<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission file number: 000-22023
MACROVISION CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0156161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1341 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 743-8600
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding as of October 31, 1997
Common Stock 7,204,414
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
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MACROVISION CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1997 (unaudited) and December 31, 1996 ............... 4
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended September 30, 1997 and 1996, and
Nine Months Ended September 30, 1997 and 1996 ............................ 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1997 and 1996..................... 6
Notes to Condensed Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................... 13
Item 2-3 Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders ........................ 13
Item 5. Other Information .......................................................... 13
Item 6. Exhibits and Reports on Form 8-K ........................................... 13
Signatures............................................................................ 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,689 $ 2,409
Short-term investments 12,185 -
Accounts receivable, less allowance for doubtful
accounts of $465 and $267 4,295 3,376
Inventories 639 550
Deferred tax assets 1,709 929
Prepaid expenses and other assets 599 186
---------- ----------
Total current assets 24,116 7,450
Property and equipment, net 1,838 2,017
Patents and other intangibles, net 1,064 1,161
Other assets 1,322 1,325
---------- ----------
$ 28,340 $ 11,953
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 662 $ 1,073
Accrued expenses 2,130 2,713
Deferred revenue 1,802 749
Income taxes payable 1,190 585
Current portion of capital lease 107 105
---------- ----------
Total current liabilities 5,891 5,225
Capital lease liability 216 296
Deferred tax liabilities 351 360
---------- ----------
TOTAL LIABILITIES 6,458 5,881
Stockholders' equity:
Preferred stock - 1
Common stock 7 4
Additional paid-in capital 23,045 9,530
Stockholders note receivable (131) (157)
Deferred stock compensation (132) (240)
Accumulated deficit (728) (2,931)
Accumulated translation adjustment (184) (135)
Unrealized gain on investments 5 -
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 21,882 6,072
---------- ----------
$ 28,340 $ 11,953
---------- ----------
---------- ----------
</TABLE>
See the accompanying notes to these condensed consolidated financial
statements.
4
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MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 5,040 $ 4,380 $ 14,326 $ 11,700
Costs and expenses:
Cost of revenues 444 525 1,822 1,826
Research and development 549 594 1,622 1,915
Selling and marketing 1,472 1,280 4,398 3,817
General and administrative 1,021 1,016 2,918 2,492
---------- --------- ---------- ----------
Total costs and expenses 3,486 3,415 10,760 10,050
---------- --------- ---------- ----------
Operating income from continuing operations 1,554 965 3,566 1,650
Interest and other income, net 138 (13) 311 (242)
---------- --------- ---------- ----------
Income from continuing operations before
income taxes 1,692 952 3,877 1,408
Provision for income taxes 644 331 1,518 585
---------- --------- ---------- ----------
Net income from continuing operations 1,048 621 2,359 823
Loss from discontinued operations, net - - - 827
---------- --------- ---------- ----------
Net income (loss) $ 1,048 $ 621 $ 2,359 $ (4)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Computation of earnings per share:
Net income from continuing operations $ 1,048 $ 621 $ 2,359 $ 823
Preferred stock dividends - (176) (156) (401)
---------- --------- ---------- ----------
Adjusted net income from continuing operations 1,048 445 2,203 422
Discontinued operations - - - (827)
---------- --------- ---------- ----------
Earnings (loss) applicable to common stock $ 1,048 $ 445 $ 2,203 $ (405)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Earnings (loss) per share:
Continuing operations $ 0.14 $ 0.10 $ 0.33 $ 0.10
Discontinued operations - - - (0.19)
---------- --------- ---------- ----------
Net Income (loss) $ 0.14 $ 0.10 $ 0.33 $ (0.09)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Shares used in computing earnings per share 7,675 4,358 6,717 4,351
</TABLE>
See the accompanying notes to these condensed consolidated financial
statements.
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MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 2,184 $ 675
Cash flows from investing activities:
Purchases of short-term investments (12,180) -
Sales of short-term investments - 1,200
Investment in related party (792) -
Receivable from related party - (295)
Acquisition of property and equipment (484) (346)
Payments for patents and other intangibles (223) (296)
Other, net (77) (61)
---------- ---------
Net cash (used in) provided by
investing activities (13,756) 202
Cash flows from financing activities:
Payments on capital lease obligations (78) (92)
Payments on long-term debt - (696)
Proceeds from issuance of common stock, net 14,060 125
Proceeds from stockholder receivable 26 -
Payments of deferred offering costs - (211)
Cash dividends (156) (225)
---------- ---------
Net cash provided by (used in)
financing activities 13,852 (1,099)
---------- ---------
Net increase (decrease) in cash and cash equivalents 2,280 (222)
Cash and cash equivalents at beginning of period 2,409 2,286
---------- ---------
Cash and cash equivalents at end of period $ 4,689 $ 2,064
---------- ---------
---------- ---------
</TABLE>
See the accompanying notes to these condensed consolidated financial
statements.
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MACROVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Macrovision Corporation (the "Company") in accordance with the rules
and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosure, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted in accordance with such rules and regulations. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company, and its results of operations and cash flows for those periods
presented. This quarterly report on Form 10-QSB should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's Registration Statement on Form SB-2
(Registration No. 333-19373), which was declared effective by the SEC on March
12, 1997.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year ending December 31, 1997
or any other future interim period, and the Company makes no representations
related thereto.
NOTE 2: CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less at date of acquisition to be cash
equivalents.
Investments held by the Company are classified as "available-for-sale" and are
carried at fair value based on quoted market prices, with unrealized gains and
losses, if material, reported in stockholders' equity. Such investments consist
of U.S. government or agency issues with original maturities beyond 3 months and
less than 12 months.
<TABLE>
<CAPTION>
Gross
(In thousands) Amortized Cost Unrealized Gain Fair Value
-------------- --------------- ----------
<S> <C> <C> <C>
Government Bonds $ 8,207 $ 5 $ 8,212
Auction rate preferred stock 2,000 - 2,000
Government agency securities 1,973 - 1,973
-------- ----- --------
$ 12,180 $ 5 $ 12,185
</TABLE>
NOTE 3 - SHARES ISSUED UNDER STOCK PURCHASE PLAN AND EXCERCISE OF OPTIONS
During the quarter ended September 30, 1997, the Company issued 11,645 shares of
common stock under the Employee Stock Purchase Plan and received proceeds of
approximately $89,000. Also during the quarter ended September 30, 1997, the
Company issued 33,531 shares of common stock and received proceeds of
approximately $83,000 associated with the exercise of stock options.
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NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and consisted of the following:
September 30, December 31,
(In thousands) 1997 1996
-----------------------------------
Raw materials $ 353 $ 260
Work-in-process 106 73
Finished goods 180 217
-----------------------------------
$ 639 $ 550
-----------------------------------
-----------------------------------
NOTE 5 - NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share for the periods presented was determined using the
weighted average number of shares of common stock and dilutive common equivalent
shares from stock options using the treasury stock method. Pursuant to the
rules of the 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 of net earnings (loss) per share for the three and nine month
periods ended September 30. 1996 as if they had been outstanding for the entire
period.
NOTE 6 - 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. Mr. Swyt
filed his claim in arbitration for this matter with the American Arbitration
Association in June 1997 and the arbitration is proceeding. 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.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 requires the presentation of basic earnings per share (EPS) and, for
companies with complex capital structure diluted EPS. SFAS No. 128 is effective
for annual and interim periods ending after December 31, 1997. The Company
expects that basic EPS will be higher than primary earnings per share as
presented in the accompanying consolidated financial statements and that diluted
EPS will not differ materially from fully diluted earnings per share as
presented in the accompanying consolidated financial statements.
The FASB also recently issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 and 131 are effective for fiscal 1998. The Company
is currently evaluating the impact of these statements on the consolidated
financial statements.
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NOTE 8 - INVESTMENT IN COMMAND AUDIO CORPORATION (CAC)
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 and third-party
financing. The investment is classified in other assets in the accompanying
condensed consolidated balance sheets in the amount of $357,000 and $1,149,000
as of December 31, 1996 and September 30, 1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION IN THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. PREDICTIONS OF
FUTURE EVENTS ARE INHERENTLY UNCERTAIN. ACTUAL EVENTS COULD DIFFER MATERIALLY
FROM THOSE PREDICTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF THE RISKS
SET FORTH IN THIS FORM 10-QSB AND IN THE RISK FACTORS SECTION OF THE COMPANY'S
PROSPECTUS DATED MARCH 12, 1997, INCLUDED IN THE COMPANY'S REGISTRATION
STATEMENT ON FORM SB-2 (REGISTRATION NO. 333-19373), WHICH WAS DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997. THERE
ARE NO ASSURANCES THAT THE COMPANY HAS IDENTIFIED ALL POSSIBLE PROBLEMS WHICH
THE COMPANY MIGHT FACE. ALL INVESTORS SHOULD CAREFULLY READ THE COMPANY'S
REGISTRATION STATEMENT ON FORM SB-2, TOGETHER WITH THIS FORM 10-QSB, AND
CONSIDER ALL SUCH RISKS BEFORE MAKING AN INVESTMENT DECISION WITH RESPECT TO THE
COMPANY'S STOCK.
OVERVIEW
The Company 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 revenues of the Company primarily
consists of licensing fees for videocassette and DVD copy protection, licensing
of digital Pay-Per-View copy protection, licensing and selling products
incorporating its PhaseKrypt video scrambling technology to cable television
system operators, law enforcement agencies, television broadcasters, private
analog satellite networks and in its licensing of CineGuard motion picture
theaters.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
NET REVENUES
Consolidated net revenues for the third quarter of 1997 increased to $5.0
million or 15% from $4.4 million in the third quarter of 1996. Revenues in the
Copy Protection group increased 32% to $4.6 million from $3.5 million and
revenues in the Video Scrambling group decreased 57% to $340,000 from $787,000.
Revenues in the Copy Protection group during the third quarter of 1997 included
revenues from packaged media of $3.8 million which was 28% or $824,000 higher
than the third quarter of 1996. This was due in part to the higher number of
copy protected videos and DVDs produced during the third quarter of 1997 as
compared to the third quarter of 1996. Increased revenues in the Copy
Protection group were also due to DVD copy protection royalty revenue from
replication of DVDs and license fees from PC subassembly manufacturers, which
revenue did not exist in the third quarter of 1996. Revenues from the other
component of Copy Protection, Pay Per View, increased to $838,000 which was 57%
or $305,000 higher than the third quarter of 1996. Revenue growth in the Pay
Per View area was primarily due to an increase in system operator license fees
and an increased number of set top boxes employing the Company's technology
shipped by manufacturers during the quarter. Revenues in the Video Scrambling
group during the third quarter of 1997 included revenues from scrambling
equipment of $64,000 which was 85% or $356,000 lower than the third quarter of
1996. This was due in part to the lack of orders for VES products
9
<PAGE>
from various government law enforcement agencies. The analog decoding
component of Video Scrambling also saw a decrease in revenue of $91,000 to
$276,000 from $367,000 in the third quarter of 1996 due primarily to the
Southeast Asian financial crises which has delayed expected cable TV system
upgrades and therefore our licensees' ability to sell addressable set-top
converters which include the Company's PhaseKrypt TM scrambling technology.
GROSS MARGIN
Gross margin for the third quarter of 1997 was 91% compared to 88% for the third
quarter of 1996. The Company's gross margin is influenced by the sales mix which
in the third quarter of 1997 benefited from increased license fees and higher
margined home video royalties versus lower margin product sales. Cost of sales
includes items such as product costs, duplicator fees, patent amortization and
mastering costs.
RESEARCH AND DEVELOPMENT
Research and Development expenses decreased by $45,000 or 8% in the third
quarter of 1997 compared to the third quarter of 1996 primarily due to a
reduction in consulting fees and engineering supplies associated with the
completion of the VES-TM product during 1996.
SELLING & MARKETING
Selling and marketing expenses increased by $192,000 or 15% in the third quarter
of 1997compared to the third quarter of 1996 primarily due to increased sales
efforts in Pay Per View and Video Scrambling business.
GENERAL & ADMINISTRATIVE
General and administrative expenses increased by $5,000 or 1% in the third
quarter of 1997 compared to the third quarter of 1996 as increased legal
expenses and expenses associated with an increase in the number of employees in
support of the Company's growing business were offset from the reversal of
reserves permitted under a favorable judicial ruling in a tax case.
INTEREST AND OTHER EXPENSE
Other income during the third quarter of 1997 benefited from interest income
earned on the invested proceeds from the Company's initial public offering
("IPO"). The third quarter of 1996 included interest expense on the Company's
convertible debt which was converted into preferred stock during the third
quarter of 1996.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal and state taxes at an effective
rate of 38% and 35% from continuing operations for the three months ended
September 30, 1997 and 1996, respectively. The higher rate for 1997 was due to
higher foreign taxes related to income in the quarter.
NET INCOME (LOSS)
Net income from operations for the third quarter of 1997 was $1,048,000 compared
to $621,000 in the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
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NET REVENUES
Consolidated net revenues for the first nine months of 1997 increased to $14.3
million or 22% from $11.7 million in the first nine months of 1996. Revenues in
the Copy Protection group increased 19% to $12.2 million from $10.3 million and
revenues in the Video Scrambling group increased 50% to $2.0 million from $1.3
million. Revenues in the Copy Protection group during the first nine months of
1997 included higher revenues from packaged media due in part to higher
videocassette and DVD royalties and DVD license fees during the period as
compared to the first nine months of 1996. During 1997, the Company recorded
its first DVD copy protection royalty revenue from replication of DVDs and
license fees from PC subassembly manufacturers. Revenues fromthe other
component of Copy Protection,Pay Per View,was 119% or $1.4 million higher in the
first nine months of 1997 than the comparable period of 1996. Revenue growth in
the Pay Per View area is primarily due to an increase in system operator license
fees and an increased number of set top boxes shipped during the period. In the
Video Scrambling Group, Video System's revenues were $77,000 or 11% lower during
the nine months ended September 30, 1997 compared to nine months ended September
30, 1996 as a result of lower shipments of the VES-TM product and the
introduction of new products, the VES-MX and VES-TL. In the first nine months
of 1997, revenues from the analog decoding component of Video Scrambling
increased 127% or $735,000 compared to the first nine months of 1996 resulting
from business in South America and Southeast Asia.
GROSS MARGIN
Gross margin for the nine months ended September 30, 1997 was 87% compared to
84% for the comparable period of 1996. The Company's gross margin is influenced
by the sales mix which in 1997 benefited from increased license fees and higher
margin royalty based revenue versus lower margin product sales. Cost of sales
includes items such as product costs, duplicator fees, patent amortization and
mastering costs.
RESEARCH AND DEVELOPMENT
Research and Development expenses decreased by $293,000 or 15% during the first
nine months of 1997 compared to the same period in 1996 primarily due to a
reduction in the number of employees, consulting fees and engineering supplies
associated with the completion of the VES-TM product during 1996.
SELLING & MARKETING
Selling and marketing expenses increased by $581,000 or 15% during the first
nine months of 1997 compared to the same period in 1996 primarily due to
increased sales and marketing efforts in Pay Per View and Video Scrambling.
GENERAL & ADMINISTRATIVE
General and administrative expenses increased by $426,000 or 17% during the
first nine months of 1997 compared to the same period in 1996 primarily due to
legal expenses, bad debt provisions, an increase in the number of employees,
expenses associated with being a public company, and support for the growing
businesses of Pay Per View, DVD and Video Scrambling.
INTEREST AND OTHER EXPENSE
Other income during the first nine months of 1997 benefited from interest income
earned on the IPO proceeds. The first nine months of 1996 included interest
expense on the Company's convertible debt which was converted into preferred
stock during the third quarter of 1996.
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PROVISION FOR INCOME TAXES
Income tax expense represents combined federal and state taxes at an effective
rate of 39% and 42% from continuing operations for the nine months ended
September 30, 1997 and 1996, respectively. The higher rate for 1996 was due to
higher taxes on increased foreign income in the first nine months of 1996, while
the lower rate for 1997 is due in part to tax-exempt interest earned on the
proceeds of the IPO.
NET INCOME (LOSS)
Net income from continuing operations for the nine months ended September 30,
1997 was $2.4 million compared to $823,000 for the first nine months of 1996.
Net income for the first nine months of 1997 was $2.4 million compared to a loss
of $4,000 which included the loss from the discontinued operations of Command
Audio Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from cash generated by
operations, principally by its videocassette copy protection business. The
Company's operating activities provided net cash of $2,184,000 and $675,000 for
the nine months ending September 30, 1997 and 1996, respectively. In each of
these periods, net cash was provided primarily by net income from continuing
operations and an increase in deferred revenue and income taxes payable
partially offset by increases in accounts receivable and deferred taxes, with
discontinued operations primarily creating the usage in 1996.
The Company made capital expenditures of $484,000 and $346,000 in the first
nine months ending September 30, 1997 and 1996, respectively. The Company
also paid $223,000 and $296,000 in the nine months ended September 30, 1997
and 1996, respectively, for costs associated with obtaining patents and other
intangibles. The proceeds from the IPO have been invested in various cash
equivalents and short term securities.
During the three months ended September 30, 1997, the Company invested
$545,000 in Command Audio Corporation (CAC) maintaining its 19.8% ownership
in CAC in connection with a round of external third-party financing obtained
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 achievement of milestones
specified in CAC's business plan as well as new third party financing rounds.
The Company accounts for the investment in CAC by the cost method. The
Company is obligated to make an additional equity investment in CAC in the
amount of $1,188,000 upon the future achievement of certain business
milestones. The Company does not exert any material influence over the
financial and operating policies of CAC.
The Company believes that the net proceeds of its initial public offering,
together with available funds and cash flows generated from operations will be
sufficient to meet its working capital and capital expenditure requirements
through 1997. The Company may also utilize cash to acquire or invest in
complementary businesses or to obtain the right to use complementary
technologies.
The Company paid interest of $9,000 and $281,000 in the nine months ended
September 30, 1997 and 1996, respectively. The interest expense paid in 1996
was primarily from the Company's payments on its convertible debt that was
converted into preferred stock during the third quarter of 1996. The Company
paid $1,494,000 and $532,000 in taxes for the nine months ended September 30,
1997 and 1996, respectively.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. Mr. Swyt
filed his claim in arbitration for this matter with the American Arbitration
Association in June 1997 and the arbitration is proceeding. 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fiscal quarter ended September 30, 1997, there were no submission of
matters to the vote of security holders.
ITEM 5 - OTHER INFORMATION.
ITEM 5.1 - In July 1997, the Board of Directors approved an amendment to
the Company's bylaws to allow for not less than five nor more than nine
members of the board setting the current number at six. The Board also
elected Tom Wertheimer, as a director, and appointed him to serve on the
Audit and Compensation Committees of the Board.
ITEM 5.2 - In September 1997, Macrovision entered into an agreement with
Digimarc Corporation to develop a joint plan for addressing the digital
copyright issues associated with the Digital Versatile Disc (DVD) platform
and other digital distribution media. Digimarc and Macrovision submitted
their digital media copyright protection solution in response to a call for
proposals from the Copy Protection Technical Working Group (CPTWG), an ad
hoc industry group comprised of Hollywood studios, consumer electronics
manufacturers, PC hardware and software companies, and suppliers to these
groups. This jointly developed technology will have the capability to
protect Hollywood movies and other video content from indiscriminate
copying on future digital recording devices. In August 1997, the Company
also entered into negotiations to make an equity investment in Digimarc.
The Company has committed to investing, at a future date upon the
occurrence of certain events, a minimum amount between $1 million to $1.5
million in exchange for shares of Digimarc's preferred stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11.1 - Schedule of Computation of Earnings (Loss) Per Share.
27.1 - Financial Data Schedule.
(a) Reports on Form 8-K.
During the quarter ended September 30, 1997, the Company filed no Current
Reports on Form 8-K.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Macrovision Corporation
Date: November 14, 1997 By: /S/ William A. Krepick
---------------------- ----------------------------------
William A. Krepick, President and
Chief Operating Officer
Date: November 14, 1997 By: /S/ Victor A. Viegas
---------------------- ----------------------------------
Victor A. Viegas, Vice President,
Finance and Administration and Chief
Financial Officer
14
<PAGE>
Exhibit 11.1
MACROVISION CORPORATION AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF NET EARNINGS (LOSS) PER SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Computation of earnings (loss) per share:
Net income from continuing operations $ 1,048 $ 621 $ 2,359 $ 823
Preferred stock dividends - (176) (156) (401)
--------- ---------- ---------- ----------
Adjusted net income (loss) from continuing operations 1,048 445 2,203 422
Discontinued operations - - - (827)
--------- ---------- ---------- ----------
Earnings (loss) applicable to common stock $ 1,048 $ 445 $ 2,203 $ (405)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Earnings (loss) per share:
Continuing operations $ 0.14 $ 0.10 $ 0.33 $ 0.10
Discontinued operations - - - (0.19)
--------- ---------- ---------- ----------
Net earnings (loss) $ 0.14 $ 0.10 $ 0.33 $ (0.09)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average common shares outstanding 7,145 3,681 6,233 3,652
Weighted average common equivalent shares from stock 530 432 484 454
options calculated using the treasury stock method
Common equivalent shares from common shares issued
and stock options granted within twelve months of
the initial public offering, included pursuant to Staff
Accounting Bullentin No. 83 - 245 - 245
--------- ---------- ---------- ----------
Shares used to compute net earnings (loss) per share 7,675 4,358 6,717 4,351
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Financial Statements of Macrovision Corporation for the nine months ended
September 30, 1997, and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4689
<SECURITIES> 12185
<RECEIVABLES> 4760
<ALLOWANCES> 465
<INVENTORY> 639
<CURRENT-ASSETS> 24116
<PP&E> 4590
<DEPRECIATION> 2752
<TOTAL-ASSETS> 28340
<CURRENT-LIABILITIES> 5891
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 21875
<TOTAL-LIABILITY-AND-EQUITY> 28340
<SALES> 14326
<TOTAL-REVENUES> 14326
<CGS> 1822
<TOTAL-COSTS> 1822
<OTHER-EXPENSES> 8938
<LOSS-PROVISION> 370
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 3877
<INCOME-TAX> 1518
<INCOME-CONTINUING> 2359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2359
<EPS-PRIMARY> .33
<EPS-DILUTED> 0
</TABLE>
