FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-22023
Macrovision Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0156161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1341 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 743-8600
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding as of October 31, 1999
Common Stock, $0.001 par value 18,375,898
<PAGE>
MACROVISION CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 ............ 3
Condensed Consolidated Statements of Operations
for the Three Month Periods Ended September 30,
1999 and 1998, and the Nine Month Periods Ended
September 30, 1999 and 1998 ............................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Month Periods Ended September 30, 1999
and 1998 .................................................. 5
Notes to Condensed Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .................................................... 17
Risk Factors ................................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 26
Item 5. Other Information .............................................. 26
Item 6. Exhibits and Reports on Form 8-K ............................... 26
Signatures ............................................................. 27
2
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements.
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,351 $ 3,513
Short-term investments 18,196 22,877
Accounts receivable, less allowance for
doubtful
accounts of $1,089 and $838 8,812 5,574
Inventories 211 325
Deferred tax assets 2,221 1,669
Prepaid expenses and other assets 1,365 1,008
-------- --------
Total current assets 38,156 34,966
Property and equipment, net 1,678 1,297
Patents and other intangibles, net 1,645 1,526
Long-term marketable investment securities 11,662 18,795
Intangibles associated with C-Dilla Ltd
acquisition, net 15,611 --
Other assets 9,981 8,910
-------- --------
$ 78,733 $ 65,494
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,092 $ 803
Accrued expenses 3,069 2,691
Deferred revenue 2,424 1,207
Income taxes payable 1,878 680
Current portion of capital lease obligation 105 112
-------- --------
Total current liabilities 8,568 5,493
Capital lease obligation, net of current
portion -- 76
Deferred tax liabilities -- 383
-------- --------
8,568 5,952
Stockholders' equity:
Common stock 18 9
Additional paid-in capital 59,763 52,617
Stockholder's note receivable -- (78)
Accumulated other comprehensive loss (233) (82)
Retained earnings 10,617 7,076
-------- --------
Total stockholders' equity 70,165 59,542
-------- --------
$ 78,733 $ 65,494
======== ========
See the accompanying notes to these condensed consolidated financial
statements.
3
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues $ 9,363 $ 6,307 $24,583 $17,150
------- ------- ------- -------
Costs and expenses:
Cost of revenues 701 592 2,140 1,439
Research and development 1,167 690 2,906 1,967
Selling and marketing 2,246 1,354 6,192 4,367
General and administrative 1,405 1,114 3,982 3,401
Amortization of intangibles from
acquisition 682 -- 791 --
In process research and development -- -- 4,286 --
------- ------- ------- -------
Total costs and expenses 6,201 3,750 20,297 11,174
------- ------- ------- -------
Operating income 3,162 2,557 4,286 5,976
Interest and other income, net 375 382 1,198 685
------- ------- ------- -------
Income before income taxes 3,537 2,939 5,484 6,661
Income taxes 1,252 1,129 1,941 2,543
------- ------- ------- -------
Net income $ 2,285 $ 1,810 $ 3,543 $ 4,118
======= ======= ======= =======
Computation of basic and diluted
earnings per share:
Basic earnings per share $ .13 $ .10 $ .20 $ .27
======= ======= ======= =======
Shares used in computing basic earnings
per share 18,278 17,383 18,002 15,501
======= ======= ======= =======
Diluted earnings per share $ .12 $ .10 $ .19 $ .25
======= ======= ======= =======
Shares used in computing diluted earnings
per share 19,396 18,492 18,964 16,564
======= ======= ======= =======
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
4
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,543 $ 4.118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,600 699
Amortization of prepaid future royalties to
C-Dilla Ltd. 166 70
Deferred income taxes (2,289) (91)
Amortization of deferred stock compensation -- 96
Tax benefit from employee stock benefit plans 756 --
In process research and development 4,286 --
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other
current assets (2,693) (727)
Accounts payable, accrued expenses, deferred
revenue and income taxes payable 1,665 1,085
Other 69 (67)
-------- --------
Net cash provided by operating activities 7,103 5,183
-------- --------
Cash flows from investing activities:
Purchases of long-term marketable investment
securities (11,635) (18,364)
Sales or maturities of long-term marketable
investment securities 18,617 2,541
Purchases of short-term investments (24,345) (47,120)
Sales or maturities of short-term investments 28,963 38,160
Acquisition of property and equipment (402) (210)
Payments for patents and other intangibles (393) (512)
Proceeds from related party receivable -- 310
Investment in Digimarc Corporation (2,000) --
Investment in AudioSoft International (750) --
Investment in C-Dilla Ltd. -- (3,553)
Investment in Command Audio Corporation -- (500)
Receivable from related party (481) --
Acquisition of C-Dilla Ltd., net of cash
acquired (11,960) --
Prepaid future royalties to C-Dilla Ltd. -- (1,015)
Other, net 48 (9)
-------- --------
Net cash used in investing activities (4,338) (30,272)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (83) (80)
Payments on note payable (247) --
Proceeds from issuance of common stock, net 1,325 28,432
Payment of stockholder's note receivable 78 53
-------- --------
Net cash provided by financing activities 1,073 28,405
-------- --------
Net increase in cash and cash equivalents 3,838 3,316
Cash and cash equivalents at beginning of period 3,513 1,314
-------- --------
Cash and cash equivalents at end of period $ 7,351 $ 4,630
======== ========
Supplemental cash flow information and noncash transactions:
Interest paid $ 8 $ 9
======== ========
Income taxes paid $ 2,107 $ 2,313
======== ========
Stock issued for C-Dilla Ltd. $ 5,073 $ --
======== ========
</TABLE>
See the accompanying notes to these condensed consolidated financial
statements.
5
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Macrovision Corporation (the "Company") in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted in accordance with such rules and regulations. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company
and its results of operations and cash flows for those periods presented. This
quarterly report on Form 10-Q should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1998, and
other disclosures, including risk factors, included in the Company's Annual
Report on Form 10-KSB filed on March 30, 1999.
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year ending December 31, 1999
or any other future interim period, and the Company makes no representations
related thereto.
In July of 1999 the Company declared a stock split. All shares presented have
been retroactively adjusted for the effect of such stock split.
NOTE 2 - CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents.
Investments held by the Company are classified as "available-for-sale" and are
carried at fair value based on quoted market prices, with unrealized gains and
losses, if material, reported in stockholders' equity. Such investments
consisting of U.S. government or agency issues with an original maturity beyond
3 months and less than 12 months are classified as short-term investments. All
marketable securities with maturities over one year are classified as long-term
marketable investment securities. 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. The following is a summary of
available -for-sale securities:
September 30, December 31,
(In thousands) 1999 1998
------------- ------------
Cash equivalents - money market funds $ 6,127 $ 3,098
Investments:
Municipal preferred certificates 4,000 1,000
United States government
bonds and agency securities 25,858 40,672
------- -------
29,858 41,672
======= =======
$35,985 $44,770
======= =======
Government bond securities totaling $11,662,000 and $18,795,000 as of September
30, 1999 and December 31, 1998, respectively, are classified as long-term
marketable investment securities.
The difference between the fair value and the amortized cost of
available-for-sale securities was a loss of $66,000 as of September 30, 1999 and
a gain of $148,000 as of December 31, 1998.Such amounts have been recorded under
"Accumulated other comprehensive loss" as a component in stockholders' equity.
6
<PAGE>
NOTE 3 - EXERCISE OF OPTIONS AND STOCK PURCHASE PLAN
During the quarter ended September 30, 1999, the Company issued 124,444 shares
of common stock and received proceeds of approximately $351,000 associated with
the exercise of stock options. Also during the quarter ended September 30, 1999,
the Company issued 16,404 shares of common stock under the Employee Stock
Purchase Plan and received proceeds of approximately $198,000.
NOTE 4 - INVENTORIES
Inventories are stated at the lower of first-in, first-out cost or market and
consisted of the following:
September 30, December 31,
(In thousands) 1999 1998
------------- ------------
Raw materials $ 63 $ 138
Work in process 41 -
Finished goods 107 187
======= ========
$ 211 $ 325
======= ========
NOTE 5 - OTHER ASSETS
The Company intends to hold its investments for the long term and monitors
whether there has been an other than a temporary decline in the value of these
investments based on management's estimates of their net realizable value taking
into account the achievement of milestones in business plans and third-party
financing. The Company records its investments using the cost method, and these
investments are classified as other assets in the accompanying condensed
consolidated balance sheets as follows:
(In thousands)
September 30, December 31,
1999 1998
------ ------
Investment in CAC $2,837 $2,837
Investment in Digimarc Corporation 3,500 1,500
Investment in C-Dilla Ltd. -- 3,553
Investment in AudioSoft International 750 --
Prepayment of royalties to C-Dilla Ltd. -- 872
Long term deferred tax assets 2,794 --
Deposits and other assets 100 148
------ ------
$9,981 $8,910
====== ======
During the quarter ended September 30, 1999, the Company acquired a 7.3%
ownership interest in AudioSoft International SA ("AudioSoft"), a Swiss
corporation with registered offices in Geneva, Switzerland. AudioSoft is a
developer of secure e-music delivery technology and copyright management royalty
reporting systems. The Company does not have the ability to exert significant
influence over AudioSoft. The Company has committed to invest an additional
$750,000 should Audiosoft attain certain commercial milestones by March 31,
2000. In addition, the Company entered into a consulting agreement with
AudioSoft to provide technical, business and strategic consulting to AudioSoft
over a term of one year. The Company will receive a fixed fee of $500,000 from
AudioSoft payable in four equal installments ending May 1, 2000, and recognize
the associated revenue based on consulting hours provided to AudioSoft
NOTE 6 - ACQUISITIONS
7
<PAGE>
In June 1999, the Company acquired the remaining shares of C-Dilla Limited of
Woodley, UK, developers of copy protection and rights management technologies
for CD-ROM and internet-delivered software products. The Company paid
approximately $12,810,000 in cash and acquisition costs and 109,199 shares of
Macrovision stock valued at $5,073,000. The transaction has been accounted for
under the purchase method. The excess purchase price over the net tangible
assets acquired was $20,689,000 of which, based on management's estimates
prepared in conjunction with a third party valuation consultant was allocated as
follows:
(In thousands)
In-process research and development $ 4,286
Developed technology 3,824
Core technology 7,844
Acquired workforce 497
Covenant not to compete 1,788
Goodwill 2,450
=========
$ 20,689
=========
In connection with the purchase of C-Dilla Ltd., we allocated $4,286,000 of the
$21,437,000 total purchase price to in-process research and development
projects. This preliminary allocation represents the estimated fair value based
on risk-adjusted cash flows related to the incomplete research and development
projects. At the date of the acquisition, this amount was expensed as a
non-recurring charge as the in-process technology had not yet reached
technological feasibility and had no alternative future uses. C-Dilla Ltd. had
five major copy protection projects in progress at the time of acquisition.
These projects include a product which is being designed to protect DVD-ROMs
from unauthorized replication or copying, three products that are being designed
to prohibit the unauthorized copying of audio products and a product which is
being designed to allow DVD manufacturers to track where any DVD has been
manufactured and trace illegal copies. As of the acquisition date, costs to
complete the development of the projects acquired were expected to be
approximately $1.4 million. We currently expect to complete the development of
these projects at various dates through fiscal 2001.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing and testing activities necessary to establish that the
product will meet its design requirements including functions, features and
technical performance requirements. Though we currently expect that the acquired
in process technology will be successfully developed, there can be no assurance
that commercial or technical viability of these products will be achieved.
Furthermore, future developments in the computer software industry, changes in
the delivery of audio products, changes in other product offerings or other
developments may cause us to alter or abandon these plans.
The value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk adjusted revenues considering completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and elapsed portion of the total project time. A net
revenue projection of $52,489,000 beginning in the year 2000 through the year
2007 was used to value the in-process research and development. This projection
is based on sales forecasts and adjusted to consider only the revenue related to
achievements completed at the acquisition date. Net cash flow estimates include
cost of goods sold, sales and marketing and general and administrative expenses
and taxes forecasted based on historical operating characteristics. The
estimated total costs are equal to approximately 78% of the projected revenue.
In addition, net cash flow estimates were adjusted to allow for fair return on
working capital and fixed assets, charges for technology leverage and return on
other intangibles. Appropriate risk adjusted discount rates ranging from 20% to
30% were used to discount the net cash flows back to their present values.
The remaining excess purchase price was allocated to existing products and
technologies, retention of workforce and noncompete agreements. The Company used
the income approach to determine the value allocated to existing products and
technologies and non-compete agreements and used the replacement cost approach
to determine the value allocated to workforce. The residual excess purchase
price was allocated to goodwill.
The Company will amortize such intangibles on a straight line basis over three
to seven years based on expected useful lives of existing products and
technologies, retention of workforce, noncompete agreements and goodwill. If the
identified projects are not successfully developed, we may not realize the value
assigned to the in-process research and development projects and the value of
the acquired intangible assets may also become impaired.
8
<PAGE>
The results of C-Dilla Ltd. and the estimated fair value of assets acquired and
liabilities assumed are included in the Company's financial statements from the
date of acquisition. In connection with the C-Dilla Ltd. acquisition, the
purchase price has been allocated to the assets and liabilities assumed based
upon fair values on the date of acquisition, as follows:
(In thousands)
Current assets $ 675
Property and equipment, net 521
In process research and development 4,286
Deferred tax asset 1,440
Intangibles associated with C-Dilla Ltd acquisition 16,403
Current liabilities (1,888)
---------
$ 21,437
=========
NOTE 7 - NET INCOME PER SHARE
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 except for periods of operating loss for which no common share
equivalents are included because their effect would be antidilutive. Dilutive
common equivalent shares consist of common stock issuable upon exercise of stock
options using the treasury stock method. In August, 1999, the Company issued one
additional share for every share outstanding, thus affecting a 2 for 1 stock
split. All share information presented has been retroactively adjusted for the
effect of such stock split. The following is a reconciliation of the shares used
in the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic EPS - weighted average number of
common shares outstanding 18,278 17,383 18,002 15,501
Effect of dilutive common shares -
stock options outstanding 1,118 1,109 962 1,063
------------- -------------- ------------- -------------
Diluted EPS - weighted average number
of common shares and common shares
outstanding 19,396 18,492 18,964 16,564
============= ============== ============= =============
</TABLE>
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company adopted SOP No. 98-1 on January 1,
1999, with no material effect.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company adopted SOP No. 98-5 on January 1, 1999, with no material
effect.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds only one derivative instrument, the Company expects that the
adoption of SFAS No. 133 will have no material impact on its financial position,
results of operations or cash flows. The Company will be required to implement
SFAS No. 133 during the year ending December 31, 2001.
9
<PAGE>
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP No.
98-9 requires recognition of revenue using the "residual method" in a multiple
element software arrangement when fair value does not exist for one or more of
the delivered elements in the arrangement. Under the "residual method," the
total fair value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. The Company will be required to implement SOP No.
98-9 for the year ending December 31, 2000. SOP No. 98-9 also extends the
deferral of the application of SOP No. 97-2 to certain other multiple-element
software arrangements through the Company's year ending December 31, 1999. The
Company does not expect the adoption of SOP No. 98-9 to have a material impact
on its financial position, results of operations or cash flows.
NOTE 9 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three industry segments as follows: Video Copy
Protection, Video Scrambling and Computer Software Copy Protection. In the Video
Copy Protection segment, the Company licenses its anti-copy video technologies
to customers in the home videocassette, DVD and digital pay-per-view markets. In
the Video Scrambling segment, the Company licenses and sells products utilizing
the Company's PhaseKrypt video scrambling technology to manufacturers of analog
set-top decoders for sale to cable television system operators in developing
cable television markets, and to end users and distributors for applications in
television broadcasting for securing incoming contribution circuits to network
control centers and outbound rebroadcast circuits and in the government,
military and law enforcement markets for covert surveillance applications. In
the Computer Software Copy Protection segment, the Company licenses copy
protection technology to software publishers, primarily in the multimedia
software market. The "other" segment reflects consulting income.
The Company identifies segments based principally upon the type of products
sold. The accounting policies of these reportable segments are the same as those
described in the consolidated entity. The Company evaluates the performance of
its segments based on revenue and segment income. In addition, as the Company's
assets are primarily located in its corporate office in the United States and
not allocated to any specific segment, the Company does not produce reports for
or measure the performance of its segments based on any asset-based metrics.
Therefore, segment information is presented only for revenue and segment income.
The following segment reporting information of the Company is provided (dollars
in thousands):
<TABLE>
<CAPTION>
Revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Video Copy Protection $ 7,673 $ 6,018 $ 22,012 $ 15,880
Video Scrambling 176 166 378 1,147
Computer Software Copy Protection 1,442 123 2,121 123
Other 72 - 72 -
--------- --------- --------- ----------
Total $ 9,363 $ 6,307 $ 24,583 $ 17,150
========= ========= ========= ==========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Operating Income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Video Copy Protection $ 5,907 $ 4,709 $ 17,197 $ 11,939
Video Scrambling (123) (305) (680) (378)
Computer Software Copy Protection 579 (35) (319) (100)
Other 53 (8) 53 (117)
-------- -------- -------- --------
Segment income 6,416 4,361 16,251 11,344
Research and development 1,167 690 2,906 1,967
General and administrative 1,405 1,114 3,982 3,401
Amortization of intangibles from acquisition 682 -- 791 --
In process research and development -- -- 4,286 --
-------- -------- -------- --------
Operating income 3,162 2,557 4,286 5,976
Interest and other income, net 375 382 1,198 685
-------- -------- -------- --------
Income before income taxes $ 3,537 $ 2,939 $ 5,484 $ 6,661
======== ======== ======== ========
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements concerning future
matters such as our expectations for gross margins, operating expenses and
capital needs and other statements regarding matters that are not historical are
forward-looking statements. Predictions of future events are inherently
uncertain. Actual events could differ materially from those predicted in the
forward-looking statements as a result of the risks set forth in this Form 10-Q
and in the "Risk Factors" section of the Company's 1998 Annual Report on Form
10-KSB filed on March 30, 1999. We may not have identified all possible risks
that we might face. All investors should carefully read the annual report on
Form 10-KSB, together with this Form 10-Q, and consider all these risks before
making an investment decision with respect to our stock.
Overview
Macrovision was founded in 1983 to develop video security solutions for major
motion picture studios and independent video producers. Since that time, we have
derived most of our revenues and operating income from licensing our video copy
protection technologies. Our revenues primarily consist of licensing fees for
videocassette and DVD copy protection, licensing fees for digital Pay-Per-View
copy protection, licensing fees for computer/multimedia software copy protection
and licensing and selling products incorporating our PhaseKrypt and other video
scrambling technology to cable television equipment manufacturers, law
enforcement agencies, television broadcasters and private analog satellite
networks.
On June 18, 1999, we acquired the remaining outstanding shares of C-Dilla Ltd.
(Woodley, UK) for $12.8 million in cash and acquisition costs and 109,200 shares
of Macrovision stock. Including the $3.6 million we paid for our initial 19.8%
stake in C-Dilla Ltd. in 1998, the total acquisition was valued at $21.4
million.
11
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
The following table provides revenue information by specific product segments
for the three-month period ended as indicated:
<TABLE>
<CAPTION>
(In thousands)
September 30, September 30,
1999 % 1998 % % Change
--------------- ------ ---------------- ------ -----------
<S> <C> <C> <C> <C> <C>
Video Copy Protection $7,673 82 $6,018 95 28%
Video Scrambling 176 2 166 3 6%
Computer Software Copy Protection 1,442 15 123 2 1,072%
Other 72 1 -- -- --
--------------- ------ ---------------- ------ -----
Total $9,363 100 $6,307 100 48%
=============== ====== ================ ====== =====
</TABLE>
Net Revenues
Consolidated net revenues for the third quarter of 1999 increased 48% to $9.4
million from $6.3 million in the third quarter of 1998. Revenues from the Video
Copy Protection Group increased 28% to $7.7 million from $6.0 million. Within
this group, revenue from videocassettes was $3.4 million in the third quarter of
1999 compared to $4.2 million in 1998 due to the absence in the third quarter of
1999 of a mega hit on the level of "Titanic," which increased our revenues in
the earlier period. DVD revenue was $2.0 million in the third quarter of 1999
compared to $813,000 in 1998 due to increases in DVD replication as the market
for DVD hardware and software continued to expand. Digital pay-per-view copy
protection revenue was $2.3 million in the third quarter of 1999 compared to
$1.1 million in 1998 due to continued increases in the shipments of digital
set-top boxes as the digital subscriber base grew in the direct broadcast
satellite (DBS) and cable TV domestic and international markets. We expect that,
although the videocassette copy protection will remain a significant part of our
business, it will continue to decline as a percentage of our revenues and
profits as our copy protection business in DVD, digital PPV and computer
software continue to grow at much higher rates.
Revenues from the Video Scrambling Group increased 6% to $176,000 in the third
quarter of 1999 from $166,000 in the third quarter of 1998. Within the Video
Scrambling Group the overall demand for VES products from various government law
enforcement agencies continued to be weak. Similarly, the demand for our
proprietary analog scrambling technology in Southeast Asia and Brazil remained
weak, due mostly to the continuation of weak country economics and delays
associated with cable TV system upgrades. We recorded Computer Software Copy
Protection revenues in the third quarter of 1999 of $1,442,000 compared to
$123,000 in the third quarter of 1998, as several new customers began to use our
SafeDisc copy protection on their PC games and other consumer multimedia
software during their traditionally strong third quarter. We recorded "other"
revenue of $72,000 relating to the consulting contract with AudioSoft.
Gross Margin
Gross margin for the third quarter of 1999 was 93% compared to 91% for the same
period in 1998. The increase in margin was due to the substantial increases in
sales of high gross margin computer software copy protection products following
the Company's acquisition of C-Dilla Ltd. in the second quarter of 1999. Cost of
revenues increased in absolute dollars for the third quarter of 1999 compared to
the third quarter of 1998 due primarily to higher duplicator/replicator fees and
patent defense costs offset slightly by the discontinuation of SafeDisc royalty
fees paid to C-Dilla Ltd. prior to the acquisition of C-Dilla Ltd. Cost of
revenues includes items such as product costs, duplicator/replicator fees,
videocassette copy protection processor costs, patent amortization and SafeDisc
royalty expense prior to the acquisition of C-Dilla Ltd. Following the
acquisition of C-Dilla Ltd., we expect gross margins to increase as a result of
the elimination of royalty expenses, although the increased margins will be
partially offset by patent defense costs associated with current patent
litigation. If we have a material increase in revenues associated with our Video
Scrambling technologies, our gross margin could decrease due to the fact that
hardware sales have a lower gross margin.
Research and Development
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Research and development expenses increased by $477,000, or 69%, to $1.2 million
in the third quarter of 1999 compared to the third quarter of 1998. The
increased expenses were the result of absorbing the research and development
expenses at C-Dilla Ltd. during the third quarter of 1999 following the
acquisition on June 18, 1999. Research and development expenses increased as a
percentage of net revenues from 11% in the third quarter of 1998 to 12% in the
third quarter of 1999. We expect research and development expenses to increase
over the prior year periods as a result of the expanded computer software copy
protection and rights management research and development activity at C-Dilla
Ltd.
Selling and Marketing
Selling and marketing expenses increased by $892,000, or 66%, to $2.2 million in
the third quarter of 1999 compared to the third quarter of 1998. This increase
was primarily due to Computer Software Copy Protection selling and marketing
expenses. In 1998, these expenses were not part of our income statement, since
C-Dilla Ltd. was operating as a separate company and reimbursed Macrovision for
specific marketing related expenses under the joint marketing agreement. Selling
and marketing expenses increased as a percentage of net revenues from 21% to 24%
for the third quarter of 1999 compared to the third quarter of 1998. Adding back
the reimbursement from C-Dilla Ltd. in 1998, selling and marketing expenses
would have been 25% of net revenues in the third quarter of 1998. Selling and
marketing expenses are expected to increase over prior year periods as we
continue to expand our efforts in selling and marketing Computer Software Copy
Protection and Rights Management products.
General and Administrative
General and administrative expenses increased by $291,000 or 26% in the third
quarter of 1999 compared to the third quarter of 1998 primarily due to the
absorption of C-Dilla Ltd.'s administrative expenses following the acquisition
in the second quarter of 1999, along with higher compensation and benefits from
increased personnel and increased legal costs. General and administrative
expenses declined as a percentage of net revenues from 18% in the third quarter
of 1998 to 15% in the third quarter of 1999.
Amortization of Intangibles from Acquisitions
In connection with the acquisition C-Dilla Ltd. in June 1999, the amounts of the
purchase price allocated to intangible assets are amortized over lives ranging
from three to seven years resulting in amortization of $682,000 for the third
quarter ended September 30, 1999.
Interest and Other Income
Interest and other income decreased by $7,000 or 2% in the third quarter of 1999
compared to the third quarter of 1998.
Income Taxes
Income taxes represent combined federal and state taxes at an effective rate of
35% for the quarter ended September 30, 1999 compared to an effective rate of
38% for the quarter ended September 30, 1998. The lower effective income tax
rate in the third quarter 1999 compared to the third quarter 1998 was the result
of the availability of net operating losses to reduce 1999 taxes from the
acquisition of C-Dilla Ltd.
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Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The following table provides revenue information by specific product segments
for the nine-month periods ended as indicated:
<TABLE>
<CAPTION>
(In thousands)
September 30, September 30,
1999 % 1998 % % Change
--------------- ------ ---------------- ------ -----------
<S> <C> <C> <C> <C> <C>
Video Copy Protection $22,012 89 $15,880 92 39%
Video Scrambling 378 2 1,147 7 (67)%
Computer Software Copy Protection 2,121 9 123 1 1,624%
Other 72 -- -- -- --
--------------- ------ ---------------- ------ -----
Total $24,583 100 $17,150 100 43%
=============== ====== ================ ====== =====
</TABLE>
Net Revenues
Consolidated net revenues for the first nine months of 1999 increased 43% to
$24.6 million from $17.2 million for the first nine months of 1998. Revenues
from the Video Copy Protection Group increased 39% to $22.0 million from $15.9
million. Within this group, revenue from videocassettes was $11.7 million in the
first nine months of 1999 compared to $11.0 million in 1998 due to a slight
decrease in Hollywood studio royalties and copy protected videocassette volume,
offset by a material increase in Special Interest videocassette copy protection
royalties for the hit fitness video "Tae-Bo". DVD revenue was $5.1 million in
the first nine months of 1999 compared to $2.1 million in 1998 due to increases
in DVD video software shipments as the market for both DVD players and DVD
software continued to expand. A one time licensing fee from DIVX is included in
the 1998 revenue. Digital pay-per-view copy protection revenue was $5.2 million
in the first nine months of 1999 compared to $2.8 million in 1998 due to
continued increases in the shipments of copy protection enabled digital set-top
boxes as the digital subscriber base grew in the direct broadcast satellite
(DBS) and cable TV domestic and international markets. Revenues from the Video
Scrambling Group decreased 67% to $378,000 in the first nine months of 1999 from
$1.1 in the first nine months of 1998. Within the Video Scrambling Group, we
experienced weak demand for VES products from various government law enforcement
agencies. In addition, the Southeast Asian and Brazilian financial crises have
helped to continue to delay expected cable TV system upgrades. Because of this
situation, our PhaseKrypt licensees have not sold very many cable TV scrambling
systems which utilize our technology. We recorded Computer Software Copy
Protection revenues for the first nine months of 1999 of $2.1 million compared
to $123,000 in 1998 as several new customers began to use our SafeDisc copy
protection on their PC games and other consumer multimedia software during the
year, with a strong growth in copy protected units during the traditionally
strong third quarter in anticipation of holiday season releases. The Company
recorded "other" revenue of $72,000 in the first nine months of 1999 compared to
none in 1998 relating to the consulting contract with AudioSoft.
Gross Margin
Gross margin for the nine months ended September 30, 1999 was 91% compared to
92% for the comparable period of 1998. The decrease in margin was due to the
higher royalty costs and fees associated with the Computer Software Copy
Protection business prior to the acquisition of C-Dilla Ltd in June 1999, higher
replicator fees relating to the DVD units produced and higher patent defense
costs. Cost of revenues increased in absolute dollars for the first nine months
of 1999 compared to the first nine months of 1998 due primarily to higher
C-Dilla Ltd. royalty fees, higher duplicator/replicator fees and higher patent
defense costs. Cost of revenues includes items such as product costs,
duplicator/replicator fees, video copy protection processor costs, patent
amortization, patent defense costs and royalty expense prior to the acquisition
of C-Dilla Ltd. Following the acquisition of C-Dilla Ltd., we expect the gross
margin to increase as a result of the elimination of royalty expenses, although
these will be offset partially by the patent defense costs associated with
current patent litigation. To the extent revenues increase from Video
Scrambling, gross margin could decrease due to the higher cost of sales
associated with the hardware costs.
Research and Development
Research and development expenses increased by $939,000 or 48% in the first nine
months of 1999 compared to the first nine months of 1998. The increased expenses
were a result of a one-time licensing fee of $300,000 related to technology
acquisition in support of a current project, one-time continuation bonuses of
$99,000 paid to
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engineering employees of C-Dilla Ltd. and the absorption of research and
development expenses at C-Dilla Ltd. Following the acquisition on June 18, 1999.
Research and development expenses remained relatively stable as a percentage of
net revenues at 12% for the first nine months of 1999 and 1998. If not for the
one-time charges noted above, the percentage would have declined to 10% in 1999.
We expect research and development expenses to increase over the prior year
periods as a result of the research and development activity at C-Dilla Ltd. and
as we expand into new technologies and products.
Selling and Marketing
Selling and marketing expenses increased by $1.8 million or 42% in the first
nine months of 1999 compared to the first nine months of 1998. This increase was
primarily from one-time continuation bonuses of $290,000 paid to sales and
marketing employees of C-Dilla Ltd., higher compensation and benefits associated
with additional headcount in the Computer Software Copy Protection business
along with the increased advertising and marketing for the business unit. Many
of these expenses were offset in 1998 by C-Dilla Ltd's reimbursement of specific
marketing related expenses under the joint marketing agreement and the marketing
and selling expenses at C-Dilla Ltd. prior to the June 18, 1999 acquisition.
Selling and marketing expenses remained stable as a percentage of net revenues
at approximately 25% for the first nine months of 1999 and 1998. If not for the
one-time charges and reimbursement noted above, the percentages would have been
24% for the first nine months of 1999 compared to 28% for same period in 1998.
Selling and marketing expenses are expected to increase over the prior year
periods as we continue to expand our efforts in selling and marketing Computer
Software Copy Protection and other Rights Management products from the newly
acquired C-Dilla Ltd. subsidiary.
General and Administrative
General and administrative expenses increased by $581,000 or 17% in the first
nine months of 1999 compared to the first nine months of 1998 primarily due to
one-time continuation bonuses of $48,000 paid to administrative employees of
C-Dilla Ltd., higher compensation and benefits from increased personnel, higher
legal fees associated with the favorable decision in the Swyt litigation,
accounting fees, and the administrative expenses incurred by C-Dilla Ltd. since
its acquisition on June 18, 1999. General and administrative expenses declined
as a percentage of net revenues from 20% in the first nine months of 1998 to 16%
in the first nine months of 1999.
In-process Research and Development
In June 1999, we allocated $4,286,000 of the $21,437,000 total purchase price
for C-Dilla Ltd. to in-process research and development projects. This
preliminary allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete research and development
projects. At the date of the acquisition, this amount was expensed as a
non-recurring charge as the in-process technology had not yet reached
technological feasibility and had no alternative future uses. C-Dilla Ltd. had
five major copy protection/rights management projects in progress at the time of
acquisition. These projects include a product that is being designed to protect
DVD-ROMs from unauthorized replication or copying, three products that are being
designed to prohibit the unauthorized copying of audio products and a product
that is being designed to allow DVD manufacturers to track where any DVD has
been manufactured and trace illegal copies. As of the acquisition date, costs to
complete the development of the projects acquired were expected to be
approximately $1.4 million. The projects have progressed as expected, and we
currently expect to complete the development of these projects at various dates
through fiscal 2001.
The nature of the efforts required to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing and testing activities necessary to establish that the
product will meet its design requirements including functions, features and
technical performance requirements. Though we currently expect that the acquired
in process technology will be successfully developed, there can be no assurance
that commercial or technical viability of these products will be achieved.
Furthermore, future developments in the computer software industry, changes in
the delivery of audio products, changes in other product offerings or other
developments may cause us to alter or abandon these plans.
The value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk adjusted revenues considering completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, importance of
completed development tasks and elapsed portion of the total project time. A net
revenue projection of $52.5 million from year 2000 through year 2007 was used to
value the in-process research and development. This projection is based on sales
forecasts and adjusted to consider only the revenue related to achievements
completed
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<PAGE>
at the acquisition date. Net cash flow estimates include cost of goods sold,
sales and marketing and general and administrative expenses and taxes forecasted
based on historical operating characteristics. In addition, net cash flow
estimates were adjusted to allow for fair return on working capital and fixed
assets, charges for technology leverage and return on other intangibles.
Appropriate risk adjusted discount rates ranging from 20% to 30% were used to
discount the net cash flows back to their present values.
The remaining excess purchase price was allocated to existing products and
technologies, retention of workforce and non-compete agreements. We used the
income approach to determine the value allocated to existing products and
technologies and non-compete agreements and used the replacement cost approach
to determine the value allocated to workforce. The residual excess purchase
price was allocated to goodwill.
We will amortize these intangibles on a straight line basis over three to seven
years based on expected useful lives of existing products and technologies,
retention of workforce, non-compete agreements and goodwill. If the identified
projects are not successfully developed, we may not realize the value assigned
to the in-process research and development projects and the value of the
acquired intangible assets may also become impaired.
Interest and Other Income
Other income during the first nine months of 1999 increased $513,000, or 75%,
compared to the same period in 1998, primarily from interest income received on
the proceeds of our public stock offering in late June 1998.
Income Taxes
Income tax expense represents combined federal and state taxes at effective
rates of 35% and 38% for the nine months ended September 30, 1999 and 1998,
respectively. The lower rate for 1999 was the result of utilizing post
acquisition of C-Dilla Ltd.'s net operating losses to reduce our 1999 taxes.
combined with higher tax-exempt interest earned in 1999.
Net Income
Net income for the nine months ended September 30, 1999 was $3.5 million
compared to $4.1 million for the first nine months of 1998. The lower net income
was a result of the one-time charge to earnings of $4.3 million for the C-Dilla
Ltd.'s in-process research and development.
Liquidity and Capital Resources
We have financed our operations primarily from cash generated by operating
activities, principally by our video copy protection business. Our operating
activities provided net cash of $7.1 million for the nine months ended September
30, 1999 and $5.2 million for the nine months ended September 30, 1998. For the
first nine months of 1999, net cash was provided primarily by net income
adjusted for noncash charges and in-process research and development, reduced by
an increase in accounts receivable and offset slightly by an increase in
deferred revenue and income taxes payable. For the first nine months of 1998,
net cash was provided primarily by net income adjusted for noncash charges, the
payment of a note due from a related party and an increase in deferred revenue
offset slightly by an increase in accounts receivable.
Investing activities used cash of $4.3 million in the nine months ended
September 30, 1999 and $30.3 million in the first nine months ended September
30, 1998. For the first nine months of 1999, net cash used in investing
activities was primarily the acquisition of C-Dilla Ltd. and the investments in
Digimarc and AudioSoft, offset by the net sales and maturities in short and
long-term investment securities. The investment in Digimarc and AudioSoft were
in connection with separate rounds of third-party financing obtained by each
company. For the first nine months of 1998, net cash used in investing
activities was primarily the investment of the proceeds from the June 1998
public offering, an investment in and payment of royalties to C-Dilla Ltd. and
an additional investment in Command Audio Corporation ("CAC"). We also made
capital expenditures of $402,000 in the nine months ended September 30, 1999 and
$210,000 in the nine months ended September 30, 1998. In addition, we paid
$393,000 in the nine months ended September 30, 1999 and $512,000 in the nine
months ended September 30, 1998, for costs associated with obtaining patents.
For the nine months ended September 30, 1999 and 1998, we had net cash provided
from financing activities of $1.1 million and $28.4 million, respectively. In
1999, the net cash provided from financing activities was primarily related to
the issuance of common stock upon the exercise of stock options, stock purchases
under the
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<PAGE>
our stock purchase plan and the final payment of a stockholder's note receivable
offset by payments on loans. In 1998, the net cash provided in financing
activities was related to the net proceeds from the stock offering and, to a
lesser extent, the issuance of common stock upon the exercise of stock options
and stock purchases under our stock purchase plan.
In August 1999, we participated in a convertible bridge loan to Command Audio
Corporation ("CAC") by which investors would fund expenditures of CAC up to a
predetermined amount. Our commitment under the Convertible Note Purchase
Agreement is $836,733, of which we have funded approximately $478,000 through
the period ended September 30, 1999. The note bears an interest rate of 9% and a
term of one year and is convertible to equity shares upon certain events
occurring.
At September 30, 1999, we had $7.3 million in cash and cash equivalents, $18.2
million in short-term investments and $11.7 million in long-term marketable
investment securities. We had no material commitments for capital expenditures
but anticipate that capital expenditures for the next 12 months will aggregate
approximately $600,000. We also have future minimum lease payments of
approximately $1.8 million under operating leases and approximately $105,000
under capital leases. We are also committed to provide an additional investment
of $750,000 in AudioSoft and financing of $359,000 to CAC. We believe that the
current available funds and cash flows generated from operations will be
sufficient to meet our working capital and capital expenditure requirements for
the foreseeable future. We may also use cash to acquire or invest in businesses
or to obtain the rights to use certain technologies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in interest rates,
foreign exchange rates and security investments. Changes in these factors may
cause fluctuations in our earnings and cash flows. We evaluate and manage the
exposure to these market risks as follows:
Fixed Income Investments
We have an investment portfolio of fixed income securities, including those
classified as cash equivalents, short-term investments and long-term marketable
investments securities, of $36.0 million as of September 30, 1999. These
securities are subject to interest rate fluctuations. An increase in interest
rates could adversely affect the market value of our fixed income securities.
We do not use derivative financial instruments in our investment portfolio to
manage interest rate risk. We limit our exposure to interest rate and credit
risk, however, by establishing and strictly monitoring clear policies and
guidelines for our fixed income portfolios. The primary objective of these
policies is to preserve principal while at the same time maximizing yields,
without significantly increasing risk. A hypothetical 50 basis point increase in
interest rates would result in an approximate $130,000 decrease (approximately
0.5%) in the fair value of our available-for-sale securities as of September 30,
1999.
Foreign Exchange Rates
Due to our reliance on international and export sales, we are subject to the
risks of fluctuations in currency exchange rates. While a substantial majority
of our international and export revenues are typically denominated in United
States dollars, fluctuations in currency exchange rates could cause our products
to become relatively more expensive to customers in a particular country,
leading to a reduction in sales or profitability in that country. Our future
results of operations could be materially adversely affected by currency
fluctuations. Our subsidiaries in England and Japan operate in their local
currency, which mitigates a portion of the exposure related to the respective
currency royalties collected. We use yen options to hedge anticipated balance
sheet exposures and as of September 30, 1999 there was no gain.
Strategic Investments
We have expanded our technological base in current as well as new markets
through strategic investments in companies, technologies, or products. We
currently hold minority equity interests in CAC, Digimarc and AudioSoft
International. These investments, totaling $7.1 million, represented 9.0% of our
total assets as of September 30, 1999. Because these companies are privately
held, there is no active trading market for their securities, and our
investments in them are illiquid. There may never be an opportunity for us to
realize a return on our investment in any of these companies, and we 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
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more of these investments could have a material adverse affect on our business,
financial condition and results of operations.
Risk Factors.
We expect to experience seasonality and other fluctuations in future operating
results.
Our 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. These factors include, but are not limited to:
o the timing of releases of popular motion pictures on videocassettes
or DVDs or by digital PPV transmission;
o the ability of the Motion Picture Association of America ("MPAA")
studios to produce one or more "blockbuster" titles on an annual
basis;
o the degree of acceptance of our copy protection technologies and
their perceived cost/benefit ratios by major motion picture studios
and software companies;
o the timing and release of computer software consumer multimedia
titles;
o consolidation in the entertainment industry;
o the mix of products sold and technologies licensed;
o any change in product or license pricing;
o any change in product or technology effectiveness and/or resistance
to circumvention devices and techniques;
o the seasonality of revenues;
o changes in our operating expenses;
o personnel changes;
o the development of our direct and indirect distribution channels;
o foreign currency exchange rates;
o general economic conditions;
o competition; and
o legal activity to protect patented technologies
We 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 us to invest significantly
greater resources in research and development or marketing efforts, our future
operating results may be adversely affected. Because a high percentage of our
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.
We have experienced significant seasonality in our business, and our financial
condition and results of operations are likely to be affected by seasonality in
the future. We have typically experienced our highest revenues in the fourth
quarter of each calendar year followed by lower revenues and operating income in
the first quarter, and at times in subsequent quarters, of the next year. We
believe that this trend has been principally due to the tendency of certain of
our customers to release their more popular motion pictures on videocassettes
and DVDs during the year-end holiday shopping season. We anticipate that
revenues 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, we believe that our 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 we will be
able to grow in future periods or that we will be able to sustain our level of
net revenues or our rate of revenue growth on a quarterly or annual basis. It is
likely that, in some future quarter, our operating results will be below the
expectations of stock
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market analysts and investors. In this event, the price of our common stock
could decline. Further, we 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 our common
stock.
We depend on videocassette copy protection technology and on advocacy of this
technology by major motion picture studios.
We currently derive a substantial majority of our net revenues and operating
income from fees for the application of our patented video copy protection
technology to prerecorded videocassettes of motion pictures and other
copyrighted materials that are sold or rented to consumers. These fees
represented 62.0%, 64.5% and 47.6% of our net revenues during 1997, 1998 and the
first nine months of 1999, respectively. We expect these fees to account for a
majority of our net revenues and operating income for most of 1999. This portion
of our business has not grown significantly in recent years, and there can be no
assurance that revenues from these fees will grow significantly or at all. Any
future growth in revenues from these fees will depend on the use of our copy
protection technology on a larger number of videocassettes. In order to increase
or maintain our market penetration, we must continue to persuade rights owners
that the cost of licensing the technology is outweighed by the increase in
revenues that the rights owners and retailers would achieve as a result of using
copy protection, such as revenues from additional sales of the copy protected
material or subsequent revenues from other venues. In this regard, our copy
protection technologies are intended to deter consumer copying and are generally
not effective against professional duplication and video processing equipment.
In the event that the major motion picture studios or other customers of our
copy protection technology were to determine that the benefits of using our
technology did not justify the cost of licensing the technology, demand for our
technology would decline. Any factor that results in a decline in demand for our
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 our copy protection technology, would have a material
adverse effect on our business, financial condition and results of operations.
Moreover, our ability to expand our 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 technology into the hardware and network infrastructure required to
distribute such video programming. In the event that the motion picture industry
withdraws its support for our copy protection technologies or otherwise
determines not to copy protect a significant portion of prerecorded
videocassettes or DVD or digital PPV programs, our business, financial condition
and results of operations would be materially adversely affected.
We depend on our key customers.
Our customer base is highly concentrated among a limited number of customers,
primarily due to the fact that the MPAA studios dominate the motion picture
industry. Historically, we have derived a substantial majority of our net
revenues from relatively few customers. For 1997, revenues from one of our
customers accounted for 11% of our net revenues. For 1998, another one of our
customers accounted for more than 12% of our net revenues. For the first nine
months of 1999, no one customer accounted for more than 10% of our net revenues.
The MPAA studios as a group accounted for 38.6%, 45.1% and 35.3% of our net
revenues in 1997, 1998 and the first nine months of 1999. We expect that
revenues from the MPAA studios will continue to account for a substantial
portion of our net revenues for the foreseeable future. We have agreements with
five of the major home video companies for copy protection of substantially all
of their videocassettes and/or DVDs in the United States. These agreements
expire at various times ranging from February 2000 to March 2001. The failure of
any of these customers to renew its contracts or to enter into a new contract
with us on terms that are favorable to us would likely result in a substantial
decline in our net revenues and operating income, and would have a material
adverse effect on our business, financial condition and results of operations.
Most of our other videocassette copy protection customers license our technology
on an annual contract basis or title-by-title or month-by-month. There can be no
assurance that our current customers will continue to use our technology at
current or increased levels, if at all, or that we 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 our business, financial
condition and results of operations.
We are introducing products into the evolving market for DVD and digital PPV
copy protection.
Our 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 our copy protection technologies. A number of
factors will affect our ability to derive revenues from DVD and digital PPV copy
protection. These factors include the cost and effectiveness of our copy
protection technology in our 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, our ability 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
uncertain. 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, our future growth
would be adversely affected if DVD players and digital PPV set-top decoders that
do not include our copy protection components achieve market acceptance.
While our copy protection capability is embedded in more than 23.6 million
digital set-top decoders manufactured by some of the leading set-top decoder
manufacturers, only four system operators have activated copy protection for
digital PPV programming. In Japan, DirectTV Japan and SkyPerfecTV copy protect
all adult programming channels and certain PPV motion pictures. In Hong Kong,
one system operator copy protects all video-on-demand movies. In the United
Kingdom, British Sky Broadcasting has to date copy protected all digital
channels of PPV motion pictures. 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 copy protection in other digital PPV
networks outside of Japan, Hong Kong or the United Kingdom. Also, 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 and PPV programs, as well as free broadcast programming.
In addition, certain television sets or combinations of VCRs and television sets
may 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, our 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 our solution does not achieve or sustain market acceptance,
our business, financial condition and results of operations would be materially
adversely affected.
We seek to expand our copy protection business through licensing arrangements
and strategic investments. Macrovision, Philips 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
recordable DVD and digital videocassette recording devices. We have submitted
our proposed solution to the Copy Protection Technical Working Group ("CPTWG").
At least one other group of companies (IBM, NEC, Sony, Pioneer and Hitachi) has
also submitted proposals to the CPTWG. The companies 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 Macrovision, Philips and Digimarc
is not the selected solution or otherwise is not widely adopted by studios or
consumer electronics manufacturers, Macrovision, Philips and Digimarc will be at
a competitive disadvantage in marketing their solution. There can be no
assurance that the solution being developed by Macrovision, Philips 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.
We are also just beginning to enter the market for computer software copy
protection.
We acquired C-Dilla Ltd. on June 18, 1999. C-Dilla Ltd.'s products include
SafeDisc, our new copy protection technology for CD-ROM software products in the
consumer multimedia market. Prior to June 18, 1999, we had an exclusive
marketing agreement with C-Dilla Ltd. for this product. The market for copy
protection of CD-ROMs is unproven. For us to be successful in entering this new
market, producers of multimedia CD-ROMs must accept copy protection generally
and also adopt our SafeDisc solution. 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
prevented 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 or compatible with all PC and CD ROM hardware platforms or
configurations or may prove to be easily circumvented. A number of competitors
and potential competitors are developing CD-ROM copy protection solutions. Many
of these competitors and potential competitors have substantially greater name
recognition and financial, technical and marketing resources than we do. There
may not be demand for CD-ROM copy protection. Software developed for CD-ROM may
migrate to DVD-ROM, a format in which we have not developed copy protection
technology. Internet posted hacks may be used to circumvent the technology.
Further, the solution we are marketing may not achieve or sustain market
acceptance under emerging industry standards or may not meet, or
20
<PAGE>
continue to meet, the changing demands of multimedia software providers. If the
market for CD-ROM copy protection fails to develop or develops more slowly than
expected, or if our solution does not achieve or sustain market acceptance, our
business, financial condition and results of operations would be materially
adversely affected.
Our intellectual property rights may not be adequately protected.
Our success is heavily dependent upon our proprietary technologies. We rely on a
combination of patent, trademark, copyright and trade secret laws, nondisclosure
and other contractual provisions, and technical measures to protect our
intellectual property rights. Our patents, trademarks or copyrights may be
challenged and invalidated or circumvented. Any patents that issue from our
pending or future patent applications or the claims in issued patents or pending
patent applications may not be of sufficient scope or strength or be issued in
all countries where our products can be sold or our technologies can be licensed
to provide meaningful protection or any commercial advantage to us. The
expiration of certain patents may have a material adverse effect on our
business, financial condition and results of operations. Others may develop
technologies that are similar or superior to our technologies, duplicate our
technologies or design around our patents. Effective intellectual property
protection may be unavailable or limited in certain foreign countries. Despite
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise use aspects of processes and devices that we regard as
proprietary. Policing unauthorized use of our proprietary information is
difficult, and there can be no assurance that the steps we have taken will
prevent misappropriation of our technologies. In the event that our intellectual
property protection is insufficient to protect our intellectual property rights,
we could face increased competition in the market for our products and
technologies, which could have a material adverse effect on our business,
financial condition and results of operations.
Additional litigation may be necessary in the future to enforce our patents and
other intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. There can be no
assurance that any litigation of these types will be successful. Litigation
could result in substantial costs, including indemnification of customers, and
diversion of resources and could have a material adverse effect on our business,
financial condition and results of operations, whether or not such litigation is
determined adversely to us. In the event of an adverse ruling in any litigation,
we 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. Our failure to develop or
license a substitute technology could have a material adverse effect on our
business, financial condition and results of operations.
It can be time consuming and costly to defend against infringement claims.
From time to time, we have received claims from third parties that our
technologies and products infringe their intellectual property rights. A
Japanese company has filed an invalidation claim against one of our anti-copy
patents in Japan. After a hearing in March 1999, the Japanese Patent Office has
recommended that our patent be invalidated. We believe that this conclusion was
reached in error, and we intend to seek reconsideration by the Japanese Patent
Office. If necessary, the matter is expected to be decided by the Tokyo High
Court sometime in the year 2000. Until a decision is rendered, the patent
remains valid and part of our business. In connection with this reconsideration,
we may reduce the scope of our claims under the patent but the reduction in
scope, if any, is not expected to have a material effect on the value of this
patent to our business. If an adverse ruling ultimately is reached on this
invalidation claim, we might incur legal competition from clones of our own copy
protection technology in Japan and a corresponding decline in demand for our
technology in Japan which could have a material adverse effect on our business,
financial condition and results of operations.
We acquire or license a portion of the technology included in our products from
third parties, our exposure to infringement actions may increase because we must
rely upon these third parties for information as to the origin and ownership of
the acquired or licensed technology. Although we intend to obtain
representations as to the origin and ownership of the acquired or licensed
software and obtain indemnification to cover any breach of any of these
representations, these representations may not be accurate or indemnification
may not provide adequate compensation for any breach of these representations.
To the extent that these or any other communications or any litigation create
further uncertainty in the marketplace, acceptance of the technology that we
market would be delayed, which could have a material adverse effect on our
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, divert management's attention from
day-to-day operations, cause product shipment delays or require us to cease
utilizing the infringing technology unless we can enter into royalty or
licensing agreements. Royalty or licensing agreements might not be available on
terms acceptable to us, or at all, which could have a material adverse effect on
our business, financial condition and results of operations.
21
<PAGE>
In January 1999, we filed a complaint against Dwight-Cavendish Developments Ltd.
in the United States District Court for the District of Northern California
(Case No. 99-20011). The complaint alleges that Cavendish infringes a United
States patent held by Macrovision. We seek to recover compensatory damages,
treble damages and costs and to obtain injunctive relief arising from these
claims. Cavendish's response to the complaint contained a counterclaim alleging
that Macrovision has violated the federal Sherman Antitrust Act and the Lanham
Act and the California false advertising laws and Unfair Competition Act. The
counterclaim seeks injunctive relief, compensatory damages, treble damages and
costs. It also seeks a declaratory judgment that the United States patent held
by Macrovision is invalid and that Cavendish's products do not infringe the
patent. We intend to defend the allegations in the counterclaim vigorously.
It can be time-consuming and costly to limit the spread of circumvention
devices.
We have 10 United States and 30 foreign patents covering a number of processes
and devices that unauthorized parties could use to circumvent our video copy
protection technologies. We use these patents to limit the proliferation of
devices intended to circumvent our video copy protection technologies. In the
past, we have initiated a number of patent infringement disputes against
manufacturers and distributors of these devices. We currently have one such suit
pending in Germany. In the event of an adverse ruling in a patent infringement
lawsuit, we might suffer from the legal availability of the circumvention device
or have to obtain rights to the offending device. The legal availability of
circumvention devices could result in the increased proliferation of devices
that defeat our copy protection technology and a decline in demand for our
technologies, which could have a material adverse effect on our business,
financial condition and results of operations. In October 1998, President
Clinton signed the Digital Millennium Copyright Act into law. This new law will
require all new VCRs manufactured or sold in the United States, beginning in May
2000, to be specifically designed to make poor quality copies of programming
encoded with our copy protection technology. Existing VCRs that currently
respond to our technology (over 90% of all new VCRs) are required to maintain
their compliant designs. The new law also provides for both criminal and civil
penalties for companies or individuals who import, produce, or distribute
devices designed to circumvent our technology.
Any patent infringement or similar claims or claims under the Digital Millenium
Copyright Act that we may initiate could be time-consuming to pursue, result in
costly litigation, and divert management's attention from day-to-day operations.
In the Computer Software Copy Protection market, a number of individuals have
developed and posted SafeDisc "hacks" on the internet. If we are not able to
generate frequent SafeDisc software releases which prevent the hackers from
developing circumvention techniques, our customers could reduce their usage of
our technology because it was compromised. Although the Digital Millennium
Copyright Act may be applicable to ISPs (Internet Service Providers) who support
the hacker sights, any legal action that we initiate could be time-consuming to
pursue, result in costly litigation, and divert management's attention from
day-to-day operations.
We are exposed to the risks associated with expanding our technological base
through strategic investments.
We have recently expanded our technological base in current as well as new
markets through strategic investments in companies with complementary or
synergistic technologies or products. We currently hold minority equity
interests in Command Audio Corporation, Digimarc and Audiosoft International.
These investments, which total $7.1 million and represented 9.0% of our total
assets at September 30, 1999, involve a number of risks. The negotiation,
creation and management of these strategic relationships typically involve a
substantial commitment of our management time and resources, and there can be no
assurance that we will ever recover the cost of these management resources.
Because these companies are privately held, there is no active trading market
for their securities, and our investments in them are illiquid. There may never
be an opportunity for us to realize a return on our investment in any of these
companies, and we 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 our business,
financial condition and results of operations.
Our 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 any new
products by us or a third party, or that any joint marketing efforts will result
in increased demand for our products. Further, there can be no assurance that
any current or future strategic investments by us will allow us to enter and
compete effectively in new markets or improve our performance in any current
markets.
We face a number of risks associated with international and export sales.
22
<PAGE>
International and export sales together represented 46.5%, 44.5% and 47.9% of
our net revenues in 1997, 1998 and the nine months ended September 30, 1999,
respectively. We expect that these sales will continue to represent a
substantial portion of our net revenues for the foreseeable future. Our future
growth will depend to a large extent on worldwide deployment of digital PPV
programming, DVD video discs, and PC-based multimedia software and the use of
copy protection in these media, and to a lesser extent, addressable analog cable
TV systems. 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 our ability to sell
our products or license our technologies into these markets would have a
material adverse effect on our business, financial condition and results of
operations. In particular, the net revenues that we derived from video
scrambling decreased 46.5% from 1997 to 1998 and 67.0% from the nine month
period ended September 30, 1998 to 1999, due to decreased demand for our
PhaseKrypt-based analog cable TV decoding equipment that resulted primarily from
the financial crisis in Southeast Asia and Latin America. In addition, the laws
of certain foreign countries may not protect our intellectual property rights to
the same extent as do the laws of the United States, which increases the risk of
unauthorized use of our 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 our
copy protection and video scrambling technologies.
Due to our reliance on international and export sales, we are 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 our 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 example, under the United States Export Administration
Act of 1979, as amended, and regulations promulgated thereunder, encryption
algorithms such as those used in our computer software copy protection and 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 us to redesign our products or
technologies or prevent us from selling our products and licensing our
technologies internationally. While international and export sales are typically
denominated in United States dollars, fluctuations in currency exchange rates
could cause our products to become relatively more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that
country. There can be no assurance that our future results of operations will
not be materially adversely affected by currency fluctuations. Our business and
operating results could be materially adversely affected if foreign markets do
not continue to develop, or if we do not receive additional orders to supply our
technologies or products for use in foreign prerecorded video, PPV and Pay TV
networks and other applications requiring our video security solutions.
Year 2000 Issues
Background
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates
because these systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer systems that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
State of Readiness
23
<PAGE>
Our business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others:
o hardware and software systems that we use internally in the
management of our business;
o hardware and software products that we have developed;
o the internal systems of our customers and suppliers; and
o non-information technology systems and services that we use in the
management of our business, such as telephone systems and building
systems.
Based on an analysis of the systems potentially impacted by conducting business
in the twenty-first century, we are applying a phased approach to making such
systems, and accordingly our operations, Year 2000 ready. Beyond awareness of
the issues and scope of systems involved, the phases of activities in progress
include:
o an assessment of specific underlying computer systems, programs
and/or hardware;
o remediation or replacement of Year 2000 non-compliant technology;
o validation and testing of technologically Year 2000 ready solutions;
and
o implementation of the Year 2000 ready systems.
The table below provides the status and timing of these phased activities:
<TABLE>
<CAPTION>
Status/Anticipated
Impacted Systems Processes Completion
---------------- --------- ----------
<S> <C> <C>
Hardware and software products that we Assessment completed, Completed Q1 1999
license or sell conducted validation and
testing (see details
below)
Hardware and software systems that we use Assessment completed; Completed Q1 1999
internally in the management of our certain components
business replaced; conducted
validation and testing
Internal systems of our customers and Assessment on-going: no In Process
suppliers issues from responding
inquiries
Non-information technology systems and Assessment completed; Completed Q1 1999
services that we use in the management of certain components
our business, internal and external, such replaced, conducted
as telephone systems and building systems validation and testing
</TABLE>
Products Status
Macrovision's products that do not include a microprocessor or other
digital-based technology and are not date or time sensitive are Year 2000 ready.
These products include the following:
Video Copy Protection Products: All versions of ACP Processors (ACP-100,
ACP-170, ACP-180; ACP-182 and ACP-184); the Standard ACP-100 and ACP-180
Chassis and the Secured ACP-180 Chassis.
Video Scrambling Products: VM-100; TurboKrypt Chassis and Processor; Video
Tilt Corrector; MacroPlus Generator; VGA Copy Processor; ColorStripe
Generator; and the WaterMark Embedder.
Macrovision's products that do contain a microprocessor or other digital based
technology, and have been tested and verified as Year 2000 ready, include the
following:
Video Copy Protection Products: ACP-180 Security Chassis; ACP Time Key.
24
<PAGE>
Video Scrambling Products: VES-TM; VES-TL; VES-MX; VES-TP; VES-TS; VES-TX;
VES-TX NET Software; VES-P; VES-C1; VES-C2; VES-TD; PK-410/415 Chassis &
CPU; AV-8; AV-10; PK-430A; PK-430M; PK-430C; StarShaker Encoder;
StarShaker Decoder; and the StarShaker Software.
Software Products: All Computer Software Copy Protection and Rights Management
software products are compliant.
Year 2000 readiness does not include the performance or functionality of third
party products, including hardware or software with which any of our products
interfaces.
Costs to Address Year 2000 Readiness
We have expensed as incurred all costs directly related to Year 2000 readiness,
even in cases where non-compliant information technology systems have been
replaced. To date, these costs have been insignificant. The replacement cost of
non-information technology systems would have been incurred, regardless of the
Year 2000 issue, to accommodate our growth.
We do not believe that future expenditures to upgrade internal systems and
applications will have a material adverse effect on our business, financial
condition and results of operations. In addition, while the potential costs of
redeployment of personnel and any delays in implementing other projects is not
known, the costs are anticipated to be immaterial.
Risks of the Year 2000 Issues
We believe our products are Year 2000 ready; however, success of our Year 2000
readiness efforts may depend on the success of our customers in dealing with
their Year 2000 issues. We sell our products to companies in a variety of
industries each experiencing different issues with Year 2000 readiness. Customer
difficulties with Year 2000 issues could interfere with the use of our products,
which might require us to devote additional resources to resolve the underlying
problems. If the problem is found to lie in our products, our business,
financial condition and results of operations could be materially adversely
affected.
Furthermore, the purchasing patterns of these customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
become Year 2000 ready. The costs of becoming Year 2000 ready for current or
potential customers may result in reduced funds available to purchase and
implement our products. In addition, we rely on various entities that are common
to many businesses, such as public utilities. If these entities were to
experience Year 2000 failures, our ability to conduct business would be
disrupted.
Although we believe that our Year 2000 readiness efforts are designed to
appropriately identify and address those Year 2000 issues that are within our
control, there can be no assurance that our efforts will be fully effective or
that the Year 2000 issues will not have a material adverse effect on our
business, financial condition or results of operations. The novelty and
complexity of the issues presented and our dependence on the preparedness of
third parties are among the factors that could cause our efforts to be less than
fully effective. Moreover, Year 2000 issues present many risks that are beyond
our control, such as the potential effects of Year 2000 issues on the economy in
general and on our business partners and customers in particular.
Contingency Plans
We have conducted an assessment of certain of our Year 2000 exposure areas in
order to determine what steps beyond those identified by our internal review
were advisable and no additional work was recommended. We do presently have a
contingency plan for handling Year 2000 issues that are not detected and
corrected prior to their occurrence. Any failure by us to address any unforeseen
Year 2000 issue could adversely affect our business, financial condition and
results of operations.
Part II. Other Information
Item 1. Legal Proceedings.
Patent Litigation
A Japanese company has filed an invalidation claim against one of our anti-copy
patents in Japan. After a hearing in March 1999, the Japanese Patent Office has
recommended that this patent be invalidated. We believe that this
25
<PAGE>
conclusion was reached in error, and we intend to seek a reconsideration by the
Japanese Patent Office. If necessary, the matter is expected to be decided by
the Tokyo High Court sometime in the year 2000. Until a decision is rendered,
the patent remains valid and part of our business. In connection with this
reconsideration, we may reduce the scope of our claims under the patent but the
reduction in scope, if any, is not expected to have a material effect on the
value of this patent to our business. If an adverse ruling ultimately is reached
on this invalidation claim, we might incur legal competition from clones of our
own copy protection technology in Japan and a corresponding decline in demand
for our technology in Japan.
From time to time, we may receive claims from third parties that our
technologies and products infringe their intellectual property rights, and we
may receive similar claims in the future. Any infringement claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
cause product shipment delays or require us to cease utilizing the infringing
technology unless we can enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to
us, or at all, which could have a material adverse effect on our business,
financial condition and results of operations.
Reference is made to our Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 for further information in response to this item.
Item 5. Other Information.
On July 26, 1999, Macrovision announced a two-for-one stock split in the form of
a common stock dividend, payable to the corporation's stockholders of record as
of August 6, 1999. Macrovision stockholders of record at the close of business
on August 6, 1999, received stock certificates representing one additional share
of Macrovision common stock for each share of common stock then held.
Distribution of additional shares issued as a result of the split occurred in
August 1999.
In October 1999, the Company signed an agreement with a major MPA studio for a
period of five years commencing on January 1, 2000. The agreement covers the
worldwide application of copy protection for videocassettes at certain minimum
guarantees and 100% for the application of copy protection to DVD's.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1999, the Company filed one current
report on Form 8-KA.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Macrovision Corporation
Date: November 15, 1999 By: /S/ William A. Krepick
-------------------------------------
William A. Krepick, President and
Chief Operating Officer
Date: November 15, 1999 By: /S/ Michael J. Peters
-------------------------------------
Michael J. Peters, Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Macrovision Corporation for the nine months
ended September 30, 1999, and is qualified in its entirety by reference to such
Consolidated Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,351
<SECURITIES> 18,196
<RECEIVABLES> 9,901
<ALLOWANCES> 1,089
<INVENTORY> 211
<CURRENT-ASSETS> 38,156
<PP&E> 5,888
<DEPRECIATION> 4,210
<TOTAL-ASSETS> 78,733
<CURRENT-LIABILITIES> 8,568
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 70,147
<TOTAL-LIABILITY-AND-EQUITY> 78,733
<SALES> 24,583
<TOTAL-REVENUES> 24,583
<CGS> 2,140
<TOTAL-COSTS> 2,140
<OTHER-EXPENSES> 18,157
<LOSS-PROVISION> 201
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 5,484
<INCOME-TAX> 1,941
<INCOME-CONTINUING> 1,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,543
<EPS-BASIC> .20
<EPS-DILUTED> .19
</TABLE>
