<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MACROVISION CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0156161
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
</TABLE>
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
VICTOR A. VIEGAS
CHIEF FINANCIAL OFFICER
MACROVISION CORPORATION
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Name, address, including zip code, and telephone number, including area code,
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. SANJIV S. DHAWAN, ESQ. PATRICK J. SCHULTHEIS, ESQ.
KRISTINA R. WILKEN, ESQ. TIMOTHY R. FULKERSON, 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
(650) 494-0600 (650) 856-1200 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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
SHARES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per share......... 1,725,000 $21.3125 $36,764,062 $10,845.40
</TABLE>
(1) Includes 225,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of the Common Stock on the
Nasdaq National Market on May 27, 1998.
------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 2, 1998
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>
PROSPECTUS
1,500,000 SHARES
[LOGO]
COMMON STOCK
Of the 1,500,000 shares of Common Stock offered hereby, 1,140,000 shares are
being sold by Macrovision Corporation ("Macrovision" or the "Company") and
360,000 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."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol MVSN. On June 1, 1998, the last reported sale price of the Company's
Common Stock was $21.75 per share. See "Price Range of Common Stock."
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------
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>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total (3)......................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 225,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
COWEN & COMPANY
, 1998
<PAGE>
HOLLYWOOD KNOWS A GREAT PICTURE WHEN THEY SEE ONE.
[PICTURE OF TELEVISION SCREEN WITH A VERY POOR QUALITY PICTURE]
[MACROVISION LOGO]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
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 DIGITAL VERSATILE DISC [Bar graph showing
Over 2.0 billion cassettes PAY-PER- VIEW (PPV) (DVD) number of copy protected
worldwide have been copy Because PPV programs can be Macrovision's technology video cassettes]
protected by Macrovision, easily copied, deters consumers from 1993 234 million
the majority of which are Macrovision's copy making high quality 1994 344 million
Hollywood releases. protection technology will videocassette copies of 1995 367 million
be essential to protect movies on DVDs. 1996 451 million
studios' home video, repeat 1997 462 million
PPV and pay TV revenues by EVERY YEAR MORE AND MORE
deterring VCR owners from VIDEOCASSETTES ARE
making copies. 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>
CABLE TV SATELLITE TV NETWORKS LAW ENFORCEMENT/GOVERNMENT
High security, low cost VES-TM- products help secure video VES-TM-TM- is a portable, hand-held,
PhaseKrypt-Registered Trademark- programs transmitted via satellite point- to-point scrambling system
scrambling technology is licensed to or land- based networks for for law enforcement and broadcast
emerging international pay TV corporate, educational or broadcast applications.
set-top decoder manufacturers. television applications.
</TABLE>
Logo
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED. FACTORS
THAT MAY CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE UNDER "RISK FACTORS" AND THOSE APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
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, digital
versatile discs ("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 has recently broadened its focus to include copy
protection of other media, including multimedia CD-ROMs and Internet-delivered
software products.
All of the Motion Picture Association of America ("MPAA") studios have used
the Company's copy protection technology to protect some or all of their
videocassettes in one or more countries around the world. Studios such as
Disney, Columbia, PolyGram and Paramount have signed agreements to apply the
Company's copy protection technologies to substantially all of the motion
pictures that they release in videocassette and DVD format in the United States.
The Company's technology has been used to copy protect more than 2 billion
videocassettes worldwide since 1985. The Company believes that its video copy
protection technologies are accepted as the DE FACTO standard for preventing
digital and analog video from being copied by consumer VHS videocassette
recorders.
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, cable and digital
terrestrial television operators, and in the 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 using analog videocassette recorders, may increase the need for
effective consumer copy protection in these applications.
The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers, including General Instrument Corporation, Pace
Micro Technology, Scientific-Atlanta and Thomson Consumer Electronics (RCA
brand), and 13 digital PPV system operators, including British Sky Broadcasting
Limited, DIRECTV, Hong Kong Telecom, Galaxy Latin America, Sky Latin America and
Sky Perfect. The Company's copy protection technology is embedded in
approximately seven million digital set-top decoders currently in use in the
United States, Japan, Europe and a number of countries in Latin America.
Currently four digital PPV program providers in Japan and one system operator in
Hong Kong have activated copy protection for digital PPV programming. To date,
82 companies that manufacture DVD video players or DVD-ROM drives have signed
agreements with the Company to incorporate the Company's DVD copy protection
technology in their 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.
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 offers licenses to consumer
electronics and personal computer manufacturers and charges rights owners a per
unit fee similar to its videocassette copy protection licensing model. Video
scrambling technologies either are licensed or are sold in hardware products and
components.
To facilitate the development of copy protection offerings for other media,
the Company has entered into arrangements with certain other companies that have
developed copy protection technologies. The Company has entered into a joint
development arrangement with Digimarc Corporation ("Digimarc") for a video
watermarking solution to protect DVD and other digital distribution media from
being copied by digital recording devices. In addition, the Company has an
exclusive marketing agreement with C-Dilla Limited ("C-Dilla") for copy
protection technology for CD-ROM and Internet-delivered software products in the
consumer multimedia market.
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) introduce 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................... 1,140,000 shares
Common Stock offered by the Selling Stockholders...... 360,000 shares
Common Stock to be outstanding after the offering..... 8,413,254 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 INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues..................................... $ 9,549 $ 13,330 $ 14,189 $ 17,080 $ 20,340 $ 4,564 $ 5,178
Operating income from continuing operations...... 1,571 2,804 2,183 3,318 5,756 899 1,472
Net income from continuing operations............ $ 665 $ 1,501 $ 1,056 $ 1,835 $ 3,821 $ 554 $ 994
Net income from continuing operations applicable
to common stock (2)............................ $ 1,248 $ 3,665 $ 398 $ 994
Earnings per share from continuing operations (2)
Basic.......................................... $ 0.33 $ 0.57 $ 0.09 $ 0.14
Diluted........................................ $ 0.29 $ 0.53 $ 0.08 $ 0.13
Shares used in computing earnings per share (2)
Basic.......................................... 3,787 6,476 4,490 7,244
Diluted........................................ 4,280 6,960 4,903 7,735
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED (3)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...................................... $ 11,607 $ 34,476
Working capital........................................................................ 13,064 35,933
Total assets........................................................................... 30,436 53,305
Long-term obligations, net of current portion.......................................... 160 160
Total stockholders' equity............................................................. 24,863 47,732
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of March 31, 1998. Does not include 821,776
shares of Common Stock issuable upon the exercise of options outstanding as
of such date at a weighted average exercise price of $6.80 per share. Also
does not include 687,958 additional shares reserved for future grants or
issuances under the Company's stock option and stock purchase plans. See
"Capitalization" and Note 5 of Notes to Consolidated Financial Statements.
(2) Net income from continuing operations applicable to common stock is
calculated by deducting preferred stock dividends from net income from
continuing operations. Shares used in computing basic and diluted earnings
per share do not include convertible preferred stock. 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 1,140,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $21.75 per
share and after deducting the estimated underwriting discount and offering
expenses. See "Capitalization" and "Use of Proceeds."
------------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
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 THAT 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 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.
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 and DVDs during the
year-end holiday shopping season. The Company anticipates that revenues, if any,
from multimedia CD-ROM copy protection will also reflect this seasonal trend. 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. Further, the Company may not be in a position to
anticipate a decline in revenues in any quarter until late in the quarter, due
primarily to the delay inherent in revenue reporting from licensees and
replicators, resulting in a potentially more significant level of volatility in
the price of the Company's Common Stock. 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 75.4%, 62.0% and 60.9% of the Company's net
revenues during 1996, 1997 and the first three months of 1998, respectively. The
Company expects these fees to account for a majority of the Company's net
revenues and operating income at least through 1998. This portion of the
Company's business has not grown significantly 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
5
<PAGE>
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 the release 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 in 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--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. During 1996, revenues from
the Company's three largest customers represented 37% of the Company's net
revenues and each accounted for more than 10% of the Company's net revenues. For
1997, one customer accounted for 11% of the Company's net revenues. For the
first three months of 1998, revenues from the Company's two largest customers
represented 22% of the Company's net revenues, and each accounted for more than
10% of the Company's net revenues. The MPAA studios as a group accounted for
47.1%, 38.6% and 41.7% of the Company's net revenues in 1996, 1997 and the first
three months of 1998, respectively. The Company expects that revenues from the
MPAA studios will continue to account for a substantial portion of the Company's
net revenues for the foreseeable future. The Company has agreements with three
of the MPAA studios and PolyGram for copy protection of substantially all of
their packaged media in the United States, which agreements expire at various
times ranging from December 1998 to June 2000. 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 an annual contract basis or
title-by-title or month-by-month. 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--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
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development of alternative technologies or standards for DVD copy protection,
the uncertainty in the marketplace engendered by alternative standards for DVD
and for DVD recordable devices, 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
seven million digital set-top decoders manufactured by certain of the leading
set-top decoder manufacturers, only four programmers on one direct broadcast
satellite network in Japan and one system operator in Hong Kong have activated
copy protection for digital PPV programming. The four programmers in Japan
distribute adult PPV programming, and the Japanese government has required that
all such programming be copy protected. There can be no assurance that any of
the MPAA studios will require copy protection for any of their PPV motion
pictures or that PPV system operators will activate such copy protection in
other digital PPV networks outside of Japan or Hong Kong. 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
subscription television ("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.
The Company seeks to expand its copy protection business through licensing
arrangements and strategic investments. The Company and Digimarc are jointly
developing a digital media copy protection solution to address the
digital-to-digital copying issues associated with the next generation of DVD
recording devices. They have submitted their proposed solution to the Copy
Protection Technical Working Group ("CPTWG"). At least six other companies have
also submitted proposals to the CPTWG. The company whose digital media copy
protection solution is selected by the CPTWG will have a significant advantage
in licensing its technology to video rights owners worldwide and in working with
consumer electronics manufacturers, PC platform companies and their suppliers to
implement digital-to-digital copy protection. The IEEE 1394 transmission
protocol has also been proposed as a digital-to-digital copy protection
solution. If the solution being developed by the Company and Digimarc is not the
selected solution or otherwise is not widely adopted by studios or consumer
electronics manufacturers, the Company and Digimarc will be at a competitive
disadvantage in marketing their solution. There can be no assurance that the
solution being developed by the Company and Digimarc will be selected as the
standard by the CPTWG or that such solution will achieve market acceptance as
the market and the standards for digital-to-digital copy protection evolve. See
"Business--Technologies and Products."
ENTRANCE INTO NEW MARKET. The Company has an exclusive marketing agreement
with C-Dilla for copy protection of multimedia CD-ROMs and Internet-delivered
software products in the consumer multimedia market. The market for copy
protection of CD-ROMs is unproven. For the Company to be successful in entering
this new market, producers of multimedia CD-ROMs must accept copy protection
generally and also adopt the solution developed by C-Dilla and marketed by the
Company. There can be no assurance that copy protection of multimedia CD-ROMs
will be accepted. For example, consumers may react negatively to the
introduction of copy protected CD-ROMs if they are prohibited from copying the
content of their favorite applications or if copy protection impairs the
playability of the CD-ROM. Moreover, copy protection may not be effective on all
hardware platforms or configurations or may be easily circumvented. A number of
competitors and potential competitors are developing CD-ROM copy protection
solutions. Many of these competitors and potential
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competitors have substantially greater name recognition and financial, technical
and marketing resources than the Company. There can be no assurance that there
will be demand for CD-ROM copy protection or that the solution marketed by the
Company will achieve or sustain market acceptance under emerging industry
standards or will meet, or continue to meet, the changing demands of multimedia
software providers. See "Business--Strategic Investments."
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 38 United States patents and has
41 United States patent applications pending. In addition, the Company has 123
foreign patents and 211 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, 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. Krypton Co., Ltd., a Japanese company, has filed
an invalidation claim against one of the Company's anti-copy patents in Japan.
After consultation with Japanese patent counsel, the Company believes that this
claim is without merit and will aggressively contest the claim in the Japanese
Patent Office. In the event of an adverse ruling on such claim, the Company may
incur legal competition from clones of its own copy protection technology in
Japan and a corresponding decline in demand for such technology from the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, as the Company
acquires or licenses a portion of the technology included in its products from
third parties, its exposure to infringement actions may increase because the
Company must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed technology. Although the Company intends
to obtain representations as to the origins and ownership of such acquired or
licensed software and obtain indemnification to cover any breach of any such
representations, there can be no assurance that such representations will be
accurate or that such indemnification will provide adequate compensation for any
breach of such representations. The Company and C-Dilla have received
communications from Ablex Audio Video Ltd. and its subsidiary, Pan Technologies,
notifying them that these companies assert rights to the technology that C-Dilla
licenses to the Company and claiming that the Company's agreements with C-Dilla
violate understandings that these companies had allegedly reached with C-Dilla.
The Company has been informed that a number of potential customers for the
CD-ROM copy protection solution to be marketed by the Company have received
similar communications. The Company believes that these assertions and claims
are without merit. If, as threatened, these companies commence litigation
against the Company or C-Dilla, uncertainty could develop as to the Company's
rights to the CD-ROM copy protection technology, which could impair the
Company's ability to market the technology and have a material adverse effect on
the Company's business, financial condition and results of operations. These and
any other such claims of infringement, with or without merit, could be time
consuming to defend, result in costly litigation, cause product shipment delays
or require the Company to cease
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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 eight United States and 20 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.
The Company has one lawsuit of this type pending to require the defendants to
discontinue the sale of devices that circumvent the Company's copy protection
technologies and infringe one or more of the Company's circumvention patents. In
the event of an adverse ruling in this litigation or in any similar litigation,
the Company might suffer from the legal availability of such a circumvention
device or obtain rights to the offending devices. The legal availability of
circumvention devices could result in the increased proliferation of devices
that defeat the Company's copy protection technology and a decline in demand for
the Company's technologies, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There is
legislation before the United States Congress and certain foreign legislative
bodies that would make such circumvention devices illegal. The Company is
supporting the legislative effort to make such circumvention devices illegal
irrespective of any patent position held by the Company.
Additional litigation may be necessary in the future to limit the sale of
circumvention 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, including indemnification of customers, 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. See "--Risks of Circumvention
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
videocassette recorders. 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 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, South
America and other developing areas and the ability of the Company's licensees to
sell into those markets. The financial crisis in Southeast Asia has delayed
expected cable television system upgrades in that region and, consequently, has
adversely affected the ability of the Company's licensees to sell addressable
set-top decoders that include the Company's PhaseKrypt video scrambling
technology. 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.
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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 CIRCUMVENTION TECHNOLOGIES. Attempts by third parties to
circumvent 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 in the videocassette
and DVD fields 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. The Company has
no such patents specifically directed to the digital-to-digital or CD-ROM copy
protection fields. Notwithstanding the Company's patent position, a number of
devices have been available, and currently are available, that circumvent 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 circumvention
technologies that do not infringe the Company's patents or that the Company will
be able to obtain patents on circumvention 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 interference with legitimate consumer use of the
original copyrighted product, the commercial availability of products that
circumvent 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."
RISKS ASSOCIATED WITH STRATEGIC INVESTMENTS. The Company has recently
expanded its technological base in current as well as new markets through
strategic investments in companies with complementary or compatible technologies
or products. The Company currently holds minority equity interests in Command
Audio Corporation, Digimarc and C-Dilla. Such investments, which total $8.4
million and represented 27.6% of the Company's total assets at March 31, 1998,
involve a number of risks. The negotiation, creation and management of these
strategic relationships typically involve a substantial commitment of management
time and resources by the Company, and there can be no assurance that the
Company will ever recover the cost of such management resources. Because these
companies are privately held, there is no active trading market for their
securities, and the Company's investments in them are illiquid. There may never
be an opportunity for the Company to realize a return on its investment in any
of these companies, and the Company may in the future be required to write off
all or part of one or more of these investments. The write-off of all or part of
one or more of these investments could have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company's strategic investments typically involve joint development or
marketing efforts or technology licensing. There can be no assurance that any
joint development efforts will result in the successful introduction of new
products by the Company or a third party, or that any joint marketing efforts
will result in increased demand for the Company's products. Further, there can
be no assurance that any current or future
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strategic investments by the Company will allow the Company to enter and compete
effectively in new markets or improve the Company's performance in current
markets. See "Business--Strategic Investments."
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, 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. 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. 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 facilities and replicators, semiconductor and equipment manufacturers,
operators of digital PPV systems, consumer electronics hardware manufacturers
and CD-ROM mastering facilities and replicators. 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--Technologies and Products" and
"Business--Customers."
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 Company and Digimarc are jointly developing a digital media copy
protection solution to address the digital-to-digital copying issues associated
with the next generation of DVD recording devices. They have submitted their
proposed solution to the CPTWG. The Company and Digimarc are competing with at
least six
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other companies that have submitted similar proposals to the CPTWG. Certain of
these companies have substantially greater name recognition and significantly
greater financial, technical, marketing and other resources than the Company and
Digimarc. There can be no assurance that the Company and Digimarc will be able
to compete successfully in presenting their proposal to the CPTWG. The company
whose digital media copy protection solution is selected by the CPTWG will have
a significant advantage in licensing its technology to video rights owners
worldwide and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
If the solution being developed by the Company and Digimarc is not the selected
solution, the Company and Digimarc will be at a competitive disadvantage in
marketing their solution. If the CPTWG adopts the Company's and Digimarc's
solution, there can be no assurance that other companies will elect not to
compete in this market.
The market for video scrambling products and technologies is highly
competitive. The Company, as a recent entrant into these markets, competes
directly or through licensed manufacturers with many companies, including
General Instrument Corporation, Pioneer Electronic Corporation,
Scientific-Atlanta, Inc., Tandberg Cryptovision A.S., VTech-HYH Broadcast
Systems and Zenith Electronics 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.
RISKS ASSOCIATED WITH INTERNATIONAL AND EXPORT SALES. In 1996, 1997 and the
first three months of 1998, international and export sales together represented
37.9%, 46.5% and 50.0%, 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 and DVDs and the use of copy
protection in these media. 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 particular, the net revenues
that the Company derives from video scrambling decreased 20.2% from the first
three months of 1997 to the first three months of 1998, due in part to decreased
demand for analog decoding equipment primarily as a result of the financial
crisis in Southeast Asia. This crisis has delayed expected cable television
system upgrades in that region and, consequently, has adversely affected the
ability of the Company's licensees to sell addressable set-top decoders that
include the Company's PhaseKrypt video scrambling technology. 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 circumvention technologies. 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, decision making
control to use the Company's products by studio headquarters operations, 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
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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. 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.
The Company typically receives license fees for videocassette and DVD copy
protection based upon the number of copy protected videocassettes and DVDs that
are produced by the MPAA studios or other rights holders. Information relating
to the number of copy protected units may not be reported to the Company until
one to three months after the period of actual usage. As a result, the Company
recognizes revenue based upon estimates of historical usage, recent trends,
market information and specific customer communications. While to date the
Company's estimates have been reasonably accurate, as the Company's product
offerings expand, and if the revenues generated from copy protection of PPV
programming and DVDs, as well as royalties from digital set-top decoders,
increase, deriving such estimates will become more complex. There can be no
assurance that, in a future period, the Company's estimates as to the usage of
its copy protection technology will be accurate. Adjustments to record the
difference between estimated and actual revenue could have a material adverse
effect on the Company's business, financial condition and results of operations
for the period in which the adjustment is recorded.
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, particularly as the
Company enters new markets. Hiring for such personnel is competitive. There can
be no assurance that the Company will be able to continue to 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,
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licenses and utilizes various technologies of the Company pursuant to several
agreements. Matsushita Electric Industrial Co., Ltd., which owns approximately
52% of JVC, also is a party to four agreements with the Company. In addition,
the Company has certain agreements with a former subsidiary, Command Audio
Corporation, in which it currently has a 19.8% interest. See Note 4 of Notes to
Consolidated Financial Statements.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock (including shares issued upon the exercise of stock options) in the public
market following this offering by current holders of the Company's Common Stock
and stock options exercisable therefor, or the perception that such sales might
occur, could adversely affect the market price of the Common Stock and the
Company's ability to raise additional equity capital. The Selling Stockholders
and the Company's executive officers and directors have agreed with the
Underwriters not to sell, offer, contract to sell, transfer the economic risk of
ownership in or otherwise dispose of (including without limitation in a short
sale), for a period of 90 days after the effective date of the Registration
Statement of which this Prospectus is a part (the "lock-up period"), any shares
of Common Stock of the Company or any options to purchase any shares of Common
Stock of the Company now owned or hereafter acquired by them or with respect to
which they have the power of disposition, without the prior written consent of
Hambrecht & Quist LLC. As a result, 3,018,016 shares of Common Stock or
securities exercisable or exchangeable for Common Stock as of March 31, 1998
were restricted during the lock-up period. The Company also has agreed with the
Underwriters that, subject to certain limited exceptions, it will not offer to
sell, contract to sell or otherwise sell or issue any shares of Common Stock for
90 days after the effective date of the Registration Statement of which this
Prospectus is a part, without the prior written consent of Hambrecht & Quist
LLC. See "Principal and Selling Stockholders" and "Underwriting."
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 35.8% of the Company's outstanding Common Stock (34.9% 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, JVC
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" 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 RISKS. 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
14
<PAGE>
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, and arbitration hearings are scheduled for October 1998. The Company
believes that the case is without merit and intends to contest it vigorously.
However, it is not possible to determine with precision the probable outcome or
the amount of liability, if any, under this lawsuit. A decision against the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
Krypton Co., Ltd., a Japanese company, has filed an invalidation claim
against one of the Company's anti-copy patents in Japan. After consultation with
Japanese patent counsel, the Company believes that this claim is without merit
and will aggressively contest the claim in the Japanese Patent Office. 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. 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 now has pending one patent infringement lawsuit to require the
defendants to discontinue the sale of devices that circumvent the Company's copy
protection technologies and infringe one or more of the Company's circumvention
patents. In the event of an adverse ruling in this litigation, the Company might
suffer from the legal availability of such a circumvention device or obtain
rights to the offending devices. The Company and C-Dilla have received
communications from Ablex Audio Video Ltd. and its subsidiary, Pan Technologies,
notifying them that these companies assert rights to the technology that C-Dilla
licenses to the Company and claiming that the Company's agreements with C-Dilla
violate understandings that these companies had allegedly reached with C-Dilla.
The Company has been informed that a number of potential customers for the
CD-ROM copy protection solution to be marketed by the Company have received
similar communications. The Company believes that these assertions and claims
are without merit. If, as threatened, these companies commence litigation
against the Company or C-Dilla, uncertainty could develop as to the Company's
rights to the CD-ROM copy protection technology, which could impair the
Company's ability to market the technology and have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Intellectual Property Rights," "Business--Legal Proceedings" and Note
8 of Notes to Consolidated Financial Statements.
YEAR 2000 ISSUES. Certain organizations anticipate that they will
experience operational difficulties at the beginning of the Year 2000 as a
result of computer programs being written using two digits rather than four to
define the applicable year. The Company's plan for the Year 2000 calls for
compliance verification with external vendors supplying the Company software,
testing in-house engineering and manufacturing software tools, testing software
in the Company's products for the Year 2000 and communication with significant
suppliers to determine the readiness of third parties' remediation of their own
Year 2000 issues. To date, the Company has not encountered any material Year
2000 issues concerning its respective computer programs. The Company plans to
complete its Year 2000 research and testing by the end of 1998. All costs
associated with carrying out the Company's plan for the Year 2000 problem are
being expensed as incurred. The costs associated with preparation for the Year
2000 are not expected to have a material adverse effect on the Company's
business, financial condition and results of operations. Nevertheless, there is
uncertainty concerning the potential costs and effects associated with any Year
2000 compliance. Any Year 2000 compliance problems of the Company or its
customers or suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations. During the past three
years, the Company completed an effort to convert its financial applications to
commercial products that, according to their suppliers, are Year 2000 compliant.
The Company has received confirmations from its primary suppliers indicating
that they are either Year 2000 compliant or have plans in place to ensure
readiness. As part of the Company's assessment, it is evaluating the level of
validation it will require of third parties to ensure their Year 2000 readiness.
EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors has
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
15
<PAGE>
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. Additionally, the Company's charter documents contain 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 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.
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.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been and in the future 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 CPTWG, the MPAA or its members,
satellite television operators, cable television operators or others regarding
motion picture distribution, business combinations, evolving industry standards
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 the stocks of many technology
companies, including the Company, 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 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.
16
<PAGE>
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 reincorporated in
Delaware in February 1997. 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-, VES-TM- and VES-TM-TM- are trademarks
of the Company. SafeDisc-TM- is a trademark held jointly by the Company and
C-Dilla. 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 1,140,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$22.9 million ($27.5 million if the Underwriters' over-allotment option is
exercised in full), assuming a public offering price of $21.75 per share and
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 opportunities for strategic
investments, licensing arrangements, joint ventures and acquisitions 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 agreements with respect to any such opportunities.
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."
PRICE RANGE OF COMMON STOCK
The Company's initial public offering occurred on March 13, 1997 at a price
to the public of $9.00 per share. Since that date, the Company's Common Stock
has been quoted on the Nasdaq National Market under the symbol MVSN. The
following table sets forth for the periods indicated the high and low sale
prices per share of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1997
First Quarter (commencing March 13, 1997)............................. $ 9.000 $ 8.000
Second Quarter........................................................ 14.750 8.250
Third Quarter......................................................... 18.125 12.750
Fourth Quarter........................................................ 17.125 12.750
1998
First Quarter......................................................... 19.313 14.250
Second Quarter (through June 1, 1998)................................. 26.125 17.500
</TABLE>
On June 1, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $21.75 per share. As of March 20, 1998, there were
123 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since 1994. 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.
The Company paid or declared a cash dividend of $0.135 per share of Series A
Preferred Stock in every quarter from the third quarter of 1991 through 1996,
and paid a cash dividend of $0.075 per share of Series A Preferred Stock for the
first quarter of 1997 until March 17, 1997 when the Series A Preferred Stock
converted into Common Stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company, as of
March 31, 1998: (i) on an actual basis and (ii) as adjusted to give effect to
the sale by the Company of the 1,140,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $21.75 per share and after
deducting the estimated underwriting discount and offering expenses. This table
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, net of current portion......................................... $ 160 $ 160
--------- -----------
--------- -----------
Stockholders' equity:
Preferred stock, par value $0.001 per share:
Authorized, 5,000,000 shares; no shares issued and outstanding........................ -- --
Common stock, par value $0.001 per share:
Authorized, 50,000,000 shares; issued and outstanding, 7,273,254 shares (8,413,254
shares as adjusted) (1)............................................................. 7 8
Additional paid-in capital.............................................................. 23,534 46,402
Stockholder notes receivable............................................................ (131) (131)
Deferred stock compensation............................................................. (61) (61)
Accumulated other comprehensive income.................................................. (214) (214)
Retained earnings....................................................................... 1,728 1,728
--------- -----------
Total stockholders' equity.......................................................... 24,863 47,732
--------- -----------
Total capitalization.............................................................. $ 25,023 $ 47,892
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) The numbers of shares of Common Stock issued and outstanding do not include
821,776 shares of Common Stock issuable at a weighted average exercise price
of $6.80 per share upon exercise of stock options outstanding as of March
31, 1998 under the Company's Stock Option Plan, 1996 Equity Incentive Plan
and 1996 Directors Stock Option Plan, 131,103 additional shares reserved for
future grants under the 1996 Equity Incentive Plan, 45,000 shares reserved
for future grants under the 1996 Directors Stock Option Plan or 111,855
shares reserved for future issuance under the 1996 Employee Stock Purchase
Plan. They also do not include 400,000 additional shares reserved for
issuance under the 1996 Equity Incentive Plan in April 1998. See Note 5 of
Notes to Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data 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. The selected consolidated
financial data presented below as of and for the years ended December 31, 1996
and 1997 have been derived from the audited consolidated financial statements
audited by KPMG Peat Marwick LLP, independent auditors, and included elsewhere
in this Prospectus. The selected consolidated financial data presented below as
of and for the years ended December 31, 1993, 1994, and 1995 have been derived
from audited consolidated financial statements not included herein. The
consolidated balance sheet data as of March 31, 1998 and the consolidated
statements of income data for the three months ended March 31, 1997 and 1998 are
derived from unaudited consolidated financial statements included elsewhere in
this Prospectus. The unaudited consolidated financial statements have been
prepared on substantially the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods. Historical results
are not necessarily indicative of the results to be expected in the future and
results of interim periods are not necessarily indicative of results for the
entire year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues..................................... $ 9,549 $ 13,330 $ 14,189 $ 17,080 $ 20,340 $ 4,564 $ 5,178
Costs and expenses:
Cost of revenues............................... 1,578 2,067 2,457 2,579 2,422 681 398
Research and development....................... 1,639 2,355 2,161 2,527 2,248 557 623
Selling and marketing.......................... 2,848 3,637 4,270 5,090 5,765 1,548 1,526
General and administrative..................... 1,913 2,467 3,118 3,566 4,149 879 1,159
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses..................... 7,978 10,526 12,006 13,762 14,584 3,665 3,706
--------- --------- --------- --------- --------- --------- ---------
Operating income from continuing operations...... 1,571 2,804 2,183 3,318 5,756 899 1,472
Interest and other income (expense), net......... (462) (417) (433) (260) 478 24 131
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations before
income taxes............................... 1,109 2,387 1,750 3,058 6,234 923 1,603
Income taxes..................................... 444 886 694 1,223 2,413 369 609
--------- --------- --------- --------- --------- --------- ---------
Income from continuing operations............ 665 1,501 1,056 1,835 3,821 554 994
Loss from discontinued operations, net of tax
benefit (1).................................... -- -- (125) (827) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................................... $ 665 $ 1,501 $ 931 $ 1,008 $ 3,821 $ 554 $ 994
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations:
Basic........................................ $ 0.33 $ 0.57 $ 0.09 $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted...................................... $ 0.29 $ 0.53 $ 0.08 $ 0.13
Diluted discontinued operations (1)............ $ (0.19) -- -- --
--------- --------- --------- ---------
Net income................................... $ 0.10 $ 0.53 $ 0.08 $ 0.13
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing earnings (loss) per
share (2)
Basic.......................................... 3,787 6,476 4,490 7,244
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted........................................ 4,280 6,960 4,903 7,735
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 3,397 $ 3,851 $ 3,486 $ 2,409 $ 12,555 $ 11,607
Working capital................................. 3,599 3,860 3,848 2,225 15,266 13,064
Total assets.................................... 7,076 9,240 10,943 11,953 28,856 30,436
Convertible note................................ 3,038 3,038 3,038 -- -- --
Long-term obligations, net of current portion
(3)........................................... -- -- 554 296 188 160
Total stockholders' equity...................... 1,867 2,388 2,846 6,072 23,577 24,863
</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 basic and diluted 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 THAT 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, primarily for videocassettes and, more
recently, for DVD and digital PPV applications. Copy protection revenues
represented 87.5%, 85.6% and 85.0% of the Company's net revenues in 1996, 1997
and the first three months of 1998, respectively. The Company expects such
license fees to account for a majority of the Company's net revenues and
operating income at least through 1998. The Company's videocassette copy
protection customers have included the home video divisions of the seven members
of the MPAA. 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
1996, 1997 and the first three months of 1998.
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. The Company's digital PPV copy protection revenues have been
derived from up-front license fees, hardware royalties and, in 1997 and
thereafter, limited PPV programming royalties. Digital PPV up-front license
fees, hardware royalties and PPV programming royalties were 12.2%, 18.2% and
13.2% of the Company's net revenues in 1996, 1997 and the first three months of
1998, respectively. The Company's agreements with digital PPV system operators
entitle the Company to transaction-based royalty payments subsequent to the
activation of copy protection for digital PPV programming.
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 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 from 12.1% of the Company's
net revenues in 1996 to 13.5% in 1997 and 15.0% in the first three months of
1998. 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. The Company expects this margin
differential to continue for the foreseeable future.
In 1997, the Company derived its first revenues from royalties and hardware
license fees associated with DVD copy protection. The initial customers
implementing such protection have been MPAA studios. Revenues from DVD royalties
in 1997 were not significant, but the Company expects revenues from DVD copy
protection to increase in 1998 as market acceptance of DVD players increases and
more MPAA studios release their motion pictures in DVD format.
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 that the Company's founder
20
<PAGE>
developed during 1994 and 1995. This technology does not involve copy protection
or video scrambling, but rather digitally stores broadcast audio programs so
that a user can listen to these programs at his or her convenience. 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. During 1997, the Company maintained its 19.8% ownership in CAC with
an additional cash investment of approximately $2.0 million in connection with
various rounds of third-party financing obtained by CAC. In the future, the
Company may also elect to purchase additional stock in CAC to maintain its 19.8%
equity ownership in CAC. Additionally, in 1996, 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 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 "--Results of Operations--Loss from Discontinued Operations."
In December 1997, the Company invested $1.5 million in Digimarc in exchange
for shares of Digimarc's preferred stock that represent a 6.8% ownership on an
as-converted basis. Digimarc is a private company that was founded in 1995. The
Company and Digimarc are jointly developing a digital media copy protection
solution to address the digital-to-digital copying issues associated with the
next generation of DVD and digital videocassette recording devices. They have
presented their proposed solution to the CPTWG and are currently working on
prototype systems.
In February 1998, Macrovision purchased 247,500 shares (approximately 19.8%)
of the common stock of C-Dilla, for a purchase price of L2,121,212
(approximately $3.6 million) and prepaid $1.0 million of royalties. C-Dilla is a
private company founded in 1991. C-Dilla provides rights management software for
high value-added information and software publishers. In February 1998, the
Company also entered into a Software Marketing License and Development Agreement
(the "Agreement") under which it has, for an initial five-year term, the
worldwide exclusive license to market C-Dilla's proprietary copy protection
technology for CD-ROM software products in the consumer multimedia software
market.
The Company's cost of revenues consists primarily of manufacturing costs
associated with the Company's video scrambling product revenues, service fees
paid to licensed duplicators that apply the Company's videocassette copy
protection whenever rights owners license the technology directly from the
Company, and costs associated with equipment used in applying the copy
protection process at the licensed duplicators. 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
Circumvention Technologies" and "--Dependence on Proprietary Technology." 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 and marketing expenses are
comprised primarily of employee compensation and benefits, consulting and
recruiting fees, travel, advertising and an allocation of facilities costs. The
Company's general and administrative expenses are comprised primarily of
employee compensation and benefits, consulting and recruiting fees, travel,
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 and DVDs during the
year-end holiday shopping season. The Company anticipates that revenues, if any,
from multimedia CD-ROM copy protection will also reflect this seasonal trend. 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."
21
<PAGE>
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>
PERCENTAGE OF NET REVENUES
------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues............................................. 15.1 11.9 14.9 7.7
Research and development..................................... 14.8 11.1 12.2 12.0
Selling and marketing........................................ 29.8 28.3 33.9 29.5
General and administrative................................... 20.9 20.4 19.3 22.4
--------- --------- --------- ---------
Total costs and expenses................................... 80.6 71.7 80.3 71.6
--------- --------- --------- ---------
Operating income from continuing operations................ 19.4 28.3 19.7 28.4
Interest and other income (expense), net....................... (1.5) 2.4 0.5 2.6
--------- --------- --------- ---------
Income from continuing operations before income taxes...... 17.9 30.7 20.2 31.0
Income taxes................................................... 7.2 11.9 8.1 11.8
--------- --------- --------- ---------
Net income from continuing operations...................... 10.7 18.8 12.1 19.2
Loss from discontinued operations.............................. (4.8) -- -- --
--------- --------- --------- ---------
Net income................................................. 5.9% 18.8% 12.1% 19.2%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The following information provides revenue information by general product
lines for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ -------------------------------
1996 % 1997 % 1997 % 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Copy protection.................................. $ 14,953 87.5 $ 17,412 85.6 $ 3,555 77.9 $ 4,403
Video scrambling................................. 2,068 12.1 2,739 13.5 971 21.3 775
Other............................................ 59 .4 189 .9 38 .8 --
--------- --------- --------- --------- --------- --------- ---------
Total........................................ $ 17,080 100.0 $ 20,340 100.0 $ 4,564 100.0 $ 5,178
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
%
---------
<S> <C>
Copy protection.................................. 85.0
Video scrambling................................. 15.0
Other............................................ --
---------
Total........................................ 100.0
---------
---------
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998
NET REVENUES. The Company's net revenues increased 13.5% from $4.6 million
in the first three months of 1997 to $5.2 million in the first three months of
1998. The Company's copy protection revenues are derived from videocassette, DVD
and digital PPV copy protection. Copy protection revenues increased 23.9% from
$3.6 million to $4.4 million due to higher volumes of videocassettes from
studios and increases in DVD revenues, including licensing fees from DIVX and PC
subassembly manufacturers, as well as license fees from DVD rights owners. The
Company's video scrambling revenues are made up of sales of VES products and
sales and licenses of components that use the PhaseKrypt technology. Video
scrambling revenues decreased 20.2% from $971,000 to $775,000 due to decreased
demand for the analog decoding equipment primarily due to the financial crisis
in Southeast Asia. In addition, this crisis has delayed expected cable
television system upgrades in that region and, consequently, the ability of the
Company's licensees to sell addressable set-top decoders that include the
Company's PhaseKrypt video scrambling technology.
COST OF REVENUES. Cost of revenues as a percentage of revenues declined
from 14.9% in the first three months of 1997 to 7.7% in the first three months
of 1998. This decrease resulted from a shift in product mix to increased license
fees and higher margin videocassette and DVD royalties from lower margin video
scrambling product sales. 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 increase.
22
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$66,000 or 11.8% from the first three months of 1997 to the first three months
of 1998 primarily due to increased compensation and benefit expenses for
research and development personnel and increased depreciation expenses resulting
from equipment purchased in the second half of 1997. Research and development
expenses remained essentially constant as a percentage of net revenues,
representing 12.2% in the first three months of 1997 and 12.0% in the first
three months of 1998. The Company believes that the dollar amount of research
and development expenses will increase in the future, but may continue to
decline as a percentage of net revenues. There can be no assurance, however,
that net revenues will grow at a more rapid rate than research and development
expenses.
SELLING AND MARKETING. Selling and marketing expenses decreased by $22,000
or 1.4% from the first three months of 1997 to the first three months of 1998
primarily due to reduced consulting fees offset by higher compensation and
benefit expenses from additional personnel. As a result, selling and marketing
expenses declined from 33.9% of net revenues to 29.5% between the comparison
periods. The Company believes that the dollar amount of selling and marketing
expenses will increase in the future as the Company incurs the additional costs
related to new business development, but may continue to decline as a percentage
of net revenues. There can be no assurance, however, that net revenues will grow
at a more rapid rate than selling and marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $280,000 or 31.9% from the first three months of 1997 to the first three
months of 1998 and increased as a percentage of net revenues from 19.3% to
22.4%. These increases were due to increased legal, consulting fees and
accounting expenses relating to the evaluation of investment opportunities,
increased expenses associated with being a public company and higher
compensation and benefit expenses associated with increased personnel. The
Company believes that the dollar amount of general and administrative expenses
will increase in the future as the Company evaluates new business opportunities,
but may decline as a percentage of net revenues. There can be no assurance,
however, that net revenues will grow at a more rapid rate than general and
administrative expenses.
INTEREST AND OTHER INCOME, NET. Interest and other income, net, increased
from $24,000 in the first three months of 1997 to $131,000 in the first three
months of 1998, primarily as a result of investing the proceeds from the
Company's initial public offering (the "IPO") in March 1997.
INCOME TAXES. The Company's effective rate of taxation was 40.0% in the
first three months of 1997 and 38.0% in the first three months of 1998. The
lower rate in 1998 was primarily due to increases in tax-free interest income.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
NET REVENUES. The Company's net revenues increased 19.1% from $17.1 million
in 1996 to $20.3 million in 1997. Videocassette and DVD copy protection revenues
increased $823,000 or 6.4% from $12.8 million in 1996 to $13.7 million in 1997
principally due to copy protection royalty revenue from replication of DVDs and
license fees from PC and DVD-ROM manufacturers. In addition, digital PPV
revenues increased $1.6 million or 78.8% from 1996 to 1997 as a result of
increased shipments of set-top decoders from licensed manufacturers. The
Company's video scrambling revenues increased $671,000 or 32.4% from 1996 to
1997. VES product revenues decreased $441,000 or 36.8% from $1.2 million in 1996
to $756,000 in 1997 as a result of a decline in orders from various government
law enforcement agencies. Revenues from PhaseKrypt-related royalties and
components sales to licensed cable TV equipment manufacturers in 1997 increased
$1.1 million or 127.8% from 1996 to 1997. This increase was due primarily to the
sale of addressable set-top converters into Brazil by one of the Company's
licensees, which included royalties from the Company's PhaseKrypt scrambling
technology. Due primarily to the growth in the Company's digital PPV copy
protection and video scrambling businesses, videocassette copy protection
revenues from the MPAA studios in the United States declined as a percentage of
net revenues from 33.4% in 1996 to 27.3% in 1997.
In 1996 and 1997, the Company's international and export revenues totaled
$6.5 million and $9.5 million, respectively, representing 37.9% and 46.5%,
respectively, of the Company's net revenues during those periods.
23
<PAGE>
International and export revenues grew primarily as a result of increased usage
of videocassette copy protection technology by the MPAA studios in international
markets, overseas shipments of copy protection enabled digital PPV set-top
decoders from manufacturers 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 the Company's future growth will depend to
a large extent on continued increases in international and export opportunities.
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 declined
from 15.1% in 1996 to 11.9% in 1997. This decrease was 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 addition, rates paid by the Company to videocassette duplicators were
reduced, but the effect of this reduction was offset by increased-patent related
expenses and equipment costs for processors purchased for duplicators. See Note
1 of Notes to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.5
million and $2.2 million, which represented 14.8% and 11.1% of net revenues, in
1996 and 1997, respectively. The dollar and percentage decreases from 1996 to
1997 were principally due to a decrease in consulting fees and project supplies
associated with the completion of hardware development of VES products and the
Company's Colorstripe technology for use in DVD and digital PPV applications in
1996. One of the major projects started by the Company in 1997 was the joint
development effort with Digimarc to develop a video watermarking solution for
DVD and other digital video platforms.
SELLING AND MARKETING. Selling and marketing expenses were $5.1 million and
$5.8 million, which represented 29.8% and 28.3% of net revenues, in 1996 and
1997, respectively. The increase in absolute dollars from 1996 to 1997 was
primarily a result of the hiring of additional employees for PPV and
international business development, increased compensation and benefits, and
external consulting costs associated with digital PPV and international
marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.6
million and $4.1 million, representing 20.9% and 20.4% of net revenues, in 1996
and 1997, respectively. The increase in absolute dollars from 1996 to 1997 was
primarily related to the additional administrative expenses required in managing
a public company compared to a private company, increased compensation and
benefits, legal fees associated with the Swyt arbitration proceeding and an
increase in bad debt expense.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other expense
consists primarily of interest expense on a convertible note and capitalized
equipment leases. Interest and other expense was $327,000 and $35,000 in 1996
and 1997, respectively. The decrease in interest expense from 1996 to 1997 was
principally attributable to the conversion of a $3.0 million convertible note
into Preferred Stock in July 1996 and subsequently into common stock upon
completion of the IPO. Interest income was $67,000 and $513,000 in 1996 and
1997, respectively. The increase from 1996 to 1997 was a result of interest
earned on cash and cash equivalents, short term investments and long-term
marketable investment securities primarily from the proceeds of the IPO. See
Notes 2 and 3 of Notes to Consolidated Financial Statements.
INCOME TAXES. The Company's effective rate of taxation on continuing
operations was 40.0% and 38.7% in 1996 and 1997, respectively. Income taxes
consist primarily of federal income taxes, state taxes and international taxes
withheld on foreign revenue. The decrease in such rate from 1996 to 1997 was
primarily due to an increase in tax credits and an increase in tax exempt
interest. See Note 6 of Notes to Consolidated Financial Statements.
24
<PAGE>
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued operations
was $827,000 in 1996, net of income tax benefit. Information related to
discontinued operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Costs and expenses............................................................................. $ (1,081)
-------
Operating loss............................................................................... (1,081)
Other income, net.............................................................................. 5
-------
Loss before income taxes..................................................................... (1,076)
Income tax benefit, net........................................................................ 249
-------
Net loss..................................................................................... $ (827)
-------
-------
</TABLE>
Included in income tax benefit, net for 1996 is a write-off of the deferred
tax asset attributable to CAC of $203,000.
The costs and expenses in the above table represent 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. In connection with the incorporation of CAC, the Company contributed
to CAC the patents that related to the CAC technology. The underlying technology
of CAC is distinct from the copy protection and video scrambling technologies
that underlie the Company's core business. The employees of CAC have been
exclusively involved in the CAC operation since they were hired. None of these
employees was involved in the technology development underlying the Company's
core business or any other aspect of the Company's business. 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. Additionally, in 1996,
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 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 Note 4 of Notes to Consolidated
Financial Statements.
25
<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 substantially 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
------------------------------------------------------------------------------------------------
1996 1997 1998
----------------------------------------- ----------------------------------------- --------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 3,583 $ 3,737 $ 4,380 $ 5,381 $ 4,564 $ 4,722 $ 5,040 $ 6,014 $ 5,178
Costs and expenses:
Cost of revenues.............. 594 707 525 752 681 697 444 600 398
Research and development...... 642 679 594 612 557 516 549 626 623
Selling and marketing......... 1,241 1,296 1,280 1,273 1,548 1,378 1,472 1,367 1,526
General and administrative.... 601 875 1,016 1,074 879 1,018 1,021 1,231 1,159
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses.... 3,078 3,557 3,415 3,712 3,665 3,609 3,486 3,824 3,706
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income from
continuing operations..... 505 180 965 1,669 899 1,113 1,554 2,190 1,472
Interest and other income
(expense), net................. (120) (109) (13) (19) 24 149 138 167 131
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes....... 385 71 952 1,650 923 1,262 1,692 2,357 1,603
Income taxes.................... 192 62 331 638 369 505 644 895 609
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations................ 193 9 621 1,012 554 757 1,048 1,462 994
Loss from discontinued
operations..................... (195) (632) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ (2) $ (623) $ 621 $ 1,012 $ 554 $ 757 $ 1,048 $ 1,462 $ 994
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues............... 16.6 18.9 12.0 14.0 14.9 14.8 8.8 10.0 7.7
Research and development....... 17.9 18.2 13.6 11.4 12.2 10.9 10.9 10.4 12.0
Selling and marketing.......... 34.6 34.7 29.2 23.6 33.9 29.2 29.2 22.7 29.5
General and administrative..... 16.8 23.4 23.2 20.0 19.3 21.5 20.3 20.5 22.4
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total costs and expenses..... 85.9 95.2 78.0 69.0 80.3 76.4 69.2 63.6 71.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income from
continuing operations...... 14.1 4.8 22.0 31.0 19.7 23.6 30.8 36.4 28.4
Interest and other income
(expense), net.................. (3.3) (2.9) (0.3) (0.3) 0.5 3.2 2.8 2.8 2.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes...................... 10.8 1.9 21.7 30.7 20.2 26.7 33.6 39.2 31.0
Income taxes..................... 5.4 1.7 7.5 11.9 8.1 10.7 12.8 14.9 11.8
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations................. 5.4 0.2 14.2 18.8 12.1 16.0 20.8 24.3 19.2
Loss from discontinued
operations...................... (5.4) (16.9) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............ (0.0)% (16.7)% 14.2% 18.8% 12.1% 16.0% 20.8% 24.3% 19.2%
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
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. Revenues increased
26
<PAGE>
22.9% 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.
Revenues increased 19.3% from the third quarter of 1997 to the fourth quarter of
1997 as a result of revenue increases in all technology and product categories,
particularly Pay TV components and licenses.
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. In the second quarter of 1996, the Company experienced a higher cost
of revenues as a percentage of revenues due to a writedown of certain obsolete
inventory. In the last two quarters of 1997 and the first quarter of 1998, cost
of revenues as a percentage of revenues was lower than previous quarters as
video scrambling products represented a smaller proportion of the Company's net
revenues.
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.
The increase in selling and marketing expenses from the fourth quarter of
1996 to the first quarter of 1997 was primarily due to increased sales efforts
in PPV and video scrambling.
General and administrative expenses in 1996 fluctuated principally due to
bad debt reserves and bonuses. General and administrative expenses in 1997
increased as a result of costs associated with being a public company as well as
additional bad debt reserves recorded in the fourth quarter of 1997.
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 began earning interest income in the first quarter of 1997 as a result
of investing the proceeds from the IPO.
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 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. Furthermore, the Company may not be in a position
to anticipate a decline in revenues in any quarter until late in the quarter,
due primarily to the delay inherent in revenue reporting from licensees and
replicators, resulting in a potentially more significant level of volatility in
the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily from cash generated by
continuing operations. The Company's continuing operations provided net cash of
$2.9 million, $2.4 million and $2.5 million in 1996, 1997 and the first three
months of 1998, respectively. In 1996, net cash was provided primarily by net
income (before
27
<PAGE>
depreciation and amortization) and increases in accounts payable, accrued
liabilities and deferred revenue, partially offset by increases in accounts
receivable. In 1997, net cash was provided primarily by net income (before
depreciation and amortization) and increases in income taxes payable and
deferred revenue, partially offset by increases in accounts receivable. In the
first three months of 1998, net cash was provided primarily by net income
(before depreciation and amortization), a decrease in accounts receivable and an
increase in deferred revenue.
Investing activities provided net cash of $48,000 in 1996 and used net cash
of $17.5 million in 1997 and $1.3 million in the first three months of 1998. In
1996, cash from sales or maturities of short-term investments was almost
completely offset by purchases of equipment, payments for patents and other
intangibles and expenses paid on behalf of CAC. In 1997, net cash used in
investing activities resulted primarily from purchases of short and long-term
marketable investment securities and investments of $1.5 million in Digimarc and
approximately $2.0 million in CAC. In the first three months of 1998, net cash
used in investing activities was primarily an investment of $3.6 million in
C-Dilla and approximately $1.0 million of prepaid royalties to C-Dilla, offset
in part by sales and maturities of marketable securities. See Note 2 of Notes to
Consolidated Financial Statements.
Net cash used in financing activities was $1.6 million in 1996, primarily to
repay long-term debt and to pay cash dividends on Preferred Stock then
outstanding. Net cash provided by financing activities was $13.9 million in
1997, almost all of which resulted from the Company's initial public offering.
Net cash provided by financing activities was $230,000 in the first three months
of 1998, primarily from sales of stock under the Company's employee stock option
and stock purchase plans.
At March 31, 1998, the Company had $2.8 million in cash and cash
equivalents, $8.8 million in short-term investments and $751,000 in long-term
marketable investment securities. The Company has no material commitments for
capital expenditures but anticipates that capital expenditures for the next 12
months will aggregate approximately $400,000. The Company also has future
minimum lease payments of approximately $1.8 million under operating leases and
approximately $300,000 under capital leases. In the future, the Company may also
elect to purchase additional stock in CAC to maintain its 19.8% equity ownership
in CAC.
The Company believes that its existing cash, cash equivalents and short-term
investments, cash provided by operating activities and the proceeds of this
offering will be sufficient to meet its working capital and capital expenditure
requirements for at least the next 12 months. 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 and long-term, interest bearing, investment
grade securities. Although there are no other present 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 opportunities for
strategic investments, licensing arrangements, joint ventures and 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.
YEAR 2000 ISSUES
Certain organizations anticipate that they will experience operational
difficulties at the beginning of the Year 2000 as a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company's plan for the Year 2000 calls for compliance verification with
external vendors supplying the Company software, testing in-house engineering
and manufacturing software tools, testing software in the Company's products for
the Year 2000 and communication with significant suppliers to determine the
readiness of third parties' remediation of their own Year 2000 issues. To date,
the Company has not encountered any material Year 2000 issues concerning its
respective computer programs. The Company plans to complete its Year 2000
research and testing by the end of 1998. All costs associated with carrying out
the
28
<PAGE>
Company's plan for the Year 2000 problem are being expensed as incurred. The
costs associated with preparation for the Year 2000 are not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Nevertheless, there is uncertainty concerning the
potential costs and effects associated with any Year 2000 compliance. Any Year
2000 compliance problems of the Company or its customers or suppliers could have
a material adverse effect on the Company's business, financial condition and
results of operations. During the past three years, the Company completed an
effort to convert its financial applications to commercial products that,
according to their suppliers, are Year 2000 compliant. The Company has received
confirmations from its primary suppliers indicating that they are either Year
2000 compliant or have plans in place to ensure readiness. As part of the
Company's assessment, it is evaluating the level of validation it will require
of third parties to ensure their Year 2000 readiness.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME." SFAS No. 130 establishes standards of reporting and
display of comprehensive income and its components of net income and "other
comprehensive income" in a full set of general purpose financial statements.
"Other comprehensive income" refers to revenues, expenses, gains and losses that
are not included in net income but rather are recorded directly in stockholders'
equity. SFAS No. 130 is effective for annual and interim periods beginning after
December 15, 1997 and for periods ended before that date when presented for
comparative purposes. SFAS No. 130 was adopted by the Company in its quarter
ended March 31, 1998 and for prior comparative periods. The Company has not yet
determined the format it will use to display the information required by SFAS
No. 130 in the annual financial statements for the year ended December 31, 1998.
Total comprehensive income was $496,000 and $994,000 for the three months ended
March 31, 1997 and 1998, respectively, and $991,000 and $3,742,000 for the years
ended December 31, 1996 and 1997, respectively. The primary components of other
comprehensive income include unrealized gains and losses resulting from the
translation of the Company's foreign subsidiaries which have a local functional
currency and unrealized holding gains and losses related to the Company's
available-for-sale investments.
In June 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 establishes standards of
reporting information about operating segments in annual financial statements by
public business enterprises and requires such enterprises to report selected
information about operating segments in interim financial reports. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and for periods
ended before that date when presented for comparative purposes. The required
interim disclosures are not required to be made in the initial year of
application, but the information for the interim periods for the initial year is
required as comparative information in the second year of application. As such,
the Company intends to display the information required by SFAS No. 131 in the
interim and annual financial statements for the year ending December 31, 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical are
forward-looking statements. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements including those factors identified in "Risk Factors." Results
actually achieved thus may differ materially from expected results included in
these statements.
29
<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 has
recently broadened its focus to include copy protection of other media,
including multimedia CD-ROMs and Internet-delivered software products.
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 1997 were copy
protected, and that substantially all of those copy protected videocassettes
incorporated the Company's technology. All of the MPAA studios have used the
Company's copy protection technology to protect some or all of their
videocassettes in one or more countries around the world. Studios such as
Disney, Columbia, PolyGram and Paramount have signed agreements to apply the
Company's copy protection technologies to substantially all of the motion
pictures that they release in videocassette and DVD format in the United States.
The Company believes that its video copy protection technologies are accepted as
the DE FACTO standard for preventing digital and analog video from being copied
by consumer VHS videocassette recorders. The Company does not license and has no
plans to license its technology for use in deterring consumer copying of free
television broadcasts.
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.
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
indicates the studios' aggregate United States revenues from each venue in 1997,
as estimated by entertainment media analyst Paul Kagan Associates, Inc. ("Paul
Kagan"), and shows the typical major motion picture release windows in the
United States.
[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.
The studios typically release motion pictures on network television in the
United States approximately 24 months after theatrical box office release.
Theatrical box office release in foreign countries generally follows theatrical
box office release in the United States by at least four months. In foreign
countries, PPV releases generally follow home video releases by approximately
six months and Pay TV releases generally follow PPV releases by approximately
six months.
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<PAGE>
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 34.8 million
households in the United States (approximately 43% of all households with VCRs)
owned two or more VCRs in December 1997, 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. Recently, studios have begun to participate in the
revenue stream from the rental of motion pictures on videocassettes through
agreements with video rental businesses. The Company believes that revenue
sharing could provide further incentive for the studios to support videocassette
copy protection. 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. 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 movies 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
PPV systems.
DVD hardware and media became commercially available in the United States in
1997, and approximately 500,000 DVD players had been shipped by manufacturers as
of March 31, 1998. The introduction of DVDs presents serious concerns to the
studios. Without effective copy protection, any one of the approximately 425
million VCRs throughout the world, when combined with a DVD player, can 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.
Although system operators in the United States and Western Europe are
upgrading their networks with digital compression, analog cable and microwave
Pay TV systems continue to be built, particularly in developing countries,
because analog systems are far 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.
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<PAGE>
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.
CD-ROM/MULTIMEDIA COPY PROTECTION
The Interactive Digital Software Association estimates that computer
software and video game companies based in the United States lost $3.2 billion
worldwide in 1997 due to software piracy, primarily professional counterfeiting.
Recently CD recordable drives have been introduced in the consumer electronics
industry that are priced as low as $300 and are expected to become standard
features in personal computers in the near future. In addition, blank CD-ROM
disks can be purchased for less than $1 in the United States. As a result,
computer software and video game companies may soon face an additional threat of
lost revenues due to consumer copying of CD-ROM software.
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. The
Company also intends to offer copy protection for CD-ROM and Internet-delivered
software products in the consumer multimedia market through its relationship
with C-Dilla.
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 activated 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]
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<PAGE>
VIDEO SCRAMBLING
The Company's video scrambling technologies prevent unauthorized viewing of
video programming unless the viewer has paid for, or otherwise has been granted,
the right to view such programming. The video signals are scrambled using a
combination of analog video scrambling and digital encryption. This provides a
high level of security against signal theft while maintaining low decoder cost.
For cable, satellite and microwave television applications of the Company's
PhaseKrypt technology, the cost of decoding the scrambled picture is minimized
by using a secure analog technology that partially relies on the electronics of
the television set to make the image viewable. 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]
CD-ROM/MULTIMEDIA COPY PROTECTION
Under an agreement with C-Dilla, the Company has the exclusive marketing
rights for consumer multimedia applications of certain software copy protection
technologies developed by C-Dilla for CD-ROM and Internet-delivered software
products. The Company and C-Dilla have recently demonstrated their CD-ROM copy
protection technology, called SafeDisc. SafeDisc is in final customer acceptance
testing and is expected to be available before the end of 1998. The Company
believes that its expertise in marketing video copy protection technology and
its reputation for providing high quality copy protection solutions will give
the Company an advantage in marketing CD-ROM copy protection technology. There
can be no assurance that the CD-ROM copy protection solution marketed by the
Company will achieve or sustain market acceptance. See "Risk Factors--Entrance
Into New Market."
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
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<PAGE>
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 and future sales opportunities 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. The Company licenses its technology to DVD hardware
manufacturers and provides favorable terms to DVD hardware manufacturers that
ensure that the VCRs they manufacture respond to the Company's copy protection
technologies. The Company intends to 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.
INTRODUCE NEW PRODUCT APPLICATIONS AND TECHNOLOGIES. The Company intends to
continue to expand its technological base, primarily in intellectual property
copy protection, in current as well as new markets, through internal
development, strategic investments, licensing arrangements, joint ventures or
potential acquisitions of products, technologies or companies. In addition to
its internally-developed video copy protection technology, the Company has
recently entered into agreements with Digimarc and C-Dilla to develop and
license, respectively, products for DVD, DVD-ROM and CD-ROM copy protection.
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 further technological innovation, legal action
and support of further legislative initiatives to protect rights owners.
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 apply the Company's technology. In addition, copyright
holders typically pay the Company a per unit license fee to apply copy
protection to DVDs. 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 to verify proper implementation of the
Company's copy protection technologies in integrated circuits for set-top
decoders. For the DVD market, the Company offers licenses to consumer
electronics and personal computer manufacturers and rights owners. The licenses
to rights owners use unit-based royalties similar to that for the Company's
videocassette copy protection business. In the video scrambling business, the
Company both licenses its PhaseKrypt technology on a per-decoder or per-encoder
basis, and sells PhaseKrypt decoder integrated circuits and PhaseKrypt encoders.
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. For the CD-ROM copy protection
business, the Company intends to pursue the same business model that it
established for videocassette copy protection. See "Risk Factors--Need to
Establish and Maintain Licensing Relationships."
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<PAGE>
COPY PROTECTION TECHNOLOGIES
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 such factors as the term of the
contract and 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 230 commercial duplication
facilities in 34 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 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 2 billion
videocassettes worldwide since 1985, and was applied to more than 460 million
videocassettes in 1997. All MPAA studios use the Company's copy protection
technologies to protect some or all of their videocassettes in one or more
countries around the world. In 1996 and 1997, three of these studios applied the
Company's technology to a majority of the videocassettes 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. This copy protection signal inhibits customers from
using a DVD player or a digital set-top decoder to make commercial quality
videocassette copies of the DVD or PPV program. See "Risk Factors--Evolving
Market for DVD and Digital PPV Copy Protection."
The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers and 13 digital PPV system operators. As of
March 31, 1998, four digital PPV program providers in Japan and one system
operator in Hong Kong had activated copy protection for digital PPV programming.
The Company's copy protection technology is embedded in approximately seven
million digital set-top decoders currently in use in the United States, Japan,
Europe 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. As
of March 31, 1998, 82 companies that manufacture DVD players or DVD-ROM drives
had signed agreements with the Company to incorporate the Company's DVD copy
protection technology in their hardware.
Copy protection represented 87.5%, 85.6% and 85.0% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively.
VIDEO SCRAMBLING TECHNOLOGIES AND PRODUCTS
The Company's video scrambling technologies are used to prevent unauthorized
viewing of video content during analog video transmissions from one location to
another location. These technologies are used in PPV, Pay
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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'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. One of the VES
systems is a professional, broadcast-quality video scrambling system that is
available in NTSC and PAL versions. Primary applications include broadcast
television distribution to network affiliate stations and retransmission
facilities, programming delivery to cable television head-ends, programming
contribution circuits and backhauls. The Company has also developed two
miniaturized DC-powered scrambling systems that are used primarily for covert
law enforcement, military surveillance and broadcast television news gathering
applications. A miniaturized multiplexer product is also available that combines
two video signals for transmission over single channel video links.
Video scrambling represented 12.1%, 13.5% and 15.0% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively.
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. 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. In 1997, the Company discontinued its CineGuard operations in Poland,
Ireland and South Africa due to lack of demand from local exhibitors. The
Company has an existing master licensee in the Philippines and will continue to
license CineGuard to interested parties. Neither the revenues nor the costs for
CineGuard are expected to have a material impact on the business or financial
condition of the Company in 1998.
CD-ROM/MULTIMEDIA COPY PROTECTION
The Company and C-Dilla have recently demonstrated their CD-ROM copy
protection technology, called SafeDisc. The Company has an exclusive license
from C-Dilla to market and license SafeDisc for consumer multimedia
applications. SafeDisc is comprised of an authenticating digital signature on
the CD-ROM, encryption of the software content and authentication instructions
that preclude decryption unless the authentication digital signature is found.
The Company believes that SafeDisc will provide a relatively secure, low cost
means of protecting CD-ROM software from consumer copying without adversely
affecting the consumer's use of the CD-ROM content. There can be no assurance
that SafeDisc will be successfully introduced, that it will provide its intended
benefits or that it will achieve or sustain market acceptance with multimedia
software publishers or consumers. See "Risk Factors--Entry Into New Market."
CUSTOMERS
COPY PROTECTION LICENSEES
The Company's packaged media copy protection technology for videocassettes
and DVDs is used by the following major motion picture studios and other home
video suppliers and by the following commercial
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videocassette duplicators, each of which accounted for at least $75,000 of the
Company's net revenues during 1997:
<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
New Line Home Video
Paramount Pictures
Twentieth Century Fox Home Entertainment, Inc.
Universal Studios Home Video
Warner Home Video
</TABLE>
During 1996, revenues from the Company's three largest customers represented
37% of the Company's net revenues and each accounted for more than 10% of the
Company's net revenues. For 1997, one customer accounted for 11% of the
Company's net revenues. For the first three months of 1998, revenues from the
Company's two largest customers represented 22% of the Company's net revenues
and each accounted for more than 10% of the Company's net revenues. The MPAA
studios as a group accounted for 47.1%, 38.6% and 41.7% of the Company's net
revenues in 1996, 1997 and the first three months of 1998, respectively. The
Company expects that revenues from the MPAA studios will continue to account for
a substantial portion of the Company's net revenues for the foreseeable future.
The loss of, or any significant reduction in revenues from, any of these
customers 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
17.2%, 12.1% and 12.9% of the Company's copy protection revenues in 1996, 1997
and the first three months of 1998, respectively.
CONSUMER ELECTRONICS AND HARDWARE MANUFACTURERS
The Company has licensed its copy protection technology for digital PPV to
41 set-top decoder manufacturers, including the following:
Echostar Communications Corporation
General Instrument Corporation
Nokia Satellite Systems, A.B.
Pace Micro Technology, Ltd.
Philips Consumer Electronics
Scientific-Atlanta, Inc.
Sony Corporation
Thomson Consumer Electronics (RCA brand)
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 40 companies to incorporate the Company's digital
PPV and DVD copy protection technologies 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 verification of proper implementation of 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
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Macrovision-licensed DVD hardware manufacturers and to Macrovision-licensed
digital set-top decoder manufacturers.
SYSTEM OPERATORS
The Company has licensed its digital PPV copy protection technology for
incorporation into the networks of 13 system operators, including British Sky
Broadcasting Limited, DIRECTV, Galaxy Latin America, Hong Kong Telecom, the
Kirsch Group, Sky Latin America and Sky Perfect. 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. Another 13 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 Comcast Corporation, Cox Enterprises, Inc., PRIMESTAR
Partners, L.P., TeleCommunications, Inc. and Time Warner Inc.
VIDEO SCRAMBLING CUSTOMERS
The Company's customers for video scrambling Pay TV components and licenses
are cable television system hardware manufacturers that sell their products to
cable operators in 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 1997:
<TABLE>
<CAPTION>
VES CUSTOMERS PAY TV COMPONENTS AND LICENSES
- ---------------------------------------- ------------------------------------------------------------
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Integrated Telecommunications Systems Eastern Electronics Co., Ltd. (Taiwan)
(Canada) Efforts Development International, Ltd. (Hong Kong)
News Sports Microwave, Inc. Pacific Satellite International, Ltd. (Hong Kong)
SIM Security and Electronic (Germany) Tae Kwang Industrial (South Korea)
Skehan Televideo Service Inc. Taihan Electric Wire Co., Ltd. (South Korea)
Wood & Douglas LTD (United Kingdom)
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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 29 countries that sell products based on
the Company's video scrambling technologies. VES scrambling products are sold
directly or through distributors to end users. The Company licenses its
PhaseKrypt technology and sells encoder hardware and decoder components directly
to manufacturers of cable television 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 37.9%, 46.5% and 50.0% of net revenues in 1996, 1997 and the first
three months of 1998, respectively. The increase in 1997 reflects the increased
international opportunities for the Company's Pay TV video scrambling business,
the
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emergence of the PPV business and sales efforts from the Company's subsidiaries.
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 March 31, 1998, the Company employed 25 sales and marketing personnel
and eight 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."
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 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 Circumvention 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
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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 videocassette copy on
a VCR.
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. 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.
CD-ROM/MULTIMEDIA COPY PROTECTION
The Company believes that C-Dilla's recently developed SafeDisc technology
will allow software publishers to thwart consumer and professional attempts to
make usable copies of CD-ROMs. The SafeDisc technology seeks to prevent the
copying of CD-ROMs by using encryption-protected content, an authenticating
digital signature and "anti-hacking" software. Each CD-ROM published with the
SafeDisc technology is premastered with encrypted content, containing
authenticating instructions and a unique SafeDisc digital signature. The
authentication software must detect the digital signature before it decrypts the
contents of the CD-ROM. The digital signature and authentication process is
transparent to the user. If a consumer or pirate uses a CD-recordable device or
professional mastering equipment to duplicate a CD-ROM, SafeDisc is designed to
inhibit the transmission of the digital signature. Because decryption will not
take place without the digital signature, the copy will not run. SafeDisc also
contains anti-hacking technology to prevent the compromise of its security
features. The anti-hacking technology is designed not only to deter consumer
copying, but also to thwart destructive hackers and commercial hackers. See
"Risk Factors--Entrance Into New Market."
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.
In September 1997, the Company and Digimarc agreed to develop a digital
video watermarking solution to address the digital-to-digital copying issues
associated with the next generation of DVD recording devices. Digital watermarks
embedded in motion pictures and other video material act as an invisible
identity providing basic copyright identification information as well as various
directions either to allow or to disallow playback, viewing and copying onto
another digital device. The new technology will be based upon the Company's
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patented play control technology and Digimarc's patented watermarking
technology, which can survive numerous transformations (e.g., from digital to
analog and back to digital, or from one video format to another). The digital
watermarks are designed to be imperceptible to the viewer, but to be read easily
by special purpose decoders that can be built into software or semiconductors.
This jointly developed technology is intended to protect motion pictures and
other video content from unauthorized reproduction using digital recording
devices.
In February 1998, the Company purchased approximately 19.8% of the common
stock of C-Dilla and entered into a Software Marketing License and Development
Agreement with C-Dilla. Under this agreement, the Company has, for an initial
five-year term, the worldwide exclusive license to market C-Dilla's proprietary
copy protection technology for CD-ROM and Internet-delivered software products
in the consumer multimedia market. See "--Strategic Investments--C-Dilla Ltd."
As of March 31, 1998, the Company's research and development staff consisted
of 15 engineers and technicians. 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 personnel. In 1996, 1997 and the first three months of 1998,
the Company's expenses for research and development were $2.5 million, $2.2
million and $623,000, 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 38 United States patents and has 41 United States patent
applications pending. Of the issued United States patents, 23 relate to the
Company's copy protection technologies, 11 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 earliest of the Company's core
videocassette and DVD copy protection patents expires in 2005; however, the
Company has filed applications for improvement patents which, if issued, will
extend such expiration dates beyond 2010. The Company also has 123 foreign
patents and 211 foreign patent applications pending in 40 countries. Of the
issued foreign patents, 73 relate to the Company's copy protection technologies,
49 relate to video scrambling and one relates to audio scrambling. Included in
the patents related to the Company's copy protection technologies are eight
United States and 20 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'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
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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. Krypton Co., Ltd., a Japanese company, has filed
an invalidation claim against one of the Company's anti-copy patents in Japan.
After consultation with Japanese patent counsel, the Company believes that this
claim is without merit and will aggressively contest the claim in the Japanese
Patent Office. In the event of an adverse ruling on such claim, the Company may
incur legal competition from clones of its own copy protection technology in
Japan and a corresponding decline in demand for such technology from the
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, as the Company
acquires or licenses a portion of the technology included in its products from
third parties, its exposure to infringement actions may increase because the
Company must rely upon such third parties for information as to the origin and
ownership of such acquired or licensed technology. Although the Company intends
to obtain representations as to the origins and ownership of such acquired or
licensed software and obtain indemnification to cover any breach of any such
representations, there can be no assurance that such representations will be
accurate or that such indemnification will provide adequate compensation for any
breach of such representations. These and any other 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 eight United States and 20 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.
The Company has one lawsuit of this type pending to require the defendants to
discontinue the sale of devices that circumvent the Company's copy protection
technologies and infringe one or more of the Company's circumvention patents. In
the event of an adverse ruling in this litigation or in any similar litigation,
the Company might suffer from the legal availability or such a circumvention
device or obtain rights to the offending devices. The legal availability of
circumvention devices could result in the increased proliferation of devices
that defeat the Company's copy protection technology and a decline in demand for
the Company's technologies, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There is
legislation before the United States Congress and certain foreign legislative
bodies that would make such circumvention devices illegal. The Company is
supporting the legislative effort to make such circumvention devices illegal
irrespective of any patent position held by the Company.
Additional litigation may be necessary in the future to limit the sale of
circumvention 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, including indemnification of customers, 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
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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.
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.
The Company and Digimarc are jointly developing a digital media copy
protection solution to address the digital-to-digital copying issues associated
with the next generation of DVD recording devices. They have submitted their
proposed solution to the Copy Protection Technical Working Group ("CPTWG"). The
Company and Digimarc are competing with at least six other companies that have
submitted similar proposals to the CPTWG. Certain of these companies have
substantially greater name recognition and significantly greater financial,
technical, marketing and other resources than the Company and Digimarc. There
can be no assurance that the Company and Digimarc will be able to compete
successfully in presenting their proposal to the CPTWG. The company whose
digital media copy protection solution is selected by the CPTWG will have a
significant advantage in licensing its technology to video rights owners
worldwide and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
If the solution being developed by the Company and Digimarc is not the selected
solution, the Company and Digimarc will be at a competitive disadvantage in
marketing their solution. If the CPTWG adopts the Company's and Digimarc's
solution, there can be no assurance that other companies will elect not to
compete in this market.
VIDEO SCRAMBLING
The market for video scrambling products and technologies is highly
competitive. The Company, as a recent entrant into these markets, competes
directly or through licensed manufacturers with many companies, including
General Instrument Corporation, Pioneer Electronic Corporation,
Scientific-Atlanta, Inc., Tandberg Cryptovision A.S., VTech-HYH Broadcast
Systems and Zenith Electronics 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 reputation. There can be no assurance that the
Company or its licensees can compete successfully against current and potential
competitors, especially against those with significantly greater financial,
marketing, service, support, technical and other resources.
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MANUFACTURING
The Company's preferred 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.
The Company's manufacturing operations are limited to low volume products
that require significant quality control efforts by the Company, such as the VES
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 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,
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. 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. 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
The Company has been an active participant in the DVD technical working
group that 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.
In 1996, the technical working group adopted a set of copy protection principles
that established prerequisites for commercial availability of DVD hardware and
media. Adoption of these principles has resulted in worldwide digital-to-analog
copy protection standards for DVD players and media. 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
is continuing to evaluate digital-to-digital copy protection solutions, in
anticipation of the introduction of digital videocassette recorders and DVD
recorders. The Company's joint development project with Digimarc is directed to
this opportunity. The technical working group is also supporting legislation
pending before the United States Congress and certain foreign legislative bodies
that would support various copy protection solutions for digital media and would
also outlaw copy protection circumvention devices. Such legislation, if
introduced and enacted into law, would assist the Company in controlling
proliferation of circumvention devices and in achieving widespread adoption of
its digital-to-analog copy protection solutions. However, there can be no
assurance that
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such legislation will ever be enacted, or that all DVD and PC manufacturers will
follow industry design principles and applicable technology-based copy
protection schemes.
STRATEGIC INVESTMENTS
The Company seeks to continue to expand its technological base in current as
well as new markets, through the following strategic investments in companies
with complementary or compatible technologies or products.
COMMAND AUDIO CORPORATION (REDWOOD SHORES, CALIFORNIA)
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. 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. During 1997, the Company maintained its 19.8% ownership in CAC with
the additional cash investment of $2.0 million in connection with various rounds
of third-party financing obtained by CAC, bringing the Company's total
investment in CAC to $2.0 million. Additionally, in 1996, 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 for 12 years, beginning when CAC has operating
revenues from certain sources or, at the election of the Company, at any time
prior thereto.
DIGIMARC CORPORATION (PORTLAND, OREGON)
In December 1997, the Company invested $1.5 million in Digimarc in exchange
for shares of Digimarc's preferred stock that represents a 6.8% ownership on an
as-converted basis. Digimarc is a private company that was founded in 1995. The
Company and Digimarc are jointly developing a digital media copy protection
solution to address the digital-to-digital copying issues associated with the
next generation of DVD and digital videocassette recording devices. They have
presented their proposed solution to the CPTWG and are currently working on
prototype systems.
C-DILLA LTD. (WOODLEY, UNITED KINGDOM)
In February, 1998, Macrovision purchased 247,500 shares (approximately
19.8%) of the common stock of C-Dilla, for a purchase price of L2,121,212
(approximately $3.6 million). C-Dilla is a private company founded in 1991.
C-Dilla provides rights management software for high value-added information and
software publishers.
In February, 1998, the Company also entered into a Software Marketing
License and Development Agreement, (the "Agreement") under which it has, for an
initial five-year term, the worldwide exclusive license to market C-Dilla's
proprietary copy protection technology for CD-ROM software products in the
consumer multimedia software market. Under the Agreement, the Company paid
L606,060 (approximately $1.0 million) in up-front license fees subject to offset
against future royalties and will pay royalties to C-Dilla of between 30% to 45%
of revenues from sales of software products incorporating C-Dilla's technology.
In the event that the Company fails to reach minimum royalty levels of $2.0
million in the third year of the Agreement, $5.0 million in the fourth year, or
$10.0 million in the fifth year, the license becomes a non-exclusive license for
the term of the Agreement. Additionally, in connection with C-Dilla's granting
of licenses for certain of its products outside of the markets for which the
Company has been granted rights under the Agreement, C-Dilla will pay to the
Company royalties of between 7.5% to 30% of revenues from such licenses. The
Company has the option to extend the initial term of the Agreement for an
additional five-year period upon payment of an option fee of $1.0 million and an
additional license fee of $5.0 million, which fee may be paid through future
increased royalty
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payments. Under the terms of the Agreement, the Company and C-Dilla also agreed
to develop jointly certain other proprietary copy protection technologies for
CD-ROM, DVD-ROM and other digital delivery methods.
EMPLOYEES
As of March 31, 1998, the Company had 81 employees, including eight in
manufacturing, 15 in research, engineering and development, eight in technical
support, 25 in sales and marketing and 25 in general and administrative
capacities. Twelve 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 and the Company has the right to renew the lease for two
additional terms of five years each. 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. Mr. Swyt filed
his claim in arbitration for this matter with the American Arbitration
Association in June 1997 and the arbitration is proceeding, and arbitration
hearings are scheduled for October 1998. The Company believes that the case is
without merit and intends to contest it vigorously. However, it is not possible
to determine with precision the probable outcome or the amount of liability, if
any, under this lawsuit. 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 involved in legal proceedings related to certain of its
intellectual property rights. See "Business--Intellectual Property Rights."
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages and
positions as of June 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
John O. Ryan............................. 52 Chairman of the Board of Directors, Chief Executive
Officer and Secretary
William A. Krepick....................... 52 President, Chief Operating Officer and Director
Victor A. Viegas......................... 41 Vice President, Finance and Administration and Chief
Financial Officer
Richard S. Matuszak...................... 54 Vice President, Special Interest Copy Protection and
Director
Mark S. Belinsky......................... 41 Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection
Patrice J. Capitant...................... 49 Vice President, Engineering
Brian R. Dunn............................ 41 Vice President, Business Development
Whit T. Jackson.......................... 38 Vice President, Video Encryption Technologies
Carl S. Jorgensen........................ 42 Vice President of Operations
Donna S. Birks (1)....................... 42 Director
William N. Stirlen (1)................... 59 Director
Thomas Wertheimer (1).................... 59 Director
</TABLE>
- ------------------------
(1) Member, Audit Committee and Compensation Committee.
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 46 patents and
has 11 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. Ryan is also a director of Command Audio Corporation.
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
47
<PAGE>
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 Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company since October 1997. He was Vice
President, Worldwide Theatrical and Pay-Per-View Copy Protection pf the Company
from October 1995 to October 1997. 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 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. Mr. Belinsky is an observer on the Digimarc Corporation Board of
Directors.
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, 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. Dunn is also a director of C-Dilla Limited.
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.
MR. JORGENSEN joined Macrovision in July 1990 to head up the newly created
Manufacturing Department. He currently serves as Vice President of Operations.
Mr. Jorgensen has over 19 years experience in the commercial and consumer
electronics industry. Immediately prior to joining Macrovision, he was the
Manufacturing/Engineering Manager at Digital F/X, Inc. He has held various
management positions in the manufacturing/engineering field at companies such as
Gould Electronics, Inc., Atlas Electronics (where he set up their facility in
Malaysia), Ampex Corporation and Underwriters Laboratories. Mr. Jorgensen holds
a B.S. degree with honors in Electronics from San Jose State University and has
taken numerous post graduate courses in computer electronics.
MS. BIRKS has served as a director of the Company since May 1997. Since
December 1997, she has served as Executive Vice President and Chief Financial
Officer at California Microwave, Inc., a satellite and wireless
48
<PAGE>
communications company, and from August 1994 to June 1997, she served as Vice
President, Finance and Administration and Chief Financial Officer at ComStream.
She has also held senior management positions at GTE Spacenet, Macrovision
Corporation and Contel ASC. Ms. Birks holds a B.A. degree in Business
Administration from George Mason University in Fairfax, Virginia and an M.S.
degree in Finance from American University in Washington, D.C. She is a
certified public accountant.
MR. STIRLEN has served as a director of the Company since May 1997. He has
held various executive offices with Open Text Corporation, an intranet software
company headquartered in Waterloo, Ontario, since June 1996, serving as Chief
Financial Officer until October 1997 and as Executive Vice President of
Corporate Development since October 1997. Mr. Stirlen was a consultant to
technology companies from February 1994 to June 1996. From March 1993 to
February 1994, he served as Chief Financial Officer of Supercuts Inc. He has
also held senior management positions at Computer Consoles Inc., and Trimble
Navigation Ltd. Mr. Stirlen holds a B.A. degree from Yale University and an
M.B.A. in Finance from Northwestern University in Evanston, Illinois.
MR. WERTHEIMER has served as a director of the Company since July 1997. He
has served as a consultant to Universal Studios since January 1996. From 1992 to
January 1996, Mr. Wertheimer served as Executive Vice President and Chairman of
the Home Video and Television Groups of MCA, Inc. He is a member of 4MC Corp.
Board of Directors and of the Columbia Law School Board of Visitors. He also
serves as President of the KCRW Foundation. Mr. Wertheimer holds a B.A. degree
from Princeton University and an L.L.B. from Columbia University School of Law.
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. There are no
family relationships among the directors and officers of the Company.
49
<PAGE>
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 March 31,
1998, 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 of the Company's executive officers; (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)............. 1,975,488 27.2% 250,000 1,725,488 20.5%
John O. Ryan (4)................................. 678,006 9.3 50,000 628,006 7.5
The TCW Group Inc. (5)........................... 637,900 8.8 -- 637,900 7.6
Carol Ann Farrow-Draxton (6)..................... 372,722 5.2 50,000 322,722 3.8
William A. Krepick (7)........................... 120,056 1.7 10,000 110,056 1.3
Richard S. Matuszak (8).......................... 68,932 * -- 68,932 *
Victor A. Viegas (9)............................. 64,657 * -- 64,657 *
Whit T. Jackson (10)............................. 45,499 * -- 45,499 *
Carl S. Jorgensen (11)........................... 23,777 * -- 23,777 *
Brian R. Dunn (12)............................... 18,610 * -- 18,610 *
William N. Stirlen (13).......................... 3,507 * -- 3,507 *
Donna S. Birks (14).............................. 3,248 * -- 3,248 *
Patrice J. Capitant (15)......................... 2,102 * -- 2,102 *
Thomas Wertheimer (16)........................... 937 * -- 937 *
Mark S. Belinsky (17)............................ 475 * -- 475 *
All executive officers and directors as a group
(12 persons) (18).............................. 1,032,583 14.2
</TABLE>
- ------------------------
* Less than 1%.
(1) 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 March 31, 1998 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
225,000 shares from the Company is not exercised.
(3) These shares are held of record by Pacific Media Development Inc., an
indirect, wholly owned subsidiary of JVC. The address of JVC is 12, 3-chome,
Moriya-cho, Kanagawa-ku, Yokohama 221, Japan.
(4) Represents 535,555 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, 16,330
shares held of record by Mr. Ryan as custodian for various family members,
11,666 shares held of record by his son and 11,166 shares held of record by
his daughter. The 50,000 shares to be sold in the offering are being sold by
the trust. 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.
50
<PAGE>
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 12, 1998, these shares are held of record by The TCW
Group Inc., a Nevada corporation, and by an individual, Robert Day, who may
be deemed to control The TCW Group Inc. The address of The TCW Group Inc. is
865 South Figueroa Street, Los Angeles, California 90017. The address of Mr.
Day is 200 Park Avenue, Suite 2200, New York, New York 10166.
(6) Represents shares held of record by Ms. Farrow-Draxton as Trustee of the
Farrow Trust U/T/D December 18, 1990. The address of Ms. Farrow-Draxton is
P.O. Box 789, Geyserville, California 95441.
(7) Includes 90,750 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Krepick is President, Chief Operating Officer and a
director of the Company.
(8) Represents 18,835 shares held of record by Mr. Matuszak, 15,766 shares as
to which Mr. Matuszak shares beneficial ownership and 34,331 shares subject
to options exercisable within 60 days of March 31, 1998. Mr. Matuszak is
Vice President, Special Interest Copy Protection and a director of the
Company.
(9) Includes 3,704 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Viegas is Vice President, Finance and Administration and
Chief Financial Officer of the Company.
(10) Includes 37,499 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Jackson is Vice President, Video Encryption Technologies
of the Company.
(11) Includes 19,444 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Jorgensen is Vice President of Operations of the
Company.
(12) Represents shares subject to options exercisable within 60 days of March
31, 1998. Mr. Dunn is Vice President, Business Development of the Company.
(13) Includes 2,507 shares subject to options exercisable within 60 days of
March 31, 1998. Mr. Stirlen is a director of the Company.
(14) Includes 1,248 shares subject to options exercisable within 60 days of
March 31, 1998. Ms. Birks is a director of the Company.
(15) Mr. Capitant is Vice President, Engineering of the Company.
(16) Represents shares subject to options exercisable within 60 days of March
31, 1998. Mr. Wertheimer is a director of the Company.
(17) Mr. Belinsky is Senior Vice President, Worldwide Theatrical and
Pay-Per-View Copy Protection of the Company.
(18) Represents the shares referenced in footnote (4) and footnotes (7) through
(17).
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Hambrecht
& Quist LLC, NationsBanc Montgomery Securities LLC and Cowen & Company (the
"Underwriters") have severally agreed to purchase from the Company and the
Selling Stockholders the following respective number of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
NationsBanc Montgomery Securities LLC.............................................
Cowen & Company...................................................................
----------
Total............................................................................. 1,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares, the offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company and such Selling Stockholders will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of shares of Common Stock
offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Certain stockholders of the Company, including the Selling Stockholders and
the executive officers and directors of the Company, who will own in the
aggregate 2,808,986 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly sell, offer, contract to sell, transfer the economic risk
of ownership in, make any short sale, pledge or otherwise dispose of any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock, during the
90-day period after the effective date of the Registration Statement of which
this Prospectus is a part. In addition, the Company has agreed not to offer,
sell, grant any option to purchase or otherwise dispose of any shares of Common
Stock during the 90-day period after the effective date of the Registration
Statement of which this Prospectus is a part without the prior approval of
Hambrecht & Quist LLC, except that the Company may issue, and grant options to
purchase, shares
52
<PAGE>
of Common Stock pursuant to its existing stock option and stock purchase plans
and under currently outstanding options.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in the offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with the offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) and their respective affiliates intend to engage in passive market making
in the Company's Common Stock during the cooling off period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Company's Common Stock at levels above those which might otherwise prevail
in the open market, including by entering stabilizing bids or effecting
syndicate covering transactions. A stabilizing bid means the placing of any bid
or effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Company's Common Stock. A syndicate covering transaction means
the placing of any bid on behalf of the underwriting syndicate or the effecting
of any purchase to reduce a short position created in connection with the
offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
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, 1996 and 1997 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission are
incorporated by reference into this Prospectus:
(1) The Company's Annual Report on Form 10-KSB for the year ended December
31, 1997.
(2) The Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998.
(3) The Company's Current Report on Form 8-K dated February 17, 1998.
(4) The description of the Company's capital stock contained in the
Company's Registration Statement on Form 8-A filed on January 22, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act following the date of this Prospectus and prior to the
termination of the offering contemplated hereby shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus and the Registration Statement of which it
is a part to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such
53
<PAGE>
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus and
the Registration Statement of which it is a part.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as the regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at 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. This Web site can be accessed at http://www.sec.gov. The
Company's Common Stock is quoted on the Nasdaq National Market and reports,
proxy statements and other information concerning the Company also may be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus about any contract or other document are not
necessarily complete and, in each instance in which a copy of such contract or
document is filed with, or incorporated by reference in, the Registration
Statement as an exhibit, reference is made to such copy, and each such statement
shall be deemed qualified in all respects by such reference. Copies of the
Registration Statement, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request of any
such person, a copy of any and all of the information that has been or may be
incorporated by reference in this Prospectus, other than exhibits to such
documents that are not incorporated by reference into such documents. Requests
for such copies should be directed to Victor A. Viegas, Macrovision Corporation,
1341 Orleans Drive, Sunnyvale, CA 94089, Phone: (408)743-8600.
54
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31,
1998 (unaudited)........................................................ F-3
Consolidated Statements of Income for the years ended December 31, 1996
and 1997 and for the three-month periods ended March 31, 1997 and 1998
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1997 and for the three-month period ended March
31, 1998 (unaudited).................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1997 and for the three-month periods ended March 31, 1997 and
1998 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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, 1996 and 1997, 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, 1996 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
February 6, 1998
F-2
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,409 $ 1,314 $ 2,784
Short-term investments......................................................... -- 11,241 8,823
Accounts receivable, net of allowance for doubtful accounts of $267, $684 and
$681 as of December 31, 1996 and 1997 and March 31, 1998, respectively....... 3,376 5,240 4,118
Inventories.................................................................... 550 433 545
Receivable from related party.................................................. -- 279 279
Deferred tax assets............................................................ 929 1,336 1,418
Prepaid expenses and other current assets...................................... 186 430 438
--------- --------- -----------
Total current assets......................................................... 7,450 20,273 18,405
Property and equipment, net...................................................... 2,017 1,722 1,614
Patents and other intangibles, net of accumulated amortization of $401, $796 and
$885 as of December 31, 1996 and 1997 and March 31, 1998, respectively......... 1,161 1,098 1,132
Receivable from related party.................................................... 329 -- --
Long-term marketable investment securities....................................... -- 1,763 751
Investments in and advances to investee companies................................ 357 3,837 8,405
Other assets..................................................................... 639 163 129
--------- --------- -----------
$ 11,953 $ 28,856 $ 30,436
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,318 $ 919 $ 888
Accrued expenses............................................................... 2,468 2,190 1,740
Deferred revenue............................................................... 749 944 1,705
Income taxes payable........................................................... 585 846 899
Current portion of capital lease obligations................................... 105 108 109
--------- --------- -----------
Total current liabilities.................................................... 5,225 5,007 5,341
Capital lease obligations, net of current portion................................ 296 188 160
Deferred tax liabilities......................................................... 360 84 72
--------- --------- -----------
5,881 5,279 5,573
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 1,376,432
shares, none and none issued and outstanding as of December 31, 1996 and 1997
and March 31, 1998, respectively............................................. 1 -- --
Common stock, $.001 par value; 100,000,000, 50,000,000 and 50,000,000 shares
authorized as of December 31, 1996 and 1997 and March 31, 1998, respectively;
3,951,759, 7,215,195 and 7,273,254 shares issued and outstanding as of
December 31, 1996 and 1997 and March 31, 1998, respectively.................. 4 7 7
Additional paid-in capital..................................................... 9,530 23,277 23,534
Stockholder notes receivable................................................... (157) (131) (131)
Deferred stock compensation.................................................... (240) (96) (61)
Accumulated other comprehensive income......................................... (135) (214) (214)
Retained earnings (accumulated deficit)........................................ (2,931) 734 1,728
--------- --------- -----------
Total stockholders' equity................................................... 6,072 23,577 24,863
--------- --------- -----------
$ 11,953 $ 28,856 $ 30,436
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
---------------------- ----------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................... $17,080 $20,340 $4,564 $5,178
---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues............................................. 2,579 2,422 681 398
Research and development..................................... 2,527 2,248 557 623
Selling and marketing........................................ 5,090 5,765 1,548 1,526
General and administrative................................... 3,566 4,149 879 1,159
---------- ---------- ---------- ----------
Total costs and expenses................................... 13,762 14,584 3,665 3,706
---------- ---------- ---------- ----------
Operating income from continuing operations.................... 3,318 5,756 899 1,472
Interest and other income (expense), net....................... (260) 478 24 131
---------- ---------- ---------- ----------
Income from continuing operations before income taxes...... 3,058 6,234 923 1,603
Income taxes................................................... 1,223 2,413 369 609
---------- ---------- ---------- ----------
Income from continuing operations.......................... 1,835 3,821 554 994
Discontinued operations:
Loss from operations of CAC business, net of income tax
benefit of $204............................................ (663) -- -- --
Provision for operating losses during holding period, net of
income tax benefit of $45.................................. (164) -- -- --
---------- ---------- ---------- ----------
Net income..................................................... $ 1,008 $ 3,821 $ 554 $ 994
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Computation of basic and diluted earnings per share:
Income from continuing operations............................ $ 1,835 $ 3,821 $ 554 $ 994
Preferred stock dividends.................................... (587) (156) (156) --
---------- ---------- ---------- ----------
Adjusted income from continuing operations................... 1,248 3,665 398 994
Discontinued operations...................................... (827) -- -- --
---------- ---------- ---------- ----------
Earnings applicable to common stock.......................... $ 421 $ 3,665 $ 398 $ 994
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings (loss) per share:
Continuing operations........................................ $ .33 $ .57 $ .09 $ .14
Discontinued operations...................................... (.22) -- -- --
---------- ---------- ---------- ----------
Net income................................................. $ .11 $ .57 $ .09 $ .14
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share.............. 3,787,000 6,476,000 4,490,000 7,244,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings (loss) per share:
Continuing operations........................................ $ .29 $ .53 $ .08 $ .13
Discontinued operations...................................... (.19) -- -- --
---------- ---------- ---------- ----------
Net income................................................. $ .10 $ .53 $ .08 $ .13
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share............ 4,280,000 6,960,000 4,903,000 7,735,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT 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, 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)
Conversion of preferred stock to common
stock........................................ (1,376,432) (1) 1,376,432 1 -- --
Issuance of common stock in initial public
offering, net of issuance costs of $1,531.... -- -- 1,764,016 2 13,232 --
Issuance of common stock upon exercise of
options...................................... -- -- 111,342 -- 288 --
Issuance of common stock under stock purchase
plan......................................... -- -- 11,646 -- 89 --
Cash dividends of $.075 per share paid on
1,376,432 shares of preferred stock.......... -- -- -- -- -- --
Payment on stockholder note receivable......... -- -- -- -- -- 26
Amortization of deferred stock compensation.... -- -- -- -- -- --
Tax benefit associated with stock plans........ -- -- -- -- 138 --
Translation adjustment......................... -- -- -- -- -- --
Unrealized gain on investments................. -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
--------- --- --------- --- ----------- -----
Balances as of December 31, 1997................. -- -- 7,215,195 7 23,277 (131)
Issuance of common stock upon exercise of
options (unaudited).......................... -- -- 41,560 -- 126 --
Issuance of common stock under stock purchase
plan (unaudited)............................. -- -- 16,499 -- 131 --
Amortization of deferred stock compensation
(unaudited).................................. -- -- -- -- -- --
Translation adjustment (unaudited)............. -- -- -- -- -- --
Unrealized gain on investments (unaudited)..... -- -- -- -- -- --
Net income (unaudited)......................... -- -- -- -- -- --
--------- --- --------- --- ----------- -----
Balance as of March 31, 1998 (unaudited)......... -- $ -- 7,273,254 $ 7 $ 23,534 $ (131)
--------- --- --------- --- ----------- -----
--------- --- --------- --- ----------- -----
<CAPTION>
(ACCUMULATED
ACCUMULATED OTHER DEFICIT) TOTAL
DEFERRED STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
COMPENSATION INCOME EARNINGS EQUITY
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1995................. $ -- $ (118) $ (2,099) $ 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) (135) (2,931) 6,072
Conversion of preferred stock to common
stock........................................ -- -- -- --
Issuance of common stock in initial public
offering, net of issuance costs of $1,531.... -- -- -- 13,234
Issuance of common stock upon exercise of
options...................................... -- -- -- 288
Issuance of common stock under stock purchase
plan......................................... -- -- -- 89
Cash dividends of $.075 per share paid on
1,376,432 shares of preferred stock.......... -- -- (156) (156)
Payment on stockholder note receivable......... -- -- -- 26
Amortization of deferred stock compensation.... 144 -- -- 144
Tax benefit associated with stock plans........ -- -- -- 138
Translation adjustment......................... -- (83) -- (83)
Unrealized gain on investments................. -- 4 -- 4
Net income..................................... -- -- 3,821 3,821
----- ----- ------------- -------------
Balances as of December 31, 1997................. (96) (214) 734 23,577
Issuance of common stock upon exercise of
options (unaudited).......................... -- -- -- 126
Issuance of common stock under stock purchase
plan (unaudited)............................. -- -- -- 131
Amortization of deferred stock compensation
(unaudited).................................. 35 -- -- 35
Translation adjustment (unaudited)............. -- (5) -- (5)
Unrealized gain on investments (unaudited)..... -- 5 -- 5
Net income (unaudited)......................... -- -- 994 994
----- ----- ------------- -------------
Balance as of March 31, 1998 (unaudited)......... $ (61) $ (214) $ 1,728 $ 24,863
----- ----- ------------- -------------
----- ----- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 1,008 $ 3,821 $ 554 $ 994
Adjustments to reconcile net income to net cash provided by continuing
operations:
Depreciation and amortization.......................................... 1,002 1,156 252 266
Deferred income taxes.................................................. (451) (683) (380) (94)
Amortization of deferred stock compensation............................ 180 144 36 35
Loss on disposal of fixed assets....................................... -- 105 -- --
Tax benefit from employee stock option plan............................ -- 138 -- --
Change in provision for accounts and notes receivable.................. 13 467 154 (3)
Discontinued operations................................................ 827 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets........... (590) (2,408) (690) 1,005
Accounts payable, accrued liabilities, deferred revenue, and income
taxes payable...................................................... 916 (221) 1,136 333
Other................................................................ (17) (83) (55) 12
--------- --------- --------- ---------
Net cash provided by continuing operations......................... 2,888 2,436 1,007 2,548
Net cash used in discontinued operations........................... (1,227) -- -- --
--------- --------- --------- ---------
Net cash provided by operating activities.......................... 1,661 2,436 1,007 2,548
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of long-term marketable investment securities................ -- (1,763) -- --
Sales or maturities of long-term marketable investment securities...... -- -- -- 1,013
Purchases of short-term investments.................................... -- (51,737) (9,766) (3,197)
Sales or maturities of short-term investments.......................... 1,200 40,500 -- 5,619
Acquisition of property and equipment.................................. (476) (571) (165) (86)
Payments for patents and other intangibles............................. (343) (332) (31) (123)
Receivable from related party.......................................... (329) -- -- --
Investment in Command Audio Corporation and Digimarc Corporation....... -- (3,480) -- --
Investment in C-Dilla Limited.......................................... -- -- -- (3,553)
Prepaid future royalties to C-Dilla Limited............................ -- -- -- (1,015)
Other, net............................................................. (4) (67) (108) 34
--------- --------- --------- ---------
Net cash (used in) provided by investing activities................ 48 (17,450) (10,070) (1,308)
--------- --------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations.................................. (117) (105) (27) (27)
Payments on long-term debt............................................. (696) -- -- --
Proceeds from issuance of common stock upon exercise of options........ 171 288 33 126
Proceeds from issuance of common stock under employee stock purchase
plan................................................................. -- 89 -- 131
Payment of stockholder note receivable................................. -- 26 -- --
Proceeds from sale of common stock, net of issuance costs and payments
of deferred offering costs........................................... (543) 13,777 11,031 --
Cash dividends......................................................... (401) (156) (156) --
--------- --------- --------- ---------
Net cash (used in) provided by financing activities................ (1,586) 13,919 10,881 230
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents..................... 123 (1,095) 1,818 1,470
Cash and cash equivalents at beginning of year/period.................... 2,286 2,409 2,409 1,314
--------- --------- --------- ---------
Cash and cash equivalents at end of year/period.......................... $ 2,409 $ 1,314 $ 4,227 $ 2,784
--------- --------- --------- ---------
--------- --------- --------- ---------
Cash paid during the year/period:
Interest............................................................... $ 296 $ 12 $ 2 $ 5
--------- --------- --------- ---------
--------- --------- --------- ---------
Income taxes........................................................... $ 1,446 $ 2,364 $ 273 $ 581
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Macrovision Corporation (the "Company"), was formed in 1983 and designs,
develops, and markets video security technologies and products that provide copy
protection and video scrambling for motion pictures, multimedia software, 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of March 31,
1998, and for the three months ended March 31, 1997 and 1998, have been prepared
on substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information set forth therein.
CASH, CASH EQUIVALENTS, AND 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 with maturities over three months and less
than 12 months are classified as short-term investments. Short-term investments
consisted of auction rate preferred stock, government bonds and government
agency securities. All marketable securities with maturities over one year are
classified as long-term marketable investment securities.
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, 1997 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 income. 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.
F-7
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Cash equivalents--money market funds.................................................. $ 803 $ 622
--- ---------
Investments:
Auction rate preferred stock certificates........................................... -- 3,400
Government bonds.................................................................... -- 9,604
--- ---------
-- 13,004
--- ---------
$ 803 $ 13,626
--- ---------
--- ---------
</TABLE>
As of December 31, 1997, government bond securities totaling $1,763,000 were
classified as long-term marketable investment securities in the accompanying
consolidated balance sheet.
As of December 31, 1997, the difference between the fair value and the
amortized cost of available-for-sale securities was $4,000 of unrealized gains
related to short-term government bonds that has been recorded as a component in
stockholders' equity. As of December 31, 1997, the weighted average portfolio
duration and contractual maturity was approximately six months.
INVENTORIES
Inventories are stated at the lower of first-in, first-out basis cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are carried on
the consolidated 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 $604,000 and $868,000 as of December 31, 1996
and 1997, 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 10 years. Prior
to January 1, 1997, the Company amortized the patents over the shorter of the
estimated useful life of the patent or 17 years. This change in estimate did not
have a material affect on the consolidated financial statements for the year
ended December 31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the
F-8
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
INVESTMENTS IN AND ADVANCES TO INVESTEE COMPANIES
The Company owns a minority interest in Command Audio Corporation ("CAC"), a
developer of audio-on-demand technology, Digimarc Corporation, a developer of
proprietary digital watermarking technology, and C-Dilla, Limited, a developer
of copy protection for consumer multimedia software, and carries such
investments at the lower of cost or net realizable value. Other-than-temporary
declines in the fair value of these investments are included in the consolidated
statements of income. See Note 2 of Notes to Consolidated Financial Statements.
REVENUE RECOGNITION
Advanced license fees attributable to minimum copy quantities or shared
revenues are deferred until earned. Revenue from the duplication of
videocassettes and the replication of digital versatile discs ("DVDs") is earned
based upon reported or estimated volume of each 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
agreements that contain volume pricing adjustments or return provisions are
accrued based upon anticipated unit volume. Nonrefundable technology licensing
revenue, which applies principally to DVD and PC subassembly manufacturers,
digital pay-per-view ("PPV") cable and satellite system operators and set-top
decoder manufacturers, is recognized upon contract signing 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 service fee per unit duplicated
utilizing the Company's video copy protection technology to help offset the cost
of operating the Company's copy protection equipment and reporting the volume of
copy protected videocassettes. Such amounts are charged to cost of revenues when
incurred and were $596,000 and $362,000 for 1996 and 1997, 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." As part of the legal settlement, these
companies have agreed to cease and desist from manufacturing, distributing,
and/or selling the infringing products. The outside legal costs associated with
protecting these patents amounted to $30,000 and $70,000 during 1996 and 1997,
respectively, and are included in cost of revenues as incurred. Not included in
these patent costs are the costs associated with in-house legal staffing and
engineering support. Cost of revenues also includes amortization of patents.
F-9
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits of which future realization is
uncertain.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. The translation of foreign currency denominated
financial statements 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. Adjustments resulting from such translation are included in
stockholders' equity. Gains or losses resulting from foreign currency
transactions included in the consolidated statements of income were not material
in any of the periods presented.
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, DVD, 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 and other
rights owners. 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 other scrambling
technologies 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,
short-term investments, trade accounts receivable and long-term investments. The
Company places its cash and cash equivalents and short-term investments in
deposits and money market funds with various high credit quality financial
institutions. The carrying value of the Company's
F-10
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial instruments approximates fair market value due to the relatively short
maturities of those instruments or recency of entering into such instruments as
in the case of the Company's investments in CAC and Digimarc.
The Company performs ongoing credit evaluations of its customers and to date
has not experienced any material losses. Revenues from three significant
customers aggregated 37% for the year ended December 31, 1996. Revenue from one
customer accounted for 11% of net revenue for the year ended December 31, 1997.
At December 31, 1997, receivables from one customer represented 25% of net
accounts receivable.
YEAR 2000
Certain organizations anticipate that they will experience operational
difficulties at the beginning of the Year 2000 as a result of computer programs
being written using two digits rather than four to define the applicable year.
The Company's plan for the Year 2000 calls for compliance verification with
external vendors supplying the Company software, testing in-house engineering
and manufacturing software tools, testing software in the Company's products for
the Year 2000 and communication with significant suppliers to determine the
readiness of third parties' remediation of their own Year 2000 issues. To date,
the Company has not encountered any material Year 2000 issues concerning its
respective computer programs. The Company plans to complete its Year 2000
research and testing by the end of 1998. All costs associated with carrying out
the Company's plan for the Year 2000 problem are being expensed as incurred. The
costs associated with preparation for the Year 2000 are not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Nevertheless, there is uncertainty concerning the
potential costs and effects associated with any Year 2000 compliance. Any Year
2000 compliance problems of the Company or its customers or suppliers could have
a material adverse effect on the Company's business, financial condition and
results of operations. During the past three years, the Company completed an
effort to convert its financial applications to commercial products that,
according to their suppliers, are Year 2000 compliant. The Company has received
confirmations from its primary suppliers indicating that they are either Year
2000 compliant or have plans in place to ensure readiness. As part of the
Company's assessment, it is evaluating the level of validation it will require
of third parties to ensure their Year 2000 readiness.
NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE ("EPS"). In accordance with SFAS No. 128,
basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common stock
issuable upon exercise of stock options using the treasury stock method. Common
equivalent shares from preferred stock have been excluded from the computation
of diluted EPS, prior to their conversion into common stock on March 17, 1997,
because the effect of the inclusion would
F-11
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be antidilutive. The following is a reconciliation of the shares used in the
computation of basic and diluted EPS (in thousands except for per share
amounts):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Basic EPS--weighted average number of common shares outstanding....... 3,787 6,476 4,490 7,244
Effect of dilutive common equivalent shares--stock options
outstanding......................................................... 493 484 413 491
--------- --------- --------- ---------
Diluted EPS--weighted average number of common shares and common
equivalents shares outstanding...................................... 4,280 6,960 4,903 7,735
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
STOCK BASED COMPENSATION
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.
OTHER ACCUMULATED COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "REPORTING COMPREHENSIVE INCOME." SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "other comprehensive income" in a full set of general purpose financial
statements. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. SFAS No. 130 is effective for annual and interim periods
beginning after December 15, 1997 and for periods ended before that date when
presented for comparative purposes. SFAS No. 130 was adopted by the Company in
its quarter ended March 31, 1998 and for prior comparative periods. The Company
has not yet determined the format it will use to display the information
required by SFAS No. 130 in the annual financial statements for the year ending
December 31, 1998. Total comprehensive income was $496,000 and $994,000 for the
three months ended March 31, 1997 and 1998, respectively, and $991,000 and
$3,742,000 for the years ended December 31, 1996 and 1997, respectively. The
primary components of other comprehensive income include unrealized gains and
losses resulting from the translation of the Company's foreign subsidiaries
which have a local functional currency and unrealized holding gains and losses
related to the Company's available-for-sale investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 establishes standards of
reporting information about operating segments in annual financial statements by
public business enterprises and requires such enterprises to report selected
information about operating segments in interim financial reports. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and for periods
ended before that date when presented for comparative purposes. The required
interim disclosures are not required to be made in the initial year of
application but the information for the interim periods for the initial year is
required as comparative information in the second year of application. As such,
the Company intends to display the information required by SFAS No. 131 in the
interim and annual financial statements for the year ending December 31, 1999.
F-12
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Upon closing of the IPO, all outstanding shares
of preferred stock automatically converted into 1,376,432 shares of common
stock. In March and April 1997, the Company sold an aggregate of 1,764,016
shares of common stock for $13,234,000, net of $1,531,000 of issuance costs.
REINCORPORATION
In December 1996, the Board of Directors approved the Company's
reincorporation in the state of Delaware which became effective on February 14,
1997. 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 which became effective on February 26, 1997. 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,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -------------
<S> <C> <C> <C>
Raw materials............................................................... $ 260 $ 203 $ 216
Work in progress............................................................ 73 -- 161
Finished goods.............................................................. 217 230 168
--- --- ---
$ 550 $ 433 $ 545
--- --- ---
--- --- ---
</TABLE>
PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Machinery and equipment.............................................................. $ 2,977 $ 3,263
Leasehold improvements............................................................... 913 950
Furniture and fixtures............................................................... 429 438
--------- ---------
4,319 4,651
Less accumulated depreciation and amortization....................................... 2,302 2,929
--------- ---------
$ 2,017 $ 1,722
--------- ---------
--------- ---------
</TABLE>
Equipment recorded under capital leases aggregated $518,000 with related
accumulated amortization of $130,000 and $233,000 as of December 31, 1996 and
1997, respectively.
F-13
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
INVESTMENTS IN AND ADVANCES TO INVESTEE COMPANIES
See Note 4 of Notes to Consolidated Financial Statements for a description
of the Company's investment in CAC.
In December 1997, the Company invested $1,500,000 in Digimarc in exchange
for shares of Digimarc's convertible preferred stock, which represents a 6.8%
ownership on an as-converted basis. Digimarc is a private company headquartered
in Portland, Oregon. Its products include proprietary digital watermarking
technology used in information embedding, enabling image identification,
copyright protection and facilitating electronic commerce.
On February 17, 1998, the Company acquired 247,500 shares (approximately
19.8%) of the common stock of C-Dilla, Limited, a United Kingdom company
("C-Dilla"), for a purchase price of L2,121,212 (approximately $3,600,000). On
February 17, 1998, the Company also entered into a Software Marketing Licence
and Development Agreement, (the "Agreement") under which it has obtained, for an
initial five-year term, the worldwide exclusive license to market C-Dilla's
proprietary copy protection technology for CD-ROM and Internet-delivered
software products in the consumer multimedia software market. The Company paid
L606,060 (approximately $1,000,000) in up-front license fees subject to offset
against future royalties and will pay royalty payments to C-Dilla of between 30%
to 45% of revenues from sales of software products incorporating C-Dilla's
technology. In the event that the Company fails to reach minimum royalty levels
of $2,000,000 in the third year of the Agreement, $5,000,000 in the fourth year
or $10,000,000 in the fifth year, the license becomes a non-exclusive license
for the term of the Agreement. Additionally, in connection with C-Dilla's
granting of licenses for certain of its products outside of the markets for
which the Company has been granted rights under the Agreement, C-Dilla will pay
the Company royalties of between 7.5% to 30% of revenues from such licenses. The
Company has the option to extend the initial term of the Agreement for an
additional five-year period upon payment of an option fee of $1,000,000 and an
additional license fee of $5,000,000, which fee may be paid through future
increased royalty payments. Under the terms of the Agreement, the Company also
agreed to develop jointly with C-Dilla certain other proprietary copy protection
technologies for CD-ROM, DVD-ROM and other digital delivery methods.
The Company intends to hold its investments for the long-term and monitors
the recoverability of these investments based on management's estimates of the
net realizable value based on the achievements of milestones in business plans
and third-party financings. The carrying amount of such investments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Investment in CAC......................................................... $ 357 $ 2,337 $ 2,337
Investment in Digimarc.................................................... -- 1,500 1,500
Investment in C-Dilla..................................................... -- -- 3,553
Prepayments of royalties to C-Dilla....................................... -- -- 1,015
--- --------- -----------
$ 357 $ 3,837 $ 8,405
--- --------- -----------
--- --------- -----------
</TABLE>
F-14
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Accrued compensation................................................................. $ 1,069 $ 1,142
Accrued professional fees............................................................ 234 409
Accrued rebates...................................................................... 595 30
Other accrued liabilities............................................................ 570 609
--------- ---------
$ 2,468 $ 2,190
--------- ---------
--------- ---------
</TABLE>
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Interest income......................................................................... $ 67 $ 513
Interest expense........................................................................ (284) (12)
Other................................................................................... (43) (23)
--------- ---
$ (260) $ 478
--------- ---
--------- ---
</TABLE>
F-15
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information related to noncash investing and
financing activities is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <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 -- -- --
--------- --------- --------- ---------
--------- --------- --------- ---------
Conversion of preferred stock into common stock.................. -- $ 7,433 $ 7,433 --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(3) DEBT
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 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, which was subsequently converted
into 543,099 shares of common stock upon consummation of the Company's IPO.
(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,
F-16
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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.
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.
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.
During 1997, in order to maintain its 19.8% ownership, the Company invested
an additional $1,980,000 in CAC as part of various external rounds of
third-party financings by CAC.
Information relating to discontinued operations for the year ended December
31, 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Costs and expenses............................................................................ $ (1,081)
---------
Operating loss.............................................................................. (1,081)
Other income, net............................................................................. 5
---------
Loss before income taxes.................................................................... (1,076)
Income tax benefit, net....................................................................... 249
---------
Loss from discontinued operations........................................................... $ (827)
---------
---------
</TABLE>
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 sheets as of December 31, 1996 and 1997, as
receivable from a related party.
F-17
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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 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.
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. For the
years ended December 31, 1996 and 1997 and for the three months ended March 31,
1997 and 1998, the Company recorded revenue from JVC of approximately $78,000,
$234,000, $16,000 and $78,000, respectively, and recorded expenses payable to
JVC of approximately $12,000, $22,000, $1,000 and $5,000, respectively, under
these agreements.
In connection with a license agreement dated September 26, 1995 among 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 was owed to Techno as of December 31,
1996 and paid in 1997 upon receipt of the final license payment from the
unrelated party.
The Company's Japanese subsidiary and Techno are parties to a Technical
Consulting Agreement dated July 1, 1996 pursuant to which Techno provides
technical consulting services as assigned by certain officers of the Company or
Macrovision Japan in connection with technical support subject to an hourly rate
of approximately $85 per hour, subject to a minimum consulting fee of
approximately $1,700 per quarter, and reimbursement of expenses related to the
performance under the agreement.
In January 1997, the Company and JVC entered into a Copy Protection
Technology Agreement in which the Company 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 with 95% of the
royalties from such sublicenses payable to the Company or successor 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.
In 1997, the Company entered into several agreements with JVC or its wholly
owned subsidiaries including a Copy Protection License Agreement, a Digital
Versatile Disc Player/Digital Video Cassette Recorder License
F-18
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Agreement for Anticopy Technology and a Replicator Agreement. The terms and
conditions of these agreements are not more favorable to JVC or its subsidiaries
than the terms offered to other unrelated parties. The Company recorded revenues
from JVC of approximately $59,000 during the year ended December 31, 1997 and
$3,000 for the three months ended March 31, 1998.
In 1996 and 1997, the Company entered into agreements with Matsushita, which
owns approximately 52% of JVC, including a Copy Protection Technology License
Agreement, a Digital Versatile Disc Player/Digital Video Cassette Recorder
License Agreement for Anticopy Technology and a Component Supplier Non-Assertion
and Technical Services Agreement. The terms and conditions of such agreements
are not more favorable to Matsushita or its subsidiaries than the terms offered
to other unrelated parties. The Company recorded revenues from Matsushita of
approximately $56,000, $111,000, $33,000 and $47,000 during the years ended
December 31, 1996 and 1997, and for the three months ended March 31, 1997 and
1998, respectively.
(5) STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
The Company's Certificate of Incorporation provides for the issuance of up
to 5,000,000 shares of preferred stock, of which 1,376,432 shares were
designated as Series A. In June 1991, the Company issued to Pacific Media (the
"Purchaser") 833,333 shares of Series A convertible preferred stock for gross
proceeds of $4,500,000. The shares were 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 entitled 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 were
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, 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 or (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 IPO, all rights of Pacific Media to purchase common stock of
the Company from such persons expired.
F-19
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
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, 1997, there
were 48,611 shares subject to the repurchase right and the remaining principal
of the note was $131,000.
STOCK OPTION AND PURCHASE PLANS
In December 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Equity Incentive Plan"), which serves as the successor to the Company's 1988
Stock Option Plan (the "1988 Plan"). Options granted under the 1988 Plan before
its termination continue to remain outstanding in accordance with their terms,
but no further options may be granted under the 1988 Plan. Nonstatutory stock
options and incentive stock options granted under the 1988 Plan 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 7 to 10 years from date of grant.
The Company's Board of Directors has reserved 1,332,222 shares of common
stock for issuance under the Equity Incentive Plan (see Note 10 of Notes to
Consolidated Financial Statements). 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 Equity Incentive Plan permits the
grant of either incentive or nonqualified stock options at the then current
market price. Options granted under the Equity Incentive Plan will have a
maximum term of ten years and generally vest as to one-sixth of the shares in
the first year, one-third of the shares in the second year and one-half of the
shares in the third year.
In December 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "Purchase Plan") and reserved 140,000 shares of common
stock for issuance thereunder. The Purchase Plan was 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 lower of the fair market value of
the common stock on the first day of the offering period or on the last day of
the purchase period. The Company's stockholders approved the Purchase Plan in
February 1997. In 1997, the Company issued 11,646 shares pursuant to the
Purchase Plan.
In December 1996, the Company's Board of Directors 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 of Common Stock annually
thereafter. 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's
stockholders approved the Directors Plan in February 1997. During 1997, the
Company granted options to purchase 15,000 shares of common stock.
F-20
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
The Company uses the intrinsic value-based method 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 its
plans because the exercise price of each option equaled or exceeded 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.
If compensation cost for the Company's stock-based compensation plans had
been determined in a manner consistent with the fair value approach described in
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>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C> <C>
Net income As reported................................... $ 1,008 $ 3,821
Adjusted pro forma............................ 931 3,388
Diluted net income per share As reported................................... .10 .53
Adjusted pro forma............................ .08 .46
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes method in 1997 and the minimum value method in 1996 with the
following weighted average assumptions for options and the ESPP plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
---------------- -----------
<S> <C> <C>
OPTION PLANS:
Dividends................................................................ None None
Expected term............................................................ 4.0 years 4.56 years
Risk free interest rate.................................................. 5.82% 6.07%
Volatility rate.......................................................... None 64.7%
ESPP PLAN:
Dividends................................................................ Not applicable None
Expected term............................................................ Not applicable 1.25 years
Risk free interest rate.................................................. Not applicable 5.42%
Volatility rate.......................................................... Not applicable 62.4%
</TABLE>
F-21
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Company's option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding as of December 31, 1995............................. 707,889 $ 2.66
Granted......................................................... 142,050 4.26
Canceled........................................................ (83,111) 2.69
Exercised....................................................... (66,263) 2.57
-----------
Outstanding as of December 31, 1996............................. 700,565 2.99
Granted......................................................... 126,154 11.81
Canceled........................................................ (17,034) 4.17
Exercised....................................................... (111,342) 2.59
-----------
Outstanding as of December 31, 1997............................. 698,343 4.62
Granted......................................................... 166,495 15.00
Canceled........................................................ (1,502) 2.70
Exercised....................................................... (41,560) 3.04
-----------
Outstanding as of March 31, 1998................................ 821,776 6.80
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Options exercisable at period-end....................................... 365,258 379,042
Weighted average fair value of options granted during the
period................................................................. $ .88 $ 6.87
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING --------------------------
------------------------------------------------- WEIGHTED
WEIGHTED AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER EXERCISE
PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ---------------------- --------- ------------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$2.25 - 2.70.......... 530,252 6.90 year $ 2.70 369,844 $ 2.70
$7.20 - 9.00.......... 99,114 9.07 8.10 8,678 7.60
$13.62 - 14.50........ 68,977 9.78 14.44 520 14.13
--------- -----------
698,343 7.49 4.62 379,042 2.82
--------- -----------
--------- -----------
</TABLE>
F-22
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(6) INCOME TAXES
Income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Current:
Federal.................................................................. $ 1,146 $ 2,169
Foreign.................................................................. 71 383
State.................................................................... 208 544
--------- ---------
Total current.......................................................... 1,425 3,096
--------- ---------
Deferred:
Federal.................................................................. (305) (554)
State.................................................................... (146) (129)
--------- ---------
Total deferred......................................................... (451) (683)
--------- ---------
$ 974 $ 2,413
--------- ---------
--------- ---------
</TABLE>
Total tax expense (benefit) has been allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Continuing operations...................................................... $ 1,223 $ 2,413
Discontinued operations.................................................... (249) --
--------- ---------
$ 974 $ 2,413
--------- ---------
--------- ---------
</TABLE>
The Company's effective tax rate differs from the statutory federal tax rate
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Computed "expected" tax expense.............................................. $ 674 $ 2,120
State tax expenses, net of federal benefit................................... 98 274
Tax credits.................................................................. (45) (87)
Foreign taxes................................................................ 15 47
Exempt interest.............................................................. (13) (144)
Write-off of discontinued operations deferred tax asset...................... 203 --
Other........................................................................ 42 203
--- ---------
$ 974 $ 2,413
--- ---------
--- ---------
</TABLE>
F-23
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(6) INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves......................................... $ 598 $ 673
Allowance for doubtful accounts.......................................... 106 272
Depreciation and amortization............................................ 338 707
Deferred revenue......................................................... 238 382
Other.................................................................... 32 --
--------- ---------
Total gross deferred tax assets........................................ 1,312 2,034
Deferred tax liabilities:
Patents.................................................................. 743 782
--------- ---------
Net deferred tax assets................................................ $ 569 $ 1,252
--------- ---------
--------- ---------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(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,
1997, were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----------- -----------
<S> <C> <C>
1998..................................................................... $ 116 $ 463
1999..................................................................... 116 448
2000..................................................................... 78 411
2001..................................................................... -- 426
2002 and thereafter...................................................... -- 217
--- -----------
Total.................................................................... 310 $ 1,965
-----------
-----------
Less amounts representing interest....................................... 14
---
Present value of minimum capital lease payments.......................... 296
Less current portion of capital lease liability.......................... 108
---
Capital lease liability, net of current portion.......................... $ 188
---
---
</TABLE>
Rent expense was $441,000 and $469,000 as of December 31, 1996 and 1997,
respectively.
F-24
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(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 $9,500 in
1997. 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. 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 in each of 1996 and 1997. Matching contributions
aggregated $60,000 and $54,000 for the years ended December 31, 1996 and 1997,
respectively, and are fully vested after three years of service.
(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. The plaintiff 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 the
plaintiff and the Company. The arbitration agreement contains limitations on the
types of damages available to him and expressly precludes punitive damages. The
plaintiff filed his claim in arbitration for this matter with the American
Arbitration Association in June 1997 and the arbitration hearings are scheduled
for October 1998. 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.
F-25
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(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, Japan and the Far East. The distribution of revenues, operating income,
and assets by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues:
United States......................................................... $ 15,823 $ 18,960
Foreign operations.................................................... 1,257 1,380
--------- ---------
Total revenues........................................................ $ 17,080 $ 20,340
--------- ---------
--------- ---------
Operating income from continuing operations:
United States......................................................... $ 3,064 $ 5,513
Foreign operations.................................................... 254 242
--------- ---------
Total operating income.............................................. $ 3,318 $ 5,755
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Identifiable assets:
United States......................................................... $ 10,844 $ 27,524
Foreign operations.................................................... 1,215 1,438
--------- ---------
Subtotal identifiable assets........................................ 12,059 28,962
Eliminations.......................................................... (106) (106)
--------- ---------
Total identifiable assets........................................... $ 11,953 $ 28,856
--------- ---------
--------- ---------
</TABLE>
United States revenue includes export sales to the following geographic
areas (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Europe.................................................................. $ 2,166 $ 3,200
Japan................................................................... 1,099 1,500
Rest of world........................................................... 1,947 3,382
--------- ---------
$ 5,212 $ 8,082
--------- ---------
--------- ---------
</TABLE>
(10) SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, the Company's stockholders approved an amendment to the Equity
Incentive Plan that increased the number of shares reserved for issuance under
the Equity Incentive Plan by 400,000 shares.
F-26
<PAGE>
PROTECTING YOUR IMAGE
[Words "Protecting Your Image" superimposed on floating DVD-ROM, videocassette,
satellite dish, and television set]
Macrovision, PhaseKrypt and Protecting Your Image are registered trademarks, and
CineGuard, ColorStripe, VES and VES-TM are trademarks of Macrovision
Corporation.
Logo
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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, ANY SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM
IT IS 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 THE 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............................................................... 17
Use of Proceeds........................................................... 17
Price Range of Common Stock............................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 30
Management................................................................ 47
Principal and Selling Stockholders........................................ 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Documents Incorporated by Reference....................................... 53
Available Information..................................................... 54
Index to Consolidated Financial Statements................................ F-1
</TABLE>
1,500,000 SHARES
[LOGO]
COMMON STOCK
-----------
PROSPECTUS
-------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
COWEN & COMPANY
, 1998
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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........... $ 10,846
NASD filing fee............................................... 4,177
Nasdaq National Market filing fee............................. 17,500
Accounting fees and expenses.................................. 100,000
Legal fees and expenses....................................... 125,000
Printing expenses............................................. 175,000
Road show expenses............................................ 15,000
Blue sky fees and expenses.................................... 10,000
Transfer agent, registrar and custodian fees and expenses..... 10,000
Miscellaneous................................................. 32,477
------------
Total................................................. $ 500,000
------------
------------
</TABLE>
ITEM 15. 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
II-1
<PAGE>
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 and approved by the Registrant's
Board of Directors, the Registrant maintains directors and officers liability
insurance.
ITEM 16. EXHIBITS.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement (draft dated June 1, 1998).
2.01 -- Form of Merger Agreement by and between the Registrant and Macrovision Corporation, a California
corporation.(1)
4.01 -- Registration Rights Agreement dated June 12, 1991.(1)
5.01 -- Opinion of Fenwick & West regarding legality of the securities being issued.
23.01 -- Consent of Fenwick & West (included in Exhibit 5.01).
23.02 -- Consent of KPMG Peat Marwick LLP.
24.01 -- Power of Attorney (included on page II-3).
</TABLE>
- ------------------------
(1) Incorporated by reference to the Exhibit of the same number filed with the
Registrant's Registration Statement on Form SB-2, File No. 333-19373.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) 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.
(2) 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.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
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-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on June 1, 1998.
MACROVISION CORPORATION
By: /s/ JOHN O. RYAN
-----------------------------------------
John O. Ryan
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints John O. Ryan, William A. Krepick, Richard
S. Matuszak and Victor A. Viegas, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by the Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his,
her or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------------- -------------------------- -------------------
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
Chairman of the Board of
/s/ JOHN O. RYAN Directors, Chief
- ---------------------------------------- Executive Officer and a June 1, 1998
John O. Ryan Director
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ VICTOR A. VIEGAS Vice President, Finance
- ---------------------------------------- and Administration and June 1, 1998
Victor A. Viegas Chief Financial Officer
ADDITIONAL DIRECTORS:
/s/ WILLIAM A. KREPICK
- ---------------------------------------- President, Chief Operating June 1, 1998
William A. Krepick Officer and Director
/s/ RICHARD S. MATUSZAK
- ---------------------------------------- Director June 1, 1998
Richard S. Matuszak
/s/ DONNA S. BIRKS
- ---------------------------------------- Director June 1, 1998
Donna S. Birks
/s/ WILLIAM N. STIRLEN
- ---------------------------------------- Director June 1, 1998
William N. Stirlen
/s/ THOMAS WERTHEIMER
- ---------------------------------------- Director June 1, 1998
Thomas Wertheimer
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- --------------------------------------------------------------------------------------------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement (draft dated June 1, 1998).
2.01 -- Form of Merger Agreement by and between the Registrant and Macrovision Corporation, a California
corporation.(1)
4.01 -- Registration Rights Agreement dated June 12, 1991.(1)
5.01 -- Opinion of Fenwick & West regarding legality of the securities being issued.
23.01 -- Consent of Fenwick & West (included in Exhibit 5.01).
23.02 -- Consent of KPMG Peat Marwick LLP.
24.01 -- Power of Attorney (included on page II-3).
</TABLE>
- ------------------------
(1) Incorporated by reference to the Exhibit of the same number filed with the
Registrant's Registration Statement on Form SB-2, File No. 333-19373.
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MACROVISION CORPORATION
1,500,000 SHARES
COMMON STOCK
UNDERWRITING AGREEMENT
June __, 1998
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
COWEN & COMPANY
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Macrovision Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell _________ shares of its authorized but
unissued Common Stock, $0.001 par value (herein called the Common Stock), and
the stockholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders) propose to sell an aggregate
of ____________ shares of Common Stock of the Company (said 1,500,000 shares
of Common Stock being herein called the Underwritten Stock). The Company
propose[s] to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 225,000 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 4(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters
to enter into this Agreement on its behalf and to act for it in the manner
herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (herein called the Commission) a
registration statement on Form S-3 (No. 333-_____), including the related
preliminary prospectus, for the registration under the Securities Act of
1933, as amended (herein called the Securities Act), of the Stock. Copies of
such registration statement and of each amendment thereto, if any, including
the related preliminary prospectus (meeting the requirements of Rule 430A of
the rules and regulations of the Commission) heretofore filed by the Company
with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all documents incorporated by
reference therein, all exhibits and financial statements, all information
omitted therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement) and, in the event of any amendment thereto
after the effective date of such registration statement (herein called the
Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule
462(b) registration statement). The term Prospectus as used in this
Agreement shall mean the prospectus, including the documents incorporated by
reference therein, relating to the Stock first filed with the Commission
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pursuant to Rule 424(b) and Rule 430A (or, if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement
or amendment to such prospectus after the Effective Date, shall also mean
(from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or
amended. The term Preliminary Prospectus as used in this Agreement shall
mean each preliminary prospectus, including the documents incorporated by
reference therein, included in such registration statement prior to the time
it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to
the use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the several Underwriters
that:
a. The Registration Statement has been prepared by the Company
in conformity with the requirements of the Securities Act, and the rules and
regulations (herein called the Rules and Regulations) of 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.
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
Securities 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 of the Closing Dates 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 Securities Act and the Rules and Regulations and will
in all material respects conform to the requirements of the Securities 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 Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997. The Company and each of its subsidiaries have been
duly incorporated and
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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 March 31, 1998, 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 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 Stock to be sold by the Company has 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 Stock 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 Securities 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 Stock to be sold by the Selling
Securityholders 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
Securities Act, the Securities Exchange Act of 1934, as amended
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(herein called 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.
(herein called the NASD).
g. KPMG Peat Marwick LLP, which has expressed its opinion 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, is an independent accountant as required by the
Securities 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 accountant 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 Information," "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 Securities 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 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.
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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 Stock 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.
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.
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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 Stock other than the Prospectus, the Registration
Statement and the other materials permitted by the Securities 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.
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 Stock.
v. The Company is eligible to use a registration statement on
Form S-3 in the registration of the Stock.
w. The documents incorporated by reference in the Prospectus
and the Registration Statement, when they were first filed with the
Commission, complied with the requirements of the Exchange Act and the rules
and regulations of the Commission thereunder, and none of such documents
contained an untrue statement of a material fact required to be stated
therein or necessary to make the statement therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS.
a. Each of the Selling Securityholders severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Securityholder has, and on the First
Closing Date hereinafter mentioned will have, good and marketable title to
the Stock proposed to be sold by such Selling Securityholder 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 Stock 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 Stock in good faith and without notice of
any adverse claim.
(ii) Such Selling Securityholder has executed and
delivered a Power of Attorney and a Custody Agreement (hereinafter
collectively referred to as the "Securityholders Agreements") and in
connection herewith such Selling Securityholder further represents, warrants
and agrees that such Selling Securityholder has deposited in custody, under
the Securityholders Agreement, with the agent named therein (the "Agent") as
custodian, certificates in negotiable form for the Stock to be sold hereunder
by such Selling Securityholder, for the purpose of further delivery pursuant
to this Agreement. Such Selling Securityholder agrees that the Stock to be
sold by such Selling Securityholder 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 Securityholder hereunder shall not be terminated, except as
provided in this Agreement or in the Securityholders Agreement, by any act of
such Selling Securityholder, by operation of law, by the death or incapacity
of such Selling
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Securityholder or by the occurrence of any other event. If the Selling
Securityholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Stock hereunder, the documents
evidencing Stock 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
Securityholders Agreement have been duly executed and delivered by or on
behalf of such Selling Securityholder and the form of such Securityholders
Agreements has been delivered to you.
(iii) The performance of this Agreement and the
Securityholders Agreements and the consummation of the transactions
contemplated hereby and by the Securityholders Agreements will not result in
a breach or violation by such Selling Securityholder of any of the terms or
provisions of, or constitute a default by such Selling Securityholder 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 Securityholder is a party or by which such Selling
Securityholder 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 Securityholder or any of its
properties, in which such breach, violation or default would adversely affect
the ability to such Selling Securityholder to perform its obligations
pursuant to this Agreement or the Securityholders Agreements or could
otherwise have a material adverse effect on such Selling Securityholder.
(iv) Such Selling Securityholder 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 Stock.
(v) Such Selling Securityholder has reviewed the
Registration Statement and Prospectus, and, although such Selling
Securityholder has not independently verified the accuracy or completeness of
the information contained therein (other than the information regarding such
Selling Securityholder and its affiliates, if any, set forth under the
captions "Management" and "Principal and Selling Securityholders"), nothing
has come to the attention of such Selling Securityholder that would lead such
Selling Securityholder 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 Securityholder's decision to sell the
Stock 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 Securityholders 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 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 into shares of Common Stock currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under Exchange
Act) by the such Selling Securityholder, or publicly announce such Selling
Securityholder's intention to do any of the foregoing, for a period
commencing on the date hereof and continuing to a date 90 days after the
first date any of the Stock are released by you for sale to the public,
except that, each of the Selling Securityholders 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
Securityholders 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.
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4. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell ________ shares of the Underwritten Stock to the several Underwriters,
each Selling Securityholder agrees to sell to the several Underwriters the
number of shares of the Underwritten Stock set forth in Schedule II opposite
the name of such Selling Securityholder, and each of the Underwriters agrees
to purchase from the Company and the Selling Securityholders the respective
aggregate number of shares of Underwritten Stock set forth opposite its name
in Schedule I. The price at which such shares of Underwritten Stock shall be
sold by the Company and the Selling Securityholders and purchased by the
several Underwriters shall be $___ per share. The obligation of each
Underwriter to the Company and each of the Selling Securityholders shall be
to purchase from the Company and the Selling Securityholders that number of
shares of the Underwritten Stock which represents the same proportion of the
total number of shares of the Underwritten Stock to be sold by each of the
Company and the Selling Securityholders pursuant to this Agreement as the
number of shares of the Underwritten Stock set forth opposite the name of
such Underwriter in Schedule I hereto represents of the total number of
shares of the Underwritten Stock to be purchased by all Underwriters pursuant
to this Agreement, as adjusted by you in such manner as you deem advisable to
avoid fractional shares. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b)
and (c) of this Section 4, the agreement of each Underwriter is to purchase
only the respective number of shares of the Underwritten Stock specified in
Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 9 or 10 hereof) to purchase
and pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice
to purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed
to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares, the number of shares of the
Stock which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on a pro rata
basis to absorb the remaining shares which the defaulting Underwriter or
Underwriters agreed to purchase; PROVIDED, HOWEVER, that the non-defaulting
Underwriters shall not be obligated to purchase the shares which the
defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Stock exceeds 10% of the total number of shares
of the Stock which all Underwriters agreed to purchase hereunder. If the
total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase shall not be purchased or absorbed in
accordance with the two preceding sentences, the Company and the Selling
Securityholders shall have the right, within 24 hours next succeeding the
24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares on
the terms herein set forth. In any such case, either you or the Company and
the Selling Securityholders shall have the right to postpone the First
Closing Date determined as provided in Section 6 hereof for not more than
seven business days after the date originally fixed as the First Closing Date
pursuant to said Section 6 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company and
the Selling Securityholders shall make arrangements within the 24-hour
periods stated above for the purchase of all the shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company or the Selling Securityholders to any
non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company or the Selling Securityholders.
Nothing in this paragraph (b), and no action taken hereunder, shall relieve
any defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth,
The Company grants an option to the several Underwriters to purchase,
severally and not jointly, up to 225,000 shares in the aggregate of the
Option Stock from the Company at the same price per share as the Underwriters
shall pay for the Underwritten Stock. Said option may be exercised only to
cover over- allotments in the sale of the Underwritten Stock by the
Underwriters and may be exercised in whole or in part at any
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time (but not more than once) on or before the thirtieth day after the date
of this Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Stock as to which
the several Underwriters are exercising the option. Delivery of certificates
for the shares of Option Stock, and payment therefor, shall be made as
provided in Section 6 hereof. The number of shares of the Option Stock to be
purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional
shares.
5. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page, the final paragraphs on the inside front cover, and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and
the Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and
you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
6. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 4(c) hereof
shall have been exercised not later than 7:00 A.M., San Francisco time, on
the date two business days preceding the First Closing Date), and payment
therefor, shall be made at the office of Fenwick & West LLP, Two Palo Alto
Square, Palo Alto, California, at 7:00 a.m., San Francisco time, on the
fourth business day after the date of this Agreement, or at such time on such
other day, not later than seven full business days after such fourth business
day, as shall be agreed upon in writing by the Company, the Selling
Securityholders and you. The date and hour of such delivery and payment are
herein called the First Closing Date.
(b) If the option granted by Section 4(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding
the First Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Fenwick &West
LLP, Two Palo Alto Square, Palo Alto, California at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option. The date
and hour of such delivery of such Option Stock and payment therefor are
herein called the Second Closing Date.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order, and payment for the Stock purchased from the
Selling Securityholders shall be made to the Custodian, for the account of
the Selling Securityholders, in each case by one or more certified or
official bank check or checks in same day funds or by wire transfer to an
account. Such payment shall be made upon delivery of certificates for the
Stock to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Stock to be delivered
to you shall be registered in such name or names and shall be in such
denominations as you may request at least one business day before the First
Closing Date, in the case of Underwritten Stock, and at least one business
day prior to the Second Closing Date, in the case of the Option Stock. The
First Closing Date and Second Closing Date are collectively referred to
herein as the "Closing Dates." Such certificates will be made available to
the Underwriters for inspection, checking and packaging at the offices of
Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on the
business day prior to the Closing Dates or, in the case of the Option Stock,
by 3:00 p.m., New York time, on the business day preceding the date of
purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
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whose check shall not have been received by you on the First Closing Date or
the Second Closing Date, as the case may be. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
7. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. Each of the Company and the Selling Securityholders
respectively covenants and agrees as follows, as applicable:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or
the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement, (iii) the institution or
notice of intended institution of any action or proceeding for that purpose,
(iv) the receipt by the Company of any notification with respect to the
suspension of the qualification of the Stock for sale in any jurisdiction, or
(v) the receipt by it of notice of the initiation or threatening of any
proceeding for such purpose. The Company will make every reasonable effort
to prevent the issuance of such a stop order and, if such an order shall at
any time be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the First Closing Date,
deliver to you a signed copy of the Registration Statement as originally
filed and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a signed
copy of each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to you
and send to the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably request,
and (iii) thereafter from time to time during the period in which a
prospectus is required by law to be delivered by an Underwriter or dealer,
likewise send to the Underwriters as many additional copies of the Prospectus
and as many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is necessary,
in the opinion of counsel for the Company or of counsel for the Underwriters,
to supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Stock, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall
propose to vary the terms of offering thereof by reason of changes in general
market conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the Company
or of counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
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(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus
or any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities
or blue sky laws; PROVIDED, HOWEVER, that the Company shall not be obligated
to file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request
in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports
filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company and, unless otherwise paid by the Company, the
Selling Securityholders jointly and severally agree to pay all costs and
expenses incident to the performance of their obligations under this
Agreement (without obligating the Selling Securityholders with respect to the
obligations of the Company under Section 8), including all costs and expenses
incident to (i) the preparation, printing and filing with the Commission and
the NASD of the Registration Statement, any Preliminary Prospectus and the
Prospectus, (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 7 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 7, (v) the furnishing
to you and the Underwriters of the reports and information referred to in
paragraph (g) of this Section 7 and (vi) the printing and issuance of stock
certificates, including the transfer agent's fees. 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 8 and Section 10(e) 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 memoranda
referred to in Section 7(j). 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 Stock to be sold by such Selling Stockholders to the
Underwriters hereunder.
(j) The Company and the Selling Securityholders jointly and
severally agree to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters)
paid by or for the account of the Underwriters or their counsel in qualifying
the Stock under state securities or blue sky laws and in the review of the
offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and
costs which the Company and the Selling Securityholders hereby agree to pay
and shall not affect any agreement which the Company and the Selling
Securityholders may make, or may have made, for the sharing of any such
expenses and costs.
(l) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company
will not, for a period of 90 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii)
enter into any swap or other agreement that transfers, in whole or in part,
any of the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (i) the Company's issuance of (A) the
Stock to be sold to the Underwriters pursuant to this Agreement, (B) issuance
of Common Stock upon the exercise
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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 (C)
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 90 days
following the first date that any of the shares of Common Stock are released
by the Underwriters for sale to the public.
(m) The Company agrees to use its best efforts to cause all
directors and officers of the Company to agree that, without the prior
written consent of Hambrecht & Quist LLC on behalf of the Underwriters, such
person or entity will not, for a period of 90 days following the commencement
of the public offering of the Stock by the Underwriters, directly or
indirectly, (i) sell, offer, contract to sell, make any short sale, pledge,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole
or in part, any of the economic consequences or ownership of Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise.
8. INDEMNIFICATION.
(a) The Company, John O. Ryan and William A. Krepick (each of
Messrs Ryan and Krepick may be referred to herein as an "Indemnifying
Securityholder" and collectively they may be referred to as the "Indemnifying
Securityholders"), 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 Securities 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
Securities 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
Company and a majority in interest of the Indemnifying Securityholders)
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
Securityholder, on any inaccuracy in the representations or warranties of
such Indemnifying Securityholder contained herein or any failure of such
Indemnifying Securityholder 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 Securityholder 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 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 5(b) 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 Stock (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 Stock to such person as required by the Securities Act, and
if the untrue
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statement or omission concerned has been corrected in the Prospectus, unless
such failure is the result of noncompliance by the Company with Section 7(c)
hereof. Notwithstanding the foregoing, the Indemnifying Securityholders
shall not be required to provide indemnification pursuant to this Section
8(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 Securityholders are required to indemnify the
Underwriters pursuant to this Section 8(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 Securityholders 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. In addition to its other obligations under
this Section 8(a), the Company and the Indemnifying Securityholders,
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
Securityholder (in the case of such Indemnifying Securityholder) herein or
failure to perform its obligations hereunder, all as described in this
Section 8(a) and subject to the limitations set forth in this Section 8(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 Securityholders'
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 Securityholders
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 Securityholders, one hundred twenty (120) days after the date of
such request. This indemnity agreement will be in addition to any liability
which the Company or the Indemnifying Securityholders may otherwise have.
(b) Each of the Selling Securityholders other than the Indemnifying
Securityholders, 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 Securities 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
Securities 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 Securityholders holding a majority of the Stock being sold by the
Selling Securityholders other than the Indemnifying Securityholders 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 Securityholder, or (ii) arise out of or are based in whole or in
part, on any inaccuracy in the representations or warranties of such Selling
Securityholder contained herein or any failure of such Selling Securityholder
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 Stock (or to the benefit
of any such person controlling such Underwriter) to the extent that any such
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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 Stock to such person as required by the Securities 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 7(c) hereof. In addition to its other obligations under this Section
8(b), each Selling Securityholder other than the Indemnifying
Securityholders, 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 Securityholder (in the case of
such Selling Securityholder) herein or failure to perform its obligations
hereunder, all as described in this Section 8(b) and subject to the
limitations set forth in this Section 8(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, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Selling Securityholder'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 Securityholders, 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
Securityholders 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 Securityholders and each person, if any,
who controls the Company or any Selling Securityholder within the meaning of
the Securities Act, against any losses, claims, damages, liabilities or
expenses, joint or several, to which the Company, or any such director,
officer, Selling Securityholder or controlling person may become subject,
under the Securities 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 5(b) hereof; and will reimburse the Company,
or any such director, officer, Selling Securityholder or controlling person
for any legal and other expenses as such expenses are reasonably incurred by
the Company, or any such director, officer, Selling Securityholder 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 8(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 8(c) which relates to information
furnished to the Company pursuant to Section 5(b) hereof, it will reimburse
the Company (and, to the extent applicable, each officer, director, Selling
Securityholder 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
Securityholder 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 Securityholder or controlling
person) shall 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
Securityholder) within
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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 8 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 Company and the Selling Securityholders, on the one
hand, and the Underwriters, on the other hand, from the offering of the Stock
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 Securityholders, 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 Securityholders, 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 Securityholders,
as the total price paid to the Company and to the Selling Securityholders,
respectively, for the Stock 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
Securityholders and received by the Underwriters as underwriting commissions.
The relative fault of the Company and the Selling Securityholders, 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
Securityholders 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
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<PAGE>
forth in subparagraph (d) of this Section 8, 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 8 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 Securityholders
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 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 8, 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 Stock underwritten by it and distributed to the public. No person
guilty of fraudulent misrepresentation (within the meaning of Section 8(f) of
the Securities 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 8 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 8(a), 8(b)
and 8(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 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 8(a), 8(b) and 8(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 8(a), 8(b) and 8(c) hereof.
(g) The liability of a Selling Securityholder 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 8
shall be limited to an amount equal to the product obtained by multiplying
the number of shares sold by such Selling Securityholder pursuant to this
Agreement by the price set forth in Section 4(a) above.
9. TERMINATION. This Agreement may be terminated by you at any time
prior to the First Closing Date by giving written notice to the Company and
the Selling Securityholders if after the date of this Agreement trading in
the Common Stock shall have been suspended, or if there shall have occurred
(i) the engagement in hostilities or an escalation of major hostilities by
the United States or the declaration of war or a national emergency by the
United States on or after the date hereof, (ii) any outbreak of hostilities
or other national or international calamity or crisis or change in economic
or political conditions if the effect of such outbreak, calamity, crisis or
change in economic or political conditions in the financial markets of the
United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading
in securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, or The
Nasdaq Stock Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or system, (iv) the enactment, publication, decree or other promulgation of
any federal or state statute, regulation, rule or order of, or commencement
of any proceeding or investigation by, any court, legislative body, agency or
other governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking
of any action by any federal, state or local government or agency in respect
of its monetary or fiscal affairs which in the Underwriters' reasonable
opinion has a material adverse effect on the securities markets in the United
States. If this Agreement shall be terminated pursuant to this Section 9,
there shall be no liability of the Company or the Selling Securityholders to
the Underwriters and no liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
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performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 7 hereof.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company and by the Selling Securityholders of all
their respective obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Option Stock is to be purchased, as
the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to
the financial statements contained therein), shall have been approved at or
prior to the First Closing Date by Wilson Sonsini Goodrich & Rosati, P.C.,
counsel for the Underwriters.
(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 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 Underwritten Stock
and any Option Stock) 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 Stock
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 Stock 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 Stock 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;
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<PAGE>
(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 documents incorporated by reference in the
Registration Statement and the Prospectus (except for the financial
statements included therein and the financial data derived therefrom, as
to which such counsel need express no opinion) when they became
effective or were filed with the Commission, as the case may be,
complied as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission
thereunder.
(7) 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 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;
(8) 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;
(9) 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;
(10) The information set forth in the Prospectus
under the captions "Risk Factors - Effect of Anti-Takeover Provisions,"
"Risk Factors - Shares Eligible for Future Sale," "Capitalization,"
"Business - Intellectual Property Rights" and "Principal and Selling
Securityholders," 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
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.
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<PAGE>
(ii) An opinion of Fenwick & West LLP, special counsel to the
Company and the Selling Securityholders (other than Selling Securityholder
Pacific Media), 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 Company is eligible to use a registration
statement on Form S-3 for the registration of the Stock; the
Registration Statement has become effective under the Securities 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 documents
incorporated by reference therein 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 Securities 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 Stock 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 Securities 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 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 Securities Act and such as may be required under
applicable Blue Sky laws in connection with the purchase and
distribution of the Stock by the Underwriters and the clearance of such
offering with the NASD;
(6) To such counsel's knowledge, (a) this Agreement
and the Securityholders Agreements have been duly authorized, executed
and delivered by or on behalf of each of the Selling Securityholders
(other than Pacific Media) and (b) the Agent has been duly and validly
authorized to act as the custodian of the Stock to be sold by each such
Selling Securityholder; and (c) the performance by the Selling
Securityholders (other than Pacific Media) of their respective
obligations pursuant to this Agreement and the Securityholders
Agreements 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 Securityholders (other than Pacific Media) is a party or by
which any of the Selling Securityholders (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
Securityholders (other than Pacific Media) or any of their properties if
such breach or violation would adversely affect a Selling
Securityholder's ability to perform such Selling Securityholder's
obligations pursuant to this Agreement or the Securityholders
Agreements; and to such counsel's knowledge, no
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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 Agreements or the Securityholders
Agreement or the consummation by the Selling Securityholders (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 Securities Act and such as may be required under applicable Blue Sky
laws in connection with the purchase and distribution of the Stock by
the Underwriters and the clearance of such offering with the NASD;
(7) To such counsel's knowledge, the Selling
Securityholders (other than Pacific Media) have full right, power and
authority to enter into this Agreement and the Securityholders
Agreements and to sell, transfer and deliver the Stock to be sold on
such Closing Date by such Selling Securityholders hereunder and upon
delivery of and payment for the Stock to be sold by the Selling
Securityholders (other than Pacific Media) as provided in this Agreement
and upon registration of such Stock in the names of the Underwriters (or
their nominees) in the stock records of the Company, the Underwriters
will be the owners of such Stock, free and clear of any adverse claim,
provided that the Underwriters are purchasing such Stock in good faith
and without notice of any adverse claim; and
(8) To such counsel's knowledge, this Agreement and
the Securityholders Agreements are valid and binding agreements of each
of the Selling Securityholders (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 Securities 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
Securityholders 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 First Closing Date or Second Closing Date,
as the case may be, 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:
(1) To such counsel's knowledge, (a) this Agreement
and the Securityholders 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 Stock to
be sold by Pacific Media;
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and the performance by Pacific Media of its obligations pursuant to this
Agreement and the Securityholders 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 Securityholders 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
Securityholders 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 Securities 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
Securityholders 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 Stock to be sold by Pacific Media
as provided in this Agreement and upon registration of such Stock in the
names of the Underwriters (or their nominees) in the stock records of
the Company, the Underwriters will be the owners of such Stock, free and
clear of any adverse claim, provided that the Underwriters are
purchasing such Stock in good faith and without notice of any adverse
claim; and
(3) To such counsel's knowledge, this Agreement and
the Securityholders 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 Securities 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.
(iv) 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
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<PAGE>
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 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.
(v) Such opinion or opinions of Wilson Sonsini Goodrich &
Rosati, P.C., 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 Stock, the
Registration Statement and the Prospectus and other related matters as you
may reasonably require, and the Company and the Selling Securityholders 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.
(vi) 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 each 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 Securities 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 amendment of any
prospectus which has not been disclosed in such a supplement or
amendment;
-22-
<PAGE>
(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 Securityholders 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).
(vii) 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 Securityholders to the effect
that the representations and warranties of such Selling Securityholder 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 Securityholder 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.
(viii) You shall have received from KPMG Peat Marwick LLP, a
letter or letters, addressed to the Underwriters and dated the First Closing
Date and the Second Closing Date confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities
Act and the applicable published rules and regulations thereunder and based
upon the procedures described in their letter delivered to you concurrently
with the execution of this Agreement (herein called the Original Letter), but
carried out to a date not more than three business days prior to the First
Closing Date or Second Closing Date (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are accurate
as of the First Closing Date or Second Closing Date, as the case may be, and
(ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect
any changes in the facts described in the Original Letter since the date of
the Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change,
or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in
your sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.
(ix) On or prior to the First Closing Date, you shall have
received from all directors, officers, and Selling Securityholders
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating
that, without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, such person or entity will not, for a period of 90 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase
or acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part,
-23-
<PAGE>
any of the economic consequences or ownership of Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
(x) You shall have been furnished evidence in usual written
or telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 7 hereof.
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, P.C., 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.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct in all material respects and neither the Registration Statement
nor the Prospectus omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, respectively,
not misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse change
or any development involving a prospective material adverse change in or
affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or
not arising from transactions in the ordinary course of business, and, since
such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
referred to in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, (iv) neither the
Company nor any of its subsidiaries has any material contingent obligations
which are not disclosed in the Registration Statement and the Prospectus, (v)
there are not any pending or known threatened legal proceedings to which the
Company or any of its subsidiaries is a party or of which property of the
Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents which
are required to be filed as exhibits to the Registration Statement which have
not been filed as required, (vii) the representations and warranties of the
Company herein are true and correct in all material respects as of the First
Closing Date or the Second Closing Date, as the case may be, and (viii) there
has not been any material change in the market for securities in general or
in political, financial or economic conditions from those reasonably
foreseeable as to render it impracticable in your reasonable judgment to make
a public offering of the Stock, or a material adverse change in market levels
for securities in general (or those of companies in particular) or financial
or economic conditions which render it inadvisable to proceed.
(e) In case any of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by you by giving notice to
the Company and to the Selling Securityholders. Any such termination shall
be without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 7 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein,
to fulfill any of the conditions herein, or to comply with any provision
hereof other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
-24-
<PAGE>
11. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling
Securityholders to deliver the Stock shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company and
the Selling Securityholders under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 7 hereof.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 8 hereof,
the several parties (in addition to the Company, the Selling Securityholders
and the several Underwriters) indemnified under the provisions of said
Section 8, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein
contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Stock from any of the
several Underwriters.
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Hambrecht & Quist
LLC, One Bush Street, San Francisco, California 94104, Attention: Mr.
Timothy W. Baughman, with a copy to Wilson Sonsini Goodrich & Rosati, P.C.,
at 650 Page Mill Road, Palo Alto, California 94304-1050, Attention: Jeffrey D.
Saper, Esq.; and if to the Company, shall be mailed, telegraphed or delivered
to it at its office, 1341 Orleans Drive, Sunnyvale, California 94089,
Attention: Mr. Victor A. Viegas; and if to the Selling Securityholders,
shall be mailed, telegraphed or delivered to the Selling Securityholders in
care of (i) the Company at 1341 Orleans Drive, Sunnyvale, California 94089,
Attention: Mr. Victor A. Viegas with a copy to Laird H. Simons III, Fenwick &
West LLP and (ii) Pacific Media Development, Inc., c/o Victor Company of
Japan, Limited, 12, 3-chome, Moriya-cho, Kanagawa-ku Yokohama 221, Japan,
with a copy to George H. Hohnsbeen II, Esq., 314 Lytton Avenue, Suite 200,
Palo Alto, California 94301. All notices given by telegraph shall be
promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement and indemnification agreements
contained in this Agreement and the representations, warranties and covenants
in this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the
Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
PROVIDED, HOWEVER, that if this Agreement is terminated prior to the First
Closing Date, the provisions of paragraphs (l) and (m) of Section 7 hereof
shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
Please sign and return to the Company and to the Selling Securityholders
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
MACROVISION CORPORATION
-25-
<PAGE>
By:
---------------------------------------
John O. Ryan, Chairman of the Board of
Directors and Chief Executive Officer
SELLING SECURITYHOLDERS:
By:
---------------------------------------
John O. Ryan (Attorney-in-Fact)
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
COWEN & COMPANY
By Hambrecht & Quist LLC
By:
---------------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto
-26-
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
<S> <C>
Hambrecht & Quist LLC............................................
NationsBanc Montgomery Securities LLC............................
Cowen & Company..................................................
Total.......................................................
- ---------
---------
</TABLE>
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
NAME [AND ADDRESS] SHARES
OF SELLING SECURITYHOLDERS TO BE SOLD
-------------------------- ----------
<S> <C>
Total.......................................................
----------
----------
</TABLE>
<PAGE>
Exhibit 5.01
[Fenwick & West LLP Letterhead]
June 2, 1998
Macrovision Corporation
1341 Orleans Drive
Sunnyvale, California 94089
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(the "REGISTRATION STATEMENT") to be filed by you with the Securities and
Exchange Commission (the "COMMISSION") on or about June 2, 1998 in connection
with the registration under the Securities Act of 1933, as amended, of an
aggregate of 1,725,000 shares of the Common Stock (the "COMMON STOCK") of
Macrovision Corporation, a Delaware corporation (the "COMPANY"), 1,140,000 of
which shares will be issued and sold by the Company and 360,000 of which
shares are presently issued and outstanding and will be sold by certain
selling stockholders named in the Registration Statement (the "SELLING
STOCKHOLDERS").
In rendering this opinion, we have examined the following:
(1) your registration statement on Form SB-2 (File Number 333-19373) filed
with the Commission on January 7, 1997 and declared effective by the
Commission on March 12, 1997, together with the Exhibits filed as a part
thereof;
(2) your registration statement on Form 8-A filed with the Commission on
January 22, 1997;
(3) the Registration Statement, together with the Exhibits filed as a part
thereof;
(4) the Prospectus prepared in connection with the Registration Statement;
(5) the Restated Certificate of Incorporation of the Company filed with the
Delaware Secretary of State on March 17, 1997;
(6) the Bylaws of the Company, as amended, filed as an Exhibit with the
Company's Registration Statement on Form SB-2.
<PAGE>
Macrovision Corporation
June 2, 1998
Page 2
(7) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors of the Company that are contained in
your minute books, that you have provided to us (including without
limitation (a) the minutes of a meeting of the Company's Board of
Directors held on May 18, 1998 and a written consent of the Board of
Directors as of June 1, 1998, approving the sale of Common Stock by the
Company and the Selling Stockholders and the filing of the Registration
Statement with the Commission;
(8) the stock records for the Company that you have provided to us
(consisting of the number of shares outstanding provided by your transfer
agent, Boston EquiServe LLP on June 1, 1998, and the number of options
respecting the Company's capital stock that was prepared by the Company
and dated June 1, 1998); and
(9) a Management Certificate addressed to us and dated of even date
herewith executed by the Company containing certain factual and other
representations.
By telephone call to the offices of the Commission, we have also
confirmed the continued effectiveness of the Company's registration under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the
timely filing by you of all reports required to be filed by you pursuant to
Sections 13, 14 and 15 of the Exchange Act.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the legal capacity of all natural persons executing the same, the
lack of any undisclosed terminations, modifications, waivers or amendments to
any documents reviewed by us and the due execution and delivery of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely
upon our examination of the documents referred to above and have assumed the
current accuracy and completeness of the information obtained from records
included in the documents referred to above. We have made no independent
investigation or other attempt to verify the accuracy of any of such
information or to determine the existence or non-existence of any other
factual matters; HOWEVER, we are not aware of any facts that would lead us to
believe that the opinion expressed herein is not accurate.
We are admitted to practice law in the State of California, and we
express no opinion herein with respect to the application or effect of the
laws of any jurisdiction other than the existing laws of the United States of
America, of the current version of the Delaware General Corporation Law
(without reference to case law or secondary sources) and the existing laws of
the State of California.
<PAGE>
Macrovision Corporation
June 2, 1998
Page 3
Based upon the foregoing, it is our opinion that
(i) the 360,000 shares of Common Stock to be sold by the Selling Stockholders
pursuant to the Registration Statement are validly issued, fully paid and
nonassessable; and
(ii) the 1,140,000 shares of Common Stock, when issued and sold as described
in the Registration Statement, will be validly 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 amendments
thereto.
This opinion speaks only as of its date and is intended solely for your
use as an exhibit to the Registration Statement for the purpose of the above
issuance of securities and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
<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 herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus.
KPMG Peat Marwick LLP
Mountain View, California
May 29, 1998
