . . . . . . . . . . . . . . . 8
Section 7 Other Regular Meetings . . . . . . . . . . . . . . 8
Section 8 Special Meetings . . . . . . . . . . . . . . . . . 8
Section 9 Quorum . . . . . . . . . . . . . . . . . . . . . . 9
Section 10 Waiver of Notice . . . . . . . . . . . . . . . . . 9
Section 11 Adjournment. . . . . . . . . . . . . . . . . . . . 9
Section 12 Notice of Adjournment. . . . . . . . . . . . . . . 9
Section 13 Action Without Meeting . . . . . . . . . . . . . . 9
Section 14 Fees and Compensation of Directors . . . . . . . . 9
i
<PAGE>
ARTICLE IV - Committees
Section 1 Committees of Directors. . . . . . . . . . . . . . 10
Section 2 Meetings and Action of Committees. . . . . . . . . 10
ARTICLE V - Officers
Section 1 Officers . . . . . . . . . . . . . . . . . . . . . 11
Section 2 Election of Officers . . . . . . . . . . . . . . . 11
Section 3 Subordinate Officers, Etc. . . . . . . . . . . . . 11
Section 4 Removal and Resignation of Officers. . . . . . . . 11
Section 5 Vacancies in Offices . . . . . . . . . . . . . . . 11
Section 6 Chairman of the Board. . . . . . . . . . . . . . . 11
Section 7 President. . . . . . . . . . . . . . . . . . . . . 11
Section 8 Vice Presidents. . . . . . . . . . . . . . . . . . 12
Section 9 Secretary. . . . . . . . . . . . . . . . . . . . . 12
Section 10 Chief Financial Officer. . . . . . . . . . . . . . 12
ARTICLE VI - Indemnification of Directors, Officers, Employees
and Other Agents . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VII - Records and Reports
Section 1 Maintenance and Inspection of Share Register . . . 13
Section 2 Maintenance and Inspection of Bylaws . . . . . . . 13
Section 3 Maintenance and Inspection of Other Corporate
Records . . . . . . . . . . . . . . . . . . . . . 14
Section 4 Inspection by Directors. . . . . . . . . . . . . . 14
Section 5 Annual Report to Shareholders. . . . . . . . . . . 14
ARTICLE VIII - General Corporate Matters
Section 1 Record Date for Purposes Other Than Notice
and Voting. . . . . . . . . . . . . . . . . . . . 14
Section 2 Checks, Drafts, Evidences of Indebtedness. . . . . 15
Section 3 Corporate Contracts and Instruments; How
Executed. . . . . . . . . . . . . . . . . . . . . 15
Section 4 Certificates for Shares. . . . . . . . . . . . . . 15
Section 5 Lost Certificates. . . . . . . . . . . . . . . . . 15
Section 6 Representation of Shares of Other Corporations . . 15
Section 7 Construction and Definitions . . . . . . . . . . . 16
ARTICLE IX - Amendments. . . . . . . . . . . . . . . . . . . . . . . . 16
CERTIFICATE OF SECRETARY . . . . . . . . . . . . . . . . . . . . . . . 17
ii
<PAGE>
AMENDED BYLAWS
OF
MACROVISION CORPORATION
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The board of directors shall fix the
location of the registered office of the corporation at any place within the
State of Delaware.
SECTION 2. OTHER OFFICES. The board of directors may at any time
establish the principal executive or branch or subordinate offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of Delaware designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
SECTION 2. ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of
shareholders shall be held each year on a date and at a time designated by the
board of directors. At each annual meeting directors shall be elected, and any
other proper business may be transacted.
SECTION 3. SPECIAL MEETINGS. A special meeting of the shareholders may be
called at any time by the board of directors, or by the chairman of the board,
or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at any such meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president or the secretary of the corporation. The officer receiving such
request forthwith shall cause notice to be given to the shareholders entitled to
vote, in accordance with the provisions of Sections 4 and 5 of this Article II,
that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this
Section 3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
1
<PAGE>
SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting being noticed. The notice shall specify the place, date and
hour of the meeting and (i) in the case of a special meeting, the general nature
of the business to be transacted, or (ii) in the case of the annual meeting
those matters which the board of directors, at the time of giving the notice,
intends to present for action by the shareholders. The notice of any meeting at
which directors are to be elected shall include the name of any nominee or
nominees which, at the time of the notice, management intends to present for
election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 144 of the General Corporation Law of Delaware,
(ii) an amendment of the certificate of incorporation, pursuant to Section 242
of such Law, (iii) a reorganization of the corporation, pursuant to Section 251
of such Law, or (iv) a voluntary dissolution of the corporation, pursuant to
Section 275 of such Law, the notice shall also state the general nature of such
proposal.
SECTION 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or has been so
given, notice shall be deemed to have been given if sent by first-class mail or
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where such office is located. Notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at such address, all
future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of such notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary or
any transfer agent of the corporation giving such notice, and shall be filed and
maintained in the minute book of the corporation.
SECTION 6. QUORUM. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
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shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
SECTION 7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of the majority of the shares represented at such
meeting, either in person or by proxy, but in the absence of a quorum, no other
business may be transacted at such meeting, except as provided in Section 6 of
this Article II.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at a meeting at which the adjournment is
taken, unless a new record date for the adjourned meeting is fixed, or unless
the adjournment is for more than thirty (30) days from the date set for the
original meeting, in which case the board of directors shall set a new record
date. Notice of any such adjourned meeting, if required, shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 4 and 5 of this Article II. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
SECTION 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Section 217 of the General
Corporation Law of Delaware (relating to voting shares held by a fiduciary or in
joint ownership). Such vote may be by voice vote, copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission,
or by ballot; provided, however, that all elections for directors must be by
ballot upon demand by a shareholder at any election and before the voting
begins. Any shareholder entitled to vote on any matter (other than the election
of directors) may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it will be conclusively presumed that the shareholder's approving
vote is with respect to all shares such shareholder is entitled to vote. If a
quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by the General Corporation Law
of Delaware or the certificate of incorporation.
SECTION 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to a holding of the meeting, or an approval of the minutes
thereof. The waiver of notice or consent need not specify either the business
to be transacted or the purpose of any annual or special meeting of
shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section 4
of this Article II, the waiver of notice or
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consent shall state the general nature of such proposal. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at the meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if such objection is expressly made at the meeting.
SECTION 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. In the case of election of directors, such
consent shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of directors; provided, however, that a
director may be elected at any time to fill a vacancy not filled by the
directors by the written consent of the holders of a majority of the outstanding
shares entitled to vote for the election of directors. All such consents shall
be filed with the secretary of the corporation and shall be maintained in the
corporate records. Any shareholder giving a written consent, or the
shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holder, may revoke
the consent by a writing received by the secretary of the corporation prior to
the time that written consents of the number of shares required to authorize the
proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
Such notice shall be given in the manner specified in Section 5 of this
Article II. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 144 of
the General Corporation Law of Delaware, (ii) indemnification of agents of the
corporation, pursuant to Section 145 of such Law, or (iii) a reorganization of
the corporation, pursuant to Section 251 of such Law, such notice shall be given
at least ten (10) days before the consummation of any such action authorized by
any such approval.
SECTION 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of any such meeting nor more than sixty (60) days prior to such action without a
meeting, and in such case only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date fixed as aforesaid, except as otherwise provided in the General
Corporation Law of Delaware.
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If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the board has been taken, shall be at the
close of business on the day on which the board adopts the resolution relating
thereto, or the sixtieth (60th) day prior to the date of such corporate action,
whichever is later.
SECTION 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless
(i) revoked by the person executing it, prior to the vote pursuant thereto, by a
writing delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of such proxy is received by the corporation before the
vote pursuant thereto is counted; provided, however, that no such proxy shall be
valid after the expiration of three (3) years from the date of such proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 212(c) and 218 of the General Corporation Law of Delaware.
SECTION 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request
of one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill such vacancy.
The duties of these inspectors shall be as follows:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
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(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
SECTION 14. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer who has
charge of the stock ledger of the corporation shall prepare and make, at least
ten (10) days before every meeting of shareholders, a complete list of the
shareholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each shareholder and the number of shares registered
in the name of each shareholder. Such list shall be open to the examination of
any shareholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any shareholder who is present.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. Subject to the provisions of the Delaware General
Corporation Law and any limitations in the certificate of incorporation and
these bylaws relating to action required to be approved by the shareholders or
by the outstanding shares, the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
Without prejudice to such general powers, but subject to the same
limitations, it is hereby expressly declared that the directors shall have the
power and authority to:
(a) Select and remove all officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the certificate of incorporation or these bylaws, fix
their compensation, and require from them security for faithful service.
(b) Change the principal registered office in the State of Delaware or the
principal executive office from one location to another; cause the corporation
to be qualified to do business in any other state, territory, dependency, or
foreign country and conduct business within or outside the State of Delaware;
designate any place within or without the state for the holding of any
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shareholders' meeting or meetings, including annual meetings; adopt, make and
use a corporate seal, and prescribe the forms of certificates of stock, and
alter the form of such seal and of such certificates from time to time as in
their judgment they may deem best, provided that such forms shall at all times
comply with the provisions of law.
(c) Authorize the issuance of shares of stock of the corporation from time
to time, upon such terms as may be lawful, in consideration of money paid, labor
done or services actually rendered, debts or securities canceled or tangible or
intangible property actually received.
(d) Borrow money and incur indebtedness for the purposes of the
corporation, and cause to be executed and delivered therefor, in the corporate
name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations, or other evidences of debt and securities therefor.
SECTION 2. NUMBER OF DIRECTORS. The number of directors of the
corporation shall be not less than three (3) nor more than five (5).
SECTION 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the shareholders by a plurality of the shares
represented in person or by proxy at each annual meeting of shareholders, to
hold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected or until his earlier death, resignation or removal. Any
Director or the entire Board of Directors may be removed, with or without cause,
by the holders of a majority of the shares entitled to vote at an election of
Directors, except as follows:
(a) Unless the Certificate of Incorporation otherwise provides, in
the case of a corporation whose Board is classified as provided in subsection
(d) of Section 141 of the Delaware General Corporation Law, stockholders may
effect such removal only for cause; or
(b) In the case of a corporation having cumulative voting, if less
than the entire Board is to be removed, no Director may be removed without cause
if the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board of Directors, or, if there
be classes of Directors, at an election of the class of Directors of which he is
a part.
SECTION 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each director so elected shall hold office until the next annual meeting
of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
in the case of the death, resignation or removal of any director, or if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a
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felony, or if the authorized number of directors be increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign upon giving written notice to the chairman or the
board, the president, the secretary or the board of directors. A resignation
shall be effective upon the giving of the notice, unless the notice specifies a
later time for its effectiveness. If the resignation of a director is effective
at a future time, the board of directors may elect a successor to take office
when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
SECTION 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of
the board of directors may be held at any place within or without the State that
has been designated from time to time by resolution of the board. In the
absence of such designation, regular meetings shall be held at the principal
executive office of the corporation. Special meetings of the board shall be
held at any place within or without the State that has been designated in the
notice of the meeting or, if not stated in the notice or if there is no notice,
at the principal executive office of the corporation. Any meeting, regular or
special, may be held by conference telephone or similar communication equipment,
so long as all directors participating in such meeting can hear one another, and
all such directors shall be deemed to be present in person at such meeting.
SECTION 6. ANNUAL MEETINGS. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and the transaction of
other business. Notice of this meeting shall not be required.
SECTION 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call at such time as shall from time to time be
fixed by the board of directors. Such regular meetings may be held without
notice.
SECTION 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board or the president or any vice president or secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at his or her address
as it is shown upon the records of the corporation. In case such notice is
mailed, it shall be deposited in the United States mail at least four (4)
days prior to the time of the holding of the meeting. In case such notice is
delivered personally, or by telephone or telegram, it shall be
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delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours prior to the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated to either
the director or to a person at the office of the director who the person
giving the notice has reason to believe will promptly communicate it to the
director. The notice need not specify the purpose of the meeting nor the
place if the meeting is to be held at the principal executive office of the
corporation.
SECTION 9. QUORUM. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 144 of the General Corporation Law of Delaware (approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 141(c) (appointment of committees), and Section 145
(indemnification of directors). A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
SECTION 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum be present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes thereof. The waiver of notice or consent
need not specify the purpose of the meeting. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Notice of a meeting shall also be deemed given to any
director who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director.
SECTION 11. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
SECTION 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four (24) hours, in which case notice of such time and
place shall be given prior to the time of the adjourned meeting, in the manner
specified in Section 8 of this Article III, to the directors who were not
present at the time of the adjournment.
SECTION 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
such action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written consent or
consents shall be filed with the minutes of the proceedings of the board.
SECTION 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. Nothing herein
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contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation for such services.
ARTICLE IV
COMMITTEES
SECTION 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of one or more directors, to
serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. Any such committee, to the extent
provided in the resolution of the board, shall have all the authority of the
board, except with respect to:
(a) the approval of any action which, under the General Corporation
Law of Delaware, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at
a rate or in a periodic amount or within a price range determined by the board
of directors; or
(g) the appointment of any other committees of the board of directors
or members thereof.
SECTION 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Section 5 (place of meetings),
7 (regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment) and 13 (action without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be
determined by resolution of the board of directors as well as the committee,
special meetings of committees may also be called by resolution of the board of
directors and notice of special meetings of committees shall also be given to
all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
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ARTICLE V
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be a
president, a secretary and chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V. Any number of offices may
be held by the same person.
SECTION 2. ELECTION OF OFFICERS. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
of this Article V, shall be chosen by the board of directors, and each shall
serve at the pleasure of the board, subject to the rights, if any, of an officer
under any contract of employment.
SECTION 3. SUBORDINATE OFFICERS, ETC. The board of directors may appoint,
and may empower the president to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the bylaws or as
the board of directors may from time to time determine.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the board of directors, at any regular or
special meeting thereof, or, except in case of an officer chosen by the board of
directors, by any officer upon whom such power of removal may be conferred by
the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective. Any such resignation is without prejudice to the rights, if
any, of the corporation under any contract to which the officer is a party.
SECTION 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to such
office.
SECTION 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at all meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is no president, the chairman of the board shall in addition
be the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 7 of this Article V.
SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors,
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have general supervision, direction and control of the business and the officers
of the corporation. He shall preside at all meetings of the shareholders and,
in the absence of the chairman of the board, or if there be none, at all
meetings of the board of directors. He shall have the general powers and duties
of management usually vested in the office of president of a corporation, and
shall have such other powers and duties as may be prescribed by the board of
directors or the bylaws.
SECTION 8. VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
board of directors or the bylaws, the president or the chairman of the board if
there is no president.
SECTION 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
order, a book of minutes of all meetings and actions of directors, committees of
directors and shareholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice thereof given, the names
of those present at directors' and committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required by the bylaws or by law
to be given, and he shall keep the seal of the corporation, if one be adopted,
in a safe custody, and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by the bylaws.
SECTION 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall be open at all reasonable times to inspection by any director.
The chief financial officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
The corporation shall, to the maximum extent permitted by applicable law,
have power to indemnify each of its agents against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact that any such person is or was
an agent of the corporation and shall likewise have power to advance to each
such agent expenses incurred in defending any such proceeding to the maximum
extent permitted by such law. For purposes of this Article VI, an "agent" of
the corporation includes any person who is or was a director, officer, employee
or other agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation.
ARTICLE VII
RECORDS AND REPORTS
SECTION 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the board of directors, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
Any shareholder or shareholders of the corporation may (i) inspect and copy
the records of shareholders' names and addresses and shareholdings during usual
business hours upon five days' prior written demand upon the corporation, and/or
(ii) obtain from the transfer agent of the corporation, upon written demand
under oath and upon the tender of such transfer agent's usual charges for such
list, a list of the shareholders' names and addresses, who are entitled to vote
for the election of directors, and their shareholdings, as of the most recent
record date for which such list has been compiled or as of the date specified by
the shareholder subsequent to the date of demand. Such list shall be made
available to such shareholder or shareholders by the transfer agent on or before
the later of five (5) days after the demand is received or the date specified
therein as the date as of which the list is to be compiled. The record of
shareholders shall also be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate, at any time during usual
business hours, for a purpose reasonably related to such holder's interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and
copying under this Section 1 may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making such demand.
SECTION 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or at its principal business office in
this State, the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside
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this State and the corporation has no principal business office in this State,
the Secretary shall, upon the written request of any shareholder, furnish to
such shareholder a copy of the bylaws as amended to date.
SECTION 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors, or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. Such minutes and accounting books and
records shall be open to inspection upon the written demand under oath of any
shareholder or holder of a voting trust certificate, at any reasonable time
during usual business hours, for a purpose reasonably related to such holder's
interests as a shareholder or as the holder of a voting trust certificate. Such
inspection may be made in person or by an agent or attorney, and shall include
the right to copy and make extracts. The foregoing rights of inspection shall
extend to the records of each subsidiary corporation of the corporation.
SECTION 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. Such inspection by a director may be made in
person or by agent or attorney and the right of inspection includes the right to
copy and make extracts.
SECTION 5. ANNUAL REPORT TO SHAREHOLDERS. Unless otherwise expressly
required by the General Corporation Law of Delaware or any other state, any
rights to annual reports to shareholders is hereby expressly waived and
dispensed with; provided, that nothing herein set forth shall be construed to
prohibit or restrict the right of the board to issue such annual or other
periodic reports to the shareholders of the corporation as they may from time to
time consider appropriate.
ARTICLE VIII
GENERAL CORPORATE MATTERS
SECTION 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, (other than action by
shareholders by written consent without a meeting) the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
prior to any such action, and in such case only shareholders of record on the
date so fixed are entitled to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date
fixed as aforesaid, except as otherwise provided in the Delaware General
Corporation Law.
If the board of directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board
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adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such action, whichever is later.
SECTION 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts
or other orders for payment of money, notes or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the board of directors.
SECTION 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board
of directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and such authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or to any amount.
SECTION 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any such shares are fully paid, and the board of directors may
authorize the issuance of certificates or shares as partly paid provided that
such certificates shall state the amount of the consideration to be paid
therefor and the amount paid thereon. All certificates shall be signed in the
name of the corporation by the chairman of the board or vice chairman of the
board or the president or vice president and by the chief financial officer or
an assistant treasurer or the secretary or any assistant secretary, certifying
the number of shares and the class or series of shares owned by the shareholder.
Any or all of the signatures on the certificates may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if such person were an officer,
transfer agent or registrar at the date of issue.
SECTION 5. LOST CERTIFICATES. Except as hereinafter in this Section 5
provided, no new certificates for shares shall be issued in lieu of an old
certificate unless the latter is surrendered to the corporation and canceled at
the same time. The board of directors may in case any share certificate or
certificate for any other security is lost, stolen or destroyed, authorize the
issuance of a new certificate in lieu thereof, upon such terms and conditions as
the board may require, including provisions for indemnification of the
corporation secured by a bond or other adequate security sufficient to protect
the corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
such certificate or the issuance of such new certificate.
SECTION 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman
of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority herein granted to said
officers to vote or represent on behalf of the corporation any and all shares
held by the corporation in any other
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corporation or corporations may be exercised by any such officer in person or by
any person authorized to do so by proxy duly executed by said officer.
SECTION 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
Delaware General Corporation Law shall govern the construction of the bylaws.
Without limiting the generality of the foregoing, the singular number includes
the plural, the plural number includes the singular, and the term "person"
includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
The Board of Directors may from time to time make, amend, supplement or
repeal these bylaws; provided, however, that the stockholders may change or
repeal any bylaw adopted by the Board of Directors; and provided, further, that
no amendment or supplement to these bylaws adopted by the Board of Directors
shall vary or conflict with any amendment or supplement adopted by the
stockholders.
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CERTIFICATE OF INCORPORATOR
The undersigned hereby certifies that he is the Secretary of Macrovision
Corporation, a Delaware corporation (the "Corporation"), and that the attached
Amended Bylaws of the Corporation were duly adopted and are in full force and
effect as of the date hereof.
Date: February __, 1997 ___________________________________
John O. Ryan
Secretary
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February 10, 1997
Macrovision Corporation.
1341 Orleans Drive
Sunnyvale, CA 94089
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 filed by you with the Securities and Exchange Commission (the
"Commission") on January 7, 1997 (Registration No. 333-19373), Amendment No.
1 to such Registration Statement filed by you with the Commission on January
8, 1997, Amendment No. 2 to such Registration Statement filed by you with the
Commission on January 22, 1997 and Amendment No. 3 to such Registration
Statement to be filed by you with the Commission on February 11, 1997
(collectively, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 2,702,500
shares of your Common Stock (the "Shares"), 915,984 of which are issued and
outstanding and will be sold by certain Selling Stockholders (the "Selling
Stockholders"). The Shares are to be sold to the underwriters named in the
Registration Statement for resale to the public.
As your securities counsel, we have examined the proceedings taken by
you in connection with the issuance of the 915,984 Shares that may be sold by
the Selling Stockholders. We have also examined the proceedings taken by you
in connection with the proposed issuance of the up to 1,786,516 Shares that
may be sold by you pursuant to the Registration Statement.
It is our opinion that the 915,984 Shares that may be sold by the
Selling Stockholders are legally issued, fully paid and nonassessable and the
up to 1,786,516 Shares that may be issued and sold by you, when issued and
sold in the manner referred to in the Registration Statement and the
Prospectus relating thereto, will be legally issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the Prospectus constituting a part thereof and any pre-effective
amendments thereto which have been approved by us.
Very truly yours,
/s/ Fenwick & West LLP
<PAGE>
Exhibit 10.02
MACROVISION CORPORATION
1996 EQUITY INCENTIVE PLAN
As Adopted by the Board of Directors on December 3, 1996
Section 1. PURPOSE; DEFINITIONS.
The name of the plan is the Macrovision Corporation 1996 Equity Incentive
Plan (the "Plan"). The purpose of the Plan is to encourage and enable employees
(including officers and Directors) of Macrovision Corporation (the "Company")
and its Subsidiaries, non-employee members of the Board of Directors of the
Company, and those consultants and other independent contractors who provide
services to the Company and its Subsidiaries and upon whose judgment, initiative
and efforts the Company and its Subsidiaries depend for the successful conduct
of their business to acquire proprietary interests in the Company. It is
anticipated that providing such persons with a direct stake in the Company's
welfare will assure a closer identification of their interests with those of the
Company, thereby stimulating their efforts on behalf of the Company and its
Subsidiaries and strengthening their desire to remain with the Company and its
Subsidiaries.
The following terms shall be defined as set forth below:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Administrator" means the Board or the Committee.
(c) "Award" or "Awards," except where referring to a particular category
of grant under the Plan, shall include Incentive Stock Options, Nonstatutory
Stock Options, Stock Appreciation Rights, and Restricted Stock Awards.
(d) "Board" means the Board of Directors of the Company.
(e) "Cause," as such term relates to the termination of any person's
status as an employee or other service provider of the Company, means the
occurrence of one or more of the following: (i) such person is convicted of,
pleads guilty to, or confesses to any felony or any act of fraud,
misappropriation or embezzlement which has an immediate and materially adverse
effect on the Company or any Subsidiary, as determined by the Board in good
faith in its sole discretion, (ii) such person engages in a fraudulent act to
the material damage or prejudice of the Company or any Subsidiary or in conduct
or activities materially damaging to the property, business or reputation of the
Company or any Subsidiary, all as determined by the Board in good faith in its
sole discretion, (iii) any material act or omission by such person involving
malfeasance or negligence in the performance of such person's duties to the
Company or any Subsidiary to the material detriment of the Company or any
Subsidiary, as determined by the Board in good faith in its sole discretion,
which has not been corrected by such person to the satisfaction of the Board
within 30 days after written notice from the Company of any such act or
omission, (iv) failure by such person to comply in any material respect with the
terms of his
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employment agreement, if any, or any written policies or directives of the Board
as determined by the Board in good faith in its sole discretion, which has not
been corrected by such person to the satisfaction of the Board within 30 days
after written notice from the Company of such failure, or (v) material breach by
such person of any other agreement with the Company, as determined by the Board
in good faith in its sole discretion.
(f) "Code" means the Internal Revenue Code of 1986, as amended, and any
successor tax laws, and related rules, regulations and interpretations.
(g) "Committee" means a committee of two or more Independent Directors
appointed by the Board to administer the Plan.
(h) "Director" means a member of the Board.
(i) "Disability" means an individual's inability to perform his normal
required services for the Company and its Subsidiaries for a period of six
consecutive months by reason of the individual's mental or physical disability,
as determined by the Administrator in good faith in its sole discretion.
(j) "Fair Market Value" of the Stock on any given date under the Plan
shall be determined as follows:
(i) If the Stock is at the time listed or admitted to trading on any
national stock exchange, then the fair market value shall be the closing
selling price per share of the Stock on the day next preceding the date of
determination on the stock exchange determined by the Administrator to be
the primary market for the Common Stock, as such price is officially quoted
in the composite tape transactions on such exchange. If there is no
reported sale of the Stock on such exchange on the day next preceding the
date of determination, then the fair market value shall be the closing
price on the exchange on the last preceding date for which such quotation
exists.
(ii) If the Stock is not at the time listed or admitted to trading on
any national exchange but is traded on the NASDAQ National Market System,
the fair market value shall be the closing selling price per share of the
Stock on the day next preceding the date of determination, as such price is
reported by the National Association of Securities Dealers, Inc. through
the NASDAQ National Market System or through any successor system. If
there is no reported closing selling price for the Stock on the day next
preceding the date of determination, then the fair market value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) If the Stock is at the time neither listed nor admitted to
trading on any stock exchange nor traded in the over-the-counter market,
then the fair market value shall be determined by the Administrator after
taking into account such factors as the Administrator shall deem
appropriate.
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(k) "Incentive Stock Option" means any Stock Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
(l) "Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
(m) "IPO Date" means the effective date of the Registration Statement on
Form SB-2 for the initial public offering of the Stock.
(n) "Nonstatutory Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(o) "Option" or "Stock Option" means any option to purchase shares of
Stock granted pursuant to Section 5.
(p) "Restricted Stock Award" means any Award granted pursuant to Section
7.
(q) "Retirement" means an employee's termination of employment with the
Company and its Subsidiaries after attainment of age 65 or attainment of age 55
and completion of 10 years of employment.
(r) "Stock" means the Common Stock, par value $.001 per share, of the
Company, subject to adjustments pursuant to Section 3.
(s) "Stock Appreciation Right" means any Award granted pursuant to Section
6.
(t) "Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities, beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
Section 2. ADMINISTRATION OF PLAN; AUTHORITY TO SELECT PARTICIPANTS AND
DETERMINE AWARDS
(a) POWERS OF ADMINISTRATOR. The Administrator shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select those employees (including officers and Directors) of
the Company and its Subsidiaries, non-employee Directors, and consultants
and other independent contractors in service to the Company and its
Subsidiaries to whom Awards may from time to time be granted;
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(ii) to determine the time or times of grant, and the extent, if any,
of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation
Rights, and Restricted Stock Awards, or any combination of the foregoing,
granted to any one or more participants;
(iii) to determine the number of shares of Stock to be covered by any
Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual
Awards and participants, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of all
or any portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend at any
time the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the
participant and whether and to what extent the Company shall pay or credit
amounts constituting interest (at rates determined by the Administrator) or
dividends or deemed dividends on such deferrals; and
(viii) at any time to adopt, alter and repeal such rules, guidelines
and practices for administration of the Plan and for its own acts and
proceedings as it shall deem advisable; to interpret the terms and
provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and otherwise to supervise the administration of the Plan.
All decisions and interpretations of the Administrator shall be binding on
all persons, including the Company and Plan participants.
(b) DELEGATION OF AUTHORITY TO GRANT AWARDS. The Administrator, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Administrator's authority and duties with respect to Awards,
including the granting thereof, to individuals who are not subject to the
reporting and other provisions of Section 16 of the Act or "covered employees"
within the meaning of Section 162(m) of the Code. The Administrator may revoke
or amend the terms of a delegation at any time but such action shall not
invalidate any prior actions of the Administrator's delegate or delegates that
were consistent with the terms of the Plan.
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Section 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) STOCK ISSUABLE. The maximum number of shares of Stock reserved and
available for the grant of Awards under the Plan shall be the sum of five
hundred forty thousand (540,000) shares, plus the number of shares of Stock
remaining under the Company's Stock Option Plan, as adopted effective September
9, 1988, and amended and restated February 6, 1992 (the "Prior Plan"), that are
not the subject of any stock options outstanding on the IPO Date or exercised
prior to the IPO Date, plus the number of shares of Stock that are returned to
the Prior Plan as a result of the expiration, forfeiture, cancellation,
reacquisition by the Company, satisfaction without the issuance of Stock or
other termination (other than by exercise) after the IPO Date of any stock
options outstanding on the IPO Date. For purposes of this limitation, the
shares of Stock underlying any Awards which expire or which are forfeited,
canceled, reacquired by the Company, satisfied without the issuance of Stock or
otherwise terminated (other than by exercise) shall be added back to the shares
of Stock available for issuance under the Plan. Subject to such overall
limitation, shares of Stock may be issued up to such maximum number pursuant to
any type or types of Award; provided, however, that Stock Options or Stock
Appreciation Rights with respect to no more than two hundred seventy thousand
(270,000) shares of Stock may be granted to any one individual participant
during any one calendar year period. The shares available for issuance under
the Plan may be authorized but unissued shares of Stock or shares of Stock
reacquired by the Company. Upon the exercise of a Stock Appreciation Right
settled in shares of Stock, the right to purchase an equal number of shares of
Stock covered by a related Stock Option, if any, shall be deemed to have been
surrendered and will no longer be exercisable, and said number of shares of
Stock shall no longer be available under the Plan.
(b) RECAPITALIZATIONS. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, the outstanding shares of
Stock are increased or decreased or are exchanged for a different number or kind
of shares or other securities of the Company, or additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the
Administrator shall make an appropriate or proportionate adjustment in (i) the
maximum number of shares reserved for issuance under the Plan, (ii) the number
of Stock Options or Stock Appreciation Rights that can be granted to any one
individual participant, (iii) the number and kind of shares or other securities
subject to any then outstanding Awards under the Plan, and (iv) the price for
each share subject to any then outstanding Stock Options and Stock Appreciation
Rights under the Plan, without changing the aggregate exercise price (i.e., the
exercise price multiplied by the number of Stock Options and Stock Appreciation
Rights) as to which such Stock Options and Stock Appreciation Rights remain
exercisable. The adjustment by the Administrator shall be final, binding and
conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Administrator in its discretion may
make a cash payment in lieu of fractional shares.
(c) MERGERS, ETC. In the event of (i) a dissolution or liquidation of the
Company; (ii) a merger or consolidation in which the Company is the not the
surviving corporation (other than a
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merger or consolidation with a wholly-owned subsidiary, a reincorporation of the
Company in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the Stock Options and Stock Appreciation Rights granted under this
Plan are assumed, converted or replaced by the successor corporation, which
assumption will be binding on all optionees); (iii) a merger in which the
Company is the surviving corporation but after which the stockholders of the
Company (other than any stockholder which merges (or which owns or controls
another corporation which merges) with the Company in such merger) cease to own
their shares or other equity interests in the Company; (iv) the sale of
substantially all of the assets of the Company; or (v) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the
Internal Revenue Code of 1986, as amended, wherein the stockholders of the
Company give up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company from or by the stockholders of the Company), the Board, or
the board of directors of any corporation assuming the obligations of the
Company, may, in its discretion, take any one or more of the following actions,
as to outstanding Stock Options and Stock Appreciation Rights: (I) provide that
such Stock Options shall be assumed or equivalent options shall be substituted,
by the acquiring or succeeding corporation (or an affiliate thereof), (II) upon
written notice to the optionees, provide that all unexercised Stock Options and
Stock Appreciation Rights will terminate immediately prior to the consummation
of such transaction unless exercised by the optionee within a specified period
following the date of such notice, and/or (III) in the event of a business
combination under the terms of which holders of the Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the business combination, make or provide for a cash payment to the optionees,
equal to the difference between (A) the value (as determined by the
Administrator) of the consideration payable per share of Stock pursuant to the
business combination (the "Merger Price") multiplied by the number of shares of
Stock subject to such outstanding Stock Options and Stock Appreciation Rights
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding Stock Options and Stock
Appreciation Rights, in exchange for the termination of such Stock Options and
Stock Appreciation Rights.
(d) SUBSTITUTE AWARDS. The Administrator may grant Awards under the Plan
in substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Administrator may direct that the
substitute awards be granted on such terms and conditions as the Administrator
considers appropriate in the circumstances.
Section 4. ELIGIBILITY
Participants in the Plan shall be such full-time or part-time employees
(including officers and Directors) of the Company and its Subsidiaries,
non-employee Directors, and consultants and other independent contractors in
service to the Company and its Subsidiaries as the Administrator in its sole
discretion shall select from time to time.
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Section 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve. Stock Options granted under the
Plan may be either Incentive Stock Options or Nonstatutory Stock Options.
Incentive Stock Options may be granted only to employees of the Company or any
Subsidiary that is a "subsidiary corporation" within the meaning of Section
424(f) of the Code. To the extent that any Option does not qualify as an
Incentive Stock Option, it shall be a Nonstatutory Stock Option.
No Incentive Stock Option shall be granted under the Plan after November
30, 2006.
(a) TERMS AND CONDITIONS OF STOCK OPTIONS. The Administrator in its
discretion may grant Stock Options subject to the following terms and conditions
and such additional terms and conditions, not inconsistent with the terms of the
Plan, as the Administrator shall deem desirable:
(i) EXERCISE PRICE. The exercise price per share for the Stock
covered by a Stock Option granted pursuant to this Section 5(a) shall be
determined by the Administrator at the time of grant, but shall not be less
than 100% of the Fair Market Value of a share of Stock on the date of grant
in the case of Incentive Stock Options, or less than 85% of the Fair Market
Value of a share of Stock on the date of grant in the case of Nonstatutory
Stock Options. If an employee owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company or of any
"parent or subsidiary corporation" of the Company (within the meaning of
Section 424(f) of the Code) and an Incentive Stock Option is granted to
such employee, the exercise price per share for the Stock covered by such
Incentive Stock Option shall be not less than 110% of the Fair Market Value
of a share of Stock on the grant date.
(ii) OPTION TERM. The term of each Stock Option shall be fixed by
the Administrator, but no Incentive Stock Option shall be exercisable more
than ten years after the date the Option is granted. If an employee owns
or is deemed to own (by reason of the attribution rules of Section 424(d)
of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or of any "parent or subsidiary corporation" of the
Company (within the meaning of Section 424(f) of the Code) and an Incentive
Stock Option is granted to such employee, the term of such Option shall
expire no more than five years after the date of grant.
(iii) EXERCISABILITY; RIGHTS OF A STOCKHOLDER. Stock Options shall
become exercisable at such time or times, whether or not in installments,
as shall be determined by the Administrator at the time of grant. The
Administrator may at any time accelerate the exercisability of all or any
portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock Option
and not as to unexercised Stock Options.
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(iv) METHOD OF EXERCISE. Stock Options may be exercised in whole or
in part, by giving written notice of exercise to the Company specifying the
number of shares to be purchased. Payment of the purchase price shall be
made in full concurrently with such exercise by any one of the following
methods: (A) in cash; (B) if and to the extent the instrument evidencing
the Option so provides and if the Company is not then prohibited from
purchasing or acquiring shares of Stock, with shares of Stock that have
been held by the optionee for the requisite period necessary to avoid a
charge to the Company's earnings for financial reporting purposes,
delivered in lieu of cash and valued at their Fair Market Value on the date
of exercise; (C) through a "same day sale" commitment from the optionee and
a broker-dealer that is a member of the National Association of Securities
Dealers, Inc. (the "NASD Dealer") whereby the optionee irrevocably elects
to exercise the Option and to sell a portion of the shares so purchased to
pay for the exercise price, and whereby the NASD Dealer irrevocably commits
upon receipt of such shares to forward the exercise price directly to the
Company; (D) through a "margin" commitment from the optionee and a NASD
Dealer whereby the optionee irrevocably elects to exercise the Option and
to pledge the shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise
price , and whereby the NASD Dealer irrevocably commits upon receipt of
such shares to forward the exercise price directly to the Company; or (E)
any combination of the foregoing. The delivery of certificates
representing the shares of Stock to be purchased pursuant to the exercise
of a Stock Option will be contingent upon receipt from the optionee (or a
purchaser acting in his stead in accordance with the provisions of the
Stock Option) by the Company of the full purchase price for such shares and
the fulfillment of any other requirements contained in the Stock Option or
applicable provisions of laws.
(v) TERMINATION BY REASON OF DEATH. Any Stock Option held by an
optionee whose employment by (or other business relationship with) the
Company and its Subsidiaries is terminated by reason of the optionee's
death may thereafter be exercised, to the extent it was exercisable by the
optionee on the date of the optionee's death, by the legal representative
of the optionee's estate or by any other person who acquires the right to
exercise the option by reason of such death under the optionee's will or
the laws of intestate succession, for a period of 12 months (or such other
period as the Administrator shall specify in the Stock Option) from the
date of death, but not later than the expiration of the stated term of the
Option, if earlier.
(vi) TERMINATION BY REASON OF DISABILITY. Any Stock Option held by
an optionee whose employment by (or other business relationship with) the
Company and its Subsidiaries is terminated by reason of Disability may
thereafter be exercised, to the extent it was exercisable on the date of
such termination, for a period of 12 months (or such other period as the
Administrator shall specify in the Stock Option) from the date of such
termination of employment (or business relationship), but not later than
the expiration of the stated term of the Option, if earlier. The
Administrator shall have sole authority and discretion to determine whether
a participant's employment (or business relationship) has been terminated
by reason of Disability. The Administrator may specify
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in any Stock Option that the death of an optionee during the period
provided in this Section 5(a)(vi) for the exercise of the Option shall
extend such period for a period ending not later than 12 months following
the date of the optionee's death, subject to termination on the expiration
of the stated term of the Option, if earlier.
(vii) TERMINATION BY REASON OF RETIREMENT. Any Stock Option held by
an optionee whose employment by the Company and its Subsidiaries is
terminated by reason of Retirement may thereafter be exercised, to the
extent it was exercisable on the date of such termination, for a period of
12 months (or such other period as the Administrator shall specify) from
the date of such termination of employment, but not later than the
expiration of the stated term of the Option, if earlier. The Administrator
may specify in any Stock Option that the death of an optionee during the
period provided in this Section 5(a)(vii) for the exercise of the Option
shall extend such period for a period ending not later than 12 months
following the date of the optionee's death, subject to termination on the
expiration of the stated term of the Option, if earlier.
(viii) TERMINATION FOR CAUSE. If any optionee's employment by (or
business relationship with) the Company and its Subsidiaries is terminated
for Cause, any Stock Option held by such optionee, including any Stock
Option that is exercisable at the time of such termination, shall
immediately terminate and be of no further force and effect; provided,
however, that the Administrator may, in its sole discretion, provide in any
Stock Option that such Stock Option can be exercised, to the extent it was
exercisable on the date of such termination, for a period of up to 30 days
from the date of termination of employment (or business relationship), but
not later than the expiration of the stated term of the Option, if earlier.
(ix) OTHER TERMINATION. Unless otherwise determined by the
Administrator, if an optionee's employment by (or business relationship
with) the Company and its Subsidiaries terminates for any reason other than
death, Disability, Retirement, or for Cause, any Stock Option held by such
optionee may thereafter be exercised, to the extent it was exercisable on
the date of such termination, for three months (or such other period not to
exceed 60 months as the Administrator shall specify) from the date of
termination of employment (or business relationship), but not later than
the expiration of the stated term of the Option, if earlier.
(x) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent required
for "incentive stock option" treatment under Section 422 of the Code, the
aggregate Fair Market Value (determined as of the time of grant) of the
shares of Stock with respect to which Incentive Stock Options granted under
this Plan and any other plan of the Company or its parent and subsidiary
corporations become exercisable for the first time by an optionee during
any calendar year shall not exceed $100,000. To the extent that any Stock
Option exceeds this limit, it shall constitute a Nonstatutory Stock Option.
(b) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options
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shall be exercisable, during the optionee's lifetime, only by the optionee.
Notwithstanding the foregoing, the Administrator may provide in an option
agreement evidencing a Nonstatutory Stock Option that the optionee may transfer,
without consideration for the transfer, such Nonstatutory Stock Option to
members of his immediate family, to trusts for the benefit of such family
members, to partnerships in which such family members are the only partners, or
to charitable organizations, provided that the transferee agrees in writing with
the Company to be bound by all of the terms and conditions of the Plan and the
applicable option agreement.
(c) FORM OF SETTLEMENT. Shares of Stock issued upon exercise of a Stock
Option shall be free of all restrictions under the Plan, except as otherwise
provided in the Plan.
Section 6. STOCK APPRECIATION RIGHTS.
(a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an
award entitling the recipient to receive an amount in cash or shares of Stock or
a combination thereof having a value equal to the excess of the Fair Market
Value of a share of Stock on the date of exercise over the per share exercise
price of the Stock Appreciation Right set by the Administrator at the time of
grant, which exercise price shall be not less than the Fair Market Value of a
share of Stock on the date of grant (or not less than the Option exercise price
per share, if the Stock Appreciation Right was granted in tandem with a Stock
Option) multiplied by the number of shares of Stock with respect to which the
Stock Appreciation Right shall have been exercised, with the Administrator
having the right to determine the form of payment.
(b) GRANT AND EXERCISE OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights may be granted by the Administrator in tandem with, or independently of,
any Stock Option granted pursuant to Section 5 of the Plan. In the case of a
Stock Appreciation Right granted in tandem with a Nonstatutory Stock Option,
such Stock Appreciation Right may be granted either at or after the time of the
grant of such Option. In the case of a Stock Appreciation Right granted in
tandem with an Incentive Stock Option, such Stock Appreciation Right may be
granted only at the time of the grant of the Option.
(c) TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights shall be subject to such terms and conditions as shall be determined from
time to time by the Administrator, subject to the following:
(i) Stock Appreciation Rights granted in tandem with Options shall
be exercisable at such time or times and to the extent that the related
Stock Options shall be exercisable. A Stock Appreciation Right or
applicable portion thereof granted in tandem with a Stock Option shall
terminate and no longer be exercisable upon the termination or exercise of
the related Option.
(ii) Upon exercise of a Stock Appreciation Right, the applicable
portion of any related Option shall be surrendered.
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(iii) Stock Appreciation Rights granted in tandem with an Option shall
be transferable only when and to the extent that the underlying Option
would be transferable. Stock Appreciation Rights not granted in tandem
with an Option shall not be transferable otherwise than by will or the laws
of descent or distribution. All Stock Appreciation Rights shall be
exercisable during the participant's lifetime only by the participant or
the participant's legal representative.
Section 7. RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARDS. A Restricted Stock Award is an
Award entitling the recipient to acquire shares of Stock subject to such
restrictions and conditions as the Administrator may determine at the time of
grant ("Restricted Stock"), at a purchase price and for such consideration as
the Administrator may determine, which price shall not be less than 85% of the
Fair Market Value of the Stock on the date of issuance. Such Restricted Stock
issuances may, at the discretion of the Administrator, be based on continuing
employment (or other business relationship) with the Company and its
Subsidiaries and/or achievement of pre-established performance goals and
objectives. Restricted Stock Awards shall be limited to a total of two hundred
twenty-five thousand (225,000) shares of Stock.
(b) RIGHTS AS A STOCKHOLDER. Upon execution of a written instrument
setting forth the Restricted Stock Award and paying any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the
Administrator shall otherwise determine, certificates evidencing the Restricted
Stock shall remain in the possession of the Company or of a third party escrow
holder until such Restricted Stock is vested as provided in Section 7(d) below.
(c) RESTRICTIONS. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the written instrument evidencing the
Restricted Stock Award. If a participant's employment (or other business
relationship) with the Company and its Subsidiaries terminates for any reason,
the Company shall have the right to repurchase from the participant or the
participant's legal representative at their purchase price the Restricted Stock
with respect to which conditions have not lapsed.
(d) VESTING OF RESTRICTED STOCK. The Administrator at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase shall lapse. Subsequent to such date or dates and/or the attainment
of such pre-established performance goals, objectives and other conditions, the
shares on which all restrictions have lapsed shall no longer be Restricted Stock
and shall be "vested." Except as may otherwise be provided by the
Administrator, a participant's rights in any shares of Restricted Stock that
have not vested shall terminate automatically upon the participant's termination
of employment (or other business relationship) with the Company and its
Subsidiaries and such shares shall be subject to the Company's right of
repurchase as provided in Section 7(c) above.
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(e) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
Section 8. TAX WITHHOLDING
(a) PAYMENT BY PARTICIPANT. Each participant shall, no later than the date
as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Administrator regarding payment of, any Federal, state, or
local taxes of any kind required by law to be withheld with respect to such
income. The Company and its Subsidiaries shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the participant.
(b) PAYMENT IN STOCK. Subject to approval by the Administrator, a
participant may elect to have such tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the participant with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
Section 9. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
Section 10. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Administrator may, at any time, amend or cancel any outstanding Award (or
provide substitute Awards at the same or reduced exercise or purchase price or
with no exercise or purchase price in a manner not inconsistent with the terms
of the Plan, but such price, if any, must satisfy the requirements which would
apply to the substitute or amended Award if it were then initially granted under
this Plan) for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's consent. If
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and to the extent determined by the Administrator to be required to ensure that
Incentive Stock Options granted under the Plan are qualified under Section 422
of the Code, Plan amendments shall be subject to approval by the Company's
stockholders entitled to vote at a meeting of stockholders.
Section 11. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Administrator shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Administrator may authorize the creation of trusts or other arrangements to meet
the Company's obligations to deliver Stock or make payments with respect to
Awards hereunder, provided that the existence of such trusts or other
arrangements is consistent with the foregoing sentence.
Section 12. GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The Administrator
may require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof. No shares of Stock shall be issued
pursuant to an Award until all applicable securities law and other legal and
stock exchange or similar requirements have been satisfied. The Administrator
may require the placing of such stop-orders and restrictive legends on
certificates for Stock and Awards as it considers appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Delivery of stock certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a stock transfer agent of the Company shall have mailed such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
Section 13. EFFECTIVE DATE OF PLAN
This Plan shall become effective when adopted by the Company's Board of
Directors, but no Award shall be granted under the Plan prior to the IPO Date,
and no Award granted under the Plan shall become exercisable and no shares shall
be issuable under the Plan unless the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve (12) months of the Board's approval, then all Awards previously granted
under the Plan shall terminate, and no further Awards shall be granted or
issued. Subject to such
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approval by the stockholders, Stock Options and other Awards may be granted
hereunder on and after the IPO Date.
Section 14. GOVERNING LAW
This Plan shall be governed by California law except to the extent such law
is preempted by federal law.
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MACROVISION CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
________________________, 19___
(Date of Grant)
Macrovision Corporation, a Delaware corporation (the "Company"), does
hereby grant to______________________ (the "Optionee") an option to purchase an
aggregate of _________________ (_____) shares of the Common Stock of the Company
(the "Optioned Shares") at the price of _____________ Dollars ($_______) per
share (the "Option Price") as a Incentive Stock Option under the Macrovision
Corporation 1996 Equity Incentive Plan (the "Plan"). All capitalized terms not
defined herein shall have those meanings ascribed to them in the Plan.
This option cannot be exercised, unless the Optionee first signs this
Agreement in the place provided and returns it to the Administrator. However,
the Optionee's signing and delivering this Agreement will not bind the Optionee
to purchase any of the Optioned Shares. The Optionee's obligation to purchase
such shares can arise only when the Optionee exercises this option in the manner
set forth in Section 8 below.
THIS OPTION IS SUBJECT TO, AND MAY BE EXERCISED ONLY IN ACCORDANCE WITH,
THE TERMS AND CONDITIONS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE
INCLUDED IN THIS AGREEMENT. A COPY OF THE PLAN IS ATTACHED TO THIS AGREEMENT
AND SHOULD BE READ CAREFULLY.
1. TERM OF OPTION AND EXERCISE OF OPTION. Subject to the provisions of
the Plan and the terms and conditions of this Agreement, this option can be
exercised by the Optionee during a period of ten (10) years from the date of
grant as follows:
DATE NO. OF SHARES
---- -------------
(a)
---------------- --------------------
(b)
---------------- --------------------
(c)
---------------- --------------------
(d)
---------------- --------------------
The dates appearing in the above schedule refer to the earliest dates
on which this option may be exercised with respect to the number of Optioned
Shares set forth therein, and this option may be exercised with respect to all
or any part of such shares at any time on or after such dates but prior to the
expiration of ten (10) years from the date of grant. The Optionee must be and
remain an employee of the Company, or of any parent corporation or subsidiary
corporation of the Company (as such terms are defined in Sections 424 (e) and
(f) of the Code), during the entire period commencing with the date of grant of
this option and ending with each of the dates
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appearing in the above schedule in order to exercise this option with respect to
the number of shares set forth next to such date.
2. TERMINATION BY REASON OF DEATH. If the Optionee's employment by the
Company and/or its Subsidiaries is terminated by reason of the Optionee's death,
this option may thereafter be exercised, but only to the extent it was
exercisable on the date of the Optionee's death, by the Optionee's estate for a
period of twelve (12) months from the date of death, or until the expiration of
the stated term of the option, if earlier. The Optionee's estate shall mean the
duly authorized executor of the Optionee's last Will or the duly authorized
administrator or special administrator of the Optionee's probate estate or any
other duly authorized legal representative of the Optionee's estate or any
person who acquires the right to exercise this option by reason of the
Optionee's death under the Optionee's Will or the laws of intestate succession.
3. TERMINATION BY REASON OF DISABILITY. If the Optionee's employment by
the Company and/or its Subsidiaries is terminated by reason of the Optionee's
Disability, this option may thereafter be exercised, to the extent it was
exercisable on the date of such termination, for a period of twelve (12) months
from the date of such termination, or until the expiration of the stated term of
the option, if earlier. The Administrator shall have sole authority and
discretion to determine whether the Optionee's employment has been terminated by
reason of Disability.
4. TERMINATION BY REASON OF RETIREMENT. If the Optionee's employment by
the Company and/or its Subsidiaries is terminated by reason of Retirement, this
option may thereafter be exercised, to the extent it was exercisable on the
date of such termination, for a period of three (3) months from the date of such
termination of employment, or until the expiration of the stated term of the
option, if earlier. If the Optionee dies within the three (3)-month period
described in the preceding sentence, the Optionee shall be treated as though he
or she died on the date his or her employment terminated by reason of
Retirement, and the provisions of Section 2 shall apply to this option (with
date of termination substituted for date of death) to the extent that it has not
been exercised prior to the Optionee's death.
5. TERMINATION FOR CAUSE. If the Optionee's employment by the Company
and/or its Subsidiaries is terminated for Cause, this option shall immediately
terminate and be of no further force and effect.
6. OTHER TERMINATION. Unless otherwise determined by the Administrator,
if the Optionee's employment by the Company and/or its Subsidiaries terminates
for any reason other than death, Disability, Retirement, or for Cause, this
option may thereafter be exercised, to the extent it was exercisable on the date
of termination of employment, for three (3) months from the date of termination
of employment or until the expiration of the stated term of the option, if
earlier.
7. NON-TRANSFERABILITY OF OPTION. This option shall not be transferable
except by Will or the laws of descent and distribution, and this option may be
exercised during the Optionee's lifetime only by the Optionee. Any purported
transfer or assignment of this option
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shall be void and of no effect, and shall give the Company the right to
terminate this option as of the date of such purported transfer or assignment.
8. METHOD OF EXERCISE. This option may be exercised with respect to all
or any part of the Optioned Shares that are exercisable at time of exercise, by
delivering to the Company a Notice of Exercise of Macrovision Corporation
Incentive Stock Option substantially in the form attached hereto as EXHIBIT A,
specifying the number of Optioned Shares as to which this option is so
exercised, and making full payment to the Company in cash or by check of the
Option Price for the Optioned Shares with respect to which this option is
exercised.
[If the Company's outstanding Common Stock is registered under Section
12 (g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), at
the time this option is exercised, then the Option Price also may be paid as
follows:
a. in shares of the Company's Common Stock held by the Optionee
for the requisite period necessary to avoid a charge to the Company's earnings
for financial reporting purposes and valued at fair market value on the exercise
date;
b. through a special sale and remittance procedure pursuant to
which the Optionee (i) is to provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the purchased Optioned
Shares and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Option Price payable
for the purchased Optioned Shares plus all applicable federal and state income
and employment taxes required to be withheld by the Company by reason of such
purchase and (ii) concurrently is to provide written directives to the Company
to deliver certificates for the purchased shares directly to such brokerage firm
in order to effect the sale transaction;
c. through a special margin commitment procedure pursuant to
which the Optionee elects to exercise his or her vested Optioned Shares and then
pledge those Optioned Shares purchased into a margin account with a brokerage
firm as security for a loan from the brokerage firm in an amount equal to the
aggregate exercise price of the Optioned Shares. The brokerage firm is then
irrevocably committed to forward sufficient funds to the Company to cover the
aggregate exercise price payable for the purchased Optioned Shares plus all
applicable federal and state income and employment taxes required to be withheld
by the Company by reason of such purchase. The Optionee is required to provide
written directives to the Company to deliver concurrently certificates for the
purchased shares directly to such brokerage firm; or
d. any combination of the foregoing.]
As soon as practical after receipt of such notice, the Company shall,
without transfer or issue tax or other incidental expense to the Optionee or his
or her successor, transfer and deliver thereto at the office of the Company or
such other place as may be mutually agreeable a certificate or certificates for
such shares of its Common Stock; provided, however, that the time of such
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with applicable registration requirements
under the Securities Act of 1933, as amended, any applicable listing
requirements of any national
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securities exchange, and requirements under any other laws or regulations
applicable to the issuance or transfer of such shares.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the outstanding Common Stock of the Company by reason of stock
dividends, recapitalization, mergers, consolidations, split-up, combinations or
exchanges of shares and the like, the aggregate number or class of shares
subject to this option immediately prior to such event shall be appropriately
adjusted by the Board of Directors in accordance with the terms of the Plan.
10. WITHHOLDING AND EMPLOYMENT TAXES. Upon exercise of any option granted
hereby, the Optionee shall remit to the Company in cash the amount of any and
all applicable federal and state withholding and employment taxes.
11. TAX STATUS. The Optionee's treatment of shares purchased pursuant to
the exercise of this Incentive stock option may have significant tax
consequences. The Optionee acknowledges that he or she has been encouraged to
obtain the advice of independent tax counsel regarding the federal and state
income tax consequences of the receipt and exercise of the option granted hereby
and of the disposition of Common Stock acquired upon exercise hereof. The
Optionee acknowledges that he or she has not relied and will not rely upon any
advice or representations by the Company or by its employees or representatives
with respect to the tax treatment of the options granted hereunder.
12. NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained in this Agreement
shall confer upon the Optionee any right to continued employment by the Company
or its Subsidiaries or in any way limit the right of the Company or its
Subsidiaries to terminate the Optionee's employment at any time.
13. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Company shall not be
obligated to deliver any shares of its Common Stock hereunder for such period as
may reasonably be required for it to comply with any applicable requirements of
: (i) the Securities Act of 1933; (ii) the Securities Exchange Act of 1934;
(iii) applicable state securities laws; (iv) any applicable listing requirement
of any stock exchange on which the Company's Common Stock is then listed; and
(v) any other law or regulation applicable to the issuance of such shares.
14. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with the postage thereon
fully prepaid, addressed to the parties at the addresses indicated on the
signature page hereof. Service of any such notice or other communication so
made by mail shall be deemed complete on the date of actual delivery as shown by
the addressee's registry or certification receipt or at the expiration of the
third (3rd) business day after the date of mailing, whichever is earlier in
time. Either party may from time to time by notice in writing served upon the
other as aforesaid, designate a different mailing address or a different person
to which such notices or other communications are thereafter to be addressed or
delivered.
4
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MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, California 94089
By:
-------------------------------------
Title:
----------------------------------
OPTIONEE:
----------------------------------------
(signature)
Name:
-----------------------------------
(print)
Address:
--------------------------------
----------------------------------------
----------------------------------------
Social Security No. :
-------------------
5
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
OF MACROVISION CORPORATION
INCENTIVE STOCK OPTION
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, CA 04089
Gentlemen:
I hereby exercise the right to purchase __________________ shares of Common
Stock of MACROVISION CORPORATION under the terms of the option granted to me on
____________________________, 19___, pursuant to the Incentive Stock Option
Agreement, dated as of said grant date. This exercise of said option and the
purchase and delivery of said shares shall be subject to all terms and
conditions of such Incentive Stock Option Agreement.
I enclose my check for $____________ in full payment of the purchase price
of said shares ($__________) and applicable withholding and employment taxes
($____________). Please register said shares in my name.
Dated:___________________________
------------------------------
(signature)
------------------------------
------------------------------
------------------------------
(Print name and address)
6
<PAGE>
MACROVISION CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
________________________, 19___
(Date of Grant)
Macrovision Corporation, a Delaware corporation (the "Company"), does
hereby grant to______________________, (the "Optionee") an option to purchase an
aggregate of _________________ (_____) shares of the Common Stock of the Company
(the "Optioned Shares") at the price of _____________ Dollars ($_______) per
share (the "Option Price") as a Nonstatutory Stock Option under the Macrovision
Corporation 1996 Equity Incentive Plan (the "Plan"). All capitalized terms not
defined herein shall have those meanings ascribed to them in the Plan.
This option cannot be exercised, unless the Optionee first signs this
Agreement in the place provided and returns it to the Administrator. However,
the Optionee's signing and delivering this Agreement will not bind the Optionee
to purchase any of the Optioned Shares. The Optionee's obligation to purchase
such shares can arise only when the Optionee exercises this option in the manner
set forth in Section 8 below.
THIS OPTION IS SUBJECT TO, AND MAY BE EXERCISED ONLY IN ACCORDANCE WITH,
THE TERMS AND CONDITIONS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE
INCLUDED IN THIS AGREEMENT. A COPY OF THE PLAN IS ATTACHED TO THIS AGREEMENT
AND SHOULD BE READ CAREFULLY.
1. TERM OF OPTION AND EXERCISE OF OPTION. Subject to the provisions of
the Plan and the terms and conditions of this Agreement, this option can be
exercised by the Optionee during a period of ten (10) years from the date of
grant as follows:
DATE NO. OF SHARES
---- -------------
(a)
---------------- --------------------
(b)
---------------- --------------------
(c)
---------------- --------------------
(d)
---------------- --------------------
The dates appearing in the above schedule refer to the earliest dates
on which this option may be exercised with respect to the number of Optioned
Shares set forth therein, and this option may be exercised with respect to all
or any part of such shares at any time on or after such dates but prior to the
expiration of ten (10) years from the date of grant.
2. TERMINATION BY REASON OF DEATH. If the Optionee's
[employment/business relationship] with the Company and/or its Subsidiaries is
terminated by reason of the Optionee's death, this option may thereafter be
exercised, but only to the extent it was exercisable on the
1
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date of the Optionee's death, by the Optionee's estate for a period of twelve
(12) months from the date of death, or until the expiration of the stated term
of the option, if earlier. The Optionee's estate shall mean the duly authorized
executor of the Optionee's last Will or the duly authorized administrator or
special administrator of the Optionee's probate estate or any other duly
authorized legal representative of the Optionee's estate or any person who
acquires the right to exercise this option by reason of the Optionee's death
under the Optionee's Will or the laws of intestate succession.
3. TERMINATION BY REASON OF DISABILITY. If the Optionee's
[employment/business relationship] with the Company and/or its Subsidiaries is
terminated by reason of Disability this option may thereafter be exercised, to
the extent it was exercisable on the date of such termination, for a period of
twelve (12) months from the date of such termination, or until the expiration of
the stated term of the option, if earlier. The Administrator shall have sole
authority and discretion to determine whether the Optionee's
[employment/business relationship] has been terminated by reason of Disability.
4. TERMINATION BY REASON OF RETIREMENT. If the Optionee's
[employment/business relationship] with the Company and/or its Subsidiaries is
terminated by reason of Retirement, this option may thereafter be exercised, to
the extent it was exercisable on the date of such termination, for a period of
three (3) months from the date of such termination of [employment/business
relationship], or until the expiration of the stated term of the option, if
earlier. If the Optionee dies within the three (3)-month period described in
the preceding sentence, the Optionee shall be treated as though he or she died
on the date his or her employment terminated by reason of Retirement, and the
provisions of Section 2 shall apply to this option (with date of termination
substituted for date of death) to the extent that it has not been exercised
prior to the Optionee's death.
5. TERMINATION FOR CAUSE. If the Optionee's [employment/business
relationship] with the Company and/or its Subsidiaries is terminated for Cause,
this option shall immediately terminate and be of no further force and effect.
6. OTHER TERMINATION. Unless otherwise determined by the Administrator,
if the Optionee's [employment/business relationship] with the Company and/or its
Subsidiaries terminates for any reason other than death, Disability, Retirement,
or for Cause, this option may thereafter be exercised, to the extent it was
exercisable on the date of such termination, for three (3) months from the date
of such termination or until the expiration of the stated term of the option, if
earlier.
7. NON-TRANSFERABILITY OF OPTION. This option shall not be transferable
except by Will or the laws of descent and distribution, and this option may be
exercised during the Optionee's lifetime only by the Optionee. [Notwithstanding
the foregoing, [with the approval of the Administrator,] the Optionee may
transfer this option, without consideration for the transfer, to members of his
immediate family, to trusts for the benefit of such family members, to
partnerships in which such family members are the only partners, or to
charitable organizations, provided that the transferee agrees in writing with
the Company to be bound by all of the terms
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<PAGE>
and conditions of the Plan and this option agreement.] Any purported transfer
or assignment of this option not in compliance with the foregoing shall be void
and of no effect, and shall give the Company the right to terminate this option
as of the date of such purported transfer or assignment.
8. METHOD OF EXERCISE. This option may be exercised with respect to all
or any part of the Optioned Shares that are exercisable at time of exercise, by
delivering to the Company a Notice of Exercise of Macrovision Corporation
Nonstatutory Stock Option substantially in the form attached hereto as EXHIBIT
A, specifying the number of Optioned Shares as to which this option is so
exercised, and making full payment to the Company in cash or by check of the
Option Price for the Optioned Shares with respect to which this option is
exercised.
[If the Company's outstanding Common Stock is registered under Section
12 (g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), at
the time this option is exercised, then the Option Price also may be paid as
follows:
a. in shares of the Company's Common Stock held by the Optionee
for the requisite period necessary to avoid a charge to the Company's earnings
for financial reporting purposes and valued at fair market value on the exercise
date;
b. through a special sale and remittance procedure pursuant to
which the Optionee (i) is to provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the purchased Optioned
Shares and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Option Price payable
for the purchased Optioned Shares plus all applicable federal and state income
and employment taxes required to be withheld by the Company by reason of such
purchase and (ii) concurrently is to provide written directives to the Company
to deliver certificates for the purchased shares directly to such brokerage firm
in order to effect the sale transaction;
c. through a special margin commitment procedure pursuant to
which the Optionee elects to exercise his or her vested Optioned Shares and then
pledge those Optioned Shares purchased into a margin account with a brokerage
firm as security for a loan from the brokerage firm in an amount equal to the
aggregate exercise price of the Optioned Shares. The brokerage firm is then
irrevocably committed to forward sufficient funds to the Company to cover the
aggregate exercise price payable for the purchased Optioned Shares plus all
applicable federal and state income and employment taxes required to be withheld
by the Company by reason of such purchase. The Optionee is required to provide
written directives to the Company to deliver concurrently certificates for the
purchased shares directly to such brokerage firm; or
d. any combination of the foregoing.]
As soon as practical after receipt of such notice, the Company shall,
without transfer or issue tax or other incidental expense to the Optionee or his
or her successor, transfer and deliver thereto at the office of the Company or
such other place as may be mutually agreeable a certificate or certificates for
such shares of its Common Stock; provided, however,
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<PAGE>
that the time of such delivery may be postponed by the Company for such period
as may be required for it with reasonable diligence to comply with applicable
registration requirements under the Securities Act of 1933, as amended, any
applicable listing requirements of any national securities exchange, and
requirements under any other laws or regulations applicable to the issuance or
transfer of such shares.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the outstanding Common Stock of the Company by reason of stock
dividends, recapitalization, mergers, consolidations, split-up, combinations or
exchanges of shares and the like, the aggregate number or class of shares
subject to this option immediately prior to such event shall be appropriately
adjusted by the Board of Directors in accordance with the terms of the Plan.
10. WITHHOLDING AND EMPLOYMENT TAXES. Upon exercise of any option granted
hereby, the Optionee shall remit to the Company in cash the amount of any and
all applicable federal and state withholding and employment taxes.
11. TAX STATUS. The Optionee's treatment of shares purchased pursuant to
the exercise of this nonstatutory stock option may have significant tax
consequences. The Optionee acknowledges that he or she has been encouraged to
obtain the advice of independent tax counsel regarding the federal and state
income tax consequences of the receipt and exercise of the option granted hereby
and of the disposition of Common Stock acquired upon exercise hereof. The
Optionee acknowledges that he or she has not relied and will not rely upon any
advice or representations by the Company or by its employees or representatives
with respect to the tax treatment of options granted hereunder.
12. NOT INCENTIVE STOCK OPTION. This option shall not be treated as an
"incentive stock option" as such term is defined in Section 422 of the Code.
13. NO RIGHT TO CONTINUED RELATIONSHIP. Nothing contained in this
Agreement shall confer upon the Optionee any right to a continued
[employment/business relationship] with the Company and its Subsidiaries or in
any way limit the right of the Company or its Subsidiaries to terminate such
relationship at any time.
14. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Company shall not be
obligated to deliver any shares of its Common Stock hereunder for such period as
may reasonably be required for it to comply with any applicable requirements of
: (i) the Securities Act of 1933; (ii) the Securities Exchange Act of 1934;
(iii) applicable state securities laws; (iv) any applicable listing requirement
of any stock exchange on which the Company's Common Stock is then listed; and
(v) any other law or regulation applicable to the issuance of such shares.
15. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with the postage thereon
fully prepaid, addressed to the parties at the addresses indicated on the
signature page
4
<PAGE>
hereof. Service of any such notice or other communication so made by mail shall
be deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing, whichever is earlier in time. Either
party may from time to time by notice in writing served upon the other as
aforesaid, designate a different mailing address or a different person to which
such notices or other communications are thereafter to be addressed or
delivered.
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, California 94089
By:
-------------------------------------
Title:
----------------------------------
OPTIONEE:
----------------------------------------
(signature)
Name:
-----------------------------------
(print)
Address:
--------------------------------
----------------------------------------
----------------------------------------
Social Security No. :
-------------------
5
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
OF MACROVISION CORPORATION
NONSTATUTORY STOCK OPTION
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, CA 04089
Gentlemen:
I hereby exercise the right to purchase __________________ shares of Common
Stock of MACROVISION CORPORATION under the terms of the option granted to me on
____________________________, 19___, pursuant to the Nonstatutory Stock Option
Agreement, dated as of said grant date. This exercise of said option and the
purchase and delivery of said shares shall be subject to all terms and
conditions of such Nonstatutory Stock Option Agreement.
I enclose my check for $____________ in full payment of the purchase price
of said shares ($__________) and applicable withholding and employment taxes
($____________). Please register said shares in my name.
Dated:___________________________
----------------------------------------
(signature)
----------------------------------------
----------------------------------------
----------------------------------------
(Print name and address)
6
<PAGE>
MACROVISION CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
This Restricted Stock Award Agreement ("Agreement") is made as of this ____
day of ______________, 19__, by and among Macrovision Corporation, a Delaware
corporation (the "Company") and _____________________________ (the
"Participant") pursuant to the Macrovision Corporation 1996 Equity Incentive
Plan (the "Plan").
1. PURCHASE OF SHARES
1.1 PURCHASE. The Participant hereby purchases and the Company hereby
sells to the Participant, _______________________ shares of the Company's Common
Stock (the "Shares") at a purchase price of $____________ per share (the
"Purchase Price") pursuant to the provisions of the Plan.
1.2 PAYMENT. Concurrently with the execution of this Agreement, the
Participant shall deliver to the Secretary of the Company the aggregate Purchase
Price payable for the Shares. The Purchase Price shall be paid in cash or
pursuant to the terms of the promissory note in the form attached as Exhibit A
hereto. If the Participant executes said promissory note, he or she shall also
sign a stock pledge agreement in the form attached as Exhibit B hereto.
1.3 DELIVERY OF CERTIFICATES. The certificates representing the Shares
hereunder shall be held in escrow by the Secretary of the Company as provided in
Section 3 below.
1.4 STOCKHOLDER RIGHTS. Until such time as the Company exercises its
repurchase rights, if any, under this Agreement, the Participant (or any
successor in interest) shall have all of the rights of a stockholder (including
voting and dividend rights) with respect to the Shares, including the Shares
held in escrow under Section 3 below.
1.5 VESTING SCHEDULE. The Shares shall be unvested and subject to
repurchase by the Company as set forth in Section 2 below (the "Repurchase
Right"). As the Participant continues to remain in Service to the Company, the
Participant shall acquire a vested interest in, and the Company's Repurchase
Right will accordingly lapse with respect to, (i)________________ (______) of
the Shares on _____________________________, (ii)________________ (______) of
the Shares on _____________________________ and (iii) the balance of the Shares
on ______________________________________________. For purposes of this
Agreement, the Participant shall be deemed to remain in Service to the Company
for so long as the Participant continues to render periodic services to the
Company, whether as an employee, a non-employee member of the Board of
Directors, or an independent contractor or consultant. In no event will any
additional Shares vest after the Participant's cessation of Service to the
Company.
2. REPURCHASE RIGHT
2.1 REPURCHASE RIGHT. Notwithstanding any provision contained in this
Agreement, the Company shall have a Repurchase Right, exercisable at any time
during the ninety (90)-day
1
<PAGE>
period following the date the Participant ceases for any reason to remain in
Service to the Company, permitting the Company to repurchase at the Purchase
Price all or (at the discretion of the Company) any portion of the Shares in
which the Participant has not acquired a vested interest in accordance with the
vesting schedule of Section 1.5 above (such shares to be hereinafter called the
"Unvested Shares").
2.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be
exercisable with respect to any or all of the Unvested Shares by written notice
delivered by the Company to the Participant prior to the expiration of the
ninety (90)-day period specified in Section 2.1. The notice shall specify the
number of Unvested Shares to be repurchased and the date on which the repurchase
is to be effected, such date to be not more than thirty (30) days after the date
of the notice. To the extent that one or more certificates representing
Unvested Shares may have been previously delivered out of escrow to the
Participant, then the Participant shall, prior to the close of business on the
date specified for the repurchase, deliver to the Secretary of the Company the
certificates representing the Unvested Shares to be repurchased, each
certificate to be properly endorsed for transfer. The Company shall,
concurrently with the receipt of such stock certificates (either from escrow or
from the Participant as herein provided), pay to the Participant in cash or cash
equivalents (including the cancellation of any promissory note received by the
Company from the Participant) an amount equal to the Purchase Price previously
paid by the Participant for the Unvested Shares that are to be repurchased.
2.3 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any
stock dividend, stock split, recapitalization or other change affecting the
Company's outstanding Common stock as a class effected without receipt of
consideration, then any new, substituted or additional securities or other
property (including money paid other than as a regular cash distribution) which
is by reason of such transaction distributed with respect to the Shares shall be
immediately subject to the Repurchase Right, but only to the extent the Shares
are at the time covered by such right. Appropriate adjustments to reflect the
distribution of such securities or property shall be made to the number of
shares at the time subject to the Repurchase Right hereunder and to the price
per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such transaction upon the Company's capital structure;
PROVIDED, however, that the aggregate Purchase Price shall remain the same.
3. ESCROW
3.1 DEPOSIT. Upon issuance, the certificates for the Shares purchased
hereunder shall be deposited in escrow with the Secretary of the Company to be
held in accordance with the provisions of this Section 3. Each deposited
certificate shall be accompanied by a duly executed Assignment Separate From
Certificate in the form attached as Exhibit C hereto. The deposited
certificates shall remain in escrow until such time or times as the certificates
are to be released or otherwise surrendered for cancellation in accordance with
Section 3.2 below.
3.2 RELEASE/SURRENDER. The Shares in which the Participant has acquired a
vested interest under Section 1.5 [and for which the Purchase Price has been
paid in cash, or, if paid by promissory note, payment of principal on the
promissory note in the amount of such Purchase
2
<PAGE>
Price has been made] shall be released from escrow and delivered to the
Participant. Should the Company or its assignees elect to exercise the
Repurchase Right under Section 2 with respect to any or all of the Unvested
Shares, then the certificates for such Unvested Shares shall be delivered to the
Company, concurrently with the payment to the Participant, in cash or cash
equivalent (including the cancellation of any promissory note received by the
Company from the Participant), of an amount equal to the aggregate Purchase
Price for such Unvested Shares, and the Participant shall cease to have any
further rights or claims with respect to such Unvested Shares.
3.3 PROHIBITION ON TRANSFER. The Participant shall not sell, transfer,
pledge, hypothecate or otherwise dispose of any Unvested Shares, and any such
sale, transfer or pledge of any Unvested Shares in violation of this Agreement
shall be void. Company shall not be required (a) to transfer on its books any
Shares which shall have been sold or transferred in violation of this Agreement,
or (b) to treat as the owner of such Shares, or to accord the right to vote as
such owner or to pay dividends to any transferee to whom such Shares shall have
been so transferred.
4. LEGENDS. In order to reflect the restrictions on disposition of the
Unvested Shares [and Shares that are subject to the Stock Pledge Agreement], the
stock certificates for the such Shares will be endorsed with restrictive
legends, including one or more of the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY
WITH THE TERMS OF A WRITTEN AGREEMENT DATED ________________, 19__, BETWEEN
THE COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN
INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS CERTAIN REPURCHASE RIGHTS
[AND SECURITY INTERESTS] TO THE COMPANY (OR ITS ASSIGNEES). THE COMPANY
WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER
HEREOF WITHOUT CHARGE."
5. SECTION 83(b) ELECTION. The Participant understands that Section 83
of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the amount paid for the Shares and the fair market
value of the Shares as of the date any restrictions on the Shares lapse. In
this context, "restriction" means the right of Company to buy back the Shares
pursuant to the Repurchase Right. The Participant understands that if such
provision is applicable to him he may elect to be taxed at the time the Shares
are purchased rather than when and as the Repurchase Right expires by filing an
election under Section 83(b) of the Code with the Internal Revenue Service
within thirty (30) days from the date of purchase and with his income tax
returns for the year to which the 83(b) election pertains. Even if the fair
market value of the Shares equals the amount paid for the Shares, the election
must be made to avoid adverse tax consequences in the future. The Participant
understands that the failure to make this filing timely will result in the
recognition of ordinary income by the
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<PAGE>
Participant, as the Repurchase Option lapses, on the difference between the
Purchase Price and the fair market value of the Shares at the time such
restrictions lapse.
THE PARTICIPANT ACKNOWLEDGES THAT IT IS THE PARTICIPANT'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S, TO FILE TIMELY THE ELECTION UNDER THE
INTERNAL REVENUE CODE SECTION 83(b), EVEN IF THE PARTICIPANT REQUESTS THE
COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON PARTICIPANT'S BEHALF.
6. NOTICE OF TAX ELECTION AND DISPOSITION OF SHARES. If the Participant
makes any tax election relating to the treatment of the Shares under the Code,
at the time of such election the Participant shall promptly notify the Company
of such election.
7. "MARKET STANDOFF". In connection with the first underwritten
registration of the offering of the Shares, the Company (or a representative of
the underwriter) may require that the Participant not sell or otherwise transfer
or dispose of any Shares not registered under the Securities Act of 1933 as
amended (the "Act") during a period (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of Company
filed under the Act, provided that all officers and directors of the Company
enter into similar agreements.
8. MISCELLANEOUS PROVISIONS
8.1 FURTHER ASSURANCES. Each party agrees to cooperate fully with the
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described herein
and contemplated hereby, and to carry into effect the intents and purposes of
this Agreement.
8.2 RIGHTS CUMULATIVE. Each and all of the various rights, powers and
remedies of the parties hereto shall be considered to be cumulative with and in
addition to any other rights, powers and remedies which such parties may have at
law or in equity in the event of the breach of any of the terms of this
Agreement. The exercise or partial exercise of any right, power or remedy shall
neither constitute the exclusive election thereof nor the waiver of any other
right, power or remedy available to such party.
8.3 PRONOUNS. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person, persons, entity or entities may require.
8.4 NOTICES. All notices, consents or demands of any kind which any party
to this Agreement may be required or may desire to serve on any other party
hereto in connection with this Agreement shall be in writing and may be
delivered by personal service or overnight courier, by facsimile transfer, or by
registered or certified mail, return receipt requested, deposited in the United
States mail with postage thereon fully prepaid, addressed: (i) if to the
Company, at its address set
4
<PAGE>
forth on the signature page hereof; or (ii) if to the Participant, at its
address as set forth on the signature page hereof. Service of any such notice
or demand so made by mail shall be deemed complete on the date of actual
delivery as shown by the addressee's registry or certification receipt or at the
expiration of the third (3rd) business day after the date of mailing, whichever
is earlier in time. Any party hereto may from time to time by notice in writing
served upon the others as aforesaid, designate a different mailing address or a
different person to which such notices or demands are thereafter to be addressed
or delivered.
8.5 CAPTIONS. Captions are provided herein for convenience only and they
form no part of this Agreement and are not to serve as a basis for
interpretation or construction of this Agreement, nor as evidence of the
intention of the parties hereto.
8.6 SEVERABILITY. The provisions of this Agreement are severable. The
invalidity, in whole or in part, of any provision of this Agreement shall not
affect the validity or enforceability of any other of its provisions. If one or
more provisions hereof shall be so declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof.
The parties further agree to replace such void or unenforceable provisions of
this Agreement with valid and enforceable provisions which will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provisions.
8.7 ATTORNEYS' FEES. In any action at law or in equity to enforce any of
the provisions or rights under this Agreement, the unsuccessful party to such
litigation, as determined by the court in a final judgment or decree, shall pay
the successful party all costs, expenses and reasonable attorneys' fees incurred
by the successful party (including, without limitation, costs, expenses and fees
on any appeal).
8.8 COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed as an original, and when executed,
separately or together, shall constitute a single original instrument, effective
in the same manner as if the parties hereto had executed one and the same
instrument.
8.9 WAIVER. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be, or be construed as, a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
8.10 ENTIRE AGREEMENT. This Agreement (together with its Exhibits and the
other documents referred to herein, and except as otherwise disclosed in such
Exhibits and documents) is intended by the parties hereto to be the final
expression of their agreement and constitutes and embodies the entire agreement
and understanding between the parties hereto with regard to the subject matter
hereof and is a complete and exclusive statement of the terms and conditions
thereof, and shall supersede any and all prior correspondence, conversations,
negotiations, agreements or understandings relating to the same subject matter.
5
<PAGE>
8.11 CHOICE OF LAW. It is the intention of the parties that the internal
laws of the State of California (irrespective of its, or any other
jurisdictions, choice of law principles) shall govern the validity of this
Agreement, the construction of its terms and the interpretation of the rights
and duties of the parties.
8.12 BINDING ON HEIRS, SUCCESSORS AND ASSIGNS. This Agreement and all of
its terms, conditions and covenants are intended to be fully effective and
binding, to the extent permitted by law, on the heirs, executors,
administrators, successors and permitted assigns of the parties hereto.
8.13 SURVIVAL. The respective representations and warranties given by the
Company and the Participant, as contained herein and in any certificates to be
delivered at the Closing, shall survive the Closing Date without regard to any
investigation made by any party. All statements as to factual matters contained
in any certificates, Exhibits or other instruments delivered by or on behalf of
any party pursuant to the terms hereto or in connection with the transactions
contemplated hereby shall be deemed, for all purposes, to constitute
representations and warranties by such party under the terms of this Agreement
given as of the date of such certificate or instrument.
8.14 FINDER'S FEES. Each Participant hereby agrees to indemnify and to
hold harmless the Company from any liability for any commission or compensation
in the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which such Participant or any of its
employees or representatives is responsible.
8.15 AMENDMENT. This Agreement may be amended upon the written consent of
the Company and the Participant (or their permitted assignees to whom they have
expressly assigned their rights under this Agreement) holding at least a
majority of the Shares (including, for such purpose, any shares of Common Stock
issued upon conversion thereof) sold pursuant to this Agreement and then held by
such Participant and such permitted assignees. The Participant and permitted
assignees shall be bound by any amendment effected pursuant to this
Section 8.15, whether or not any such Participant or assignee is a party to any
such amendment. Any party hereto may, as to itself, by a writing signed by an
authorized representative of such party: (i) extend the time for the
performance of any of the obligations of another party; (ii) waive any
inaccuracies in representations and warranties made by another party contained
in this Agreement or in any documents delivered pursuant hereto; (iii) waive
compliance by another party with any of the covenants contained in this
Agreement or the performance of any obligations of such other party; or
(iv) waive the fulfillment of any condition that is precedent to the performance
by such party of any of its obligations under this Agreement.
8.16 PARTICIPANT INVESTIGATION. The Participant acknowledges that it is
not relying upon any person, firm or corporation (other than the Company and its
officers and directors) in making its investment or decision to invest in the
Company. The Participant represents to the other Participant that it has been
solely responsible for its own "due diligence" investigation of the Company and
its management and business, for its own analysis of the merits and risks of
this investment. The Participant agrees that no Participant nor the respective
controlling persons,
6
<PAGE>
officers, directors, partners, agents or employees of any such Participant shall
be liable to any other Participant for any actions taken in connection with the
purchase of Common Stock in accordance with the terms of this Agreement.
8.17 CONSENT OF SPOUSE. If the Participant is married, the Participant
shall obtain the signature of the Participant's spouse as set forth on the
Consent of Spouse form which is attached to this Agreement. The Participant's
failure to obtain such consent shall constitute a representation by the
Participant, on which the Company shall rely, that the Participant is unmarried
and that the Participant has sole authority with respect to the Participant's
actions regarding the Shares.
8.18 NO IMPLIED EMPLOYMENT TERM. Nothing in this Agreement shall affect in
any manner whatsoever the right or power of the Company to terminate the
Participant's employment with the Company, or the Participant's ability to quit
the Company's employment, with or without cause, at any time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement with
the intent and agreement that the same shall be effective as of the day and year
first above written.
MACROVISION CORPORATION
By:
--------------------------------
Its:
-------------------------------
PARTICIPANT:
By:
--------------------------------
(Signature)
-----------------------------------
(Print Name)
Address:
---------------------------
---------------------------
SS# or EIN:
------------------------
7
<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of the Participant agrees that my interest, if any,
in the stock subject to the foregoing Restricted Stock Award Agreement between
the Participant and the Company shall be irrevocably bound by such Agreement and
further understands and agrees that my community property interest, if any,
shall be similarly bound by such Agreement. The undersigned spouse further
agrees the Participant's actions, omissions, and/or deeds with respect to the
Shares, including the execution of any and all documents by the Participant,
shall bind the undersigned irrevocably, the same as if the undersigned had
executed such document or performed such action, omission and/or deed and
further that any third party, including, but not limited to, Company, shall be
entitled to rely upon same.
Spouse of the Participant
-----------------------------------
(signature)
Name:
------------------------------
(print)
8
<PAGE>
EXHIBIT A
FORM OF PROMISSORY NOTE
9
<PAGE>
PROMISSORY NOTE
$__________ [date]
Sunnyvale, California
FOR VALUE RECEIVED, ___________ ("Borrower") promises to pay to MACROVISION
CORPORATION ( the "Company") or order, at 1341 Orleans Drive, Sunnyvale,
California 94089 or such other place as the Company or holder hereof may from
time to time designate, the principal sum of __________________________________
($_________).
This Note is attached as EXHIBIT A to that certain Restricted Stock Award
Agreement between Borrower and the Company (the "Agreement"). Capitalized terms
not otherwise defined herein shall have the meaning ascribed to them in the
Agreement,
1. INTEREST RATE. Interest shall accrue on the unpaid principal portion
of this Note at the rate of _________ percent (_____%) per annum, simple
interest.
2. PAYMENT SCHEDULE. Principal and accrued interest, if any, shall be
due and payable on ________. Notwithstanding the foregoing, principal and
accrued interest, if any, shall be due and payable in full thirty (30) days
after Borrower ceases to have a [employment/business] relationship with the
Company.
3. PREPAYMENT. Borrower shall have the right to prepay all or any part
of the unpaid balance hereof at any time, without penalty.
4. NO OFFSETS. The Company shall not be entitled to offset any amounts
owed to Borrower as compensation arising out of Borrower's [employment/business]
relationship with the Company against the balance owing on this Note at the time
of Borrower's termination of such relationship.
5. TAX CONSEQUENCES. Borrower represents and warrants to the Company
that Borrower has consulted his tax advisers and understands the tax
consequences of this Note, and Borrower has not relied on the Company, its
officers, directors, employees, or attorneys for any tax advice. Borrower shall
make provision for and indemnify the Company against the payment by the Company
of or damages incurred by the Company with respect to any federal or state
withholding taxes required to be paid or withheld by the Company due to the
terms of this Note.
6. WAIVERS. Borrower waives any right of demand, presentment, notice of
nonpayment, protest or notice of dishonor.
7. AMENDMENT OF NOTE. This Note may be terminated or amended only by
prior written consent of the Company.
10
<PAGE>
8. SEVERABILITY. If for any reason any of the provisions of this Note
shall be determined to be inoperative or invalid, the validity and effect of the
other provisions hereof shall not be affected thereby and such other provisions
shall remain in full force and effect.
9. ATTORNEYS FEES. In the event an action is brought by the Company to
enforce or to interpret the terms of this Note, the prevailing party in such
action shall be entitled to its reasonable attorney's fees in addition to any
other relief to which that party may be entitled.
10. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
the conflict of law principles thereof.
BORROWER:
-----------------------------------
(Signature)
-----------------------------------
(Name)
-----------------------------------
(Address)
-----------------------------------
11
<PAGE>
EXHIBIT B
FORM OF STOCK PLEDGE AGREEMENT
12
<PAGE>
STOCK PLEDGE AGREEMENT
In consideration of the loan which Macrovision Corporation, a California
corporation (the "Company"), having its principal offices at 1341 Orleans Drive,
Sunnyvale, California 94089 has on this day extended to the undersigned and as
security for the payment of that certain promissory note ("Note") in the
principal sum of _______________ Dollars ($_________) payable to the Company
which the undersigned has on this day executed to evidence such loan, the
undersigned hereby grants to the Company a security interest in, and assigns,
transfers to and pledges with the Company, the following securities and other
property:
(i) _______________ (_________) shares of the Company's Common Stock
which were acquired by the undersigned on _____ , ____ and which have on
this day been delivered to and deposited with the Company;
(ii) any and all new, additional or different securities subsequently
distributed with respect to the shares identified in clause (i) above which are
to be delivered to and deposited with the Company pursuant to the requirements
of Section 3 of this Stock Pledge Agreement (the "Agreement");
(iii) any and all other property and money which is delivered to or
comes into the possession of the Company pursuant to the terms and provisions of
this Agreement; and
(iv) the proceeds of any sale, exchange or disposition of the
property and securities described in clauses (i), (ii) or (iii) above.
All securities, property and money so assigned, transferred to and pledged
with the Company shall be herein referred to as the "Collateral." The Company
shall hold the Collateral in accordance with the following terms and provisions:
1. WARRANTIES. The undersigned hereby warrants that the undersigned is
the owner of the Collateral and has the right to pledge the Collateral and that
the Collateral is free from liens, adverse claims and other security interests,
except as provided in the Restricted Stock Award Agreement, of even date
herewith, between the undersigned and the Company, to which this Agreement is
attached as EXHIBIT B ("Award Agreement").
2. RIGHTS AND POWERS. The Company may, without obligation to do so,
exercise at any time and from time to time one or more of the following rights
and powers with respect to any or all of the Collateral:
(a) accept in its discretion, but subject to the limitations of Section 7
of this Agreement, other property of the undersigned in exchange for all or part
of the Collateral and release Collateral to the undersigned to the extent
necessary to effect such exchange,
13
<PAGE>
and in such event the money, property or securities received in the exchange
shall be held by Company as substitute security for the Note and all other
indebtedness secured hereunder;
(b) perform such acts as are necessary to preserve and protect the
Collateral and the rights, powers and remedies granted with respect to such
Collateral by this Agreement; and
(c) transfer record ownership of the Collateral to the Company or its
nominee and receive, endorse and give receipt for, or collect by legal
proceedings or otherwise, dividends or other distributions made or paid with
respect to the Collateral, provided and only if there exists at the time an
outstanding event of default under Section 8 of this Agreement.
Expenses reasonably incurred in the exercise of such rights and powers
shall be payable by the undersigned to the Company and form part of the
indebtedness secured hereunder as provided in Section 10 of this Agreement.
So long as there exists no event of default under Section 8 of this
Agreement, the undersigned may exercise all shareholder voting rights and be
entitled to receive any cash distribution with respect to the Collateral.
Accordingly, until such time as an event of default occurs under this Agreement,
all proxy statements and other shareholder materials shall be delivered to the
undersigned at the address indicated below.
3. DUTY TO DELIVER. Any new, additional or different securities which
may now or hereafter become distributable with respect to the Collateral by
reason of a stock dividend, stock split or reclassification of the capital stock
of the Company or by reason of a merger, consolidation or other reorganization
affecting the capital structure of the Company shall, upon receipt by the
undersigned, be promptly delivered to and deposited with the Company as part of
the Collateral hereunder. Such securities shall be accompanied by one or more
properly endorsed stock power assignments.
4. CARE OF COLLATERAL. The Company shall exercise reasonable care in the
custody and preservation of the Collateral, but shall have no obligation to
initiate any action with respect to, or otherwise inform the undersigned of, any
conversion, call, exchange right, preemption right, subscription right, purchase
offer or other right or privilege relating to or affecting the Collateral. The
Company shall have no duty to preserve the rights of the undersigned against
adverse claims or to protect the Collateral against the possibility of a decline
in market value. The Company shall not be obligated to take any action with
respect to the Collateral requested by the undersigned unless the request is
made in writing and the Company determines that the requested action will not
unreasonably jeopardize the value of the Collateral as security for the Note.
The Company may at any time deliver all or part of the Collateral to the
undersigned, and the receipt thereof by the undersigned shall constitute a
complete and
14
<PAGE>
full release for the Collateral so delivered. The Company shall accordingly be
discharged from any further liability or responsibility for the delivered
Collateral.
5. PAYMENT OF TAXES AND OTHER CHARGES. The undersigned shall pay, prior
to the delinquency date, all taxes, liens, assessments and other charges against
the Collateral; if undersigned fails to do so, the Company may at its election
pay any or all of such taxes, liens, assessments and charges without contesting
the validity or legality thereof. Any payments so made by the Company under
this Section 5 shall become part of the indebtedness secured hereunder and shall
bear interest at the same rate provided in the Note.
6. TRANSFER OF COLLATERAL. In connection with the transfer or assignment
of the Note (whether by negotiation, discount or otherwise), if any, the Company
may transfer all or any part of the Collateral, and the transferee shall
thereupon succeed to all the rights, powers and remedies granted to the Company
hereunder with respect to the Collateral so transferred. Upon such transfer,
the Company shall be fully discharged from all liability and responsibility for
the transferred Collateral.
7. RELEASE OF COLLATERAL.
(a) If all indebtedness secured hereunder is either paid in full, the
shares of the Company's Common Stock pledged and deposited by the undersigned
hereunder, together with any additional Collateral which may hereafter be
pledged and deposited with the Company pursuant to the requirements of Section 3
above, shall to the extent such shares are vested under the Award Agreement, be
released from pledge thirty (30) days after such payment in full.
(b) If the Collateral becomes in whole or in part comprised of "margin
security" within the meaning of Section 207.2(d) of Regulation G of the Federal
Reserve Board ("Regulation G"), then no Collateral shall thereafter be released
or substituted under this Agreement unless:
(i) the amount of indebtedness at the time secured hereunder is not
in excess of the maximum loan value (as determined pursuant to the provisions of
Regulation G) of the Collateral remaining after the release or substitution is
effected; OR
(ii) the amount of indebtedness secured hereunder is reduced by at
least the amount by which the maximum loan value of the new Collateral (if any)
deposited hereunder is less than the maximum loan value of the Collateral to be
released or otherwise withdrawn.
8. EVENTS OF DEFAULT. The occurrence of one or more of the following
events shall constitute an event of default under this Agreement:
15
<PAGE>
(a) failure of the undersigned to pay principal or accrued interest when
due under the Note;
(b) the occurrence of any event of default specified in the Note;
(c) the failure of the undersigned to perform any obligation imposed on
the undersigned by reason of this Agreement; or
(d) the breach of any warranty of the undersigned contained in this
Agreement.
Upon the occurrence of any such event of default, the Company may, at its
election, declare the Note and all other indebtedness secured hereunder to
become immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the California
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder. Any proceeds realized from the disposition of the Collateral
pursuant to the power of sale hereby granted to the Company shall first be
applied to the payment of expenses incurred by the Company in connection with
the disposition, and the balance shall be applied to the payment of the Note and
any other indebtedness secured hereunder in such order of application as the
Company shall deem appropriate. Any surplus proceeds shall be paid over to the
undersigned. In the event such proceeds prove insufficient to satisfy all
indebtedness secured hereunder, then the undersigned shall be personally liable
for the deficiency.
9. OTHER REMEDIES. The rights, powers and remedies granted to the
Company pursuant to the provisions of this Agreement shall be in addition to all
rights, powers and remedies granted to the Company under any statute or rule of
law. Any forbearance, failure or delay by the Company in exercising any right,
power or remedy under this Agreement shall not be deemed to be waiver of such
right, power or remedy. Any single or partial exercise of any right, power or
remedy under this Agreement shall not preclude the further exercise thereof, and
every right, power and remedy of the Company under this Agreement shall continue
in full force and effect until such right, power or remedy is specifically
waived by an instrument executed by the Company.
10. COSTS AND EXPENSES. All costs and expenses (including reasonable
attorneys' fees) incurred by the Company in the exercise or enforcement of any
right, power or remedy granted it under this Agreement shall become part of the
indebtedness secured hereunder and shall be payable immediately by the
undersigned, without demand, and until paid, shall bear interest at the rate
provided for in the Note.
11. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
the conflict of
16
<PAGE>
law principles thereof. This Agreement shall be binding upon the executors,
administrators, heirs and assigns of the undersigned.
12. SEVERABILITY. If any provision of this Agreement is held to be
invalid under applicable law, then such provision shall be ineffective only to
the extent of such invalidity, and neither the remainder of such provision nor
any other provisions of this Agreement shall be affected thereby.
IN WITNESS WHEREOF, this Agreement has been executed by the undersigned on
this______day of _______, _____.
------------------------------
(Signature)
------------------------------
(Name)
------------------------------
(Address)
------------------------------
Agreed to and Accepted by:
Macrovision Corporation
By:
---------------------
17
<PAGE>
EXHIBIT C
ASSIGNMENT SEPARATE FROM CERTIFICATE
18
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto, ________________________________, ________________________ (_______)
shares of the Common Stock of Macrovision Corporation, a Delaware corporation,
standing in the undersigned's name on the books of said corporation represented
by Certificate No. ____ herewith, and does hereby irrevocably constitute and
appoint ____________ as attorney-in-fact, to transfer the said stock on the
books of the said corporation with full power of substitution in the premises.
Dated: _____________________, 19__
------------------------------
(Signature)
------------------------------
(Print Name)
19
<PAGE>
MACROVISION CORPORATION
STOCK APPRECIATION RIGHT AGREEMENT
________________________, 19___
(Date of Grant)
Macrovision Corporation, a Delaware corporation (the "Company"), does
hereby grant to______________________, (the "Grantee") the right (this "SAR") to
receive an amount based upon any appreciation with respect to an aggregate of
_________________ (_____) shares of the Common Stock of the Company (the "SAR
Shares") over their Fair Market Value of _____________ Dollars ($_______) per
share on the date of grant (the "Exercise Value") as a Stock Appreciation Right
under the Macrovision Corporation 1996 Equity Incentive Plan (the "Plan"). All
capitalized terms not defined herein shall have those meanings ascribed to them
in the Plan.
This SAR cannot be exercised, unless the Grantee first signs this Agreement
in the place provided and returns it to the Administrator. However, the
Grantee's signing and delivering this Agreement will not constitute the
Grantee's exercise of this SAR with respect to any of the SAR Shares, which will
occur only when the Grantee exercises this SAR in the manner set forth in
Section 8 below. [This SAR is being granted in tandem with a
[Nonstatutory/Incentive] Stock Option dated __________ granted pursuant to the
Plan. This SAR shall terminate and no longer shall be exercisable upon
Grantee's exercise of the related Stock Option, to the extent of such exercise.
Upon exercise of this SAR, the related Stock Option shall terminate and Grantee
shall surrender it to the Company, to the extent of such exercise.]
THIS SAR IS SUBJECT TO, AND MAY BE EXERCISED ONLY IN ACCORDANCE WITH, THE
TERMS AND CONDITIONS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE
INCLUDED IN THIS AGREEMENT. A COPY OF THE PLAN IS ATTACHED TO THIS AGREEMENT
AND SHOULD BE READ CAREFULLY.
1. TERM OF SAR AND EXERCISE OF SAR. Subject to the provisions of the
Plan and the terms and conditions of this Agreement, this SAR can be exercised
by the Grantee during a period of ten (10) years from the date of grant as
follows:
DATE NO. OF SHARES
---- -------------
(a)
---------------- --------------------
(b)
---------------- --------------------
(c)
---------------- --------------------
(d)
---------------- --------------------
The dates appearing in the above schedule refer to the earliest dates
on which this SAR may be exercised with respect to the number of SAR Shares set
forth therein, and this SAR may be exercised with respect to all or any part of
such shares at any time on or after such dates but prior to the expiration of
ten (10) years from the date of grant.
1
<PAGE>
2. TERMINATION BY REASON OF DEATH. If the Grantee's [employment/business
relationship] with the Company and/or its Subsidiaries is terminated by reason
of the Grantee's death, this SAR may thereafter be exercised, but only to the
extent it was exercisable on the date of the Grantee's death, by the Grantee's
estate for a period of twelve (12) months from the date of death, or until the
expiration of the stated term of the SAR, if earlier. The Grantee's estate
shall mean the duly authorized executor of the Grantee's last Will or the duly
authorized administrator or special administrator of the Grantee's probate
estate or any other duly authorized legal representative of the Grantee's estate
or any person who acquires the right to exercise this SAR by reason of the
Grantee's death under the Grantee's Will or the laws of intestate succession.
3. TERMINATION BY REASON OF DISABILITY. If the Grantee's
[employment/business relationship] with the Company and/or its Subsidiaries is
terminated by reason of the Grantee's Disability this SAR may thereafter be
exercised, to the extent it was exercisable on the date of such termination, for
a period of twelve (12) months from the date of such termination, or until the
expiration of the stated term of the SAR, if earlier. The Administrator shall
have sole authority and discretion to determine whether the Grantee's
[employment/business relationship] has been terminated by reason of Disability.
4. TERMINATION BY REASON OF RETIREMENT. If the Grantee's
[employment/business relationship] with the Company and/or its Subsidiaries is
terminated by reason of Retirement, this SAR may thereafter be exercised, to the
extent it was exercisable on the date of such termination, for a period of three
(3) months from the date of such termination of [employment/business
relationship], or until the expiration of the stated term of the SAR, if
earlier. If the Grantee dies within the three (3)-month period described in the
preceding sentence, the Grantee shall be treated as though he or she died on the
date his or her employment terminated by reason of Retirement, and the
provisions of Section 2 shall apply to this SAR (with date of termination
substituted for date of death) to the extent that it has not been exercised
prior to the Grantee's death.
5. TERMINATION FOR CAUSE. If the Grantee's [employment/business
relationship] with the Company and/or its Subsidiaries is terminated for Cause,
this SAR shall immediately terminate and be of no further force and effect.
6. OTHER TERMINATION. Unless otherwise determined by the Administrator,
if the Grantee's [employment/business relationship] with the Company and/or its
Subsidiaries terminates for any reason other than death, Disability, Retirement,
or for Cause, this SAR may thereafter be exercised, to the extent it was
exercisable on the date of such termination, for three (3) months from the date
of such termination or until the expiration of the stated term of the SAR, if
earlier.
7. NON-TRANSFERABILITY OF SAR. This SAR shall not be transferable except
by Will or the laws of descent and distribution, and this SAR may be exercised
during the Grantee's lifetime only by the Grantee. Any purported transfer or
assignment of this SAR shall be void and of no
2
<PAGE>
effect, and shall give the Company the right to terminate this SAR as of the
date of such purported transfer or assignment.
8. METHOD OF EXERCISE. This SAR may be exercised with respect to all or
any part of the SAR Shares that are exercisable at time of exercise, by
delivering to the Company a Notice of Exercise of Macrovision Corporation Stock
Appreciation Right substantially in the form attached hereto as EXHIBIT A,
specifying the number of SAR Shares as to which this SAR is so exercised. Upon
such exercise, the Company shall pay to the Grantee for each SAR Share as to
which this SAR is exercised an amount in cash equal to the excess of the Fair
Market Value of a share of the Company's Common Stock on the date of exercise
over the per share Exercise Price set by the Administrator at the time of grant.
[If the Company's outstanding Common Stock is registered under Section
12 (g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), at
the time this SAR is exercised, then the cash value of the SAR (determined in
accordance with the preceding sentence) also may be paid as follows:
a. in shares of the Company's Common Stock valued at Fair
Market Value on the exercise date; or
b. a combination of cash and shares of the Company's Common
Stock.
If the Company determines to deliver any shares of the Company's
Common Stock upon exercise, then as soon as practical after receipt of such
notice, the Company shall, without transfer or issue tax or other incidental
expense to the Grantee or his or her successor, transfer and deliver thereto at
the office of the Company or such other place as may be mutually agreeable a
certificate or certificates for such shares of its Common Stock; provided,
however, that the time of such delivery may be postponed by the Company for such
period as may be required for it with reasonable diligence to comply with
applicable registration requirements under the Securities Act of 1933, as
amended, any applicable listing requirements of any national securities
exchange, and requirements under any other laws or regulations applicable to the
issuance or transfer of such shares.]
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the outstanding Common Stock of the Company by reason of stock
dividends, recapitalization, mergers, consolidations, split-up, combinations or
exchanges of shares and the like, the aggregate number or class of shares
subject to this SAR immediately prior to such event shall be appropriately
adjusted by the Board of Directors in accordance with the terms of the Plan.
10. WITHHOLDING AND EMPLOYMENT TAXES. Upon exercise of any SAR granted
hereby, the Company shall withhold from its payment to the Grantee the amount of
any and all applicable federal and state withholding and employment taxes.
3
<PAGE>
11. TAX STATUS. The Grantee's exercise of this SAR may have significant
tax consequences. The Grantee acknowledges that he or she has been encouraged to
obtain the advice of independent tax counsel regarding the federal and state
income tax consequences of the receipt and exercise of the SAR granted hereby.
The Grantee acknowledges that he or she has not relied and will not rely upon
any advice or representations by the Company or by its employees or
representatives with respect to the tax treatment of SARs granted hereunder.
12. NO RIGHT TO CONTINUED RELATIONSHIP. Nothing contained in this
Agreement shall confer upon the Grantee any right to a continued
[employment/business relationship] with the Company and its Subsidiaries or in
any way limit the right of the Company or its Subsidiaries to terminate such
relationship at any time.
13. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with the postage thereon
fully prepaid, addressed to the parties at the addresses indicated on the
signature page hereof. Service of any such notice or other communication so
made by mail shall be deemed complete on the date of actual delivery as shown by
the addressee's registry or certification receipt or at the expiration of the
third (3rd) business day after the date of mailing, whichever is earlier in
time. Either party may from time to time by notice in writing served upon the
other as aforesaid, designate a different mailing address or a different person
to which such notices or other communications are thereafter to be addressed or
delivered.
14. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Company shall not be
obligated to deliver any shares of its Common Stock hereunder for such period as
may reasonably be required for it to comply with any applicable requirements of:
(i) the Securities Act of 1933; (ii) the Securities Exchange Act of 1934;
(iii) applicable state securities laws; (iv) any applicable listing requirement
of any stock exchange on which the Company's Common Stock is then listed; and
(v) any other law or regulation applicable to the issuance of such shares.]
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, California 94089
By:
--------------------------------
Title:
-----------------------------
GRANTEE:
4
<PAGE>
-----------------------------------
(signature)
Name:
------------------------------
(print)
Address:
---------------------------
-----------------------------------
-----------------------------------
Social Security No. :
--------------
5
<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
OF MACROVISION CORPORATION
STOCK APPRECIATION RIGHT
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, CA 04089
Gentlemen:
I hereby exercise the right to receive the difference between (a) the Fair
Market Value on the date of this exercise of __________________ shares of Common
Stock of MACROVISION CORPORATION and (b) the Fair Market Value of such shares at
the time of the SAR granted to me on ____________________________, 19___,
pursuant to the Stock Appreciation Right Agreement, dated as of said grant date.
This exercise of said SAR shall be subject to all terms and conditions of such
Stock Appreciation Right Agreement.
Dated:___________________________
-----------------------------------
(signature)
-----------------------------------
-----------------------------------
-----------------------------------
(Print name and address)
6
<PAGE>
MACROVISION CORPORATION
1996 DIRECTORS STOCK OPTION PLAN
As Adopted by the Board of Directors on December 3, 1996
1. PURPOSE. The purpose of the Macrovision Corporation 1996 Directors
Stock Option Plan (the "Plan") is to grant to non-employee members of the
Company's Board of Directors ("Outside Directors") of Macrovision Corporation
(the "Company") the opportunity to acquire Common Stock of the Company, thereby
encouraging such persons to accept or continue their service on the Company's
Board of Directors; to align the interests of such persons with those of the
Company's stockholders through stock ownership; and to furnish such persons an
additional incentive to improve operations and increase profits of the Company.
To accomplish the foregoing objectives, this Plan provides a means
whereby Outside Directors may receive options to purchase Common Stock. Options
granted under this Plan will be nonstatutory (nonqualified) stock options.
2. ADMINISTRATION. The Plan shall be administered by the Company's Board
of Directors (the "Administrator"), which shall have the power and authority to
grant stock options consistent with the terms of the Plan, including the power
and authority:
(a) to determine the terms and conditions of the stock option
agreements entered into between the Company and any Outside Director;
(b) to interpret the Plan;
(c) to modify or amend any such option; and
(d) to make all determinations necessary or advisable for the
administration of the Plan.
3. ELIGIBILITY; NUMBER. Each Outside Director who first becomes a member
of the Company's Board of Directors after the effective date of the Registration
Statement on Form SB-2 for the initial public offering of the Company's Common
Stock (the "IPO Date") shall be granted options to purchase nine thousand
(9,000) shares of the Company's Common Stock effective as of the date he or she
first becomes a member of the Company's Board of Directors (the "Initial Grant
Date") and shall be granted options to purchase five thousand four hundred
(5,400) shares of the Company's Common Stock annually on each successive
anniversary of the Initial Grant Date commencing on the one (1) year anniversary
of the Initial Grant Date, provided that such Outside Director continues to
serve on the Company's Board of Directors on such dates. Each Outside Director
who is serving as a member of the Company's Board of Directors on the IPO Date
will be granted an option to purchase five thousand four hundred (5,400) shares
of the Company's Common Stock annually on each
<PAGE>
successive anniversary of the IPO Date commencing on the one (1) year
anniversary of the IPO Date, provided that such Outside Director continues to
serve on the Company's Board of Directors on such dates. Each employee member
of the Company's Board of Directors who becomes an Outside Director as a result
of ceasing to be an employee of the Company will be granted an option to
purchase five thousand four hundred (5,400) shares of the Company's Common Stock
annually on each successive anniversary of the IPO Date commencing on the first
anniversary of the IPO Date on which such individual serves as an Outside
Director, provided that such individual continues to serve as an Outside
Director on the Company's Board of Directors on such dates, but such an
individual will not receive any initial grant of an option to purchase nine
thousand (9,000) shares of the Company's Common Stock.
4. EXERCISE PRICE. The exercise price of each option to purchase a share
of the Company's Common Stock shall be the fair market value of a share of the
Company's Common Stock on the date on which such option is granted. For all
purposes of this Plan, the fair market value of the Company's Common Stock on
any particular date shall be the closing price on the trading day next preceding
that date on the principal securities exchange on which the Company's Common
Stock is listed, or, if such Common Stock is not then listed on any securities
exchange, then the fair market value of the Common Stock on such date shall be
the closing price as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ") on the trading day next preceding
such date. In the event that the Company's Common Stock is neither listed on a
securities exchange nor quoted by NASDAQ, then the Administrator shall determine
the fair market value of the Company's Common Stock on such date.
5. COMMON STOCK SUBJECT TO PLAN.
(a) There shall be reserved for issue upon the exercise of options
granted under the Plan one hundred eight thousand (108,000) shares of Common
Stock, subject to adjustment as provided in Section 8 hereof. If an option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full, the unpurchased shares subject thereto shall again be
available for the purposes of the Plan.
(b) Notwithstanding any other provisions of this Plan, the aggregate
number of shares of Common Stock subject to outstanding options granted under
this Plan, plus the aggregate number of shares issued upon the exercise of all
options granted under this Plan, shall never be permitted to exceed the number
of shares specified in the first sentence of Subsection 5(a) above.
6. TERMS OF OPTIONS. Each option granted under the Plan shall be
evidenced by a nonstatutory stock option agreement between the individual to
whom the option is granted (the "optionee") and the Company. Each such
agreement shall designate the option thereby granted as a nonstatutory stock
option. Each such agreement shall be subject to the terms and conditions set
forth in this Section 6, and to such other terms and conditions not inconsistent
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<PAGE>
herewith as the Administrator may deem appropriate in each case. All options
granted under this Plan shall be subject to the following terms and conditions:
(a) TERM OF OPTIONS. The period or periods within which an option
may be exercised shall be determined by the Administrator at the time the option
is granted, but in no event shall such period extend beyond ten (10) years from
the date the option is granted.
(b) METHOD OF PAYMENT FOR COMMON STOCK. Payment for stock purchased
upon any exercise of an option granted under this Plan shall be made in full
concurrently with such exercise by any one of the following methods: (i) in
cash; (ii) if and to the extent the instrument evidencing the option so provides
and if the Company is not then prohibited from purchasing or acquiring shares of
such stock, with shares of the same class of stock as are subject to the option
that have been held by the optionee for the requisite period necessary to avoid
a charge to the Company's earnings for financial reporting purposes, delivered
in lieu of cash, with the shares so delivered to be valued on the basis of the
fair market value of the stock (determined in a manner specified in the
instrument evidencing the option) on the date of exercise; (iii) through a "same
day sale" commitment from the optionee and a broker-dealer that is a member of
the National Association of Securities Dealers (the "NASD Dealer") whereby the
optionee irrevocably elects to exercise the option and to sell a portion of the
shares so purchased to pay for the exercise price, and whereby the NASD Dealer
irrevocably commits upon receipt of such shares to forward the exercise price
directly to the Company; (iv) through a "margin" commitment from the optionee
and a NASD Dealer whereby the optionee irrevocably elects to exercise the option
and to pledge the shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the exercise price ,
and whereby the NASD Dealer irrevocably commits upon receipt of such shares to
forward the exercise price directly to the Company; or (v) any combination of
the foregoing.
(c) VESTING. The option shares shall become first exercisable
ratably over a four (4) year period such that one forty-eighth (1/48) of the
option shares shall become first exercisable on the last day of each month,
beginning with the first full month following the date of grant, provided that
the optionee continues to serve on the Company's Board of Directors on such
dates. Notwithstanding the foregoing, all options granted to an optionee under
this Plan will become exercisable immediately upon the optionee's death or
disability while serving on the Company's Board of Directors.
(d) DEATH; DISABILITY; RESIGNATION. In the event of an optionee's
death or disability while serving on the Company's Board of Directors, all
options granted to that optionee under this Plan may be exercised by the
optionee or the optionee's estate for a period of one (1) year after the date on
which the optionee ceases to serve on the Company's Board and will terminate if
not exercised during such period, subject to termination on the expiration of
the stated term of the option, if earlier. If an optionee resigns from the
Company's Board of Directors or declines to stand for reelection, options that
have become exercisable through
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<PAGE>
the last date on which the optionee serves on the Company's Board may be
exercised for a period of three (3) months thereafter and will terminate if not
exercised during such period, subject to termination on the expiration of the
stated term of the option, if earlier. If an optionee is removed from the Board
by action of the Company's Stockholders or Board of Directors, options that have
become exercisable through the date of such removal may be exercised for a
period of one (1) week thereafter and will terminate if not exercised during
such period, subject to termination on the expiration of the stated term of the
option, if earlier. The "optionee's estate" shall mean the duly authorized
conservator or guardian of the estate of the optionee or the executor of the
optionee's last will or the duly authorized administrator or special
administrator of the optionee's probate estate or any other legal representative
of the optionee's estate duly appointed as a result of the optionee's death or
incapacity or any person who acquires the right to exercise this option by
reason of the optionee's death under the optionee's will or the laws of
intestate succession.
(e) WITHHOLDING AND EMPLOYMENT TAXES. At the time of exercise of an
option, the optionee shall remit to the Company in cash the amount of any and
all applicable federal and state withholding and employment taxes.
7. STOCK ISSUANCE AND RIGHTS AS STOCKHOLDER. Notwithstanding any other
provisions of the Plan, no optionee shall have any of the rights of a
stockholder (including the right to vote and receive dividends) of the Company,
by reason of the provisions of this Plan or any action taken hereunder, until
the date such optionee shall both have paid the exercise price for the Common
Stock and shall have been issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) the
stock certificate evidencing such shares.
8. NON-TRANSFERABILITY OF OPTIONS. No option shall be transferable by
the optionee otherwise than by will or by the laws of descent and distribution
and all options shall be exercisable, during the optionee's lifetime, only by
the optionee. Notwithstanding the foregoing, the Administrator may provide in
any option agreement that the optionee may transfer, without consideration for
the transfer, such option to members of his immediate family, to trusts for the
benefit of such family members, to partnerships in which such family members are
the only partners, or to charitable organizations, provided that the transferee
agrees in writing with the Company to be bound by all of the terms and
conditions of the Plan and the applicable option agreement.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Subject to any required action by the Company's stockholders, the
number of shares of Common Stock covered by this Plan as provided in Section 5,
the number of shares covered by each outstanding option granted hereunder and
the exercise price thereof shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a split,
reverse split, subdivision or consolidation of such
4
<PAGE>
shares or the payment of a stock dividend (but only on the Common Stock) or any
other increase or decrease in the number of such outstanding shares of Common
Stock effected without the receipt of consideration by the Company; provided,
however, that the conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration."
(b) In the event of (i) a dissolution or liquidation of the Company;
(ii) a merger or consolidation in which the Company is the not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders of
the Company or their relative stock holdings and the options granted under this
Plan are assumed, converted or replaced by the successor corporation, which
assumption will be binding on all optionees); (iii) a merger in which the
Company is the surviving corporation but after which the stockholders of the
Company (other than any stockholder which merges (or which owns or controls
another corporation which merges) with the Company in such merger) cease to own
their shares or other equity interests in the Company; (iv) the sale of
substantially all of the assets of the Company; or (v) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the
Internal Revenue Code of 1986, as amended, wherein the stockholders of the
Company give up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company from or by the stockholders of the Company), any and all
outstanding options under this Plan shall become fully exercisable,
notwithstanding any other provision of this Plan and without regard to any
vesting provisions contained in the options, for a reasonable period of time
prior to the consummation of such event. Upon any such event, the successor
corporation (if any) may assume, convert or replace any outstanding options that
are not exercised prior to the consummation of the event or may substitute
equivalent options or provide substantially similar consideration to the
optionees as was provided to the stockholders (after taking into account the
existing provisions of the option grants). In the event such successor
corporation (if any) does not assume or substitute options, as provided above,
upon an event described in this Subsection 8(b), such options will terminate on
the consummation of such event at such time and on such conditions as the
Company's Board of Directors shall determine.
(c) To the extent that any adjustments described in this Section 8
relate to stock or securities of the Company, such adjustments shall be made by
the Company's Board of Directors, whose determination in that respect shall be
final, binding and conclusive.
(d) Except as expressly provided in this Section 8, no optionee shall
have any rights by reason of any subdivision or consolidation of shares of the
capital stock of any class or the payment of any stock dividend or any other
increase or decrease in the number of shares of any class or by reason of any
dissolution, liquidation, merger or consolidation or spin-off of assets or stock
of another corporation, and any issue by the Company of shares of stock of any
class or of securities convertible into shares of stock of any class shall not
affect,
5
<PAGE>
and no adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to any option granted hereunder.
(e) The grant of an option pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
10. SECURITIES LAW REQUIREMENTS.
(a) The Administrator may require an individual as a condition of the
grant and of the exercise of an option, to represent and establish to the
satisfaction of the Administrator that all shares of Common Stock to be acquired
upon the exercise of such option will be acquired for investment and not for
resale. The Administrator shall cause such legends to be placed on certificates
evidencing shares of Common Stock issued upon exercise of an option as, in the
opinion of the Company's counsel, may be required by federal and applicable
state securities laws.
(b) No shares of Common Stock shall be issued upon the exercise of
any option unless and until counsel for the Company determines that: (i) the
Company and the optionee have satisfied all applicable requirements under the
Securities Act of 1933, as amended (the "Securities Act") and the Exchange Act;
(ii) any applicable listing requirement of any stock exchange on which the
Company's Common Stock is listed has been satisfied; and (iii) all other
applicable provisions of state and federal law have been satisfied.
11. FINANCIAL ASSISTANCE. The Company shall have the authority under this
Plan to assist any Outside Director to whom an option is granted hereunder in
the payment of the purchase price payable on exercise of that option, by lending
the amount of such purchase price to such Outside Director on such terms and at
such rates of interest and upon such security as shall have been authorized by
or under authority of the Company's Board of Directors.
12. AMENDMENT. The Company's Board of Directors may terminate the Plan or
amend the Plan from time to time in such respects as the Board may deem
advisable.
13. TERMINATION. The Plan shall terminate automatically on December 1,
2006, and may be terminated at any earlier date by the Company's Board of
Directors. No option shall be granted hereunder after termination of the Plan,
but such termination shall not affect the validity of any option then
outstanding.
14. TIME OF GRANTING OPTIONS. The date of grant of an option hereunder
shall, for all purposes, be the date on which the Administrator makes the
determination granting such option.
6
<PAGE>
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of shares of its Common
Stock as shall be sufficient to satisfy the requirements of the Plan.
16. EFFECTIVE DATE. This Plan was adopted by the Company's Board of
Directors on December 3, 1996, and was approved by the stockholders of the
Company on February ___, 1997. However, no options shall be granted under the
Plan prior to the IPO Date.
7
<PAGE>
MACROVISION CORPORATION
1996 DIRECTORS STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
_____________________, 19__
(Date of Grant)
Macrovision Corporation, a Delaware corporation (the "Company"), does
hereby grant to ____________________________ (the "Optionee") an option to
purchase an aggregate of ________ (_____) shares of the Common Stock of the
Company (the "Optioned Shares") at the price of _____________ Dollars ($_______)
per share (the "Option Price") as a Nonstatutory Stock Option under the
Macrovision Corporation 1996 Directors Stock Option Plan (the "Plan"). All
capitalized terms not defined herein shall have those meanings ascribed to them
in the Plan.
This option cannot be exercised, unless the Optionee first signs this
Agreement in the place provided and returns it to the Administrator. However,
the Optionee's signing and delivering this Agreement will not bind the Optionee
to purchase any of the Optioned Shares. The Optionee's obligation to purchase
such shares can arise only when the Optionee exercises this option in the manner
set forth in Section 4 below.
THIS OPTION IS SUBJECT TO, AND MAY BE EXERCISED ONLY IN ACCORDANCE WITH,
THE TERMS AND CONDITIONS OF THE PLAN. ONLY CERTAIN PROVISIONS OF THE PLAN ARE
INCLUDED IN THIS AGREEMENT. A COPY OF THE PLAN IS ATTACHED TO THIS AGREEMENT
AND SHOULD BE READ CAREFULLY.
1. TERM OF OPTION AND EXERCISE OF OPTION. Subject to the provisions of
the Plan and the terms and conditions of this Agreement, this option can be
exercised by the Optionee, but only as to vested Optioned Shares, at any time
prior to the expiration of ten (10) years from the date of grant. One
forty-eighth (1/48) of the Optioned Shares shall vest on the last day of each
month following the date of grant beginning with the first full month following
the date of grant, provided that the Optionee continues to serve on the
Company's Board of Directors on such dates.
2. TERMINATION OF RELATIONSHIP. If the Optionee's service as a member of
the Company's Board of Directors is terminated due to the Optionee's resignation
from the Company's Board of Directors or due to the Optionee's failure to stand
for reelection to the Board, this option may be exercised only within the period
ending three (3) months after the last day on which the Optionee serves as a
member of the Company's Board of Directors and only to the extent that it was
vested on the last day of such service, and will expire if not exercised during
such period. If the Optionee is removed from the Company's Board of Directors
by action of the Company's stockholders or Board of Directors, this option may
be exercised only within the period ending one (1) week following such removal
and only to the extent that it was vested on the date of removal, and will
expire if not exercised during such period. In no event, however, may this
option be exercised after ten (10) years from the date of grant.
<PAGE>
3. DEATH OR DISABILITY. In the event the Optionee's service as a member
of the Company's Board of Directors terminates due to the Optionee's death or
disability, all of the Optioned Shares shall become fully vested and immediately
exercisable, and this option may be exercised in whole or in part by the
Optionee or the Optionee's estate only within the period ending twelve (12)
months after the last day on which the Optionee serves as a member of the
Company's Board of Directors, and will expire if not exercised during such
period. In no event, however, may such option be exercised after ten (10) years
from the date of grant. The Optionee's estate shall mean the duly authorized
conservator or guardian of the estate of the Optionee or the executor of the
Optionee's last Will or the duly authorized administrator or special
administrator of the Optionee's probate estate or any other legal representative
of the Optionee's estate duly appointed as a result of the Optionee's death or
incapacity or any person who acquires the right to exercise this option by
reason of the Optionee's death under the Optionee's Will or the laws of
intestate succession.
4. METHOD OF EXERCISE. This option may be exercised with respect to all
or any part of any vested Optioned Shares by delivering to the Company a Notice
of Exercise of Macrovision Corporation Nonstatutory Stock Option substantially
in the form attached hereto as EXHIBIT A, specifying the number of Optioned
Shares as to which this option is so exercised, and making full payment to the
Company in cash or by check of the Option Price for the Optioned Shares with
respect to which this option is exercised.
[If the Company's outstanding Common Stock is registered under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), at
the time this option is exercised, then the Option Price also may be paid as
follows:
a. in shares of the Company's Common Stock held by the Optionee
for the requisite period necessary to avoid a charge to the Company's earnings
for financial reporting purposes and valued at fair market value on the exercise
date;
b. through a special sale and remittance procedure pursuant to
which the Optionee (i) is to provide irrevocable written instructions to a
designated brokerage firm to effect the immediate sale of the purchased Optioned
Shares and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate Option Price payable
for the purchased Optioned Shares plus all applicable federal and state income
and employment taxes required to be withheld by the Company by reason of such
purchase and (ii) concurrently is to provide written directives to the Company
to deliver certificates for the purchased shares directly to such brokerage firm
in order to effect the sale transaction;
c. through a special margin commitment procedure pursuant to
which the Optionee elects to exercise his or her vested Optioned Shares and then
pledge those Optioned Shares purchased into a margin account with a brokerage
firm as security for a loan from the brokerage firm in an amount equal to the
aggregate exercise price of the Optioned Shares. The brokerage firm is then
irrevocably committed to forward sufficient funds to the
2
<PAGE>
Company to cover the aggregate exercise price payable for the purchased Optioned
Shares plus all applicable federal and state income and employment taxes
required to be withheld by the Company by reason of such purchase. The Optionee
is required to provide written directives to the Company to deliver concurrently
certificates for the purchased shares directly to such brokerage firm; or
d. any combination of the foregoing.]
As soon as practical after receipt of such notice, the Company shall,
without transfer or issue tax or other incidental expense to the Optionee or his
or her successor, transfer and deliver thereto at the office of the Company or
such other place as may be mutually agreeable a certificate or certificates for
such shares of its Common Stock; provided, however, that the time of such
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with applicable registration requirements
under the Securities Act of 1933, as amended, any applicable listing
requirements of any national securities exchange, and requirements under any
other laws or regulations applicable to the issuance or transfer of such shares.
5. WITHHOLDING AND EMPLOYMENT TAXES. Upon exercise of any option granted
hereby, the Optionee shall remit to the Company in cash the amount of any and
all applicable federal and state withholding and employment taxes.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; ACCELERATED VESTING. In
the event of any change in the outstanding Common Stock of the Company by reason
of stock dividends, recapitalization, mergers, consolidations, split-up,
combinations or exchanges of shares and the like, the aggregate number or class
of shares subject to this option immediately prior to such event shall be
appropriately adjusted by the Board of Directors in accordance with the terms of
the Plan.
All of the Optioned Shares shall become fully vested not less than
fifteen (15) days prior to the effective date of any of the following: (a) a
dissolution or liquidation of the Company; (b) a merger or consolidation in
which the Company is the not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the options granted under this Plan are assumed, converted or
replaced by the successor corporation); (c) a merger in which the Company is the
surviving corporation but after which the stockholders of the Company (other
than any stockholder which merges (or which owns or controls another corporation
which merges) with the Company in such merger) cease to own their shares or
other equity interests in the Company; (d) the sale of substantially all of the
assets of the Company; or (e) any other transaction which qualifies as a
"corporate transaction" under Section 424(a) of the Internal Revenue Code of
1986, as amended (the "Code") wherein the stockholders of the Company give up
all of their equity interest in the Company (except for the acquisition, sale or
transfer of all or substantially all of the outstanding shares of the Company
from or by the stockholders of the Company). This option shall be fully
exercisable during the period of not
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<PAGE>
less than fifteen (15) prior to such event, without regard to the vesting
provisions set forth above; provided, however, that in no event may this option
be exercised after ten (10) years from the date of grant.
7. NON-TRANSFERABILITY OF OPTION. This option shall not be transferable
except by Will or the laws of descent and distribution, and this option may be
exercised during the Optionee's lifetime only by the Optionee. [Notwithstanding
the foregoing, [with the approval of the Administrator,] the Optionee may
transfer this option, without consideration for the transfer, to members of his
immediate family, to trusts for the benefit of such family members, to
partnerships in which such family members are the only partners, or to
charitable organizations, provided that the transferee agrees in writing with
the Company to be bound by all of the terms and conditions of the Plan and this
option agreement.] Any purported transfer or assignment of this option not in
compliance with the foregoing shall be void and of no effect, and shall give the
Company the right to terminate this option as of the date of such purported
transfer or assignment.
8. TAX STATUS. The Optionee's treatment of shares purchased pursuant to
the exercise of this nonstatutory stock option may have significant tax
consequences. The Optionee acknowledges that he or she has been encouraged to
obtain the advice of independent tax counsel regarding the federal and state
income tax consequences of the receipt and exercise of the option granted hereby
and of the disposition of Common Stock acquired upon exercise hereof. The
Optionee acknowledges that he or she has not relied and will not rely upon any
advice or representations by the Company or by its employees or representatives
with respect to the tax treatment of options granted hereunder.
9. NOT INCENTIVE STOCK OPTION. This option shall not be treated as an
"incentive stock option" as such term is defined in Section 422 of the Code.
10. COMPLIANCE WITH SECURITIES AND OTHER LAWS. The Company shall not be
obligated to deliver any shares of its Common Stock hereunder for such period as
may reasonably be required for it to comply with any applicable requirements
of: (i) the Securities Act of 1933; (ii) the Securities Exchange Act of 1934;
(iii) applicable state securities laws; (iv) any applicable listing requirement
of any stock exchange on which the Company's Common Stock is then listed; and
(v) any other law or regulation applicable to the issuance of such shares.
11. NOTICES. All notices and other communications of any kind which
either party to this Agreement may be required or may desire to serve on the
other party hereto in connection with this Agreement shall be in writing and may
be delivered by personal service or by registered or certified mail, return
receipt requested, deposited in the United States mail with the postage thereon
fully prepaid, addressed to the parties at the addresses indicated on the
signature page hereof. Service of any such notice or other communication so
made by mail shall be deemed complete on the date of actual delivery as shown by
the addressee's registry or certification receipt or at the expiration of the
third (3rd) business day after the date of mailing, whichever is earlier in
time. Either party may from time to time by notice in
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<PAGE>
writing served upon the other as aforesaid, designate a different mailing
address or a different person to which such notices or other communications are
thereafter to be addressed or delivered.
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, California 94089
By:
--------------------------------
Title:
-----------------------------
OPTIONEE:
-----------------------------------
(signature)
Name:
------------------------------
(print)
Address:
---------------------------
-----------------------------------
-----------------------------------
Social Security No.:
---------------
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<PAGE>
EXHIBIT A
FORM OF NOTICE OF EXERCISE
OF MACROVISION CORPORATION
NONSTATUTORY STOCK OPTION
UNDER MACROVISION CORPORATION
1996 DIRECTORS STOCK OPTION PLAN
MACROVISION CORPORATION
1341 Orleans Drive
Sunnyvale, CA 04089
Gentlemen:
I hereby exercise the right to purchase __________________ shares of Common
Stock of MACROVISION CORPORATION under the terms of the nonstatutory option
granted to me on ____________________________, 19___, pursuant to the
Nonstatutory Stock Option Agreement, dated as of said grant date. This exercise
of said option and the purchase and delivery of said shares shall be subject to
all terms and conditions of such Nonstatutory Stock Option Agreement.
I enclose my check for $____________ in full payment of the purchase price
of said shares ($__________) and applicable withholding and employment taxes
($____________). Please register said shares in my name.
Dated:___________________________
-----------------------------------
(signature)
-----------------------------------
-----------------------------------
-----------------------------------
(Print name and address)
6
<PAGE>
MACROVISION CORPORATION
1996 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
As Adopted Effective December 3, 1996
1. PURPOSE. The purpose of the Macrovision Corporation 1996 Employee
Stock Purchase Plan (the "Plan") is to grant to all employees of Macrovision
Corporation (the "Company") and its subsidiaries and affiliates, a favorable
opportunity to acquire Common Stock of the Company, thereby encouraging all
employees to accept, or to continue in, employment with the Company; increasing
the interest of all employees in the Company's welfare through participation in
the growth and value of the Common Stock; and furnishing employees with an
incentive to improve operations and increase profits of the Company.
To accomplish the foregoing objectives, this Plan provides a means whereby
all employees may accrue rights to purchase shares of Common Stock of the
Company.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors (the "Board") of the Company or by a committee of two or more
directors appointed by the Board (the "Administrator").
The Administrator may delegate nondiscretionary administrative duties to
such employees of the Company as it deems proper. Subject to the terms and
conditions of this Plan, the Administrator shall have the sole authority, in its
discretion to interpret the Plan and to make all determinations deemed necessary
or advisable for the administration of the Plan.
3. ELIGIBILITY.
3.1 EMPLOYMENT REQUIREMENT. Except as otherwise set forth herein,
every individual who, on the date of commencement of any offering period
pursuant to this Plan, is an employee of the Company or of any parent or
subsidiary of the Company, as defined below, is eligible to receive purchase
rights to acquire shares of Common Stock of the Company pursuant to this Plan.
The term "employee" includes an officer or director who is an employee of the
Company or a parent or subsidiary of it, as well as a non-officer, non-director
employee of the Company or a parent or subsidiary of it and excludes an
individual who provides services to the Company as an independent contractor
whether or not such individual is reclassified as a common law employee, unless
the Company withholds or is required to withhold U.S. Federal employment taxes
for such individual pursuant to Section 3402 of the Internal Revenue Code of
1986, as amended (the "IRC"). As used in this Plan, the terms "parent
corporation" and "subsidiary corporation" shall have the meanings set forth in
Sections 424(e) and (f), respectively, of the IRC.
3.2 PERMISSIBLE EMPLOYEES. In no event shall a purchase right be
granted to any individual who, immediately after the grant of such purchase
right, would own five percent (5%) or more of the total combined voting power or
value of all classes of outstanding capital
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stock of the Company, its parent or any subsidiary. For purposes of this
Section 3.2, in determining stock ownership, an individual shall be considered
as owning the voting capital stock owned, directly or indirectly, by or for his
brothers and sisters, spouse, ancestors and lineal descendants. Voting capital
stock owned, directly or indirectly, by or for a corporation, partnership,
estate or trust shall be considered as being owned proportionately by or for its
stockholders, partners or beneficiaries, as applicable. An individual shall be
considered as owning the shares of Common Stock issuable upon exercise of any
option or purchase right which such individual holds. Additionally, for
purposes of this Section 3.2, outstanding capital stock shall include all
capital stock actually issued and outstanding immediately after the grant of the
option or the purchase right. Outstanding capital stock shall not include
capital stock authorized for issue under outstanding options or purchase rights
held by any person.
3.3 EXCLUDED EMPLOYEES. The following categories of employees shall
be excluded from participating in this Plan: (i) employees whose customary
employment is twenty (20) hours or less per week; and (ii) employees whose
customary employment is not more than five months in any calendar year.
3.4 TRANSFER TO RELATED CORPORATION. In the event that an employee
leaves the employ of the Company to become an employee of any parent or
subsidiary corporation of the Company, or if the employee leaves the employ of
any such parent or subsidiary corporation to become an employee of the Company
or of another parent or subsidiary corporation, such employee shall be deemed to
continue as an employee of the Company for all purposes of this Plan.
4. COMMON STOCK SUBJECT TO PLAN.
4.1 SHARES RESERVED FOR ISSUE. There shall be reserved for issue
upon the exercise of options granted under this Plan two hundred fifty-two
thousand (252,000) shares of Common Stock ("Plan Shares"), subject to adjustment
as provided in Section 12 hereof. If any purchase rights granted under this Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall again be available for the purposes
of the Plan.
4.2 AGGREGATE SHARES. Notwithstanding any other provisions of this
Plan, the aggregate number of shares of Common Stock subject to outstanding
purchase rights granted under this Plan, plus the aggregate number of shares
issued upon the exercise of all purchase rights granted under this Plan, shall
never be permitted to exceed the number of shares specified in the first
sentence of Section 4.1 above.
5. NONTRANSFERABILITY. All purchase rights acquired pursuant to this
Plan shall be nontransferable, except by will or the laws of descent and
distribution, and shall be exercisable during the lifetime of the participant
only by the participant.
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6. TERMS AND CONDITIONS OF EACH OFFERING. All offerings under this Plan
shall be subject to the following terms and conditions:
6.1 TERM AND FREQUENCY OF OFFERINGS. Each offering under the
Purchase Plan will be for a period of twenty-four (24) months (the "Offering
Period") commencing on February 1 and August 1 of each year and ending
twenty-four (24) months thereafter on January 31 and July 31, respectively;
provided, however, that, notwithstanding the foregoing, the first Offering
Period will begin on the effective date of the Registration Statement on Form
SB-2 for the initial public offering of the Company's Common Stock and will end
on January 31, 1999. Except for the first Offering Period, each Offering Period
will consist of four (4) six-month purchase periods (each a "Purchase Period")
commencing on the first business day of February and August of each year. The
first Offering Period shall consist of no fewer than three (3) Purchase Periods,
the first of which may be greater or less than six months as determined by the
Administrator. The Board has the power to change the duration of Offering
Periods or Purchase Periods without stockholder approval, provided that the
change is announced at least fifteen (15) days prior to the scheduled beginning
of the first Offering Period or Purchase Period to be affected.
6.2 OTHER TERMS AND CONDITIONS. Purchase rights granted under this
Plan shall be subject to the terms and conditions set forth herein, and to such
other terms and conditions not inconsistent herewith as the Administrator may
deem appropriate, provided that, except as otherwise permitted herein, such
terms and conditions shall be identical for each participant granted purchase
rights pursuant to any particular offering.
6.3 ELECTION TO PARTICIPATE. An individual who is an eligible
employee and desires to participate in an offering, should deliver to the
Administrator on or before the 15th day of the month before the start of the
particular Offering Period a written enrollment form evidencing his or her
election to participate. Once an employee becomes a participant in an Offering
Period, such employee will automatically participate in the Offering Period
commencing immediately following the last day of the prior Offering Period
unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Sections
6.8 and 6.9. If the purchase price on the first day of any current Offering
Period in which a participant is enrolled is higher than the purchase price on
the first day of any subsequent Offering Period, the Company automatically will
enroll such participant in the subsequent Offering Period (the participant does
not need to file any forms with the Company to be so enrolled), and any funds
accumulated in such participant's account, and not withdrawn, prior to the first
day of such subsequent Offering Period will be applied to purchase shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period.
6.4 PURCHASE RIGHTS. Enrollment by an eligible employee in this Plan
with respect to an Offering Period will constitute the grant, as of the first
day of such Offering Period, by the Company to such employee of purchase rights
to acquire that number of Plan Shares (rounded to the nearest whole share) equal
to the quotient obtained by dividing (i) the amount
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accumulated in such employee's payroll deduction account during each Purchase
Period in the Offering Period, by (ii) eighty-five percent (85%) of the lesser
of the fair market value of the Company's Common Stock on the first day of the
applicable Offering Period or on the last day of the respective Purchase Period,
subject to the limitations set forth below (the "Maximum Shares"). No
participant may accrue purchase rights, pursuant to this Plan (and/or any other
stock purchase plan qualifying under IRC Section 423 of this Company or of any
parent or subsidiary of this Company), to acquire more than twenty-five thousand
dollars ($25,000) worth of Common Stock (based on the fair market value of the
Common Stock on the grant date of the purchase rights) in any one calendar year.
No participant may accrue purchase rights pursuant to this Plan to acquire more
than the maximum number of shares that may be established for a particular
Purchase Period or Offering Period by the Board or the Administrator.
6.5 PAYMENT FOR COMMON STOCK. The purchase price will be paid with
funds accumulated through periodic payroll deductions from the participant's
compensation during the Offering Period. The participant should provide written
authorization for payroll deductions to the Company department designated by the
Administrator, on or before the 15th day of the month preceding any Offering
Period, specifying the percentage, which shall be not less than one percent
(1%), nor more than twenty percent (20%), of his or her gross compensation
earned during each payroll period during the Offering Period, which he or she
desires to be deducted and set aside for purchases of Plan Shares for the
duration of the Offering Period, up to an aggregate payroll deduction not to
exceed twenty-one thousand two hundred fifty dollars ($21,250) in any calendar
year. A participant may reduce (but not increase) the rate of payroll
deductions during an Offering Period by filing with the Company department
designated by the Administrator a new written authorization for payroll
deductions, in which case the new rate shall become effective for the next
payroll period commencing more than fifteen (15) days after receipt of the
authorization and shall continue for the remainder of the Offering Period. Such
a change in the rate of payroll deductions may be made at any time during an
Offering Period, but not more than one (1) change may be made effective during
any Offering Period. A participant may increase or decrease the rate of payroll
deductions for any subsequent Offering Period by filing a new authorization for
payroll deductions not later than fifteen (15) days before the beginning of such
Offering Period. Payroll deductions made for each participant shall be credited
to a special book account on the Company's books, but no funds will be actually
set aside in any special fund or account.
6.6 PURCHASE DATES. The semi-annual purchase dates will occur on the
last business day of each Purchase Period (the "Purchase Dates"). All payroll
deductions collected from the participant and not theretofore applied to the
purchase of Plan Shares, will automatically be applied to the purchase of that
number of Plan Shares for which the participant was granted purchase rights for
that Purchase Period pursuant to the formula set forth in Section 6.4 hereof.
Any funds deducted from the participant's compensation pursuant to this Plan
during a particular Purchase Period in excess of the purchase price of the
shares purchased for the Purchase Period shall be carried over to subsequent
Purchase Periods within the same Offering Period. Any funds deducted from the
participant's compensation pursuant to this Plan for a particular Offering
Period in excess of the purchase price of the shares purchased during the
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Offering Period shall be promptly refunded to the participant following the
expiration of the Offering Period.
6.7 PURCHASE PRICE. The purchase price for the Company's Common
Stock purchased under the Purchase Plan is 85% of the lesser of the fair market
value of the Company's Common Stock on the first day of the applicable Offering
Period or the last day of the respective Purchase Period. For all purposes of
this Plan, the fair market value of the Common Stock on any particular date
shall be the closing price on the trading day next preceding that date on the
principal securities exchange on which the Company's Common Stock is listed, or,
if such Common Stock is not then listed on any securities exchange, then the
fair market value of the Common Stock on such date shall be the closing bid
price as reported by the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") on the trading day next preceding such
date. In the event that the Company's Common Stock is neither listed on a
securities exchange nor quoted by NASDAQ, then the Administrator shall determine
the fair market value of the Company's Common Stock on such date, which in the
case of the first day of the first Offering Period will be the price per share
at which shares of the Company's Common Stock are initially offered for sale to
the public by the Company's underwriters in the initial public offering of the
Company's Common Stock pursuant to the Registration Statement on Form SB-2.
6.8 WITHDRAWAL. Each participant may withdraw from an Offering
Period under this Plan by notifying the Administrator in writing of his or her
election to withdraw at any time at least fifteen (15) days prior to the end of
an Offering Period. Upon receipt of such notice by the Administrator, all
future payroll deductions will cease, and any payroll deductions previously
collected during such Offering Period pursuant to Section 6.5 (to the extent not
already applied to the purchase of Plan Shares) will be refunded, without
interest. In the event a participant voluntarily elects to withdraw from this
Plan, he or she may not resume his or her participation in this Plan during the
same Offering Period, but he or she may participate in any Offering Period under
this Plan which commences on a date subsequent to such withdrawal in the same
manner as set forth above for initial participation in this Plan.
6.9 TERMINATION OF PARTICIPATION IN AN OFFERING. Payroll deductions
with respect to any participant in an offering will automatically terminate upon
the participant's cessation of employment, retirement, permanent or total
disability, as defined in Section 105(d)(4) of the IRC or death (a "terminating
event").
6.10 REGISTRATION OF PLAN AND DUE AUTHORIZATION. Notwithstanding
anything to the contrary, express or implied herein, no rights granted under the
Plan may be exercised to any extent unless the Plan (including the purchase
rights and the shares covered thereby) is covered by an effective registration
statement pursuant to the Securities Act of 1933, as amended (the "Securities
Act"). If on any Purchase Date, the Plan is not so registered, no rights
granted under the Plan or any offering shall be exercised, and the Purchase Date
shall be delayed until the Plan is subject to an effective registration
statement, except that the Purchase Date shall not be delayed more than six (6)
months, and in no event shall the Purchase Date be more than twenty-
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<PAGE>
seven (27) months from the commencement of the particular Offering Period. If
on the Purchase Date of any offering hereunder, as delayed to the maximum extent
permissible, the Plan is still not registered, no purchase rights shall be
exercised and all payroll deductions accumulated (to the extent not already
applied to the purchase of Plan Shares) shall be refunded to the participants,
without interest. If after reasonable efforts, the Company is unable to obtain
from each regulatory commission or agency having jurisdiction over the Plan such
authority as counsel for the Company deems necessary or appropriate, the Company
shall be relieved from any liability for failure to issue and sell Plan Shares
upon exercise of such purchase rights unless and until such authority is
obtained.
7. WITHHOLDING AND EMPLOYMENT TAXES. The Company shall be entitled to
withhold and/or pay from any payroll deductions made pursuant to this Plan, the
amount of any and all applicable federal and state withholding and employment
taxes.
8. EQUAL RIGHTS AND PRIVILEGES. Except as set forth in Sections 3.2 and
3.3, all employees eligible to participate in this Plan shall have the same
rights and privileges hereunder, except in any particular offering, the amount
of stock which may be purchased by any employee may bear a uniform relationship
to the employee's total compensation, or his or her basic or regular rate of
compensation.
9. DISQUALIFYING DISPOSITIONS. If any Plan Shares are disposed of within
two (2) years from the date the purchase rights were acquired or within one (1)
year after the acquisition of the Plan Shares by the participant, immediately
prior to the disposition, the participant shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the disposition as the Company may reasonably require.
10. STOCK ISSUANCE AND RIGHTS AS STOCKHOLDER. Notwithstanding any other
provisions of the Plan, no participant shall have any of the rights of a
stockholder (including the right to vote and receive dividends) of the Company,
by reason of the provisions of this Plan or any action taken hereunder, until
the date such participant shall both have paid the purchase price for the Plan
Shares and shall have been issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) the
stock certificate evidencing such shares.
11. DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any shares and cash, if any, from
the participant's account under the Plan in the event of such participant's
death subsequent to the end of an Offering Period but prior to delivery to him
or her of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to the
Exercise Date of an Offering Period. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective. Such designation of beneficiary may be
changed by the participant (and his or her spouse, if any) at any time by
written notice. In the event of the
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<PAGE>
death of a participant and in the absence of a beneficiary validly designated
under the Plan who is living at the time of such participant's death, the
Company shall deliver such shares and/or cash to the executor or administrator
of the estate of the participant, or if no such executor or administrator has
been appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares and/or cash to the spouse or to any one or
more dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
12.1 APPROPRIATE ADJUSTMENT IN NUMBER OF SHARES. Subject to any
required action by the Company's stockholders, the number of shares of Common
Stock covered by this Plan as provided in Section 4, the number of shares
covered by each outstanding purchase right granted hereunder and the purchase
price thereof shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a subdivision or
consolidation of such shares or the payment of a stock dividend (but only on the
Common Stock) or any other increase or decrease in the number of such
outstanding shares of Common Stock effected without the receipt of consideration
by the Company; provided, however, that the conversion of any convertible
securities of the Company shall not be deemed to have been "effected without
receipt of consideration."
12.2 MERGERS AND/OR ACQUISITIONS. Subject to any required action by
the Company's stockholders, if the Company shall be the surviving corporation in
any merger or consolidation (other than one described in (iii) below), each
outstanding purchase right shall pertain and apply to the securities to which a
holder of the number of shares subject to the purchase right would have been
entitled. In the event of (i) a dissolution or liquidation of the Company; (ii)
a merger or consolidation in which the Company is the not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders of
the Company or their relative stock holdings and the purchase rights granted
under this Plan are assumed, converted or replaced by the successor corporation,
which assumption will be binding on all participants); (iii) a merger in which
the Company is the surviving corporation but after which the stockholders of the
Company (other than any stockholder which merges (or which owns or controls
another corporation which merges) with the Company in such merger) cease to own
their shares or other equity interests in the Company; (iv) the sale of
substantially all of the assets of the Company; or (v) any other transaction
which qualifies as a "corporate transaction" under Section 424(a) of the
Internal Revenue Code of 1986, as amended, wherein the stockholders of the
Company give up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the outstanding
shares of the Company from or by the stockholders of the Company), each
outstanding purchase right shall terminate, unless the surviving corporation in
the case of a merger or consolidation assumes outstanding purchase rights or
replaces them with substitute purchase rights having substantially similar terms
and conditions; provided, however, that if an outstanding purchase right is to
terminate upon any such event, the Administrator on
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<PAGE>
such terms and conditions as it deems appropriate, shall provide either by the
terms of the agreement or by a resolution adopted prior to the occurrence of any
such event, that, for some period of time prior to such event, such purchase
right shall be exercisable as to all of the shares covered by the portion of the
purchase right that previously has not lapsed, terminated, or been exercised.
12.3 BOARD'S DETERMINATION CONCLUSIVE. To the extent that the
foregoing adjustments relate to stock or securities of the Company, such
adjustments shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive.
12.4 LIMITATION ON RIGHTS. Except as hereinabove expressly provided
in this Section 12, no participant shall have any rights by reason of any
subdivision or consolidation of shares of the capital stock of any class or the
payment of any stock dividend or any other increase or decrease in the number of
shares of any class or by reason of any dissolution, liquidation, merger or
consolidation or spin-off of assets or stock of another corporation, and any
issue by the Company of shares of stock of any class or of securities
convertible into shares of stock of any class shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to any purchase right granted hereunder.
12.5 RESERVATION OF RIGHTS. The grant of a purchase right pursuant to
this Plan shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or consolidate or to dissolve, liquidate, sell or
transfer all or any part of its business or assets.
13. SECURITIES LAW REQUIREMENTS.
13.1 INVESTMENT REPRESENTATIONS. The Administrator may require an
individual as a condition of the grant and of the exercise of a purchase right,
to represent and establish to the satisfaction of the Administrator that all
Plan Shares to be acquired will be acquired for investment and not for resale.
The Administrator shall cause such legends to be placed on certificates
evidencing Plan Shares as, in the opinion of the Company's counsel, may be
required by federal and applicable state securities laws.
13.2 COMPLIANCE WITH APPLICABLE SECURITIES LAWS. No Plan Shares shall
be issued unless and until counsel for the Company determines that: (i) the
Company and the participant have satisfied all applicable requirements under the
Securities Act of 1933, as amended, and the Exchange Act; (ii) any applicable
requirement of any stock exchange or quotation system on which the Company's
Common Stock is listed or quoted has been satisfied; and (iii) all other
applicable provisions of state and federal law have been satisfied.
14. AMENDMENT. The Board may terminate the Plan or amend the Plan from
time to time, immediately after the close of any offering, in such respects as
the Board may deem advisable, provided that, without the approval of the
Company's stockholders in compliance with the requirements of applicable law, no
such revision or amendment shall:
8
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(a) increase the number of shares of Common Stock reserved under
Section 4 hereof for issue under the Plan, except as provided in Section 12
hereof;
(b) change the class of persons eligible to participate in the Plan
under Section 3 hereof;
(c) extend the term of the Plan under Section 15 hereof; or
(d) amend this Section 14 to defeat its purpose.
15. TERMINATION. The Plan will terminate automatically on the earlier of
termination by the Board, issuance of all the shares reserved under the Purchase
Plan or ten years from the date the Purchase Plan was adopted by the Board. No
offering shall be initiated hereunder after termination of the Plan, but such
termination shall not affect the validity of any purchase rights then
outstanding.
16. TIME OF GRANTING OPTIONS. The date of grant of a purchase right
hereunder shall, for all purposes, be the date on which the particular Offering
Period commences.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of shares of its Common
Stock as shall be sufficient to satisfy the requirements of the Plan.
18. EFFECTIVE DATE. This Plan was adopted by the Board of Directors of
the Company on December 3, 1996, and shall be effective on said date. The Plan
was approved by the stockholders of the Company on February ___, 1997.
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MACROVISION CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
ENROLLMENT/CHANGE FORM
Enrollment
- ---
Change in Payroll Deductions for Next Offering Period
- ---
Stop Payroll Deductions for Offering Period
- ---
Designation of Beneficiary(ies)
- ---
- --------------------------------- ---------------------------
Print Name Social Security No.
- ---------------------------------
Address
- ---------------------------------
City, State Zip
1. I hereby elect to participate in the Macrovision Corporation Employee Stock
Purchase Plan (the "Plan") and subscribe to purchase shares of Macrovision
Corporation (the "Company") Common Stock ("Common Stock") in accordance
with this Enrollment/Change Form and the Plan.
2. I hereby authorize payroll deductions from each paycheck of ____% [not less
than one percent (1%) nor more than twenty percent (20%)] of my gross
compensation earned from the Company during each payroll period during the
Offering Period as that term is defined in the Plan. I understand that the
aggregate payroll deduction may not exceed twenty-one thousand two hundred
and fifty dollars ($21,250) in any calendar year.
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common stock at the applicable purchase price
determined in accordance with the Plan.
4. I have received a copy of the Company's Employee Stock Purchase Plan. I
understand that my participation in the Plan is in all respects subject to
the terms of the Plan.
5. I understand that shares purchased for me under the Plan will be issued in
my name and will be sent to me at my home address. If I change my home
address I will notify the Company's Chief Financial Officer.
<PAGE>
6. In the event of my death, I hereby designate the following person(s) as my
beneficiary(ies) to receive all payments and shares due to me under the
Plan:
Name (Please Print)
-------------------------------- ----------------------------
First Middle Last Relationship
--------------------------------
Address
--------------------------------
7. I understand that if I dispose of any of these shares before the lapse of
two (2) years after the first day of the Offering Period in which they were
acquired and one (1) year after the Purchase Date, the excess of the fair
market value of the shares at time of purchase over the price I paid for
the shares will be treated, for federal income tax purposes, as ordinary
income. I further understand that if I dispose of such shares at any time
after the expiration of the two (2) year and one (1) year holding period, I
will be treated as having received income only at the time of such
disposition, and such income will be treated as ordinary income to the
extent of an amount equal to the lesser of: (i) the excess of the current
fair market value of the shares on the Purchase Date over the purchase
price, or (ii) the excess of the current fair market value of the shares on
the Purchase Date over the fair market value of the shares on the first day
of the Offering Period in which they were acquired. The remainder of the
gain or loss, if any, recognized on such disposition will be treated as
capital gain or loss.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER THE
DATE OF ANY DISPOSITION. I UNDERSTAND THAT TAX CONSEQUENCES INCURRED IN
CONNECTION WITH THIS STOCK ARE VERY COMPLICATED AND I WILL CONSULT WITH MY
OWN TAX PROFESSIONAL TO BE CERTAIN I UNDERSTAND THE RULES AND REGULATIONS
GOVERNING STOCK PURCHASE PLANS.
8. I hereby agree to be bound by the terms of the Plan. The effectiveness of
this Enrollment/Change Form is dependent upon my eligibility to participate
in the Plan.
I UNDERSTAND THAT THIS ENROLLMENT/CHANGE FORM SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS AND UNTIL TERMINATED BY ME.
- ------------------------------------- -----------
Signature Date
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For use by Stock Administrator only
Date:
-----------------
No. of shares eligible to purchase:
--------------------------------------------
Comments: ----------------------------------------------------------------------
<PAGE>
Exhibit 10.19
MACROVISION CORPORATION
700 El Camino Real East
Mountain View, California 94040
------------------------------------------
STOCK AND
CONVERTIBLE NOTE PURCHASE AGREEMENT
May 24, 1991
-----------------------------------------
<PAGE>
TABLE CONTENTS
Page
----
SECTION 1 Authorization, Purchase and Sale of the Shares: Issuance of
Convertible Note . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Sale of Series A Shares . . . . . . . . . . . . . . . . . . . 1
1.3 Sale of Common Stock . . . . . . . . . . . . . . . . . . . . . 1
1.4 Issuance of Convertible Note . . . . . . . . . . . . . . . . . 1
SECTION 2 Closing Dates; Delivery. . . . . . . . . . . . . . . . . . . . 2
2.1 Closing Dates. . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3 Representations and Warranties of the Company. . . . . . . . . 2
3.1 Organization and Standing; Articles and By-Laws. . . . . . . . 2
3.2 Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 3
3.5 Restrictions and Preemptive Rights . . . . . . . . . . . . . . 4
3.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . 4
3.7 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . 4
3.8 Material Contracts and Commitments . . . . . . . . . . . . . . 5
3.9 Title to Properties and Assets, Liens, Etc.. . . . . . . . . . 6
3.10 Compliance with Other Instruments, None Burdensome, Etc. . . . 6
3.11 Litigation, Etc. . . . . . . . . . . . . . . . . . . . . . . . 6
3.12 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.13 Registration Rights. . . . . . . . . . . . . . . . . . . . . . 7
3.14 Governmental Consent, Etc. . . . . . . . . . . . . . . . . . . 7
3.15 Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.16 Patents, Trademarks, Etc.. . . . . . . . . . . . . . . . . . . 8
3.17 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.18 Outstanding Indebtedness . . . . . . . . . . . . . . . . . . . 9
3.19 Certain Transactions . . . . . . . . . . . . . . . . . . . . . 9
3.20 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 9
3.21 Real Property Holding Corporation. . . . . . . . . . . . . . . 9
3.22 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.23 Voting Agreements. . . . . . . . . . . . . . . . . . . . . . . 9
3.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.25 Best Knowledge . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4 Representations and Warranties of the Selling Shareholder. . . 10
4.1 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.3 Valid Transfer . . . . . . . . . . . . . . . . . . . . . . . . 11
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4.4 Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5 Representations and Warranties of the Purchaser. . . . . . . . 12
5.1 Experience . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 Restricted Securities. . . . . . . . . . . . . . . . . . . . . 12
5.4 No Public Market . . . . . . . . . . . . . . . . . . . . . . . 12
5.5 Access to Data . . . . . . . . . . . . . . . . . . . . . . . . 12
5.6 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7 Government Consents, Etc.. . . . . . . . . . . . . . . . . . . 13
SECTION 6 Closing Conditions . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Conditions to First Closing of Purchaser. . . . . . . . . . . . 13
(a) Representations and Warranties Correct. . . . . . . . . 13
(b) Consents and Waivers. . . . . . . . . . . . . . . . . . 14
(c) Employee Agreements . . . . . . . . . . . . . . . . . . 14
(d) Compliance Certificate. . . . . . . . . . . . . . . . . 14
(e) Opinion of Company's Counsel. . . . . . . . . . . . . . 14
(f) Blue Sky and Other Regulations. . . . . . . . . . . . . 14
6.2 Conditions to Second Closing of Purchaser . . . . . . . . . . . 14
(a) Representations and Warranties Correct. . . . . . . . . 14
(b) Consents and Waivers. . . . . . . . . . . . . . . . . . 14
(c) Articles; Bylaws. . . . . . . . . . . . . . . . . . . . 15
(d) Employee Agreements . . . . . . . . . . . . . . . . . . 15
(e) Compliance Certificate. . . . . . . . . . . . . . . . . 15
(f) Consummation of First Closing . . . . . . . . . . . . . 15
(g) Registration Rights Agreement . . . . . . . . . . . . . 15
(h) Opinion of Company's Counsel. . . . . . . . . . . . . . 15
(i) Blue Sky and Other Regulations. . . . . . . . . . . . . 15
(j) Redemption of Common Stock. . . . . . . . . . . . . . . 15
(k) Board of Directors Representation . . . . . . . . . . . 16
(l) Option Agreements . . . . . . . . . . . . . . . . . . . 16
(m) Voting Agreements . . . . . . . . . . . . . . . . . . . 16
6.3 Conditions to First Closing of Selling Shareholder. . . . . . . 16
(a) Representations . . . . . . . . . . . . . . . . . . . . 16
(b) Consents and Waivers. . . . . . . . . . . . . . . . . . 16
(c) Compliance Certificate. . . . . . . . . . . . . . . . . 16
6.4 Conditions to Second Closing of Company . . . . . . . . . . . . 16
(a) Representations . . . . . . . . . . . . . . . . . . . . 17
(b) Other Conditions. . . . . . . . . . . . . . . . . . . . 17
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(c) Consents and Waivers. . . . . . . . . . . . . . . . . . 17
(d) Compliance Certificate. . . . . . . . . . . . . . . . . 17
(e) Consummation of First Closing . . . . . . . . . . . . . 17
SECTION 7 Affirmative Covenants of the Company. . . . . . . . . . . . . . 17
7.1 Financial Statements and Other Information. . . . . . . . . . . 17
7.2 Rule 144A Information . . . . . . . . . . . . . . . . . . . . . 18
7.3 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.4 Termination of Covenants. . . . . . . . . . . . . . . . . . . . 19
7.5 Key-Man Insurance . . . . . . . . . . . . . . . . . . . . . . . 19
7.6 Proprietary Rights Agreements . . . . . . . . . . . . . . . . . 19
7.7 Limitations on Transfer of Intellectual Property. . . . . . . . 19
7.8 Equity Method of Accounting . . . . . . . . . . . . . . . . . . 20
7.9 Option Agreements . . . . . . . . . . . . . . . . . . . . . . . 20
8.1 The Right of First Refusal. . . . . . . . . . . . . . . . . . . 20
8.2 Standstill. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.3 Subsequent Acquisition of Capital Stock . . . . . . . . . . . . 23
8.4 Public Offerings. . . . . . . . . . . . . . . . . . . . . . . . 24
8.5 Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.6 Waiver and Assignment of Dividend rights. . . . . . . . . . . . 25
8.7 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 9 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.2 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.3 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . 26
9.4 Entire Agreement; Registration Rights Agreement . . . . . . . . 26
9.5 Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.6 Delays or Omissions . . . . . . . . . . . . . . . . . . . . . . 27
9.7 California Corporate Securities Law . . . . . . . . . . . . . . 27
9.8 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.9 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.10 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.11 Titles and Subtitles. . . . . . . . . . . . . . . . . . . . . . 28
9.12 Finder's Fees and Other Fees. . . . . . . . . . . . . . . . . . 28
9.13 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . 29
9.14 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . 29
9.15 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . 29
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EXHIBITS
A Amended and Restated Articles of Incorporation
B Convertible Note
C Schedule of Exceptions - Company
D Form of Registration Rights Agreement
E Nondisclosure Agreement and Proprietary Rights Assignment
F Schedule of Exceptions - Selling Shareholder
G-1 Form of Legal Opinion of Holtzmann, Wise & Shepard - First Closing
G-2 Form of Legal Opinion of Holtzmann, Wise & Shepard - Second Closing
H-1 Shareholder Option Agreement
H-2 Shareholder Option Agreement
I Voting Agreement
J Schedule of Exceptions - Exclusivity
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STOCK AND CONVERTIBLE NOTE PURCHASE AGREEMENT
This Stock and Convertible Note Purchase Agreement ("Agreement") is made as
of May 24, 1991 among Macrovision Corporation, a California corporation (the
"Company"), University National Bank & Trust Company, Trustee under Trust
Agreement dated May 22, 1991 (the "Purchaser"), and A. Victor Farrow and Carol
Ann Farrow as Trustees of the Farrow Family Trust U/T/D December 18, 1990 (the
"Selling Shareholder").
SECTION 1
AUTHORIZATION, PURCHASE AND SALE OF THE SHARES; ISSUANCE OF CONVERTIBLE NOTE
1.1 AUTHORIZATION. The Company will authorize the sale and issuance,
under this Agreement, as 1,500,000 shares of its Series A Preferred Stock (the
"SERIES A SHARES") and, under The Note (as defined below), 977,578 shares of its
Series A Preferred Stock (the "CONVERSION SHARES"). The Series A Shares and the
Conversion Shares will have the rights, preferences and privileges set forth in
the Company's Amended and Restated Articles of Incorporation (the "ARTICLES") in
the form attached to this Agreement as EXHIBIT A.
1.2 SALE OF SERIES A SHARES. Subject to the terms and conditions this
Agreement, the Company will issue and sell to the Purchaser, and the Purchaser
will buy from the Company, the Series A Shares at a price of $3.00 per share
with an aggregate purchase price of $4,500,000.
1.3 SALE OF COMMON STOCK BY SELLING SHAREHOLDER. Subject to the terms
and conditions of this Agreement, the Selling Shareholder will sell to the
Purchaser, and the Purchaser will buy from the Selling Shareholder, 2,269,100
shares of the Company's Common Stock (the "COMMON SHARES") at a price of
$2.644220175 per share and with an aggregate purchase price of $6,000,000. The
Common Shares and the Series A Shares will be collectively referred to as the
"SHARES".
1.4 ISSUANCE OF CONVERTIBLE NOTE. Subject to the terms and conditions
of this Agreement, the Company will issue to the Purchaser a note in the
principal amount of $3,037,994.40 which is convertible into the Conversion
Shares according to the terms and conditions of the Convertible Note attached as
EXHIBIT B (the "NOTE").
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SECTION 2
CLOSING DATES; DELIVERY
2.1 CLOSING DATES. The closing of the purchase and sale of the Common
Shares under this Agreement will be held at the offices of Ware & Freidenrich,
400 Hamilton Avenue, Palo Alto, California at 12:00 p.m., local time, on May 24,
1991 (the "FIRST CLOSING") or at such other time and place upon which the
Company, the Purchaser and the Selling Shareholder shall agree. The closing of
the purchase and sale of the Series A Shares and the issuance of the Note under
this Agreement will be held at the offices of Ware & Freidenrich, 400 Hamilton
Avenue, Palo Alto, California at 1:00 p.m., local time, on June 5, 1991 (the
"SECOND CLOSING") or at such other time and place upon which the Company and the
Purchaser shall agree. The dates of the First Closing and Second Closing are
referred to as the "CLOSING DATES."
2.2 DELIVERY. Subject to the terms of this Agreement:
(a) At the First Closing, the Selling Shareholder will deliver
to the Purchaser a certificate or certificates representing the Common Share to
be purchased by the Purchaser, accompanied by duly executed stock powers in a
form appropriate for the transfer of the Common Shares to the Purchaser, against
payment of the purchase price to the Selling Shareholder in a form mutually
acceptable to the Purchaser and the Selling Shareholder.
(b) At the Second Closing, the Company will deliver to the
Purchaser a certificate representing the Series A Shares to be purchased by the
Purchaser and an original of the Note, against payment of the purchase price by
check payable to the Company or wire transfer per the Company's instructions.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser that, except as set
forth on a Schedule of Exceptions attached as EXHIBIT C, which exceptions shall
be deemed to be representations and warranties as if made under this Agreement:
3.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company is a
corporation duly organized and existing under, and by virtue of, the laws of the
State of California and is in good standing under such laws. The Company has
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as currently conducted and as proposed to
be conducted. The Company is qualified to do business as a foreign corporation
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the
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Company's business as now conducted or as now proposed to be conducted. The
Company has furnished the Purchaser's counsel with copies of its Articles and
Bylaws, as amended, and these copies are true, correct and complete and contain
all amendments through each respective Closing Date.
3.2 CORPORATE POWER. The Company has now, or will have at the First
Closing and the Second Closing, all requisite legal and corporate power to enter
into this Agreement, the Registration Rights Agreement in the form attached as
EXHIBIT D (the "REGISTRATION RIGHTS AGREEMENT"), and the Note, and has or will
have taken prior to the First Closing all corporate action on the part of the
company, its officers, directors and shareholders necessary to authorize,
execute and deliver this Agreement, the Registration Rights Agreement, the Note
and the Voting Agreement, and to complete the redemption contemplated by Section
6.2(j) of this Agreement (the "REDEMPTION"); and has or will have taken prior to
the Second Closing all such corporate action necessary (i) to sell and issue the
Series A Shares, (ii) to issue the Note, (iii) to issue the Conversion Shares,
(iv) to issue the shares of Common Stock issuable upon conversion of the Series
A Shares and the Conversion Shares, and (v) to carry out and perform its
obligations under the terms of this Agreement, the Registration Rights
Agreement, the Note and the Voting Agreement. This Agreement, the Registration
Rights Agreement, the Note and the Voting Agreement are each valid and binding
obligations of the Company enforceable in accordance with their terms, except as
the indemnification provisions of Section 3.7 of the Registration Rights
Agreement may be limited by principles of public policy, and subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of creditors'
rights and rules or laws concerning equitable remedies.
3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association or business entity.
3.4 CAPITALIZATION. The authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, of which 8,331,670 shares are
issued and outstanding as of the Firs Closing Date and, immediately prior to the
effectiveness of the Redemption, as of the Second Closing Date; and 5,000,000
shares of Preferred Stock, of which 2,477,578 shares will have been designated
as Series A Preferred Stock prior to the Second Closing, and none of which are
or will be issued and outstanding at any time prior to the Second Closing. All
such issued and outstanding shares have been duly authorized and validly issued,
and are fully paid and nonassessable, and were issued in compliance with all
applicable state and federal laws concerning the issuance of securities. The
Company has duly reserved (i) the Conversion Shares, (ii) 977,578 shares of
Common Stock for issuance upon conversion of the Conversion Shares,
(iii) 1,500,000 shares of Common Stock for issuance upon conversion of the
Series A Shares, and (iv) 1,050,000 shares of Common Stock for issuance to
employees or directors under stock or option plans or arrangements approved by
the Company's
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Board of Directors, of which options to purchase 877,850 shares of Common Stock
are issued and outstanding as of the First Closing Date and, immediately prior
to the effectiveness of the Redemption, as of the Second Closing Date. Except
as set forth above, there are no options, warrants, rights of first refusal,
preemptive or subscription rights or other rights to purchase any of the
Company's authorized or unissued capital stock or other securities of the
Company.
3.5 RESTRICTIONS AND PREEMPTIVE RIGHTS.
(a) RESTRICTIONS. The Series A Shares, when issued in
compliance with the provisions of this Agreement, the Conversion Shares, when
issued in compliance with the provisions of the Note, and the shares of Common
Stock issuable upon conversion of the Series A Shares and Conversion Shares,
when issued in accordance with the provisions of the Company's Articles, will be
validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however, that all such shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
in this Agreement, and as may be required by future changes in such laws. The
rights, preferences, privileges of and restrictions on the Company's Common
Stock and Preferred Stock are as set forth in the Articles.
(b) PREEMPTIVE RIGHTS. Except as set forth in this Agreement,
no person has any right of first refusal or any preemptive rights in connection
with the issuance of the Series A Shares, the Note, the Conversion Shares or
shares of Common Stock issuable upon conversion of the Series A Shares or
Conversion Shares, or any future issuance of securities by the Company.
3.6 FINANCIAL STATEMENTS. The Company has delivered to the Purchaser
its (i) audited statement of operations and statement of cash flows for the year
ended December 31, 1990 and audited balance sheet for the year then ended, and
(ii) unaudited statement of operations and statement of cash flows for the
period ended March 31, 1991 and unaudited interim balance sheet for the period
ended March 31, 1991 (collectively referred to as the "FINANCIAL STATEMENTS").
The Financial Statements are complete and correct in all material respects and
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and accurately
set out and describe the financial condition and operating results of the
Company, except that unaudited financial statements do not contain footnotes,
and are subject to nonrecurring year-end audit adjustments which, in the
aggregate, will not be materially adverse.
3.7 ABSENCE OF CHANGES. Since March 31, 1991: (a) the Company has not
entered into any transaction which was not in the ordinary course of business,
(b) there has been no material adverse change in the condition (financial or
otherwise) of the business, property, assets or liabilities of the Company other
than changes in the ordinary course of its business, none of which, individually
or in the aggregate, has been materially adverse, (c) there has been no damage
to, destruction of or loss of
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physical property (whether or not covered by insurance) materially adversely
affecting the assets, prospects, financial condition, operating results,
business or operations of the Company, (d) the Company has not declared or paid
any dividend or made any distribution on its stock, or redeemed, purchased or
otherwise acquired any of its stock, (e) except as contemplated by this
Agreement, the Company has not materially changed any compensation arrangement
or agreement with any of its key employees or executive officers, or materially
changed the rate of pay of its employees as a group, (f) the Company has not
received notice that there has been a cancellation of an order for the Company's
products or a loss of a customer of the Company, the cancellation or loss of
which would materially adversely affect the business of the Company, (g) the
Company has not materially changed or amended any material contract by which the
Company or any of its assets are bound or subject, except as contemplated by
this Agreement, (h) there has been no resignation or termination of employment
of any key officer or employee of the Company and the Company does not know of
any impending resignation or termination of employment of any such officer or
employee that if consummated would have a material adverse effect on the
business of the Company, (i) there has been no labor dispute involving the
Company or its employees, and none is pending or, to the best of the Company's
knowledge, threatened, (j) there has been no change, except in the ordinary
course of business, in the material contingent obligations of the Company
(including any contingent obligation of the Company regarding any director,
shareholder or key employee or officer of the Company) by way of guaranty,
endorsement, indemnity, warranty or otherwise, (k) there have been no loans made
by the Company to any of its employees, officers or directors other than travel
advances and other advances made in the ordinary course of business, (1) there
has been no waiver by the Company of a valuable right or of a material debt
owing to it, (m) there has not been any satisfaction or discharge of any lien,
claims or encumbrance or any payment of any obligation by the Company, except
in the ordinary course of business and which is not material to the assets,
properties, financial condition, operating results or business of the Company,
and (n) there has been no other event or condition of any character pertaining
to and materially adversely affecting the assets or business of the Company.
3.8 MATERIAL CONTRACTS AND COMMITMENTS. All of the contracts,
mortgages, indentures, agreements, instruments and transactions to which the
Company is a party or by which it is bound (including purchase orders t the
Company or placed by the Company) which involve obligations of, or payments to,
the Company in excess of fifty thousand dollars ($50,000) and all agreements
between the Company and its officers, directors, consultants, employees,
shareholders and lenders are set forth on the list attached as EXHIBIT C (the
"CONTRACTS"), copies of which have been made available to counsel to the
Purchaser. All of the Contracts are valid, binding and in full force and effect
in all material respects and enforceable by the Company in accordance with their
respective terms in all material respect, subject to the effect of applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and rules
or laws concerning equitable remedies. The Company is not in material default
under any of such Contracts to
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the best of the Company's knowledge, no other party to any of the Contracts is
in material default under such Contracts.
3.9 TITLE TO PROPERTIES AND ASSETS, LIENS, ETC. Other than property and
assets leased by the Company, the Company owns and has good and marketable title
to its tangible and intangible property and assets, including the properties and
assets reflected in the Financial Statements, free and clear of all liens,
mortgages, loans, pledges, charges or encumbrances except liens for current
taxes, and such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets leased by the
Company, the Company is in compliance with such leases and, to the best of the
Company's knowledge, holds valid leasehold interests free and clear of any
liens, claims or encumbrances. The Company's tangible assets are in good
operating condition, ordinary wear and tear excepted.
3.10 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The
Company is not (a) in violation or default of any term of its Articles or
Bylaws; (b) in violation or default in any material respect of any mortgage,
indebtedness, indenture, contract, agreement, instrument, judgment, order or
decree applicable to the Company; or (c) to the best of the Company's knowledge,
in violation or default of any statute, rule or regulation applicable to the
Company where such violation or default would have a material adverse effect on
the Company. The execution and delivery of this Agreement, the Registration
Rights Agreement, the Note and the Voting Agreement, performance of and
compliance with this Agreement, the Registration Rights Agreement, the Note and
the Voting Agreement, and the issuance and sale of the Series A Shares, the
Note, the Conversion Shares and the Common Stock issuable upon conversion of the
Series A Shares and the Conversion Shares will not (i) result in any such
violation, or (ii) be in conflict with or constitute a default under any of the
foregoing, or (iii) result in the creation of any mortgage, pledge, lien,
encumbrance of charge upon any of the properties or assets of the Company
pursuant to any of the foregoing.
3.11 LITIGATION, ETC. There is no action, proceeding or investigation
pending against the Company or its officers, directors or shareholders, or to
the Company's knowledge, against employees or consultants of the Company (or, to
the Company's knowledge, any basis therefor or threat thereof): (1) which might
result, either individually or in the aggregate, in (a) any material adverse
change in the business, prospects, conditions, affairs or operations of the
Company (financial or otherwise) or in any of its properties or assets, (b) any
change in the current equity ownership of the Company, (c) any material
impairment of the right or ability of the Company to carry on its business as
now conducted or as proposed to be conducted, or (d) any material liability on
the part of the Company; or (2) which questions the validity of this Agreement,
the Registration Rights Agreement, the Note or the Voting Agreement, or
any action taken or to be taken in connection with such agreements, including in
each
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case, without limitation, actions pending or threatened involving the prior
employment of any of the Company's employees, the Company's use in connection
with the its business of any information or techniques allegedly proprietary to
any of its former employees, or their obligations under any agreements with
prior employers. The Company is not a party to or subject t the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company currently
intends to initiate.
3.12 EMPLOYEES. Each officer, employee and consultant of the Company has
executed an agreement regarding proprietary information substantially in the
form of the Nondisclosure Agreement and Proprietary Rights Assignment attached
as EXHIBIT E. The Company is not aware that any of its employees or consultants
are in violation of such agreements and will use its best efforts to prevent any
such violation that will have a materially adverse effect on the Company's
business. The Company is not aware that any of its employees or consultants is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business as conducted or as proposed to be conducted or that
would prevent any such employee or consultant from assigning inventions to the
Company. Neither the execution nor delivery of this Agreement, the Registration
Rights Agreement, the Note or the Voting Agreement, nor the carrying on of the
Company's business as proposed will, to the Company's knowledge, conflict with
or result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any of
such employees or consultants is now obligated. The Company does not believe
that it is or will be necessary for the Company to utilize any inventions of any
of its employees or consultants (or people it currently intends to hire) made
prior to their employment or engagement by the Company or its predecessors.
3.13 REGISTRATION RIGHTS. Except as set forth in the Registration Rights
Agreement, the Company is not under any contractual obligation to register (as
defined in Section 1 of the Registration Rights Agreement), including piggyback
registration rights, any of its currently outstanding securities or any of its
securities which may be issued in the future.
3.14 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with: (a) the valid execution and
delivery of this Agreement, the Registration Rights Agreement, the Note or the
Voting Agreement or the consummation of the transactions contemplated by this
Agreement, the Registration Rights Agreement, the Note or the Voting Agreement;
or (b) the offer, sale, exchange or issuance of the Series A Shares, the Note,
the Conversion Shares or shares of Common Stock issuable upon conversion of the
Series A Shares or Conversion Shares
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except the filing of the Articles with the California Secretary of State and,
if required, filings or qualifications under the California Corporate
Securities Law of 1968, as amended, or other applicable blue sky laws
(collectively, "BLUE SKY LAWS"), which filings or qualifications, if
required, will have been timely filed or obtained after the sale of the
Series A Shares.
3.15 OFFERING. In reliance on the representations and warranties of the
Purchaser in Section 5, (i) the offer and sale of the Series A Shares and the
Note, and (ii) the issuance of the Conversion Shares and the shares of Common
Stock issuable upon conversion of the Series A Shares and Conversion Shares,
will not result in a violation of the requirements of Section 5 of the
Securities Act of 1933, as amended (the "SECURITIES ACT"), or the qualification
or registration requirements of the Blue Sky Laws, subject to the applicable
filings under the Blue Sky Laws.
3.16 PATENTS, TRADEMARKS, ETC. The Company owns and possesses all right,
title and interest in or is appropriately licensed under all patents, patent
applications, licenses, trademarks, service marks, trade names, brand names,
inventions, copyrights, trade secrets, information, proprietary rights and
processes necessary for the operation of its business and with respect to its
products and services as now offered or conducted and as proposed to be offered
or conducted, respectively, and with no infringement of or conflict with the
rights of others respecting any of such rights, products or services. The
Company has not granted any options, licenses or agreements transferring or
conveying any of the Company's ownership rights with respect to any such rights,
except for the licenses granted and identified in EXHIBIT C. The Company is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensor of, or other claimant to,
any patent, trademark, trade name, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business, or
otherwise, except as specified in EXHIBIT C. The Company has paid all
annuities, maintenance, filing and issue fees due or owing with respect to all
patents, trademarks, service marks, trade names and brand names and all pending
applications and registrations therefor. The Company has not received any
communications notifying it of the existence of any third party's rights with
respect to which such third party asserts the Company is required to obtain a
license, or any communications alleging that it has violated or, by conducting
its business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity, nor is the Company aware of any basis for the
foregoing. The Company represents that its current products and services are
covered by the Company's issued patents and pending applications. The Company
is not aware of any proprietary rights of third parties which have previously,
are currently, or in the future will or may be infringed by the Company's
existing or planned products or services. The Company is not aware of any past,
present or future potential infringers of the Company's proprietary rights of
whom the Company or its counsel have been or are aware, whom the Company has not
pursued, but whom the Company should have pursued in the exercise of reasonable
and prudent business judgment.
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3.17 TAXES. The Company has filed all tax returns and reports that are
required to have been filed with appropriate federal, state, county and local
governmental agencies or instrumentalities. To the best of the Company's
knowledge, such returns and reports are true and correct in all material
respects. The Company has paid all taxes and other assessments when due.
3.18 OUTSTANDING INDEBTEDNESS. Except as disclosed in the Financial
Statements, the Company has no indebtedness for borrowed money which it has
directly or indirectly created, incurred, assumed or guaranteed, or with respect
to which it has otherwise become liable, directly or indirectly. The Company
has no material liability or obligation in excess of $10,000, absolute or
contingent, which is not shown or provided for in the Financial Statements,
except obligations under purchase orders, sales contracts, equipment leases or
similar obligations incurred in the ordinary course of business.
3.19 CERTAIN TRANSACTIONS. The Company is not indebted, directly or
indirectly, to any of its officers, directors or shareholders, or to their
spouses or children, in any amount whatsoever; and none of said officers,
directors or, to the best of the Company's knowledge, shareholders, or any
member of their immediate families, are indebted to the Company or have any
direct or indirect ownership interest in any firm or corporation with which the
Company is affiliated or with which the Company has a business relationship. No
such officer, director or shareholder, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
the Company. The Company is not guarantor or indemnitor of any indebtedness of
any other person, firm or corporation.
3.20 EMPLOYEE BENEFIT PLANS. The Company does not have any "employee
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
3.21 REAL PROPERTY HOLDING CORPORATION. Company is not a "real
property holding corporation" within the meaning of Section 897(c)(2) of the
United States Internal Revenue Code of 1986, as amended.
3.22 INSURANCE. The Company maintains in full force and effect policies
of fire and casualty insurance, with insurers that, to the Company's knowledge,
are financially sound and reputable, with respect to its assets or properties
which are of a character customarily insured by entities engaging in the same or
a similar business similarly situated, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of such assets or properties
which might be damaged or destroyed.
3.23 VOTING AGREEMENTS. Except for the Voting Agreement in the form
attached hereto as EXHIBIT I, the Company is not a party or subject to any
agreement or understanding, and, to the Company's knowledge, there is no
agreement or
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understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security or by a
director of the Company.
3.24 DISCLOSURE. No representation or warranty by the Company in this
Agreement, or any document or certificate furnished or to be furnished by the
Company to the Purchaser, when taken together, contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements made in such documents, in the light of
the circumstances under which they were made, not misleading.
3.25 BEST KNOWLEDGE. As used in this Section 3, the term "TO THE BEST OF
THE COMPANY'S KNOWLEDGE" shall mean actual knowledge of the Company's officers
and directors, and knowledge that an officer or director should be expected to
have through the exercise of reasonable care in the conduct of a company's
business, including reasonable inquiry.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER
The Selling Shareholder represents and warrants to the Purchaser that,
except as set forth on a Schedule of Exceptions attached as EXHIBIT F, which
exceptions shall be deemed to be representations and warranties as if made under
this Agreement:
4.1 TITLE. The Selling Shareholder owns and holds good and valid title
to the Common Shares free and clear of any liens, security interests,
restrictions, options or encumbrances other than (i) restrictions on transfer
under applicable securities laws and (ii) restrictions on transfer imposed by or
otherwise in favor of the Company, if any, described on EXHIBIT F. The Selling
Shareholder has not granted any options of any sort with respect to the Common
Shares or any right to acquire the Common Shares other than as contemplated
under this Agreement.
4.2 AUTHORITY.
(a) The Selling Shareholder has the full and unrestricted right,
power, capacity and authority to enter into, execute and deliver this Agreement
and the Voting Agreement, and as of the First Closing will have the full
unrestricted right, power and capacity and authority, to transfer and deliver
good and valid title to the Common Shares free and clear of any liens, security
interests, restrictions, options, or encumbrances (other than restrictions on
transfer under applicable securities laws or any community property interest in
the Common Shares, and to transfer and deliver the Common Shares.
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(b) This Agreement and the Voting Agreement are valid and
binding obligations of the Selling Shareholder enforceable in accordance with
their terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and rules or laws concerning
equitable remedies.
4.3 VALID TRANSFER. Upon the payment by the Purchaser of the purchase
price for the Common Shares in accordance with the terms of this Agreement, and
the delivery to the Purchaser of the certificates for the Common Shares (in form
appropriate for transfer), the Purchaser will have obtained good and valid title
to the Common Shares, free and clear of any liens, security interests,
restrictions, options or encumbrances (other than restrictions on transfer under
applicable securities laws and this Agreement).
4.4 CONFLICTS. Selling Shareholder's compliance with its obligations
under this Agreement will not violate, conflict with or constitute a breach of
any agreement, arrangement, commitment or understanding to which the Selling
Shareholder is a party or by which the Selling Shareholder is bound.
4.5 CONSENTS. No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority or agency is required on
the part of the Selling Shareholder in connection with the valid execution and
delivery of this Agreement or the Voting Agreement or the offer and sale of the
Common Shares, except such consents, approvals or authorizations as will have
been obtained or made and will be effective within the time required by law.
4.6 DISCLOSURE. No representation or warranty by the Selling
Shareholder in this Agreement, or any document or certificate furnished or to be
furnished to the Purchaser, when taken together, contains or will contain any
untrue statement of a material fact or omits or will omit to state a maternal
fact necessary to make the statements made in such documents, in the light of
the circumstances under which they were made, not misleading. To the Selling
Shareholder's knowledge without having conducted any special inquiry, no
representation or warranty by the Company in this Agreement, or any document or
certificate furnished or to be furnished to the Purchaser, when taken together,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements made in such
documents, in the light of the circumstances under which they were made, not
misleading.
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SECTION 5
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Company with respect to the
purchase of the Series A Shares and the issuance of the Note, and the Purchaser
represents and warrants to the Selling Shareholder with respect to the purchase
of the Common Shares, as follows:
5.1 EXPERIENCE. The Purchaser or its trustor is capable or evaluating
the merits and risks of its investment in the Company and has the capacity to
protect its own interests in connection with such investment.
5.2 INVESTMENT. The Purchaser is acquiring the Shares, the Note, the
Conversion Shares and the underlying Common Stock for investment for its
trustor's trust account and not with the view to, or for resale in connection
with, any distribution of such shares. The Purchaser and its trustor understand
that the Shares, the Note, the Conversion Shares and the underlying Common Stock
have not been, and will not be, registered under the Securities Act by reason of
a specific exemption from the registration provisions of the Securities Act, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of such Purchaser's representations as
expressed in this Agreement.
5.3 RESTRICTED SECURITIES. The Purchaser and its trustor understand
that the Shares, the Note, the Conversion Shares and the underlying Common Stock
must be held indefinitely unless subsequently registered under the Securities
Act or unless an exemption from such registration is available.
5.4 NO PUBLIC MARKET. The Purchaser and its trustor understand that no
public market now exists for any of the securities issued by the Company and
that the Company has made no assurances that a public market will ever exist for
the Company's securities.
5.5 ACCESS TO DATA. The Purchaser's trustor has had an opportunity to
discuss the Company's business, management and financial affairs with its
management and the opportunity to review the Company's facilities and business
plan. The Purchaser's trustor has also had an opportunity to ask questions of
officers of the Company, which questions were answered to its satisfaction.
5.6 AUTHORIZATION. The Purchaser is a national bank chartered under
federal authority and is in good standing under such laws. The Purchaser's
trustor is a corporation duly incorporated and existing under, and by virtue of,
the laws of the State of California, and is in good standing under such laws.
The Purchaser has now, or will have at the Closing Dates, all requisite legal
and corporate power to enter into this Agreement, the Registration Rights
Agreement and the Voting Agreement, and has
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or will have taken prior to the First Closing all corporate action on the part
of the Purchaser necessary to authorize, execute and deliver this Agreement, the
Registration Rights Agreement and the Voting Agreement, and to purchase the
Common Shares, and has or will have taken prior to the Second Closing all such
corporate action necessary to purchase the Shares and the Note, and to carry out
and perform its obligations under the terms of this Agreement, the Registration
Rights Agreement and the Voting Agreement. This Agreement, the Registration
Rights Agreement and the Voting Agreement are each valid and binding obligations
of the Purchaser enforceable in accordance with their terms, except as the
indemnification provisions of Section 3.7 of the Registration Rights Agreement
may be limited by principles of public policy, and subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies.
5.7 GOVERNMENT CONSENTS, ETC. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Purchaser is required in connection with the valid execution and
delivery of this Agreement, the Registration Rights Agreement or the Voting
Agreement, or the offer, sale or issuance of the Shares or the Note, or the
consummation of any other transactions contemplated by this Agreement.
SECTION 6
CLOSING CONDITIONS
6.1 CONDITIONS TO FIRST CLOSING OF PURCHASER. The obligation of the
Purchaser to purchase the Common Shares at the First Closing is subject to the
fulfillment to its satisfaction, on or prior to the First Closing, of the
following conditions, any of which may be waived in accordance with the
provisions of subsection 9.4:
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Company in Section 3 shall be true and correct when
made, and shall be true and corrects in all material respects on the First
Closing Date with the same force and effect as if they had been made on and as
of the First Closing Date. The Company shall have performed in all material
respects all obligations and conditions in this Agreement required to be
performed or observed by it on or prior to the First Closing Date. The
representations and warranties made by the Selling Shareholder in Section 4
shall be true and correct when made, and shall be true and correct in all
material respects on the First Closing Data with the same force
and effect as if they had been made on and as of the First Closing Date. The
Selling, Shareholder shall have performed in all material respects all
obligations and conditions in this Agreement required to be performed or
observed by it on or prior to the first Closing.
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(b) CONSENTS AND WAIVERS. The Company and the Selling
Shareholder shall have obtained in a timely fashion any and all consents,
permits and waivers necessary or appropriate on their respective parts for the
consummation of the transactions contemplated by this Agreement.
(c) EMPLOYEE AGREEMENTS. At or prior to the First Closing, each
employee and consultant of the Company who has not already entered into a
Proprietary Information, Inventions and Ethics Agreement in the form attached as
EXHIBIT E shall have entered into such agreement.
(d) COMPLIANCE CERTIFICATE. The Company shall have delivered a
certificate, executed by the President of the Company, dated as of the First
Closing Date, certifying to the fulfillment of the Company's conditions
specified in Sections 6.1(a), (b) and (c). The Selling Shareholder shall have
delivered a certificate, executed by the Selling Shareholder, dated as of the
First Closing Date, certifying to the fulfillment of the Selling Shareholder's
conditions specified in Sections 6.1(a) and (b).
(e) OPINION OF COMPANY'S COUNSEL. Holtzmann, Wise & Shepard, A
Partnership including Professional Corporations, counsel to the Company, shall
have delivered an opinion addressed to the Purchaser, dated as of the First
Closing Date, substantially the same in form and content as that attached as
EXHIBIT G1.
(f) BLUE SKY AND OTHER REGULATIONS. At or prior to the First
Closing, the Selling Shareholder shall have obtained all necessary Blue Sky law
permits and qualifications, or have the availability of exemptions, required by
California for the offer and sale of the Common Shares. At or prior to the
First Closing, the sale of the Common Shares by the Selling Shareholder shall be
legally permitted by all laws and regulations to which the Selling Shareholder
and the Company are subject.
6.2 CONDITIONS TO SECOND CLOSING OF PURCHASER. The obligation of the
Purchaser to purchase the Series A Shares and the Note at the Second Closing is
subject to the fulfillment to its satisfaction, on or prior to the Second
Closing, of the following conditions, any of which may be waived in accordance
with the provisions of subsection 9.4:
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Company in Section 3 shall be true and correct when
made, and shall be true and correct in all material respects on the Second
Closing Date with the same force and effect as if they had been made on and as
of the Second Closing Date. The Company shall have performed in all material
respects all obligations and conditions in this Agreement required to be
performed or observed by it on or prior to the Second Closing.
(b) CONSENTS AND WAIVERS. At or prior to the Second Closing,
the Company shall have obtained in a timely fashion any and all consents,
permits and
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waivers necessary or appropriate on its part or the consummation to the
transactions contemplated by this Agreement.
(c) ARTICLES; BYLAWS. At or prior to the Second Closing, (i)
the Articles shall have been filed with the Secretary of State of the state of
California and (ii) the Bylaws shall have been amended to authorize specifically
a variable number of authorized directors, ranging between 5 and 9 directors,
with the initial authorized number of directors, effective as of the Second
Closing, having been established as 5 directors.
(d) EMPLOYEE AGREEMENTS. At or prior to the Second Closing,
each employee and consultant of the Company who has not already entered into a
Proprietary Information, Inventions and Ethics Agreement in the form attached as
EXHIBIT E shall have entered into such agreement.
(e) COMPLIANCE CERTIFICATE. The Company shall have delivered a
certificate, executed by the President of the Company, dated as of the Second
Closing Date, certifying to the fulfillment of the Company's conditions
specified in Sections 6.2(a), (b), (c), (d), (i), (j) and (k).
(f) CONSUMMATION OF FIRST CLOSING. The First Closing and the
related transactions which are scheduled to occur at or prior to the First
Closing shall have been consummated according to the terms and conditions of
this Agreement.
(g) REGISTRATION RIGHTS AGREEMENT. At or prior to the Second
Closing, the Company and the Purchaser shall have executed the Registration
Rights Agreement.
(h) OPINION OF COMPANY'S COUNSEL. Holtzmann, Wise & Shepard, A
Partnership including Professional Corporations, counsel to the Company, shall
have delivered an opinion addressed to the Purchaser, dated as of the Second
Closing Date, substantially the same in form and content as that attached as
EXHIBIT G2.
(i) BLUE SKY AND OTHER REGULATIONS. At or prior to the Second
Closing, the Company shall have obtained all necessary Blue Sky law permits and
qualifications, or have the availability of exemptions, required by California
for the offer and sale of the Series A Shares, the issuance of the Note, the
Conversion Shares and the Common Stock issuable upon conversion of the Series A
Shares and Conversion Shares. At or prior to the Second Closing the Company
shall have obtained a permit from the California Department of Corporations for
the Note.
(j) REDEMPTION OF COMMON STOCK. Effective as of the Second
Closing, the Company shall have redeemed from its shareholders at a price of
$3.00 per share a total of 2,000,000 shares of its Common Stock (which the
Company currently contemplates will include approximately 163,126 vested shares
issuable upon
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exercise of outstanding options) in compliance with the requirements of the
California Corporations Code and other applicable laws and regulations.
(k) BOARD OF DIRECTORS REPRESENTATION. The initial nominees of
the Purchaser to serve as directors of the Company, identified in a letter
delivered by the Purchaser to the Company at or prior to the First Closing,
shall have been elected to the Company's Board of Directors effective as of the
Second Closing.
(1) OPTION AGREEMENTS. At or prior to the Second Closing, the
Selling Shareholder and each of the Company's shareholders and optionees who is
participating in the Redemption shall have executed and delivered an agreement
in the form attached as EXHIBIT H-1 or EXHIBIT H-2, respectively ("Option
Agreement"), under which such shareholders and optionees agree to sell all of
their shares in the Company to the Purchaser upon the terms and conditions in
the Option Agreements.
(m) VOTING AGREEMENT. At or prior to the Second Closing, a
Voting Agreement in the form of EXHIBIT I attached hereto shall have been
entered into by the Company, the Purchaser, and such shareholders of the
Company, if any, as the Company and the Purchaser may agree.
6.3 CONDITIONS TO FIRST CLOSING OF SELLING SHAREHOLDER. The Selling
Shareholder's obligation to sell and issue the Common Shares at the First
Closing is subject to the fulfillment to the satisfaction of the Selling
Shareholder on or prior to the First Closing Date of the following conditions,
any of which may be waived by the Selling Shareholder in accordance with the
provisions of subsection 9.4:
(a) REPRESENTATIONS. The representations made by the Company in
Section 3 and the representations made by the Purchaser in Section 5 shall be
true and correct when made, and shall be true and correct on the First Closing
Date.
(b) CONSENTS AND WAIVERS. The Purchaser and the Company shall
have obtained in a timely fashion any and all consents, permits and waivers
necessary or appropriate on their respective parts for the consummation of the
sale of the Common Shares by the Selling Shareholder to the Purchaser.
(c) COMPLIANCE CERTIFICATE. The Purchaser shall have delivered
a certificate, executed by the Purchaser, dated at the First Closing Date,
certifying to the fulfillment of the Purchaser's conditions specified in
Sections 6.3(a) and (b). The Company shall have delivered a certificate,
executed by the President of the Company, dated at the First Closing Date,
certifying to the fulfillment of the Company's conditions specified in Sections
6.3(a) and (b).
6.4 CONDITIONS TO SECOND CLOSING OF COMPANY. The Company's obligation
to sell and issue the Series A Shares and the Note at the Second Closing is
subject to the fulfillment to the satisfaction of the Company on or prior to the
Second Closing of the
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following conditions, any of which may be waived by the Company in accordance
with the provisions of subsection 9.4:
(a) REPRESENTATIONS. The representations made by the Purchaser
in Section 5 shall be true and correct when made, and shall be true and correct
on the Second Closing Date.
(b) OTHER CONDITIONS. The condition set forth in Section
6.2(c)(i), (g), (i), (j) and (m) shall have been fulfilled on or prior to the
Second Closing Date.
(c) CONSENTS AND WAIVERS. The Purchaser shall have obtained in
a timely fashion any and all consents, permits and waivers necessary or
appropriate on their respective parts for the consummation of the transactions
contemplated by this Agreement on or prior to the Second Closing Date.
(d) COMPLIANCE CERTIFICATE. The Purchaser shall have delivered
a certificate, executed by the Purchaser, dated as of the Second Closing Date,
certifying to the fulfillment of the Purchaser's conditions specified in
Sections 6.4(a) and (c).
(e) CONSUMMATION OF FIRST CLOSING. The First Closing and the
related transactions which are scheduled to occur at or prior to the First
Closing shall have been consummated according to the terms and conditions of
this Agreement.
SECTION 7
AFFIRMATIVE COVENANTS OF THE COMPANY
The Company covenants and agrees as follows:
7.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company will
deliver to the Purchaser:
(a) as soon as practicable after the end of each fiscal year of
the Company and in any event within 120 days after such fiscal year, an audited
balance sheet of the Company as at the end of such year and audited income
statement and cash flow statement of the Company for such year, certified
(without qualification as to scope) by a "big five" accounting firm selected by
the Company, and prepared in accordance with generally accepted accounting
principles consistently applied;
(b) as soon as practicable after the end of each quarter (except
the last quarter of the fiscal year), and in any event within 45 days after such
quarter, an unaudited balance sheet of the Company as at the end of such quarter
and unaudited income statement and cash flow statement of the Company for such
quarter and for the period of the fiscal year then ended, together with a
statement setting forth in
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comparative form the figures for the corresponding date and periods of the
previous fiscal year and the figures for the corresponding date and periods
previously delivered to the Purchaser under Section 7.1(c);
(c) as soon as practicable, but in any event forty-five (45)
days prior to the end of each fiscal year, a budget and business plan for the
next fiscal year, prepared on a monthly basis, including balance sheets and
sources and applications of funds statements for such months and, as soon as
prepared, any other budgets or revised budgets prepared by the Company;
(d) within 30 days of their review of the Company's Board of
Directors, any material revision of projected financial statements provided
under Section 7.1(c);
(e) promptly after receipt by the Company, a copy of each
management letter issued by the Company's accountants and any other letter
issued by the Company's accountants which expresses concern as to the adequacy
of the Company's systems of internal accounting control;
(f) together with the financial statements delivered pursuant to
Sections 7.1(a) and (b), a written statement from the Company's President
whether, to the best of his knowledge, any default by the Company of any
material obligation under any material contract, instrument or agreement of the
Company, where such default would have a material adverse effect on the
Company's business as a whole (an "EVENT OF DEFAULT"), or condition or event
which with notice or lapse of time would constitute as Event of Default, has
occurred and is continuing and, if any has occurred and is continuing, a
description of the same;
(g) with reasonable promptness, such other notices, information
and data with respect to the Company as the Company delivers to the holders of
its Common Stock, and other information and data as the Purchaser may from time
to time reasonably request.
The foregoing financial statements shall be prepared on a consolidated and
consolidating basis if the Company then has any subsidiaries. The financial
statements delivered pursuant to Section 7.1(b) above shall be accompanied by a
certificate of the chief financial officer of the Company stating that such
statements have been prepared on a basis consistent with the presentation of the
audited financial statements of the Company and fairly present the financial
condition of the company at the date thereof and for the period covered thereby,
subject only to a nonrecurring year-end audit adjustments which in the aggregate
will not be materially adverse.
7.2 RULE 144A INFORMATION. The Company will provide the Purchaser, any
transferees of the Purchaser, and any prospective purchaser of the Shares who is
a
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"qualified institutional buyer" (as defined in Rule 144A promulgated under the
Securities Act) the information required by Rule 144A.
7.3 INSPECTION. The Company shall permit the Purchaser, or any
authorized representative of the Purchaser, to visit and inspect the properties
of the Company and its subsidiaries, including their respective corporate and
financial records, and to discuss the business and finances of the Company and
its subsidiaries with their respective employees, officers and directors (and
the Company's accountants) during normal business hours following reasonable
notice to the President of the Company and as often as may be reasonably
requested.
7.4 TERMINATION OF COVENANTS. The covenants set forth in Sections 7.1,
7.2 and 7.3 shall terminate and be of no further force or effect at such time as
the Company is required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended.
7.5 KEY-MAN INSURANCE. The Company shall use best efforts to acquire
and maintain in force until cancelled or modified with the written consent of
the Purchaser or its transferees, holding two thirds or more of the outstanding
Common Stock issued or issuable upon conversion of the Shares and Conversion
Shares, a policy of key-man insurance naming the Company as owner and
beneficiary on the lives of John Ryan and Victor Farrow in the amount of
$500,000 each.
7.6 PROPRIETARY RIGHTS AGREEMENTS. The Company shall require each
person who becomes an employee or consultant of the Company in the future to
execute an agreement regarding proprietary information substantially in the form
of the Proprietary Information, Inventions and Ethics Agreement attached as
EXHIBIT E.
7.7 LIMITATIONS ON TRANSFER OF INTELLECTUAL PROPERTY.
(a) Without the prior written consent of the Purchaser, which
consent shall not be unreasonably withheld, the Company will not: (i) divide or
assign any ownership rights in any of its existing patents or pending
applications, or (ii) extend or assign any of its existing patents or pending
applications in the name of any third party.
(b) The Company has determined that it is not in the Company's
business interest to, and agrees that it will not, license, transfer, utilize,
directly or indirectly, or otherwise authorize the use of the Company's present
and future anticopy technologies for direct or indirect application to any
Broadcast or Cable signal as defined below.
(c) "Broadcast or Cable Signal" means a video program
transmitted to home video consumers for reception in the form of an
electromagnetic wave, electrical signal or optical wave, whether by means of
cable, satellite transmission or otherwise,
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but excludes any video program for which the video consumer pays a separate
charge for each program service (commonly referred to as pay-per view).
7.8 EQUITY METHOD OF ACCOUNTING. If the Purchaser desires at some date
to account for its investment in the Company pursuant to the equity method, the
Company shall promptly furnish to the Purchaser and its independent auditors all
information reasonably available to the Company which Purchaser and its
independent auditors deem to be required by generally accepted accounting
principles to enable the Purchaser to account for its investment in the Company
pursuant to the equity method. To the extent reasonably requested by the
Purchaser, the Company shall, and shall cause its employees, independent public
accountants and other representatives to provide information, to the extent
reasonably available, regarding the Company to, and otherwise cooperate with,
the Purchaser so as to enable the Purchaser to prepare financial statements in
accordance with accounting principles generally accepted in the United States
and to comply with its reporting requirements and other disclosure obligations
under applicable United States securities laws and regulations.
7.9 OPTION AGREEMENTS. The Company will use its best efforts to cause
the Purchaser to achieve the benefits of the Purchaser's rights under Option
Agreements. The Company will carry out and perform all express or implied
responsibilities of the Company referred to in the Option Agreements promptly
and in good faith.
SECTION 8
OTHER COVENANTS OF THE COMPANY AND PURCHASER
(Defined terms used in this Section 8 are defined in Section 8.6)
8.1 THE RIGHT OF FIRST REFUSAL.
(a) THE RIGHT. Prior to any sale or issuance by the Company
of any Equity Securities, the Company shall give the Purchaser the first
right to purchase all or part of the Purchaser's Pro Rata Share of such
Equity securities on the same terms as the Company is willing to sell such
Equity Securities to Potential investors.
(b) NOTICE. Prior to any sale or issuance by the Company of
any Equity Securities, the Company shall notify the Purchaser, in writing, of
its intention to sell and issue such securities, setting forth the general
terms under which it proposes to make such sale. The Purchaser shall have
twenty (20) days after the date of delivery of such notice (the "Right Notice
Date") to notify the Company in writing that it elects to purchase all or a
portion of the Equity Securities offered to it. The Purchaser shall be
entitled to apportion its Pro Rata Share of the Equity Securities to be
purchased among Purchaser, Purchaser's trustor and Purchaser's trustor's
parent corporation, provided that the Purchaser notifies the Company of such
allocation, and provided that
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<PAGE>
such allocation does not result in or create the potential of the Company being
unable to claim an exemption from the registration provisions of the Securities
Act or the qualification provisions of the Blue Sky Laws.
(c) FAILURE TO NOTIFY. If, within twenty (20) days after the
Right Notice Date, the Purchaser does not notify the Company that it desires
to purchase all or a portion of the Purchaser's Pro Rata Share of the Equity
Securities offered to the Purchaser in such notice upon the terms and
conditions set forth in such notice, then the Company may, during a period of
ninety (90) days following the end of such twenty (20) day period, sell and
issue such Equity Securities respecting which the Purchaser's option was not
exercised at a price and upon terms and conditions no more favorable in any
material respect to other purchasers than those set forth in the notice to
the Purchaser. In the event that the Company has not sold such Equity
Securities to other purchasers within said ninety (90) day period, the
Company shall not thereafter issue or sell any Equity Securities without
first offering such securities to the Purchaser in the manner provided above.
(d) PAYMENT. If the Purchaser gives the Company notice that it
desires to purchase all or part of the Equity Securities offered by the Company,
then such purchase will be pursuant to the terms and conditions agreed to by the
other purchasers of such Equity Securities and payment for such Equity
Securities shall be made against delivery of the securities at the executive
offices of the Company at the time of the scheduled closing of the purchase with
such other purchasers or, if later, at 2:00 p.m. California time on the later to
occur of the following dates: (a) the third business day following the
expiration or earlier termination of all applicable waiting periods imposed on
such purchase and sale by the HSR Act, the CFIUS Act or other applicable law,
and (b) such other date as the Company and the Purchaser may agree. The Company
shall take all such action (except registration under the Securities Act) as may
reasonably be required by any regulatory authority in connection with the
exercise by the Purchaser of the right to purchase Equity Securities as set
forth in this Section 8.1
(e) REDUCED OFFERING. Notwithstanding any other provision of
this Section 8.1, the Purchaser will have no obligation to purchase any Equity
Securities unless other purchasers are purchasing all of the Equity Securities
covered by the Company's notice to the Purchaser under Section 8.1(b) (the
"Offered Equity Securities"), other than the Purchaser's Pro Rata Share. If
less than all of the Offered Equity Securities are sold by the Company, the
Purchaser will be entitled to purchase at any closing a lesser amount of such
Equity Securities than the amount of which the Purchaser had notified the
Company previously, such lesser amount being not less than the same percentage
portion of the smaller offering than the portion of which the Purchaser notified
the Company with respect to the larger offering.
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(f) LIMITATION.
(i) The right of first refusal contained in this Section
8.1 shall not apply to the issuance by the Company on or after the First Closing
Date of shares of the Company's Common Stock and/or Preferred Stock as follows:
(A) up to 1,750,000 shares of Common Stock issued
or issuable after the First Closing Date to employees, officers, directors and
consultants either directly or pursuant to stock options or stock purchase plans
or agreements approved by the Company's Board of Directors, or upon the issuance
of options or warrants to purchase such shares. The number of shares set forth
in this Section 8.1(f)(i)(a), however, (1) may be increased with the unanimous
approval of the Company's Board of Directors, (2) shall be adjusted for stock
dividends, splits, recapitalizations and the like, and (3) shall be net of
repurchases.
(B) `the Series A Shares issued pursuant to this
Agreement, the Conversion Shares, and the shares of Common Stock issued upon
conversion of such Series A Shares and Conversion Shares.
(C) shares of Common Stock issued or issuable upon
a stock dividend, stock split, recapitalization or the like.
(D) shares of Common Stock and/or Preferred Stock
issued pursuant to the acquisition of another corporation by the Company by
merger, purchase of all or substantially all of the assets, or other
reorganization.
(E) shares issued by the Company in an initial
public offering. (The Purchaser's right of first refusal shall apply to any
public or other offering by the Company of equity Securities following the
Company's Public Offering.)
(ii) Notwithstanding subsections (D) and (E) of Section
8.1(f)(i) and Section 8.1(g), the Purchaser's right of first refusal shall apply
to any acquisition or any public offering described in such subsections in the
event such transaction, if completed, would reduce the Purchaser's Pro Rata
Share below 25%.
(g) TERMINATION. The right of first refusal contained in this
Section 8 shall terminate upon (i) shareholder approval of any merger or
consolidation of the Company with any other corporation in which more than 50%
of the voting control of the Company is transferred to a third party or third
parties, provided that, if such merger or consolidation is not consummated, the
right of first refusal shall be deemed restored and reinstated to full force and
effect and (ii) at such time, if any, as the Purchaser's Pro Rata Share is
reduced to less than 25%, unless Section 8.1(f)(ii) is applicable and the
Purchaser increases its Pro Rata Share to at least 25% by exercising its right
of first refusal in compliance with Section 8.1.
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<PAGE>
8.2 STANDSTILL.
(a) Notwithstanding the provisions of Section 8.1, following the
Second Closing and prior to a Public Offering, the Purchaser shall not directly
or indirectly acquire, hold or transfer to the Purchaser's trustor or any other
person or entity controlling, controlled by or affiliated with Purchaser's
trustor, beneficial ownership of Voting Stock (except, in any case, by way of
stock dividends or other rights or distributions or offerings made or made
available to holders of any class or series of Voting Stock generally or upon
the exercise of such rights) without the written consent of the Company, if the
effect of such acquisition, holding or transfer would be to increase the
percentage of the Total Current Voting Power of the Company represented by the
Voting Stock then owned collectively by the Purchaser, the Purchaser's trustor
or any other person or entity controlling, controlled by or affiliated with the
Purchaser's trustor, to more than 49% of the total Current Voting Power of the
Company
(b) The Purchaser shall not be deemed to have violated its
covenant under Section 8.2(a)by virtue of any increase in the aggregate
percentage of the Total Current Voting Power of the Company represented by
Voting Stock owned by the Purchaser, the Purchaser's trustor or any other person
or entity controlling, controlled by or affiliated with the Purchaser's trustor
or which the Purchaser or any such persons has a right to acquire if such
increase is the result of a recapitalization of the Company, any invalidation of
the limitations set forth in the Articles or the Voting Agreement on the voting
power of the Company's Series A Preferred Stock or the Note (so long as
Purchaser, the Purchaser's trustor or such trustor's parent corporation is not
responsible for such invalidation), a repurchase of securities by the Company or
any other action taken by the Company or its affiliates.
(c) The Purchaser shall notify the Company of the acquisition by
Purchaser, Purchaser's trustor and each other person or entity controlling,
controlled by and affiliated with Purchaser's trustor of additional securities
of the Company promptly after each such acquisition. All such acquisitions
shall comply with applicable federal and state securities laws and the
provisions of this Agreement.
8.3 SUBSEQUENT ACQUISITION OF CAPITAL STOCK. The Company understands
that from time to time the Purchaser may seek to acquire additional shares of
the Company's capital stock from the Company's shareholders or, if a market for
the Company's securities exists, in open-market transactions. So long as the
standstill provisions of Section 8.2 are in full force and effect, the Company
agrees that it shall not take any action, or permit any subsidiary to take any
action, to interfere with any acquisition by the Purchaser of securities of the
Company or any attempt by the Purchaser to acquire securities of the Company as
are permitted to be owned by the Purchaser pursuant to this Agreement,
consistent with the provisions of Section 8.2
23
<PAGE>
including, without limitation, the bringing of any legal action in connection
with any such acquisition or attempted acquisition.
8.4 PUBLIC OFFERINGS. The Company shall not register any of its
securities in a public offering of securities within two (2) years following the
Second Closing Date. In addition, the Company shall not register, at any time,
any of its securities in an initial public offering unless the reasonably
anticipated aggregate proceeds of such an offering would be at least $10
million. In the event that a majority of the Company's authorized directors in
good faith approves and authorizes the Company to register its securities
pursuant to a Public Offering, then the Purchaser may, in its sole discretion,
offer to purchase all the Voting Stock of the Company which it does not
currently own pursuant to the terms and conditions of the Option Agreements
attached as EXHIBITS H1 AND H2. In the event Purchaser does not offer to
purchase such Voting Stock, then Purchaser agrees that it will not vote its
shares or take any other action to block or prevent the Company from undertaking
the public offering and will provide reasonable cooperation to the Company to
effect the offering; provided, however, that Purchaser shall have no obligation
to waive or modify any right or benefit to which it is entitled pursuant to this
Agreement, the Articles, the Registration Rights Agreement, the Voting Agreement
or the Note.
8.5 EXCLUSIVITY. Except as set forth on a schedule attached as EXHIBIT
J, the Company shall not prior to the Second Closing Date (nor will it permit
any of its officers, directors, agents, representatives or affiliates to)
directly or indirectly take any of the following actions with any party other
than the Purchaser and its designees: (a) solicit, encourage, initiate or
participate in any negotiations, inquiries or discussions with respect to, any
offer or proposal to acquire any equity interest in the Company, any assets of
the Company, or any license to the Company's technology whether by merger,
purchase of shares, purchase of assets, tender offer or otherwise; (b) disclose
any information not customarily disclosed to any person concerning its business
and properties or afford to any person or entity access to its properties, books
or records, except in the ordinary course of business; (c) enter into or execute
any stock purchase agreement, investment agreement, license agreement, plan or
reorganization, merger agreement, or other agreement calling for the acquisition
of any equity interests in the Company, any assets of the Company, or any
license to the Company's technology; (d) make or authorize any public statement,
recommendation or solicitation with respect to any tender offer, merger,
purchase of assets or any offer or proposal relating to the foregoing other than
with respect to the Purchaser's investment in the Company and the Redemption; or
(e) except as otherwise permitted by the foregoing, assist or cooperate with any
person (other than employees with respect to equity incentive arrangements) to
make any proposal to purchase all or any part of the capital stock or assets of
the Company, other than inventory or assets in the ordinary course of business.
In the event the Company shall receive any offer or proposal, directly or
indirectly, of the type referred to in clause (a) or (c) above, or any request
for disclosure or access pursuant to clause (b) above, it shall immediately, and
prior to taking any action in response thereto, inform the Purchase as to all
material facts
24
<PAGE>
concerning any such offer or proposal and will thereafter cooperate with the
Purchaser by continuing to furnish to the Purchaser any additional
information it may at any time request. The Purchaser hereby consents to the
Redemption.
8.6 WAIVER AND ASSIGNMENT OF DIVIDEND RIGHTS. Purchaser hereby waives
and assigns to holders of Common stock other than Purchaser any and all rights
of the Common Shares (and of any subsequently acquired shares of Common Stock of
the Company issued upon conversion of the Series A Shares or Conversion shares)
to participate in any divided distributions lawfully declared by the Company
with respect to its Common Stock, until the earlier of (i) a distribution, or
series of distributions, in an aggregate amount of $1,537,994.40, or (ii) the
closing of a Public Offering. Purchaser shall not, in any manner whosoever,
take any action which would hinder or delay, or otherwise interfere with the
Company's ability to declare any such dividend. Any transferee, successor or
assignee of the Common Shares (and of any subsequently acquired shares of Common
Stock of the Company issued upon conversion of the Series A Shares or Conversion
Shares) shall take such shares subject to this waiver and assignment, and as a
condition precedent to the valid transfer of such shares, shall be bound, and
shall agree in writing to be bound thereby.
8.7 DEFINITIONS.
(a) "CFIUS ACT" shall mean the Exon-Florio Amendment to the
Omnibus Trade and Competitiveness Act of 1988 and any successor legislation.
(b) The term "EQUITY SECURITIES" shall mean any securities
having voting rights in the election of the Company's Board of Directors not
contingent upon default, or any securities evidencing an ownership interest in
the Company, or any securities convertible into or exercisable or exchangeable
for any shares of the foregoing, or any agreement or commitment to issue any of
the foregoing, or any right to acquire any of the foregoing.
(c) "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
(d) The term "PRO RATA SHARE" shall mean, at any time, the
percentage represented by (i) the sum of all shares of the Company's Common
Stock and the number of votes represented by the Shares and other voting
securities of the Company held by the Purchaser divided by (ii) the sum of
all shares of the Company's Common Stock and the number of votes represented
by the Shares and other voting securities of the Company held by all security
holders of the Company. For purposes of this Agreement, any interest in the
Company held by the Purchaser's trustor or such trustor's parent corporation
shall be included in determining the Purchaser's Pro Rata Share.
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<PAGE>
(e) "PUBLIC OFFERING" shall mean a registration of the Company's
securities pursuant to a firmly underwritten public offering under the
Securities Act the aggregate net proceeds of which are not less than
$10,000,000.
(f) "TOTAL CURRENT VOTING POWER" shall mean the total number of
votes which may be cast in the election of directors of the Company under the
Articles, if all securities entitled to vote in the election of such directors
are present and voted.
(g) "VOTING STOCK" shall mean the Common Stock, Preferred
Stock and any other securities of the Company having the ordinary power to
vote in the election of directors of the Company, other than securities
having such power only upon the happening of a contingency which has not yet
occurred.
SECTION 9
MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
9.2 SURVIVAL. The representations and warranties made in this Agreement
shall survive any investigation made by the Purchaser and the closing of the
transactions contemplated by this Agreement for a period of one year following
the Second Closing. Unless otherwise expressly provided in this Agreement, the
Registration Rights Agreement, the Note or the Voting Agreement, all covenants
and agreements set forth in such instruments and documents shall survive for as
long as the Purchaser owns any shares of capital stock (or securities
convertible into, or exercisable of exchangeable for, such shares of capital
stock) of the Company or any successor of the Company.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this
Agreement, the provisions of this Agreement shall inure to the benefit of, and
be finding upon, the successors, assigns, heirs, executors and administrators of
the parties to this Agreement.
9.4 ENTIRE AGREEMENT; REGISTRATION RIGHTS AGREEMENT. This Agreement and
the other documents delivered at the First Closing and Second Closing constitute
the full and entire understanding and agreement between the parties with regard
to the subjects of such documents, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth in such documents. Except as expressly provided in
this Agreement, neither this Agreement nor any of its terms may be amended,
waived, discharged or terminated other than by a written instrument signed by
the party against whom enforcement of any such amendment, waiver, discharge or
termination is sought.
26
<PAGE>
9.5 NOTICES, ETC. All notices and other communications required or
permitted under this Agreement shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by
hand, messenger or facsimile, addressed (a) if to the Purchaser, at the
address or facsimile number set forth on the signature page, or at such other
address as the Purchaser shall have furnished to the Company in writing, with
a copy to George H. Hohnsbeen II, Ware & Freidenrich, 400 Hamilton Avenue, CA
94301, facsimile: (415)327-3699, or (b) if to any other holder of any Common
Stock issued or issuable upon conversion of the Shares or the Note, at such
address or facsimile number as such holder shall have furnished the Company
in writing, or, until any such holder so furnishes an address to the Company,
then to and at the address of the last holder of such shares who has so
furnished an address to the Company, (c) if to the Company, at the address or
facsimile number set forth on the signature page and addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Purchaser and the Selling Shareholder, with a
copy to David Herbst, Holtzmann, Wise & Shepard, 3030 Hansen Way, Suite 100,
Palo Alto, CA 94304, facsimile: (415)856-1344, or (d) if to the Selling
Shareholder, one copy should be sent to its address or facsimile number set
forth on the signature page or at such other address as the Selling
Shareholder shall have furnished to the Purchaser and the Company.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when received.
9.6 DELAYS OR OMISSIONS. Except as expressly provided in this
Agreement, no delay or omission to exercise any right, power or remedy accruing
to any holder of any Shares, the Note, any Common Stock issued or issuable upon
conversion of the Shares or the Note, or upon any breach or default of the
Company or the Selling Shareholder under this Agreement, shall impair any such
right, power or remedy of such holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence in such breach or default, or
of or in any similar breach or default thereafter occurring; nor shall any
waiver of any single breach or default be deemed a waiver of any other breach or
default occurring before or afterwards. Any waiver, permit, consent or approval
of any kind or character on the part of any holder of any breach or default
under this Agreement, or any waiver on the part of any holder of any provisions
or conditions of this Agreement, must be in writing and shall be effective only
to the extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
9.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE
27
<PAGE>
SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR
25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
9.8 EXPENSES. The Company, the Selling Shareholder and the Purchaser
shall each bear its orr* his expenses incurred on its or is behalf with respect
to this Agreement and the transactions contemplated by this Agreement
9.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
9.10 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
9.11 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
9.12 FINDER'S FEES AND OTHER FEES.
(a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement and, (ii) agrees to indemnify and to hold the Purchaser and Selling
Shareholder harmless of and from any liability for commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expenses of defending against such liability or asserted liability)
for which the Company, or any of its employees or representatives, are
responsible
(b) The Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) agrees to indemnify and to hold the Company and Selling
Shareholder harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or asserted
liability) for which the Purchaser, or any of its employees or representatives,
are responsible.
(c) The Selling Shareholder (i) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by the Agreement and (ii) agrees to indemnify and to hold the
Company and the Purchaser
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<PAGE>
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Selling Shareholder, or any of its employees or representatives, are
responsible.
9.13 ATTORNEYS' FEES. In the event any proceeding or lawsuit is brought
by any party in connection with this Agreement or the transactions contemplated
by this Agreement, the prevailing party in such proceeding or lawsuit shall be
entitled to receive its costs and reasonable fees of expert witnesses and
attorneys, including costs and fees on appeal.
9.14 FURTHER ASSURANCES. The parties hereto shall do and perform or
cause to be done and performed all such further acts and things and shall
execute and deliver all such other agreements, certificates, instruments or
documents as any other party may reasonably request from time to time in
order to carry out the intent and purposes of this Agreement, the Articles,
the Registration Rights Agreement, the Note and the Voting Agreement and the
consummation of the transactions contemplated hereby and thereby. Neither
the Company nor the Purchaser shall voluntarily undertake any course of
action inconsistent with satisfaction of the requirements applicable to them
set forth in such instruments and documents and each shall promptly do all
such acts and take all such measures as may be appropriate to enable them to
perform as early as practicable the obligations herein and therein required
to be performed by them.
9.15 CONFIDENTIALITY. The Company, the Selling Shareholder and the
Purchaser each agree that they shall make no public announcement of, or
otherwise disclose, the matters set forth in this Agreement, the identity of
the Purchaser's trustor or the direct or indirect beneficial ownership of
Purchaser's trustor except (a) as agreed in writing by the parties, or (b) as
is required by disclosure obligations arising under law.
The foregoing Agreement is executed as of the date first above written.
"COMPANY"
MACROVISION CORPORATION
a California corporation
By: /s/ Joseph F. Swyt
------------------------------------
Joseph F. Swyt, President
Address:
700 El Camino Real East
Mountain View, CA 94040
Facsimile: (415) 691-2999
29
<PAGE>
"PURCHASER"
University National Bank & Trust
Company, Trustee under Trust
Agreement dated May 22, 1991
By: /s/ Illegible
------------------------------------
Title:
---------------------------------
Address:
250 Lytton Avenue
Palo Alto, CA 94302
Facsimile: (415) 321-9715
30
<PAGE>
"SELLING SHAREHOLDER"
/s/ A. Victor Farrow
---------------------------------------
A. Victor Farrow
Trustee of the Farrow Family Trust
U/T/D December 18, 1990
Address:
P.O. Box 789
21900 River Road
Geyserville, CA 95441
Facsimile: (707) 857-3822
31
<PAGE>
** Confidential treatment requested
for certain portions of this document
MACROVISION-Registered Trademark- Macrovision Corporation
1341 Orleans Drive
PROTECTING YOUR IMAGE Sunnyvale, California 94089
(408)743-8600
Fax (408) 743-8610
Letter Agreement - Confidential
- -------------------------------
14 January 1997 VIA FAX TO 818-566-7685 (5 PAGES TOTAL)
Mr. Craig M. Kornblau
Senior Vice President
Worldwide Operations and Logistics
Buena Vista Home Video
350 South Buena Vista Avenue
Burbank, CA 91521-7890
Dear Craig:
We present below the key business terms related to Disney/Buena
Vista Home Video's application of Macrovision's copy protection
process to videocassettes and digital video discs ("DVDs") during
the period beginning March 1, 1997 and ending February 28, 2000.
1. MINIMUM FEES AND COPY PROTECTION MAXIMUMS
Disney/Buena Vista Home Video ("Buena Vista") agrees to pay
Macrovision a Minimum Guaranteed Application Fee of [ * * ] the
period March 1, 1997 through February 28, 1998, [ * * ] for the
period March 1, 1998 through February 28, 1999, and [ * * ] for
the period March 1, 1999 through February 28, 2000. These fees
shall entitle Buena Vista to apply Macrovision copy protection to
a maximum number of videocassettes and DVD titles in all Category
A countries (as listed on Exhibit 1) combined, as follows:
- -------------------------------------------------------------------
Maximum
Minimum Guaranteed Maximum Number of Number of
Year Ended Application Fee Videocassettes DVD Titles
- -------------------------------------------------------------------
2/28/98 [ * * ]
- ------------
2/28/99
- ------------
2/28/00
- -------------------------------------------------------------------
There shall be no carry over from any year to subsequent years in
the event that Buena Vista does not apply copy protection to the
Maximum Number of Videocassettes or DVD titles in any particular
year. It is Buena Vista's intention to apply copy protection to
substantially all videocassettes which are produced in
<PAGE>
** Confidential treatment requested
for certain parts of this document
MR. CRAIG KORNBLAU -2- 1/14/97 CONFIDENTIAL
Category A countries. Buena Vista's failure to apply copy
protection as provided herein shall not constitute a breach of
this agreement.
Countries in Category B would not be covered the Minimum
Guaranteed Application Fee. Category C and D countries (as
listed on Exhibit 1) would INITIALLY not be covered by the
Minimum Guaranteed Application Fee but would automatically
convert to Category A countries (and therefore be covered by the
Minimum Guaranteed Application Fee) if and when Buena Vista
undertakes to distribute videocassettes directly in any such
Category C or Category D country. For example, if Buena Vista
decided to go direct in Brazil, and terminated its home video
distribution license with Abril, the volume of Buena Vista-direct
cassettes in Brazil effective as of the date Buena Vista went
direct in Brazil could be copy protected without payment of an
additional fee to Macrovision. "Buena Vista-direct" means any
territory where Buena Vista or other wholly owned Disney entity
operates either directly or via a joint venture or other entity
in which Disney holds at least a 40% ownership interest.
Category E countries will be addressed as described in Exhibit 1.
One half of each years' Minimum Guaranteed Application Fee shall
be payable on March 1 of each year and the other half shall be
payable on September 1 of each year. The following table
presents the payment schedule:
--------------------------
PAYMENT PAYMENT AMOUNT
DATE
--------------------------
3/1/97
--------------------------
9/1/97
--------------------------
3/1/98 [ * * ]
--------------------------
9/1/98
--------------------------
3/1/99
--------------------------
9/1/99
--------------------------
2. ADDITIONAL FEES - VIDEOCASSETTES
If, in any of the three years ending February 28, 1998, February
28, 1999, or February 28, 2000 (each, a "Contract Year") Buena
Vista applies copy protection to a total number of videocassettes
which is greater than the Maximum Number of Videocassettes for
such Contract Year, Buena Vista agrees to pay to Macrovision an
additional fee of [ * * ] for each such videocassette to which
copy protection is applied above the maximum. Each payment for
such additional videocassettes will be due and payable no later
than 30 days following the close of each Contract Year. [ * * ]
Buena Vista agrees to provide Macrovision
<PAGE>
** Confidential treatment requested
for certain parts of this document
MR. CRAIG KORNBLAU -3- 1/14/97 CONFIDENTIAL
with written notice on September 1, 1997, September 1, 1998, and
September 1, 1999 as to whether it is likely that Buena Vista will
apply copy protection to a higher number of videocassettes than
the maximum for that Contract Year, and if so, what the total
number of copy protected cassettes is likely to be for that full
Contract Year. Macrovision shall keep such a report confidential
and not disclose such information to third parties and shall use
such a report only for purposes of its internal planning and
budgeting and for no other purpose. Such report shall not
represent a binding commitment on the part of Buena Vista to
actually apply copy protection to any particular number of
videocassettes in excess of the maximum for that Contract Year.
3. ADDITIONAL FEES - DVD TITLES
Prior to applying copy protection to more than [ * * ] DVD
titles in any Contract Year, Buena Vista agrees to so notify
Macrovision and both Buena Vista and Macrovision agrees to enter
into good faith negotiations regarding the per-unit fee which
Buena Vista would pay to Macrovision for DVD titles to which copy
protection is applied in excess of [ * * ] titles per year.
4. COMMITMENT TO REQUIRE NORTH AMERICAN LICENSEES TO APPLY COPY
PROTECTION
It is Buena Vista's intention to require all Buena Vista home
video licensees in North America (such as Columbia House) to copy
protect, using Macrovision's copy protection technology or any
comparable copy protection technology which in Buena Vista's
judgment provides equal or better effectiveness and playability,
substantially all Buena Vista titles which they produce
(including Touchstone, Hollywood Pictures, Disney, Miramax and
other Buena Vista home video labels) and to pay copy protection
fees for such titles directly to Macrovision or to such other
copy protection supplier, as appropriate. Macrovision shall
charge such Buena Vista licensees not more than 6 cents per unit
for the application of the Macrovision copy protection process to
Buena Vista videocassettes or DVDs. Buena Vista's failure to
require such copy protection shall not constitute a breach of
this Agreement.
5. "CP" LOGO COMMITMENT
Buena Vista agrees to use its reasonable efforts to use the
triangular "cp" logo in substantially all of its trade
advertisements for rental and sell-through videocassettes and DVD
titles. Macrovision agrees that Buena Vista's inadvertent
omission of the "cp" logo in any particular ad or ads or Buena
Vista's failure to notify trade publications in any country as to
Buena Vista's copy protection policy will not be considered a
material breach of this agreement.
6. LONG FORM AGREEMENT
Upon acceptance of Buena Vista, this Letter Agreement shall
represent a binding agreement between Buena Vista and Macrovision
which reflects substantially all fee-related economic terms
related to Buena Vista's application of Macrovision's copy
protection process to Videocassettes and DVD titles, until such
time as a long form agreement incorporating the terms and
conditions of this Letter Agreement has been executed by the
parties. Macrovision and Buena Vista shall use their reasonable
<PAGE>
MR. CRAIG KORNBLAU -4- 1/14/97 CONFIDENTIAL
efforts to negotiate in good faith and prepare and execute within
sixty days of acceptance by Buena Vista of this Letter Agreement
such long-form agreement.
Buena Vista acknowledges that, due to the "mechanics" of actually
applying copy protection to DVDs, Macrovision requires DVD
authoring facilities and DVD replicators to sign license
agreements with Macrovision which grant them the rights to set
Macrovision's copy protection trigger bits to their "on" position
for DVD titles and/or replicate DVDs for which Macrovision's copy
protection trigger bits have been set to their "on" position.
Macrovision agrees that, with respect to Buena Vista DVDs to
which copy protection is applied in connection with this Letter
Agreement, such licenses will not require such authoring
facilities or replicators to pay fees of any kind to Macrovision.
Craig, if the above terms are acceptable to Buena Vista, please
confirm this by having the appropriate Buena Vista official sign
in the space provided below and return this Letter Agreement to
me via FAX. We can then task our respective legal
representatives with drafting the long form agreement as
described above.
Best Regards,
/s/ Mark S. Belinsky
Mark S. Belinsky
Vice President, Copy Protection Group
MSB:dh
Attachment (Exhibit 1 - Countries by Category)
Accepted and Agreed by Buena Vista Home Video
- ---------------------------------------------
/s/ Craig Kornblau 1/15/97
- ----------------------------------- ------------------------------
By (Signature) Date
Craig Kornblau Senior Vice President
- ----------------------------------- ------------------------------
Printed Name Title
<PAGE>
** Confidential treatment requested
for certain parts of this document
EXHIBIT 1
COUNTRIES BY CATEGORY
CATEGORY A - EXISTING BUENA VISTA-DIRECT TERRITORIES COVERED IN
THE CURRENT AGREEMENT, PLUS MEXICO
- - Countries Included: United States, Canada, Australia,
Austria, Benelux, Denmark, Finland, France, Germany, Italy,
Japan, Mexico, New Zealand, Switzerland, Sweden, Norway, Spain
and the United Kingdom
- - Status: Covered by the Minimum Guaranteed Application Fee
CATEGORY B - MACROVISION MASTER LICENSEE TERRITORIES
- - Countries Included: Korea, Egypt, Hungary, Poland
- - Status: Not covered by the Minimum Guaranteed Application
Fee. Business relationship to be between Macrovision licensee
and Buena Vista or the Buena Vista licensee.
CATEGORY C - BUENA VISTA LICENSEE TERRITORIES WITH PRE-EXISTING
MACROVISION RELATIONSHIPS
- - Countries Included: Brazil, South Africa, Israel, Portugal,
Iceland
- - Status: INITIALLY not covered by the Minimum Guaranteed
Application Fee. Business relationship to be between
Macrovision or its licensed duplicator and the Buena Vista
licensee. Convertible to Category A if/when Buena Vista
operates directly in the Category C country and so notifies
Macrovision in writing.
CATEGORY D - EXISTING MACROVISION LICENSEE TERRITORIES WHERE
BUENA VISTA NEITHER OPERATES DIRECTLY NOR HAS A LICENSEE
- - Countries Included: Bulgaria, Croatia, Slovenia
- - Status: INITIALLY not covered by the Minimum Guaranteed
Application Fee. Business relationship to be between Macrovision
and the Buena Vista licensee. Convertible to Category A if/when
Buena Vista operates directly in the Category D country and so
notifies Macrovision in writing.
CATEGORY E - ALL OTHER COUNTRIES
- - At Buena Vista's request, Macrovision will install one
videocassette copy protection processor unit to support Buena
Vista duplication at Buena Vista's chosen duplicator on a country-
by-country basis. Each of these installations would involve a
three-party agreement between Macrovision, the licensed
duplicator, and Buena Vista or its home video licensee and a one
time advance payment of [ * * ] from Buena Vista to Macrovision
which would be recoupable against copy protection service fees in
the relevant country. The fee payable to Macrovision for
application of the copy protection process in any Category E
country shall be [ * * ] per cassette. Installation of
Macrovision processors in Taiwan is subject to an appropriate
legal framework being in place to control black boxes.
Installation of Macrovision processors in Hong Kong is subject to
satisfactory resolution (as relates to the protection of
intellectual property) of Hong Kong's incorporation into the
People's Republic of China and the related impact on the economic
and legal climate.
<PAGE>
TECHNICAL CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is dated as of July 1, 1996, by and between VICTOR
TECHNOBRAIN CO., LTD., a Japanese company, located at 804 Futowo-cho, Kohoku-ku,
Yokohama-shi, Kanagawa 222, Japan, Facsimile No.: 045-546-5940 (hereinafter
referred to as Consultant) and MACROVISION JAPAN K.K., a Japanese corporation,
located at 2-5-3-301, Asagaya-Minami, Suginami-Ku, Tokyo 166, Japan, Facsimile
No.: 03-5378-7213 (hereinafter referred to as the "Company").
WHEREAS, the Company wishes to retain the services of the Consultant to perform
certain technical consultation services for the company subject to the terms and
conditions of this Agreement;
AND THEREFORE, in consideration of the mutual agreement herein contained, the
Company and Consultant hereby agree as follows:
1) The Company agrees to retain services of the consultant, and the
Consultant agrees to act as a Consultant to the Company, on the terms
and conditions contained in this Agreement. During the term of this
Agreement, the Consultant shall perform such consulting services as
may be assigned from time to time by the President of Macrovision
Corporation and/or the Vice President, AntiCopy Process ("ACP") Sales
and Marketing of Macrovision Corporation and/or the Worldwide
Technical Support Director, ACP of Macrovision Corporation, and/or the
Managing Director of the company. Such services shall include coping
with technical problems arising from licensed duplicators, right
owners and system operators, (satellite, cable, telephone line
operators), set-top box suppliers to system operators, and
semiconductor suppliers to such set-top box suppliers, either of the
Company or of Macrovision Corporation's master licensee in countries
listed in Appendix 1.
2) The Company agrees to retain the services of the Consultant pursuant
to the terms of this Agreement for a period of one year from the date
of this Agreement (the "Consulting Period"). This Agreement will be
extended automatically for successive one year terms unless either
party provides written notice to the other no later than ninety (90)
days prior to the end of the initial or any succeeding one year term.
3) In rendering consulting services pursuant to this Agreement, the
Consultant will be required to devote its reasonable efforts to the
performance of its duties and responsibilities under this Agreement.
The Company agrees to devote its reasonable efforts to support the
activities of the Consultant in any reasonably possible technical,
administrative and commercial way and to provide the Consultant with
documentation, statements, credentials and equipment which shall allow
the Consultant to perform duties and responsibilities in the capacity
of a Technical Consultant for the purpose of this Agreement. Within
thirty (30) days from the date of this Agreement, the Consultant
agrees to send its employees to an initial training session with
Macrovision Corporation's technical staff for three to five days, and
in that session the Company agrees to provide basic technical
education necessary for duties and responsibilities of the consultant
to the Consultant with its reasonable efforts. In the event that the
employee that attends the initial training session leaves the
employment of Consultant, then consultant agrees to transfer all the
basic technical knowledge to the successor employee in advance to such
an employee's departure.
4) Consultant's relationship with the Company is that of an independent
contractor and nothing in this Agreement should be construed to create
a partnership, joint venture, or
<PAGE>
employer-employee relationship. Consultant is not an agent of the
company and is not authorized to make any representation, contract, or
commitment on behalf of the Company unless specially requested or
authorized to do so in writing by the Company.
5) For the consulting services to be rendered under this Agreement the
Company agrees to pay to the Consultant as compensation for its
services, and the Consultant agrees to accept as full compensation the
following:
a) The sum of Y400,000 initial training session fee within thirty
(30) days from the commencement of the Consulting Period.
b) The sum of Y200,000 minimum fee per quarter, payable quarterly,
in advance from the commencement of the Consulting Period.
c) Following hourly, daily and weekly charges which would be
multiplied by the number of hours, days and weeks that Consultant
devoted on specific technical problem basis to the performance of
the duties and responsibilities under this Agreement.
Y10,000/hour
Y80,000/day (= consecutive eight hours)
Y150,000/consecutive two days
Y210,000/consecutive three days
Y270,000/consecutive four days
Y320,000/week (= consecutive five days)
d) Reimbursement on a monthly basis of necessary business expenses
against presentation of adequate receipts or evidence of payment.
A monthly expenditure for business expenses in excess of Y100,000
per month shall not to be reimbursed by the Company to the
Consultant, unless prior written approval has been obtained from
the Company.
e) Consultant agrees that it will not perform any services which
result in any hourly, daily, or weekly charges to the Company
without the prior written consent from the Company in advance of
performing each such service.
f) Consultant agrees that it will not perform any services which
result in any travels to countries listed in Appendix 1 except to
Japan without the prior written consent from the Company in
advance of performing each such service. Both parties agree that
such prior written consent will be given by the Company to
Consultant only after Consultant devotes its reasonable effort to
the performance of its duties and responsibilities by making
maximum use of telephone/facsimile communication, sample video
cassette tapes and sample video cassette recorders.
6) The Consultant agrees to promptly communicate and disclose to the
Company all information obtained by it in the course of its consulting
services relating to the business of the Company and its parent,
subsidiaries or affiliates. The Consultant shall prepare and submit
to the Company written reports as required with respect to the
activities undertaken by it in connection with specific solution
processes to each individual technical problem arising from licensed
duplicators, right owners, system operators, set-top box suppliers to
such system operators, and semiconductor suppliers to such set-top box
suppliers of the Company or of Macrovision Corporation or of
Macrovision Corporation's master licensees in countries listed in
Appendix 1. The
2
<PAGE>
Company agrees to promptly communicate and disclose to the Consultant
all information related to the business activities and interests of
the Company which may assist the Consultant in performing its duties
and provide prompt replies on matters either of technical or
commercial nature, which at the discretion and initiative of the
Consultant may be needed to perform its duties and responsibilities.
7) a) Consultant shall not disclose any confidential information
communicated by the Company to Consultant or confidential
information related to the Company's intellectual property
communicated to Consultant to customers of the Company or other
third party with whom Consultant interacts while performing
services pursuant to this Agreement, such as product technology,
design, marketing strategies and related information to any third
party. Consultant shall hold all such confidential information
within its own organization and shall not, without specific prior
written consent of the Company, disclose such information. Such
information shall not include what is deemed as general or common
knowledge already known. The information deemed confidential
shall be specifically designated as such by the Company in
writing. Consultant's agreement to not disclose any confidential
information extends for three years after termination of this
Agreement.
b) All right, title and interest in and to all inventions, work
product, drawings, methods, or other intellectual property
developed by Consultant while providing services under this
Agreement shall vest exclusively in the Company and Consultant
shall have no rights in such inventions, work product, drawings,
methods, or other intellectual property unless specifically
granted in writing by a separate agreement executed by the
Company.
8) This Agreement may be terminated by the Company for cause prior to the
end of the Consulting Period by written notice. For purpose of this
Agreement, "cause" shall mean any material action or inaction by
Consultant which affects negatively the ability to perform the
services contemplated by this Agreement, including but not limited to
any of the following; gross incompetence or misconduct;
misrepresentation of the Company or its products; misrepresentation of
equipment or funds of the Company; insolvency; or liquidation.
9) If either party fails to perform any provision of this Agreement or in
the case of the Company, it becomes insolvent and a proceeding under
bankruptcy law is commenced and not discharged within 60 (sixty) days,
then that party shall be considered in default of this Agreement upon
a written notice from the other party.
Upon receipt of a written notice of default, the defaulting party
shall, at its own expense, undertake immediate steps to remedy such
default. Should the defaulting party fail to remedy such default
within 30 (thirty) business days, after receipt of such written notice
of default, the non-defaulting party may, in writing, without
prejudice to any other rights under this Agreement and/or applicable
laws, terminate this Agreement. If a default is remedied and any
subsequent default of the same or similar nature committed by the same
previously defaulting party occurs within one year following the first
default, the other party may terminate this Agreement upon 10 (ten)
days written notice without the right of the defaulting party to
remedy such default.
10) This Agreement may be terminated by the Company, at its sole option,
upon ninety (90) days written notice if the Company has a material
change in strategy for the
3
<PAGE>
marketing of ACP in the Asian market or, in the Company's opinion, the
cost of continuing the Agreement outweigh the business gains
achievable in Asia or the Company experiences financial difficulties
causing it to substantially curtail its expenses.
11) This Agreement may be terminated by Consultant for any reason at the
end of the Consulting Period or at the end of any subsequent one-year
extension of the Consulting Period.
12) Consultant's agrees to comply with all applicable laws of Japan. In
addition:
a) Consultant agrees not to offer, pay, promise to pay, or authorize
the payment of any money, or offer, give, promise to give, or
authorize the giving of anything of value, to any employee of a
customer, or potential customer or government employee for the
purpose of improperly influencing a business decision to its
benefit.
b) Without limiting any other rights or remedies of the Company,
Consultant agrees to indemnify and hold the Company, its officers
and directors harmless from and against any and all claims,
losses, liabilities, judgments, settlements, expenses and costs,
including attorneys' fees, to which the Company may be put or
subjected by reason of Consultant's breach of paragraph 12a.
In the event Consultant performs unlawful acts in connection with this
Agreement, the Company shall be under no obligations to pay Consultant for such
services connected with unlawful acts.
13) In performing its consultancy services hereunder, the Consultant
understands that it shall not execute any documents or assume
commitments on behalf of the Company without prior written consent of
the Company.
14) Consultant agrees during the term of this Agreement not to accept work
or enter into a contract inconsistent with Consultant's obligations to
refrain from competitive activity, conflict of interest, transfer of
confidential or proprietary information or other obligations under
this Agreement.
15) Consultant agrees to indemnify the Company from any and all loss or
liability incurred by reason of the alleged breach by Consultant of
any confidentiality or services agreement with anyone other than the
Company. Consultant shall hold the Company harmless from damages or
obligations incurred by reason of conduct of Consultant while
performing services hereunder or otherwise.
16) Consultant agrees that prior to the public release of any material
prepared as a result of or in conjunction with material prepared under
this Agreement, Consultant shall provide the Company with the material
and a description of the publications for the Company's approval.
Such material shall not be published or leased without prior written
approval of the Company.
17) Consultant agrees to deliver promptly all the Company's property and
all copies of the Company's property in Consultant's possession to the
Company at any time upon the Company's request. Upon termination of
this Agreement for any reason or in any manner, Consultant agrees to
deliver promptly to the Company all such documents,
4
<PAGE>
together with any other of the Company's property then in Consultant's
possession, except as the Company may, by prior written approval,
allow Consultant to retain.
18) All notices hereunder shall be given in writing by hand delivery or by
registered or certified mail, addressed to the party to receive the
same at its respective address set forth below, or at such address as
may from time to time be designated by either party to the other.
To the Consultant:
Nobuhisa WATANABE
Director
VICTOR TECHNOBRAIN CO., LTD.
804 Futowo-cho
Kohoku-ku
Yokohama-shi
Kanagawa 222, Japan
Phone #045-546-4781
Fax #045-546-5940
To the Company:
Managing Director
Macrovision Japan K.K.
2-5-3-301, Asagaya-Minami, Suginami-ku
Tokyo 166
Phone #03-5378-7212
Fax #03-5378-7213
19) No failure by either party hereto to exercise, and to delay in
exercising, any rights hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any right hereunder by
either party preclude any other or future exercise of that right or
any other right hereunder by that party.
20) In case any one or more of the provisions of this Agreement should be
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
21) This Agreement is not assignable in whole or in party by Consultant
without the written consent of the Company.
22) This Agreement shall be construed under and governed by the law of
Japan. Any controversy, or claim arising out of, or relating to this
Agreement, or breach thereof, shall be settled under the jurisdiction
of the Tokyo District Court.
23) This Agreement shall constitute the complete and exclusive agreement
between the parties respecting this subject matter. This Agreement
may not be amended terminated or superseded except by an agreement in
writing between the parties. This Agreement supersedes all previous
agreements between Consultant and the Company whether oral or in
writing.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as the day and year first above written.
VICTOR TECHNOBRAIN CO., LTD. MACROVISION JAPAN K.K.
/s/ Akira Hirota /s/ Masao Komei
- ------------------------------ ---------------------------
Signature Signature
President Managing Director
- ------------------------------ ---------------------------
Title Title
January 28, 1997 February 3, 1997
- ------------------------------ ----------------------------
Date Date
<PAGE>
APPENDIX 1
Japan
South Korea
PRC
Taiwan
Hong Kong
Philippines
Thailand
Malaysia
Indonesia
Singapore
<PAGE>
SECOND AMENDMENT
TO
RESTRICTED STOCK ACQUISITION AGREEMENT
This Second Amendment to Restricted Stock Acquisition Agreement (this
"Amendment") is made as of January 29, 1997, by and between Macrovision
Corporation, a California corporation, and Command Audio Corporation, a
California corporation ("CAC").
RECITALS
A. The parties entered into a Restricted Stock Acquisition Agreement
dated as of July 31, 1996, as previously amended by a First Amendment dated as
of November 29, 1996, (collectively the "Agreement").
B. The parties now wish to amend the Agreement as set forth herein.
AGREEMENT
The parties agree as follows:
1. AMENDMENT OF SECTION 2 OF THE AGREEMENT. Section 2 of the Agreement
is amended to read in its entirety as follows:
2. VESTED SHARES. As of January 29, 1997, all three hundred fifty
thousand (350,000) of the Shares issued by Macrovision to CAC pursuant to
this Agreement are "Vested Shares."
2. AMENDMENT OF SECTION 3 OF THE AGREEMENT. Section 3 of the Agreement
is amended to read in its entirety as follows:
3. SALE OF SHARES IN INITIAL PUBLIC OFFERING. Notwithstanding any
other provision contained in this Agreement to the contrary, CAC agrees to
sell, and Macrovision waives its right of first refusal pursuant to Section
11 below thus permitting CAC to sell, all three hundred fifty thousand
(350,000) of the Shares in the first underwritten registration of an
offering of the Common Stock of Macrovision (the "IPO") pursuant to the
Securities Act of 1933, as amended (the "1933 Act"), provided that the IPO
becomes effective on or before March 31, 1997. The following provisions
shall apply to such sale:
3.1 SELLING SHAREHOLDER DOCUMENTS AND DELIVERY OF SHARES. CAC
shall sign and deliver such documents as may be required by the
underwriters or as otherwise may be necessary or desirable to register the
Shares in the IPO, including such indemnification provisions as may be
required of CAC. CAC shall deliver any and all certificates for the Shares
that CAC holds, and CAC
<PAGE>
and Macrovision shall instruct the Escrow Agent to deliver any and all
certificates for the Shares that the Escrow Agent holds, to the person(s)
specified in, and in accordance with, such selling shareholder documents.
3.2 EXPENSES OF REGISTRATION. Macrovision shall pay any and all
registration, qualification and filing fees, printing expenses, escrow
fees, attorneys fees and disbursements of counsel for Macrovision, blue sky
fees and expenses, and the expense of any special audits, that are incurred
in connection with the IPO. All underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities
registered in the IPO shall be borne by CAC, Macrovision and other selling
shareholders pro rata on the basis of the number of shares each has
registered.
3.3 INDEMNIFICATION OF CAC. Macrovision will indemnify CAC, its
officers and directors against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto,
incident to the IPO, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by Macrovision of the 1933 Act
or the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any
rule or regulation promulgated under the 1933 Act, the 1934 Act or any
state securities laws applicable to Macrovision in connection the IPO, and
Macrovision will reimburse CAC, its officers and directors for any legal
and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage,
liability or action, provided that Macrovision will not be liable in any
such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to Macrovision by CAC, its
officers and/or directors (other than John Ryan) and stated to be
specifically for use therein. CAC shall give notice to Macrovision
promptly after CAC, or any of its officers or directors, has actual
knowledge of any claim as to which indemnity may be sought, and shall
permit Macrovision to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for Macrovision, who
shall conduct the defense of such claim or litigation, shall be approved by
CAC (whose approval shall not unreasonably be withheld), and that CAC may
participate in such defense at its own expense. Except with the written
consent of CAC, Macrovision shall not consent to entry of any judgment or
enter into any settlement on behalf of CAC, its officers or directors, that
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to CAC, and any defendant officers and directors, a
release from all liability in respect to such claim or litigation.
2
<PAGE>
3. AMENDMENT OF SECTION 4 OF THE AGREEMENT. Section 4 of the Agreement
is amended to read in its entirety as follows:
4. NO EFFECT ON OTHER TRANSACTIONS. CAC's sale of Shares pursuant
to Section 3 above shall not affect in any way the rights and obligations
of Macrovision and CAC under the Recapitalization and Stock Purchase
Agreement and/or under any other agreement or agreements between the
parties hereto.
4. AMENDMENT OF SECTION 5 OF THE AGREEMENT. Section 5 of the Agreement
is amended to read in its entirety as follows:
5. SHAREHOLDER RIGHTS. Until such time as CAC sells or otherwise
transfers the Shares, CAC shall have all the rights of a shareholder of
Macrovision with respect to the Shares.
5. NO OTHER PROVISIONS AFFECTED. Except as set forth herein, the
provisions, terms and conditions of the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Amendment effective as
of the date first above written.
COMMAND AUDIO CORPORATION MACROVISION CORPORATION
By: /s/ illegible By: /s/ John O. Ryan
--------------------------- ----------------------------
Title: Chairman & CEO Title: Chairman & CEO
------------------------ -------------------------
<PAGE>
BY ELECTRONIC MAIL
February 10th, 1997
COMMAND AUDIO CORPORATION
805 Veterans's Boulevard
Redwood City, CA 94063
ATTENTION: MR. MANNY KRAKARIS, CHIEF FINANCIAL OFFICER
Gentlemen:
RE: OFFER TO REPURCHASE 100,000 SHARES OF MACROVISION COMMON STOCK --
RESCINDED
By letter of December 6th, 1996 (the "Offer"), Macrovision offered to
repurchase from Command Audio Corporation ("Command Audio") 100,000 shares of
the common stock of Macrovision held by Command Audio (the "Shares") on terms
set out in the Offer.
The parties have now concluded that they no longer wish to enter into such
arrangement for the sale and repurchase of the Shares, and now mutually wish
to have Macrovision rescind the terms of the Offer. By printing, signing and
returning a copy of this letter to the undersigned, Command Audio hereby
acknowledges and agrees with the rescission of the Offer by Macrovision and
the Offer is hereby considered null and void.
Yours sincerely,
MACROVISION CORPORATION
/s/ Chris Wilcox
- -------------------------------
for Victor Viegas,
Vice President, Finance and CFO
AGREED this 10th day of February, 1997.
COMMAND AUDIO CORPORATION
/s/ Manny Krakaris
- -------------------------------
per: Manny Krakaris, CFO
<PAGE>
EXHIBIT 10.26
$328,948.14 Sunnyvale, CA
January 7th, 1997
FOR VALUE RECEIVED, Command Audio Corporation, a California corporation,
whose address is 805 Veterans Boulevard, Ste. 310, Redwood City,
California, 94063 ("Maker") promises to pay to the order of Macrovision
Corporation, whose address is 1341 Orleans Drive, Sunnyvale, CA 94089
("Payee"), the sum of Three Hundred Twenty Eight Thousand, Nine Hundred
Forty Eight Dollars and Fourteen Cents ($328,948.14) together with interest
on the unpaid principal balance at the rate of nine percent (9%) simple
interest per annum. Interest accrued on this Promissory Note shall be due
and payable together with the full outstanding principal on the 1st day of
July, 1998.
Payments on this Promissory Note shall be made at the address of Payee, or
at any other place Payee designates in writing from time to time, and shall
be in lawful money of the United States of America. Maker waives demand for
payment, notice of nonpayment, presentment, notice of dishonor, protest,
and notice of protest. If Maker fails to timely make the payments required
hereunder, Maker shall pay the costs of collection and reasonable
attorneys' fees.
Maker may prepay this Promissory Note at any time, in whole or in part,
with accrued interest to the date of prepayment, and without premium or
penalty. All such payments on this Promissory Note shall be applied first
to the payment of accrued interest and the balance shall be applied to
principal.
This Promissory Note shall be binding upon Maker, and Maker's successors,
and assigns. This Promissory Note shall be governed by and construed in
accordance with the laws of the state of California.
ACCELERATION OF PAYMENT. The entire principal amount of this Promissory
Note, together will all accrued interest, shall immediately become due and
payable, without demand for payment, notice of nonpayment, presentment,
notice of dishonor, protest, notice of protest, or any other notice or
demand, all of which Maker hereby expressly waives, if:
a. Maker has made any misrepresentation in or with respect to, or has
breached any provision of this Promissory Note, or of any other agreement
with Payee;
b. Maker suspends payment of its obligations, or admits in writing its
inability to pay its debts generally as they become due;
c. Maker makes an assignment for the benefit of creditors, or a trustee or
receiver of Maker or of a substantial portion of its assets is appointed,
and the trustee or receiver is not discharged within sixty (60) days;
d. Any proceeding involving Maker is voluntarily commenced by Maker under
any bankruptcy, reorganization, insolvency, readjustment of debt,
marshalling of
CAC.Prom Note.doc 1 1/7/97
CONFIDENTIAL
<PAGE>
assets and liabilities, dissolution, or liquidation law or
statute of the United States or of any state, or a proceeding of such
nature is involuntarily instituted against Maker, and Maker by any action
indicates its approval of, or consent to, or acquiescence in, the
proceeding, or the proceeding remains undismissed for sixty (60) days; or
e. A final judgment for the payment of money is rendered against Maker, and
Maker does not discharge the judgment or procure a stay of execution of the
judgment within thirty (30) days of the date of entry and service of a copy
of the judgment, or cause execution of the judgment to be stayed during an
appeal.
This Promissory Note shall be govern by and construed in accordance with
the laws of the state of California.
COMMAND AUDIO CORPORATION
By /s/ Emmanuel Krakaris
-------------------------------------
Its CFO
-------------------------------------
CAC.Prom Note.doc 2 1/7/97
CONFIDENTIAL
<PAGE>
EXHIBIT 11.01
MACROVISION CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/95 12/31/96
----------- -----------
<S> <C> <C>
Net income from continuing operations.................................................... $ 1,056 $ 1,835
Preferred stock dividends................................................................ (450) (587)
----------- -----------
Adjusted net income from continuing operations........................................... 606 1,248
Discontinued operations.................................................................. (125) (827)
----------- -----------
Earnings applicable to common stock...................................................... $ 481 $ 421
----------- -----------
----------- -----------
Weighted average common shares outstanding............................................... 3,620 3,663
Common stock options, utilizing treasury stock method when dilutive...................... 297 445
Staff Accounting Bulletin No. 83 issuances and grants (1)................................ 245 245
----------- -----------
Weighted average shares outstanding...................................................... 4,162 4,353
----------- -----------
----------- -----------
Earnings (loss) per share:
Continuing operations.................................................................... $ .15 $ .29
Discontinued operations.................................................................. (.03) (.19)
----------- -----------
Net income............................................................................... $ .12 $ .10
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and preferred stock issued for consideration below the assumed
initial public offering (IPO) price of $11.00, and stock options and
warrants granted with exercise prices below the IPO price during the
12-month period preceding the date of the initial filing of the Registration
Statement, have been included in the calculation of common equivalent
shares, using the treasury stock method, as if they were outstanding for all
periods presented.
<PAGE>
EXHIBIT 23.02
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Macrovision Corporation and Subsidiaries:
We consent to the use of our report included in the registration statement
on Form SB-2 and to the references to our firm under the headings "Selected
Consolidated Financial Data," "Change in Auditors," and "Experts" in the
prospectus.
San Jose, California
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 1 of Notes to Consolidated
Financial Statements.
/s/ KPMG Peat Marwick LLP
San Jose, California
February 10, 1997
<PAGE>
EXHIBIT 23.03
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data," "Change in Auditors" and "Experts" and to the use
of our report dated March 7, 1995 included in the Registration Statement (Form
SB-2) and related Prospectus of Macrovision Corporation for the registration of
its common stock.
Ernst & Young LLP
Palo Alto, California
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the reincorporation of the Company in Delaware and the related exchange of
common and preferred shares as described in Note 1 of Notes to Consolidated
Financial Statements.
/s/ Ernst & Young LLP
Palo Alto, California
February 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2409
<SECURITIES> 0
<RECEIVABLES> 3643
<ALLOWANCES> (267)
<INVENTORY> 550
<CURRENT-ASSETS> 7450
<PP&E> 4319
<DEPRECIATION> (2302)
<TOTAL-ASSETS> 11953
<CURRENT-LIABILITIES> 5225
<BONDS> 0
0
1
<COMMON> 4
<OTHER-SE> 6067
<TOTAL-LIABILITY-AND-EQUITY> 11953
<SALES> 0
<TOTAL-REVENUES> 17080
<CGS> 0
<TOTAL-COSTS> 2579
<OTHER-EXPENSES> 11183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284
<INCOME-PRETAX> 3058
<INCOME-TAX> 1223
<INCOME-CONTINUING> 1835
<DISCONTINUED> (827)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1008
<EPS-PRIMARY> 0
<EPS-DILUTED> .10
</TABLE>
