<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MACROVISION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0156161
(State or other jurisdiction (I.R.S. Employer Identification)
incorporation or organization)
</TABLE>
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
IAN R. HALIFAX
CHIEF FINANCIAL OFFICER
MACROVISION CORPORATION
1341 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 743-8600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
<TABLE>
<S> <C>
DAVID W. HERBST J. ROBERT SUFFOLETTA
NANCY H. WOJTAS DAVID R. KING
DAVID M. PIKE WILSON SONSINI GOODRICH & ROSATI,
MANATT, PHELPS & PHILLIPS, LLP PROFESSIONAL CORPORATION
3030 HANSEN WAY, SUITE 100 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304 PALO ALTO, CALIFORNIA 94304
(650) 812-1300 (650) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _____
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _____
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per
share................................... 1,966,500 $70.56 $138,756,240 $36,632
</TABLE>
(1) Includes 256,500 shares of common stock subject to the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of the common stock on the
Nasdaq National Market on December 20, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION DATED JANUARY , 2000
PROSPECTUS
1,710,000 SHARES
[MACROVISION-LOGO]
COMMON STOCK
This is an offering of common stock by Macrovision Corporation. Of the
1,710,000 shares of common stock being sold in this offering, 1,250,000 shares
are being sold by Macrovision and 460,000 shares are being sold by selling
stockholders. We will not receive any of the proceeds from the sale of shares by
the selling stockholders.
--------------
Our common stock is traded on the Nasdaq National Market under the
symbol MVSN. On January , 2000, the last reported sale price of our common
stock on the Nasdaq National Market was $ per share.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Macrovision, before expenses.................... $ $
Proceeds to the selling stockholders, before expenses....... $ $
</TABLE>
The underwriters have been granted an option for a period of 30 days to
purchase up to 256,500 additional shares of common stock from Macrovision and
the selling stockholders.
--------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
HAMBRECHT & QUIST SG COWEN
U.S. BANCORP PIPER JAFFRAY ING BARINGS
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Cautionary Note On Forward-Looking Statements............... 15
Use of Proceeds............................................. 15
Price Range of Common Stock................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 35
Management.................................................. 52
Principal and Selling Stockholders.......................... 55
Underwriting................................................ 57
Legal Matters............................................... 58
Experts..................................................... 59
Where You Can Find Additional Information About
Macrovision............................................... 59
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE
ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF OUR COMMON
STOCK.
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION
REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES TO FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. BECAUSE THIS IS ONLY A SUMMARY, YOU
SHOULD READ THE REST OF THE PROSPECTUS BEFORE YOU INVEST IN OUR COMMON STOCK.
MACROVISION
We design, develop and license copy protection and rights management
technologies. We are the leading provider of copyright protection technologies
for major Hollywood studios, independent video producers, PC games and
educational software publishers, digital set-top box manufacturers and digital
pay-per-view network operators. We provide content owners with the means to
protect content such as videocassette, DVD and pay-per-view movies, PC games and
educational software against unauthorized copying and distribution.
As the world moves toward a digital media age, content owners are
increasingly vulnerable to unauthorized copying. Content owners lose billions of
dollars every year to casual copying and piracy. In particular, consumers'
ability to make unauthorized copies has increased due to the proliferation of
inexpensive, easy-to-use devices that allow in-home copying, such as VCRs and
CD-ROM recorders.
We have built and continue to extend a large patent portfolio which
provides the basis for our licensing business model. We license our technologies
and receive high margin, recurring revenues from a variety of sources. These
include unit-based royalties on videocassettes, DVDs, CD-ROMs, and set-top
boxes, transaction or use-based royalties for pay-per-view movies, and license
fees from a range of hardware manufacturers, and digital satellite and cable
system operators.
Our technology has been used to copy protect over 2.7 billion
videocassettes worldwide since 1985. All Motion Picture Association of America
studios use our video copy protection technologies to protect some or all of
their movie releases on videocassette or DVD. Our customers include Disney,
Paramount, Sony Pictures Entertainment, Twentieth Century Fox, Universal
Studios, Warner Brothers and DreamWorks. We believe that our video copy
protection technologies are accepted as the industry standard. The October 1998
Digital Millennium Copyright Act mandates compliance with our technology for all
VCR manufacturers that sell or import their hardware into the U.S.
An enhanced version of our videocassette copy protection technology has
been applied to digital video formats, and deployed worldwide on DVD, digital
satellite and cable. The rapid growth of DVD and digital pay-per-view, coupled
with the high picture quality and the relative ease of copying from these
formats, has increased the need for effective copy protection in these
applications.
We estimate that 75% of all DVDs manufactured contain our copy
protection technology. We also believe that our technology is used in
approximately 90% of all digital set-top boxes produced, including those
manufactured by General Instrument, Scientific-Atlanta, THOMSON, Nokia and Pace.
Our system operator customers include British Sky Broadcasting, DIRECTV,
EchoStar, Hong Kong Telecom and Galaxy Latin America.
We have expanded our copy protection technologies into the PC games and
educational software markets, and into rights management applications through
our recent acquisition of C-Dilla Ltd., or C-Dilla. We have licensed a majority
of the top PC games publishers, including Electronic Arts, Microsoft, Eidos, GT
Interactive, Havas, and Hasbro. We believe that our SafeDisc computer
software/CD-ROM copy protection technology has been used on approximately 30
million CD-ROMs. Additionally, we are developing a suite of rights management
technologies, called SafeCast, that will provide our customers with more options
to market and securely distribute software products using either the Internet or
packaged media.
3
<PAGE>
We seek to continue the expansion of our technology base in current as
well as new markets through strategic investments in companies with
complementary technologies. Our strategic investments include:
- Digimarc. We are working jointly with Digimarc and Philips to develop
a digital video watermarking copy protection solution to address
digital-to-digital copying issues.
- TTR. We intend to develop a copy protection product with TTR to
prevent the unauthorized copying of music CDs.
- AudioSoft. We are working with Audiosoft as a strategic consulting
partner for their e-commerce copyright royalty reporting systems.
We intend to protect and enhance our position as the leading provider of
copy protection technologies by implementing a strategy that includes the
following key elements:
- pursue multiple sources of royalty-based licensing revenue that result
in a high margin, recurring revenue business model;
- introduce new product applications and rights management technologies
through either internal development or acquisition;
- pursue strategic investments that are complementary to our existing
technologies;
- expand our patent portfolio and aggressively pursue protection of our
patents; and
- leverage key customer relationships to broaden the use of existing
applications for our technologies.
We were initially incorporated in California in January 1983. We
operated as a corporation until 1985 and as a limited partnership from 1985
until we incorporated as Macrovision Corporation in 1987. We reincorporated in
Delaware in February 1997. References to "we," "our," "us" and the "Company" in
this prospectus refer to Macrovision Corporation. Our principal executive
offices are located at 1341 Orleans Drive, Sunnyvale, California 94089 and our
telephone number is (408) 743-8600. Our Web site is located at
www.macrovision.com. Any information that is included on or linked to our
website is not a part of this prospectus.
We own or have rights to various copyrights, trademarks and trade names
used in our business. These include Macrovision-Registered Trademark-,
Protecting Your Image-Registered Trademark-, Colorstripe-TM-, SafeDisc-TM-,
SafeDisc HD-TM-, SafeCast-TM- and PhaseKrypt-TM-. This prospectus also includes
trademarks, service marks and trade names of other companies, which remain the
property of their owners.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered by us...................... shares
Common stock offered by the selling
stockholders.................................. shares
Common stock to be outstanding after the
offering...................................... shares
Use of proceeds................................. For general corporate purposes including
strategic investments and working capital.
</TABLE>
- ------------------------
The information in this prospectus is based on 18,331,678 shares outstanding as
of September 30, 1999. This share information does not include 1,736,934 shares
of common stock issuable upon the exercise of options outstanding at a weighted
average exercise price of $13.92 per share and does not include 445,942
additional shares reserved for future grants or issuances under our stock option
and stock purchase plans.
Except as otherwise noted, information in this prospectus assumes no exercise of
the underwriters' over-allotment option. All share and per share information in
this prospectus reflects a 2-for-1 stock split effected in August 1999.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
DATA:
Net revenues.......................... $13,330 $14,189 $17,080 $20,340 $24,434 $17,150 $24,583
Operating income from continuing
operations.......................... 2,804 2,183 3,318 5,756 9,169 5,976 4,286
Income from continuing operations..... 1,501 1,056 1,835 3,821 6,342 4,118 3,543
Income from continuing operations
applicable to common stock.......... $ 1,248 $ 3,665 $ 6,342 $ 4,118 $ 3,543
Earnings per share from continuing
operations
Basic................................. $ 0.16 $ 0.28 $ 0.40 $ 0.27 $ 0.20
Diluted............................... $ 0.15 $ 0.26 $ 0.37 $ 0.25 $ 0.19
Shares used in computing earnings per
share
Basic................................. 7,574 12,952 16,008 15,501 18,002
Diluted............................... 8,560 13,920 17,106 16,564 18,964
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $25,547
Working capital............................................. 29,588
Total assets................................................ 78,733
Total stockholders' equity.................................. 70,165
</TABLE>
- --------------------------
Income from continuing operations applicable to common stock is
calculated by deducting preferred stock dividends from income from continuing
operations.
The preceeding Consolidated Statements of Income Data for the nine
months ended September 30, 1999 includes a $4,286,000 charge for in process
research and development and $791,000 of amortization of intangibles
attributable to the acquisition of C-Dilla.
As adjusted numbers reflect the sale of the 1,250,000 shares of common
stock offered hereby at an assumed public offering price of $ per share and
after deducting the estimated underwriting discount and offering expenses.
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR SHARES INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISKS BEFORE PURCHASING OUR COMMON STOCK. IF ANY OF
THESE RISKS OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD
BE ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
COMPANY RISKS
WE DEPEND ON VIDEO COPY PROTECTION TECHNOLOGY AND ON ADVOCACY OF THIS TECHNOLOGY
BY MAJOR MOTION PICTURE STUDIOS, AND FAILURE OF THE MAJOR MOTION PICTURE
STUDIOS TO SUPPORT OUR TECHNOLOGY COULD HARM OUR BUSINESS.
In the event that the major motion picture studios, or other customers
of our video 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. We currently derive a majority of our
net revenues and operating income from fees for the application of our patented
video copy protection technology to prerecorded videocassettes and DVDs of
movies and other copyrighted materials that video retailers sell or rent to
consumers. These fees represented 75.4%, 67.3%, 77.2% and 68.2% of our net
revenues during 1996, 1997, 1998 and the first nine months of 1999,
respectively.
Any future growth in revenues from these fees will depend on the use of
our video copy protection technology on a larger number of videocassettes, DVDs
or digital pay-per-view, or PPV, programs. In order to increase or maintain our
market penetration, we must continue to persuade content owners that the cost of
licensing the technology is outweighed by the increase in revenues that the
content 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.
Any factor that results in a decline in demand for our video copy
protection technology, including a change of video copy protection policy by the
major motion picture studios or a decline in sales of prerecorded videocassettes
and DVDs that are encoded with our video copy protection technology, would have
a material adverse effect on our business. If several of the motion picture
studios withdraw their support for our copy protection technologies or otherwise
determine not to copy protect a significant portion of prerecorded
videocassettes or DVD or digital PPV programs, our business would be harmed.
WE MAY EXPERIENCE FLUCTUATIONS IN FUTURE OPERATING RESULTS WHICH MAY ADVERSELY
AFFECT THE PRICE OF OUR COMMON STOCK.
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. We may not be able to grow in future periods, or we may not 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 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
reporting from licensees and videocassette and optical disc manufacturers, or
replicators, resulting in a potentially more significant level of volatility in
the price of our common stock. Factors which could cause the price of our common
stock to decline include:
- the timing of releases of popular movies on videocassettes or DVDs or
by digital PPV transmission;
6
<PAGE>
- the ability of the Motion Picture Association of America studios to
produce one or more "blockbuster" titles on an annual basis;
- the degree of acceptance of our copy protection technologies by major
motion picture studios and software companies; and
- the timing of releases of computer software CD-ROM multimedia titles.
WE EXPERIENCE SEASONALITY IN OUR OPERATING RESULTS WHICH MAY AFFECT THE PRICE OF
OUR COMMON STOCK.
We have experienced significant seasonality in our business, and our
business is 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 our customers to release
their more popular movies 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, our revenues have
tended to be lower in the summer months, particularly in Europe.
WE DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A HIGH PERCENTAGE OF OUR
REVENUES AND THE LOSS OF A SIGNIFICANT CUSTOMER COULD RESULT IN A SUBSTANTIAL
DECLINE IN OUR REVENUES AND PROFITS.
Our customer base is highly concentrated among a limited number of
customers, primarily due to the fact that the Motion Picture Association of
America studios dominate the motion picture industry. Historically, we have
derived the majority of our net revenues from a relatively small number
customers. For 1996, three customers accounted for 37% of our net revenues and
each accounted for more than 10% of our net revenue. 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 Motion Picture Association of America studios as a group accounted
for 47.1%, 38.6%, 45.1% and 35.3% of our net revenues in 1996, 1997, 1998 and
the first nine months of 1999.
We expect that revenues from the Motion Picture Association of America
studios will continue to account for a substantial portion of our net revenues
for the foreseeable future. We have agreements with six of the major home video
companies for copy protection of a substantial part of their videocassettes and/
or DVDs in the United States. These agreements expire at various times ranging
from March 2000 to December 2004. The failure of any one of these customers to
renew its contract 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 our business would be harmed.
Most of our other videocassette copy protection customers license our
technology on an annual contract basis or title-by-title or month-by-month. Our
current customers may not continue to use our technology at current or increased
levels, if at all, or we may not be able to obtain new customers. The loss of,
or any significant reduction in revenues from, a key customer would harm our
business.
WE ARE DEPENDENT ON INTERNATIONAL SALES FOR A SUBSTANTIAL AMOUNT OF OUR REVENUE.
WE FACE DIVERSE RISKS OF INTERNATIONAL BUSINESS, WHICH COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
International and export sales together represented 37.9%, 46.5%, 44.5%
and 47.9% of our net revenues in 1996, 1997, 1998 and the nine months ended
September 30, 1999, respectively. We expect that international and export 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 networks, DVDs, and computer software CD-ROMs, and the
use of copy protection in these media.
7
<PAGE>
To the extent that foreign governments impose restrictions on
importation of programming, technology or components from the United States, the
requirement for copy protection in these markets could diminish. In addition,
the laws of some 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 technology.
Due to our reliance on international and export sales, we are subject to
the risks of conducting business internationally, including:
- foreign government regulation;
- changes in diplomatic and trade relationships;
- changes in, or imposition of, regulatory requirements;
- tariffs or taxes and other trade barriers and restrictions; and
- difficulty in staffing and managing foreign operations.
Our business could be materially adversely affected if foreign markets
do not continue to develop, if we do not receive additional orders to supply our
technologies or products for use in foreign prerecorded video, PPV and other
applications requiring our copy protection solutions or if regulations governing
our international business change. For example, under the United States Export
Administration Act of 1979, encryption algorithms such as those used in our
computer software copy protection technology 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.
FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
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. Our future
results of operations may be materially adversely affected by currency
fluctuations.
WE MAY BE UNABLE TO MANAGE OUR GROWTH, AND IF WE CANNOT DO SO, IT COULD HARM OUR
BUSINESS.
The growth of our business has placed, and is expected to continue to
place, significant demands on our personnel, management and other resources. Our
future results of operations will depend in part on the ability of our officers
and other key employees to continue to implement and expand our operational,
customer support and financial control systems and to expand, train and manage
our employee base. In order to manage our future growth successfully, we will
need to hire additional personnel and augment our existing financial and
management systems or implement new systems. We may not be able to augment or to
implement these systems efficiently, or on a timely basis, or to manage any
future expansion successfully. The failure to do so could harm our business.
POTENTIAL INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO
SIGNIFICANT LIABILITY FOR DAMAGES AND INVALIDATION OF OUR PROPRIETARY RIGHTS.
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. We are currently
subject to several legal proceedings. See "Legal Proceedings."
8
<PAGE>
Litigation could harm our business and result in:
- substantial settlement or related costs, including indemnification of
customers;
- diversion of management and technical resources;
- discontinuing the use and sale of infringing products;
- expending significant resources to develop non-infringing technology;
and
- obtaining licenses to infringed technology.
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. Our patents may not be of
sufficient scope or strength or be issued in all countries where our products
can be sold. The expiration of some of our patents may harm our business.
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 some 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 the steps we have taken may not prevent
misappropriation of our technologies.
IT MAY BE TIME-CONSUMING AND COSTLY TO ENFORCE OUR PATENTS AGAINST DEVICES AND
HACKING TECHNIQUES THAT ATTEMPT TO CIRCUMVENT OUR COPY PROTECTION TECHNOLOGY,
AND OUR FAILURE TO CONTROL THEM COULD HARM OUR BUSINESS.
We use our 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. Any legal action 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 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.
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 deter the hackers from
developing circumvention techniques, our customers could reduce their usage of
our technology because it was compromised. Although the anti-circumvention
provisions in the Digital Millennium Copyright Act may be applicable to Internet
service providers who support the hacker sites, 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 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
technologies or products which may not prove to be of long-term benefit to us.
We currently hold minority equity interests in two privately held companies,
9
<PAGE>
Command Audio Corporation, or CAC, and AudioSoft, and one publicly traded
company, Digimarc. Subject to satisfaction of conditions specified in a letter
agreement between us and TTR, we intend to make a minority equity investment in
TTR. These investments totaled $7.1 million and represented 9.0% of our total
assets at September 30, 1999.
The negotiation, creation and management of these strategic
relationships typically involve a substantial commitment of our management time
and resources, and we may never recover the cost of these management resources.
We may in the future be required to write off all or part of one or more of
these investments which could harm our business.
Our strategic investments typically involve joint development or
marketing efforts or technology licensing. Any joint development efforts may not
result in the successful introduction of any new products by us or a third
party, and any joint marketing efforts may not result in increased demand for
our products. Further, any current or future strategic investments by us may not
allow us to enter and compete effectively in new markets or improve our
performance in any current markets.
WE DEPEND ON THIRD PARTIES TO DEVELOP SAFEDISC COMPATIBLE ENCODING AND QUALITY
ASSURANCE APPLICATIONS.
We rely on third party vendors such as DCA, Eclipse, Media Morphics, CD
Associates, Koch Media and Audio Development to develop add-on enabling software
modules that will:
- apply the SafeDisc digital signature at licensed replication
facilities;
- allow replicators to run specialized quality assurance tests to ensure
the SafeDisc technology is applied; and
- check for manufacturing defects in the mass produced discs.
Our operations could be disrupted if our relationships with third party
vendors are disrupted or if their products are defective, not available or not
accepted by licensed replicators. This could result in a loss of customer orders
and revenue.
WE MUST ESTABLISH AND MAINTAIN LICENSING RELATIONSHIPS TO CONTINUE TO EXPAND OUR
BUSINESS, AND FAILURE TO DO SO COULD HARM OUR BUSINESS PROSPECTS.
Our future success will depend upon our ability to establish and
maintain licensing relationships with companies in related business fields,
including:
- videocassette duplicators;
- international distributors of videocassettes;
- DVD authoring facilities and replicators;
- DVD authoring tools software companies;
- semiconductor and equipment manufacturers;
- operators of digital PPV networks;
- consumer electronics and digital PPV set-top hardware manufacturers;
and
- CD-ROM mastering facilities and replicators.
Other parties may not perform their obligations as expected and our
reliance on others for the development, manufacturing and distribution of our
technologies and products may result in unforeseen problems. Substantially all
of our license agreements are non-exclusive, and therefore our licensees are
free to enter into similar agreements with third parties, including our
competitors. Licensees may not develop
10
<PAGE>
or pursue alternative technologies either on their own or in collaboration with
others, including our competitors.
IF WE DO NOT RETAIN OUR KEY EMPLOYEES AND ATTRACT NEW EMPLOYEES, OUR ABILITY TO
EXECUTE OUR BUSINESS STRATEGY WILL BE IMPAIRED.
We compete for employees in California's Silicon Valley, one of the most
challenging employer environments in the United States. Hiring for key personnel
is highly competitive. Because of the specialized nature of our business, our
future success will depend upon our continuing ability to identify, attract,
train and retain other highly skilled managerial, technical, sales and marketing
personnel, particularly as we enter new markets. The loss of key employees could
harm our business.
INDUSTRY RISKS
WE ARE INTRODUCING PRODUCTS INTO THE EVOLVING MARKET FOR DIGITAL PPV COPY
PROTECTION, AND IF THIS MARKET DOES NOT DEVELOP OR WE ARE UNABLE TO
EFFECTIVELY SERVE THIS MARKET, OUR REVENUES WILL BE ADVERSELY AFFECTED.
While our copy protection capability is embedded in more than
30 million digital set-top boxes manufactured by the leading digital set-top box
manufacturers, only four system operators have activated copy protection for
digital PPV programming. Our ability to expand our markets in additional home
entertainment venues such as digital PPV 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. The Motion Picture Association of America
studios may not require copy protection for any of their PPV movies or PPV
system operators may not activate copy protection in other digital PPV networks
outside of Japan, Hong Kong or the United Kingdom.
Further, consumers may react negatively to copy protected PPV
programming because 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, some television sets or combinations of
VCRs and television sets may exhibit impaired pictures while displaying a copy
protected digital PPV program. If there is consumer dissatisfaction that cannot
be managed, or if there are technical compatibility problems, our business would
be harmed.
POTENTIAL REVENUE MAY BE LOST IF OUR DIGITAL VIDEO WATERMARKING TECHNOLOGY IS
NOT SELECTED AS AN INDUSTRY STANDARD.
In cooperation with Philips and Digimarc, we are jointly developing a
digital video watermarking solution to address the digital-to-digital copying
issues associated with the next generation of DVD recording devices. Our group
has submitted a proposed solution to the DVD Copy Control Association, or
DVD/CCA, a wholly-owned subsidiary of Matsushita Electric Industries, which has
assumed responsibility for selecting the industry standard. Our group is
competing with a consortium of five other companies, comprised of IBM, NEC,
Sony, Hitachi and Pioneer, that have submitted a similar proposal to the DVD/
CCA. Some of these companies have substantially greater name recognition and
significantly greater financial, technical, marketing and other resources than
Philips, Digimarc and ourselves.
Our digital watermarking technology may not be selected by the DVD/CCA.
The group whose digital video watermarking solution is selected will have a
significant advantage in licensing its technology to video content owners
worldwide, and in working with consumer electronics manufacturers, PC platform
companies and their suppliers to implement digital-to-digital copy protection.
Even if the DVD/CCA adopts our solution, other companies may elect to compete in
this market. If the solution being developed by Philips, Digimarc and ourselves
is not the selected solution or otherwise is not widely adopted by studios or
consumer electronics manufacturers, our group will be at a competitive
disadvantage in
11
<PAGE>
marketing our solution. The solution being developed by our group may not be
selected as the standard by the DVD/CCA or our solution may not achieve market
acceptance as the market and the standards for digital-to-digital copy
protection evolve.
WE HAVE RECENTLY ENTERED THE MARKET FOR COMPUTER SOFTWARE COPY PROTECTION, AND
WE DO NOT KNOW IF WE WILL BE SUCCESSFUL IN SELLING OUR PRODUCTS IN THIS
MARKET.
We acquired C-Dilla in June 1999. C-Dilla's products include SafeDisc,
our copy protection technology for CD-ROM software products in the consumer
multimedia market. The market for copy protection of CD-ROMs is unproven, and we
may not be successful in developing this market.
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. Copy protection of multimedia CD-ROMs may not 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 a 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. 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 would be harmed.
WE ARE ENTERING THE MARKET FOR MUSIC CD COPY PROTECTION AND WE DO NOT KNOW IF WE
WILL BE SUCCESSFUL IN SELLING OUR PRODUCTS IN THIS MARKET.
We have entered into a strategic partnership with TTR to develop and
market a copy protection system that will inhibit casual copying of music CDs
using dual-deck CD recorder systems or personal computer systems. A number of
competitors and potential competitors may be developing similar and related
music copy protection solutions. The solution we expect to market may not
achieve or sustain market acceptance, or may not meet, or continue to meet, the
demands of the music industry. It is possible that there could be significant
consumer resistance to audio copy protection, as consumers may feel that they
are entitled to copy audio CDs, because no technology has been used in the past
to prevent copying. It is not clear what the reaction of the major music labels
would be to any consumer resistance.
If the market for music CD copy protection fails to develop, or develops
more slowly than expected, if our solution does not achieve or sustain market
acceptance or if there is consumer resistance to this technology, our business
would be harmed.
IF WE ARE UNABLE TO SUCCESSFULLY COMPETE AGAINST COMPETITIVE TECHNOLOGIES THAT
MAY BE DEVELOPED IN THE FUTURE OUR BUSINESS WILL BE HARMED.
We believe that there are currently no significant videocassette copy
protection competitors other than companies that have occasionally developed
hardware based on our technology for sale in small foreign markets, where we
have not sought patent protection. It is possible, however, that a competitive
copy protection technology could be developed in the future. For example, our
customers could attempt to promote competition by supporting the development of
alternative copy protection technologies or solutions, including solutions that
deter professional duplication. Increased competition would be likely to result
in price reductions and loss of market share, either of which could harm our
business.
12
<PAGE>
OUR FAILURE OR THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS.
The Year 2000 computer issue creates a variety of risks for us. If
systems do not correctly recognize date information when the year changes to
2000, our business could be harmed. The risks involve:
- potential warranty or other claims by our customers;
- errors in systems we use to run our business;
- errors in systems used by our suppliers; and
- errors in systems used by our customers.
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 could be harmed.
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 business would be disrupted.
INVESTMENT RISKS
OUR MANAGEMENT HAS BROAD DISCRETION AS TO HOW TO USE THE PROCEEDS FROM THIS
OFFERING AND THE PROCEEDS MAY NOT BE USED APPROPRIATELY.
We expect to use the net proceeds of this offering primarily for
strategic investments, working capital and other general corporate purposes. In
particular, we intend to pursue strategic investments in businesses, products or
technology which would complement our existing products, expand our market
coverage or enhance our technological capabilities. We have no specific plan as
to how we will spend the majority of the proceeds of this offering. If our
management uses poor judgment in spending the proceeds, our business will be
adversely affected. Investment of the proceeds from this offering may not yield
a favorable return or any return.
SUBSTANTIAL SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issued upon the exercise
of outstanding options, the trading price of our common stock could fall. Such
sales also might make it more difficult for us to raise capital in the future at
a time and price that we deem appropriate. Upon completion of this offering, we
will have outstanding 19,670,125 shares of common stock based upon shares
outstanding as of December 1, 1999, assuming no exercise of outstanding options
after December 1, 1999, other than options to purchase shares being sold in this
offering. Of these shares, the 1,710,000 shares sold in this offering and
15,156,534 additional shares will be freely tradable, and 2,803,591 are subject
to lock up agreements for 90 days.
After this offering, JVC will be entitled to register up to 1,580,976 of
its shares under the Securities Act of 1933. JVC has the right to participate in
any registration of shares we undertake on our own, except a registration of
shares in connection with an employee benefit plan or merger. If JVC exercises
its registration rights, a large number of our shares may be registered and sold
in the public
13
<PAGE>
market. This could adversely affect the trading price for our shares. If we
attempted to raise money through a registration and sale of our stock and JVC
required us to allow them to participate in the registration, our ability to
raise the amount of money we need to execute our business plan could be
adversely affected.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of our common stock has been, and in the future could
be, significantly affected by factors such as:
- actual or anticipated fluctuations in operating results;
- announcements of technical innovations;
- new products or new contracts;
- competitors or their customers;
- governmental regulatory action;
- developments with respect to patents or proprietary rights;
- changes in financial estimates by securities analysts; and
- general market conditions.
In addition, announcements by the Motion Picture Association of America
or its members, satellite television operators, cable television operators or
others regarding motion picture distribution, computer software companies
business combinations, evolving industry standards or other developments could
cause the market price of our common stock to fluctuate substantially.
Further, the trading prices of the stocks of many technology companies,
including our share price, are at or near historical highs and reflect
price/earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price/earnings ratios will be sustained.
In the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has been initiated against that
company.
14
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including:
- implementing our business strategy;
- developing and introducing new technologies;
- obtaining and expanding market acceptance of the technologies we
offer; and
- competition in our markets.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates," and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. A
description of some risks that could cause our results to vary appears under the
caption "Risk Factors" and elsewhere in this prospectus. In light of these
assumptions, risks and uncertainties, the forward-looking events discussed in
this prospectus might not occur.
USE OF PROCEEDS
Our net proceeds from the sale of the 1,250,000 shares of our common
stock are estimated to be approximately $ million, or $ million if the
underwriters' over-allotment option is exercised in full, assuming a public
offering price of $ per share and after deducting the estimated underwriting
discount and offering expenses.
We expect to use the net proceeds for strategic investments and general
corporate purposes, including working capital. However, we have not allocated
any specific portion of the net proceeds to those purposes and management will
have the ability to allocate such proceeds at its discretion.
From time to time in the ordinary course of business, we evaluate
opportunities for strategic investments, licensing arrangements, joint ventures
and acquisitions of products, businesses and technologies that complement our
business, for which a portion of the net proceeds may be used. Currently,
however, we do not have any agreements with respect to any such opportunities.
Pending use of the net proceeds for the above purposes, we intend to invest such
funds in short-term, interest-bearing, investment-grade securities. We will not
receive any proceeds from the sale of shares by the selling stockholders.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our initial public offering occurred on March 13, 1997 at a price to the
public of $4.50 per share. Since that date, our common stock has been quoted on
the Nasdaq National Market under the symbol MVSN. The following table shows for
the periods indicated the high and low sale prices per share of our common
stock.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First Quarter............................................. $ 9.88 $ 7.13
Second Quarter............................................ $13.06 $ 8.75
Third Quarter............................................. $15.44 $ 8.75
Fourth Quarter............................................ $23.38 $11.06
1999
First Quarter............................................. $21.19 $14.00
Second Quarter............................................ $38.31 $16.88
Third Quarter............................................. $47.38 $26.63
</TABLE>
On December , 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $ per share. As of December 1, 1999, we had
97 stockholders of record of our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock in
the two most recent fiscal years. We paid a cash dividend of $.0375 per share of
Series A preferred stock in the first quarter of 1997.
We currently anticipate that we will retain all future earnings for use
in our business and do not anticipate that we will pay any cash dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of our Board of Directors and will depend upon, among other things,
future earnings, operations, capital requirements and our general financial
condition, general business conditions and contractual restrictions on payment
of dividends, if any.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization, as of September 30,
1999: (i) on an actual basis and (ii) as adjusted to give effect to the sale by
us of the 1,250,000 shares of common stock offered hereby at an assumed public
offering price of $ per share and after deducting estimated underwriting
discount and offering expenses. This table should be read in conjunction with
the consolidated financial statements and the notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, par value $0.001 per share:
Authorized, 5,000,000 shares; no shares issued and
outstanding............................................. $ --
Common stock, par value $0.001 per share:
Authorized, 100,000,000 shares; issued and outstanding,
18,331,678 shares ( shares as adjusted)............. 18
Additional paid-in capital.................................. 59,763
Accumulated other comprehensive loss........................ (235)
Retained earnings........................................... 10,619
--------
Total stockholders' equity................................ 70,165
--------
Total capitalization.................................... $ 70,165
========
</TABLE>
- ------------------------
The number of shares of common stock issued and outstanding does not
include:
- 1,736,934 shares of common stock issuable at a weighted average
exercise price of $13.92 per share upon exercise of stock options
outstanding as of September 30, 1999 under our Stock Option Plan, 1996
Equity Incentive Plan and 1996 Directors Stock Option Plan;
- 268,702 shares reserved for future grants under the 1996 Equity
Incentive Plan;
- 42,000 shares reserved for future grants under the 1996 Directors
Stock Option Plan; or
- 135,240 shares reserved for future issuance under the 1996 Employee
Stock Purchase Plan.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this prospectus. The selected consolidated
financial data presented below as of and for the years ended December 31, 1996
through 1998 have been derived from the audited consolidated financial
statements audited by KPMG LLP, independent auditors, and included elsewhere in
this prospectus. The selected consolidated financial data presented below as of
and for the years ended December 31, 1994 and 1995 have been derived from
audited consolidated financial statements not included herein. The consolidated
balance sheet data as of September 30, 1999 and the consolidated statements of
income data for the nine months ended September 30, 1998 and 1999 are derived
from unaudited consolidated financial statements included elsewhere in this
prospectus. The unaudited consolidated financial statements have been prepared
on substantially the same basis as the audited consolidated financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such periods. Historical results are not necessarily
indicative of the results to be expected in the future and results of interim
periods are not necessarily indicative of results for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues...................................... $13,330 $14,189 $17,080 $20,340 $24,434 $17,150 $24,583
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues................................ 2,067 2,457 2,579 2,422 2,081 1,439 2,140
Research and development........................ 2,355 2,161 2,527 2,248 2,578 1,967 2,906
Selling and marketing........................... 3,637 4,270 5,090 5,765 5,985 4,367 6,192
General and administrative...................... 2,467 3,118 3,566 4,149 4,621 3,401 3,982
Amortization of intangibles from
acquisition(1)................................ -- -- -- -- -- -- 791
In process research and development(1).......... -- -- -- -- -- -- 4,286
------- ------- ------- ------- ------- ------- -------
Total costs and expenses.......................... 10,526 12,006 13,762 14,584 15,265 11,174 20,297
------- ------- ------- ------- ------- ------- -------
Operating income from continuing operations....... 2,804 2,183 3,318 5,756 9,169 5,976 4,286
Interest and other income (expense), net.......... (417) (433) (260) 478 1,102 685 1,198
------- ------- ------- ------- ------- ------- -------
Income from continuing operations before income
taxes........................................... 2,387 1,750 3,058 6,234 10,271 6,661 5,484
Income taxes...................................... 886 694 1,223 2,413 3,929 2,543 1,941
------- ------- ------- ------- ------- ------- -------
Income from continuing operations................. 1,501 1,056 1,835 3,821 6,342 4,118 3,543
Loss from discontinued operations, net of tax
benefit(2)...................................... -- (125) (827) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income........................................ 1,501 931 1,008 3,821 6,342 4,118 3,543
Preferred stock dividends......................... -- -- (587) (156) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income applicable to common stock............. $ 1,501 $ 931 $ 421 $ 3,665 $ 6,342 $ 4,118 $ 3,543
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations............................. $ 0.16 $ 0.28 $ 0.40 $ 0.27 $ 0.20
Discontinued operations........................... (0.11) -- -- -- --
------- ------- ------- ------- -------
Net income........................................ $ 0.05 $ 0.28 $ 0.40 $ 0.27 $ 0.20
======= ======= ======= ======= =======
Shares used in computing basic earnings per
share........................................... 7,574 12,952 16,008 15,501 18,002
======= ======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations............................. $ 0.15 $ 0.26 $ 0.37 $ 0.25 $ 0.19
Discontinued operations........................... (0.10) -- -- -- --
------- ------- ------- ------- -------
Net income........................................ $ 0.05 $ 0.26 $ 0.37 $ 0.25 $ 0.19
======= ======= ======= ======= =======
Shares used in computing diluted earnings per
share........................................... 8,560 13,920 17,106 16,564 18,964
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $3,851 $ 3,486 $ 2,409 $12,555 $26,390 $25,547
Working capital...................................... 3,860 3,848 2,225 15,266 29,473 29,588
Total assets......................................... 9,240 10,943 11,953 28,856 65,494 78,733
Convertible note..................................... 3,038 3,038 -- -- -- --
Long-term obligations, net of current portion(3)..... -- 554 296 188 76 --
Total stockholders' equity........................... 2,388 2,846 6,072 23,577 59,542 70,165
</TABLE>
- ------------------------------
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) For an explanation of the determination of the number of shares used in
computing basic and diluted earnings (loss) per share, see Note 1 of Notes
to Consolidated Financial Statements.
(3) See Note 6 of Notes to Consolidated Financial Statements.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN MANY CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES,"
"BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," "INTEND," OR "CONTINUE," OR
THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS
ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We were founded in 1983 to develop copy protection and video security
solutions for major motion picture studios and independent video producers. Our
initial products were designed to prevent the unauthorized duplication and
distribution of videocassettes. We have expanded our copy protection
technologies to address the unauthorized copying and distribution of DVDs,
digital PPV programs and CD-ROMs. We derive royalty-based licensing revenue from
multiple sources, including content owners, hardware manufacturers, digital
set-top box manufacturers, digital PPV system operators and commercial
replicators/duplicators.
The following table provides net revenues information by product line
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Video Copy Protection:
Videocassette............................ $ 12,877 $ 12,616 $ 15,770 $ 11,050 $ 11,709
DVD...................................... -- 1,084 3,096 2,078 5,065
PPV...................................... 2,076 3,712 3,760 2,752 5,238
Computer Software/CD-ROM Copy Protection... -- -- 344 123 2,121
Video Scrambling........................... 2,068 2,739 1,464 1,147 378
Other...................................... 59 189 -- -- 72
-------- -------- -------- -------- --------
Total.................................... $ 17,080 $ 20,340 $ 24,434 $ 17,150 $ 24,583
======== ======== ======== ======== ========
</TABLE>
The following table provides percentage of net revenue information by
product line:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Video Copy Protection:
Videocassette............................ 75.4% 62.0% 64.5% 64.4% 47.6%
DVD...................................... -- 5.3 12.7 12.1 20.6
PPV...................................... 12.1 18.3 15.4 16.1 21.3
Computer Software/CD-ROM Copy Protection... -- -- 1.4 .7 8.6
Video Scrambling........................... 12.1 13.5 6.0 6.7 1.6
Other...................................... .4 .9 -- -- .3
-------- -------- -------- -------- --------
Total.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
</TABLE>
19
<PAGE>
VIDEO COPY PROTECTION.
VIDEOCASSETTE COPY PROTECTION. Since inception, we have derived the
majority of our revenues and operating income from licensing our videocassette
copy protection technology. Our customers have included the home video divisions
of members of the Motion Picture Association of America, more than 150
videocassette duplication companies and a number of low volume content owners,
such as independent producers of exercise, sports and educational
videocassettes. We typically receive license fees based upon the number of copy
protected videocassettes that are produced by Motion Picture Association of
America studios or other content owners. License fees from Motion Picture
Association of America studios represented a significant portion of such fees in
1996, 1997, 1998 and the first nine months of 1999. Videocassette Copy
Protection revenues represented 75.4%, 62.0%, 64.5% and 47.6% of our net
revenues in 1996, 1997, 1998 and the first nine months of 1999, respectively. We
expect that our videocassette copy protection licenses will generate a
substantial part of our net revenues and operating income at least through 2000.
DVD COPY PROTECTION. In 1997, we introduced copy protection for DVDs.
Our customers have included members of the Motion Picture Association of America
and to a lesser extent special interest rights owners. Our customers pay per
unit royalties for DVD copy protection. Additionally, we derive annual license
fees from DVD hardware manufacturers. DVD copy protection has increased from
5.3% of net revenues in 1997 to 12.7% of net revenues in 1998 and further to
20.6% of our net revenues in the first nine months of 1999. Revenues from DVD
copy protection solutions are expected to grow in both absolute dollars and as a
percentage of net revenues in 2000 as the number of DVDs and DVD players in the
market increases.
PPV COPY PROTECTION. In 1993, we introduced copy protection for digital
PPV to satellite and cable system operators and to the equipment manufacturers
that supply the satellite and cable industries. We derive digital PPV copy
protection revenues from hardware royalties, up-front license fees, and PPV
programming royalties. Digital PPV revenues were 12.1%, 18.3%, 15.4% and 21.3%
of our net revenues in 1996, 1997, 1998 and the first nine months of 1999,
respectively. Our agreements with digital PPV system operators entitle us to
transaction-based royalty payments when copy protection for digital PPV
programming is activated. To date, such transaction-based royalty payments have
not been significant.
COMPUTER SOFTWARE/CD-ROM COPY PROTECTION.
In 1998, we made an initial equity investment in C-Dilla and entered
into a Software Marketing License and Development Agreement. In June 1999, we
acquired the remaining shares of C-Dilla for approximately $12.3 million in cash
and 218,398 shares of our common stock. In September 1998, in conjunction with
C-Dilla, we introduced our CD-ROM copy protection technology, called SafeDisc.
Customers implementing SafeDisc include the major PC game and educational
software publishers. Due to the increased availability of CD-ROM recorders, we
expect revenues from Computer Software/CD-ROM Copy Protection to increase in
2000. We typically receive license fees for Computer Software/CD-ROM Copy
Protection based upon the number of copy protected CD-ROMs that are produced by
PC game and educational software publishers or content owners. Computer
software/CD-ROM copy protection revenues represented 8.6% of our net revenues
for the first nine months of 1999. We expect that our computer software/CD-ROM
copy protection licenses will generate a substantial part of our net revenues
and operating income, in absolute dollars and as a percentage of net revenues,
at least through 2000.
VIDEO SCRAMBLING TECHNOLOGIES.
Our Video Scrambling business line is made up of our video scrambling
products, components and licensing which use our PhaseKrypt technology. Revenues
for these products have declined due to reduced demand for analog scrambling
technologies. Video Scrambling revenues were 12.1%, 13.5%, 6.0% and 1.6% of our
net revenues in 1996, 1997, 1998 and the first nine months of 1999,
respectively.
20
<PAGE>
Our cost of revenues consists primarily of service fees paid to licensed
duplicators and replicators that produce videocassettes, DVDs and CD-ROMs for
content owners who license the technology directly from us, costs associated
with equipment used in applying the copy protection process at the licensed
duplicators and royalties due C-Dilla based on revenues from copy protection of
CD-ROMs prior to our acquisition. Also included in cost of revenues are patent
amortization and enforcement costs. Our research and development expenses are
comprised primarily of employee compensation and benefits, consulting fees,
tooling and supplies and an allocation of facilities costs. Our selling and
marketing expenses are comprised primarily of employee compensation and
benefits, consulting and recruiting fees, travel, advertising and an allocation
of facilities costs. Our general and administrative expenses are comprised
primarily of employee compensation and benefits, consulting and recruiting fees,
travel, professional fees and an allocation of facilities costs.
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 movies on
videocassettes and DVDs during the year-end holiday shopping season and while
our operating expenses are incurred more evenly throughout the year. We
anticipate that revenues from multimedia CD-ROM copy protection will also
reflect this seasonal trend. In addition, revenues tend to be lower in the
summer months, particularly in Europe.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated statements of
income data expressed as a percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and expenses:
Cost of revenues.................................... 15.1 11.9 8.5 8.4 8.7
Research and development............................ 14.8 11.1 10.6 11.5 11.8
Selling and marketing............................... 29.8 28.3 24.5 25.5 25.2
General and administrative.......................... 20.9 20.4 18.9 19.8 16.2
Amortization of intangibles from acquisitions....... -- -- -- -- 3.2
In process research and development................. -- -- -- -- 17.5
----- ----- ----- ----- -----
Total costs and expenses.......................... 80.6 71.7 62.5 65.2 82.6
----- ----- ----- ----- -----
Operating income from continuing operations......... 19.4 28.3 37.5 34.8 17.4
Interest and other income (expense), net.............. (1.5) 2.4 4.5 4.0 4.9
----- ----- ----- ----- -----
Income from continuing operations before income
taxes............................................. 17.9 30.7 42.0 38.8 22.3
Income taxes.......................................... 7.2 11.9 16.0 14.8 7.9
----- ----- ----- ----- -----
Income from continuing operations................... 10.7 18.8 26.0 24.0 14.4
Loss from discontinued operations................... (4.8) -- -- -- --
----- ----- ----- ----- -----
Net income.......................................... 5.9% 18.8% 26.0% 24.0% 14.4%
===== ===== ===== ===== =====
</TABLE>
21
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
The following table provides revenue information by specific product
lines for the nine-month periods ended as indicated (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 % 1999 % % CHANGE
-------------- -------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Video Copy Protection:
Videocassette........................ $11,050 64.4 $11,709 47.6 6.0
DVD.................................. 2,078 12.1 5,065 20.6 143.7
PPV.................................. 2,752 16.1 5,238 21.3 90.3
Computer Software/CD-ROM Copy
Protection........................... 123 .7 2,121 8.6 1,624.4
Video Scrambling....................... 1,147 6.7 378 1.6 (67.0)
Other.................................. -- -- 72 .3 --
------- ---- ------- ----
Total.................................. $17,150 100 $24,583 100 43.3
======= ==== ======= ====
</TABLE>
NET REVENUES. Our net revenues for the first nine months of 1999
increased 43.3% from $17.2 million in the first nine months of 1998 to $24.6
million in the first nine months of 1999. Revenues from videocassette copy
protection increased approximately $700,000 from $11.0 million in the first nine
months of 1998 to $11.7 million in the first nine months of 1999 due to a
material increase in videocassette copy protection royalties for the hit fitness
video "Tae-Bo," partially offset by a slight decrease in Hollywood studio
royalties and copy protected videocassette volume. DVD copy protection revenues
increased $3.0 million or 143.7% from $2.1 million in the first nine months of
1998 to $5.1 million in the first nine months of 1999 due to increases in DVD
shipments as the market for both DVD players and DVD titles continued to expand.
Digital PPV copy protection revenues increased $2.4 million or 90.3% from $2.8
million in 1998 to $5.2 million in the first nine months of 1999 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 Motion
Picture Association of America studios declined as a percentage of net revenues
from 42.3% for the first nine months of 1998 to 35.3% for the first nine months
of 1999, as revenues increased in other business segments such as Computer
Software/CD-ROM and PPV. Computer Software/CD-ROM Copy Protection revenues
increased $2.0 million from $123,000 in the first nine months of 1998 to $2.1
million in the first nine months of 1999 as several new customers began to use
our SafeDisc copy protection on their PC games and other consumer multimedia
software during the year, with strong growth in copy protected units during the
traditionally strong third quarter in anticipation of holiday season releases.
Revenues from Video Scrambling products decreased 67.0% from $1.1 in the first
nine months of 1998 to $378,000 in the first nine months of 1999. During this
period, we continued to experience weak demand for Video Scrambling products. We
recorded other revenue of $72,000 in the first nine months of 1999 compared to
none in 1998 relating to a consulting contract with AudioSoft.
Our international and export revenues as a percentage of net revenues
increased from 44.4% for the first nine months of 1998 to 47.9% for the first
nine months of 1999 due to higher videocassette, DVD, set-top box and Computer
Software/CD-ROM revenues.
COST OF REVENUES. Cost of revenues as a percentage of net revenues
increased from 8.4% for the first nine months of 1998 to 8.7% for the first nine
months of 1999. This increase was due to the higher royalty costs and payments
associated with the Computer Software/CD-ROM Copy Protection business prior to
the acquisition of C-Dilla Ltd in June 1999, higher replicator fees relating to
DVD production and higher patent defense costs. Cost of revenues increased
$701,000 from $1.4 million in the first nine months of 1998 to $2.1 million in
the first nine months of 1999 primarily due to higher C-Dilla royalty fees,
higher duplicator/replicator fees and higher patent defense costs. Cost of
revenues includes items such as product
22
<PAGE>
costs, duplicator/replicator fees, video copy protection processor costs, patent
amortization, patent defense costs and royalty expense prior to the acquisition
of C-Dilla. We expect the gross margin to increase as a result of the
elimination of royalty expenses payable to C-Dilla, although these will be
offset partially by the patent defense costs associated with current patent
litigation.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by $939,000 or 47.7% from $2.0 million in the first nine months of 1998 to $2.9
million in the first nine months of 1999. 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
engineering employees of C-Dilla and the absorption of research and development
expenses at C-Dilla following its acquisition. Research and development expenses
remained relatively stable as a percentage of net revenues at 11.5% for the
first nine months of 1998 and 11.8% for the first nine months of 1999. If not
for the one-time charges noted above, the percentage would have declined to
10.2% in 1999. We expect research and development expenses to increase in
absolute terms over the prior year periods as a result of the research and
development activity at C-Dilla and as we develop new technologies.
SELLING AND MARKETING. Selling and marketing expenses increased by $1.8
million or 41.8% from $4.4 million in the first nine months of 1998 to $6.2
million in the first nine months of 1999. This increase was primarily for
one-time continuation bonuses of $290,000 paid to sales and marketing employees
of C-Dilla, higher compensation and benefits associated with additional
headcount in the Computer Software/ CD-ROM 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's reimbursement of specific marketing
related expenses under the joint marketing agreement and the marketing and
selling expenses at C-Dilla prior to its acquisition. Selling and marketing
expenses remained stable as a percentage of net revenues at approximately 25%
for the first nine months of 1998 and 1999. If not for the one time charges and
reimbursement noted above, the percentage would have declined from 27.5% for the
first nine months of 1998 to 24.0% for same period in 1999. 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/CD-
ROM Copy Protection and other rights management products from C-Dilla.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $581,000 or 17.1% from $3.4 million in the first nine months of
1998 to $4.0 million in the first nine months of 1999 primarily due to one time
continuation bonuses of $48,000 paid to administrative employees of C-Dilla,
higher compensation and benefits from increased personnel, higher legal fees,
accounting fees, and the administrative expenses incurred by C-Dilla. General
and administrative expenses declined as a percentage of net revenues from 19.8%
in the first nine months of 1998 to 16.2% in the first nine months of 1999.
IN PROCESS RESEARCH AND DEVELOPMENT. In June 1999, we allocated $4.3
million of the $21.4 million total purchase price for C-Dilla 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
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 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
23
<PAGE>
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, commercial or technical viability of these
products may not 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 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 increased $513,000 or 74.9%
from $685,000 in the first nine months of 1998 to $1.2 million in the first nine
months of 1999, 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 38.2% and 35.4% for the nine months ended
September 30, 1998 and 1999, respectively. The lower rate for 1999 was the
result of utilizing post acquisition C-Dilla 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, 1998 was
$4.1 million compared to $3.5 million for the first nine months of 1999. The
lower net income in 1999 was a result of the one time charge to earnings of $4.3
million for C-Dilla in process research and development and $791,000 of
amortization of intangibles associated with the acquisition.
24
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
The following information provides revenue information by general
product lines for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 % 1998 % % CHANGE
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Video Copy Protection:
Videocassette.................................. $12,616 62.0 $15,770 64.5 25.0
DVD............................................ 1,084 5.3 3,096 12.7 185.6
PPV............................................ 3,712 18.3 3,760 15.4 1.3
Computer Software/CD-ROM Copy Protection......... -- -- 344 1.4 --
Video Scrambling................................. 2,739 13.5 1,464 6.0 (46.5)
Other............................................ 189 .9 -- -- --
------- ----- ------- -----
Total............................................ $20,340 100.0 $24,434 100.0 20.1
======= ===== ======= =====
</TABLE>
NET REVENUES. Our net revenues increased 20.1% from $20.3 million in
1997 to $24.4 million in 1998. Videocassette copy protection revenues increased
$3.2 million or 25.0% from $12.6 million in 1997 to $15.8 million in 1998,
principally due to increased copy protection revenues from three Hollywood
studios which had no significant usage of copy protection in 1997. DVD copy
protection revenues increased $2.0 million or 185.6% from $1.1 million in 1997
to $3.1 million in 1998, due to increased revenues from the replication of DVDs
and license fees from PC and DVD ROM manufacturers. Revenues from PPV for 1998
were $3.8 million, reflecting an increase of $48,000 or 1.3% from 1997 as a
result of increased shipments of set-top boxes from licensed manufacturers
offset by a decrease in initial license fees. Revenues from the Motion Picture
Association of America studios increased as a percentage of net revenues from
38.6% to 45.1%, primarily as a result of new customer business, including the
hit title "Titanic." We recorded our first multimedia software revenues of
$344,000 from our Computer Software/CD-ROM Copy Protection technology. Our Video
Scrambling revenues decreased $1.3 million or 46.5% to $1.4 million from 1997 to
1998.
Our international and export revenues increased from $9.5 million, or
46.5% of our net revenues in 1997, to $10.9 million, or 44.5% of our net
revenues in 1998. International and export revenues grew primarily as a result
of increased usage of videocassette copy protection technology by the Motion
Picture Association of America studios in international markets including usage
for the title "Titanic" and overseas shipments of copy protection enabled
digital PPV set-top boxes, offset by the decrease in Video Scrambling products.
COST OF REVENUES. Cost of revenues as a percentage of net revenues
declined from 11.9% in 1997 to 8.5% in 1998. This decrease was primarily due to
changes in revenue mix between Video Scrambling products, which have a
relatively high cost of revenues, and licensing revenues, which have a
relatively low cost of revenues. In addition, processor equipment costs, the
inventory reserve provision and product hardware related costs were reduced, but
were offset by increased service fees for duplicators and replicators and
royalty expense.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $2.2 million in 1997 to $2.6 million in 1998, but decreased as a percentage
of net revenues from 11.1% in 1997 to 10.6% in 1998. The increase in absolute
dollars was principally due to higher compensation related expenses. In 1997, we
began a joint development effort with Digimarc to develop a video watermarking
solution for DVD and other digital video platforms. Development continued
through 1998, with Philips joining the development effort.
25
<PAGE>
SELLING AND MARKETING. Selling and marketing expenses increased from
$5.8 million in 1997 to $6.0 million in 1998, but decreased as a percentage of
net revenues from 28.3% of net revenues in 1997 to 24.5% of net revenues in
1998. The increase in absolute dollars from 1997 to 1998 was primarily a result
of higher compensation related expenses, advertising and marketing for DVD and
Computer Software/CD-ROM Copy Protection, offset by reimbursement of specific
marketing related expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased from $4.1 million in 1997 to $4.6 million in 1998, but decreased as a
percentage of the net revenues from 20.4% of the net revenues in 1997 to 18.9%
of the net revenues in 1998. The increase in absolute dollars was primarily
related to increased compensation and benefits, the reversal of sales tax
expense due to a favorable judicial ruling in a tax case that lowered our
expenses on a one time basis in 1997 and higher consulting fees offset by lower
legal fees and bad debt expense.
INTEREST AND OTHER INCOME, NET. Interest and other income, net,
consists primarily of interest income net of interest expense on capitalized
equipment leases. Interest expense was $12,000 in 1997 and $11,000 in 1998.
Interest income was $513,000 in 1997 and $1.1 million in 1998. The increase in
interest income was a result of interest earned from cash and cash equivalents,
short-term investments and long-term marketable investment securities primarily
from the proceeds received from our initial public offering in March 1997, and
the offering of our common stock completed in July 1998.
INCOME TAXES. Our effective rate of taxation was 38.7% in 1997 and
38.3% in 1998. The provision for income taxes consists primarily of federal
income taxes, state taxes and international taxes withheld on foreign revenue.
The lower rate in 1998 was primarily due to an increase in tax credits and an
increase in tax exempt interest associated with increased tax free investments.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
The following information provides revenue information by general
product lines for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 % 1997 % % CHANGE
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Video Copy Protection:
Videocassette.................................. $12,877 75.4 $12,616 62.0 (2.0)
DVD............................................ -- -- 1,084 5.3 --
PPV............................................ 2,076 12.1 3,712 18.3 78.8
Computer Software/CD-ROM Copy Protection......... -- -- -- -- --
Video Scrambling................................. 2,068 12.1 2,739 13.5 32.4
Other............................................ 59 .4 189 .9 220.3
------- ----- ------- -----
Total............................................ $17,080 100.0 $20,340 100.0 19.1
======= ===== ======= =====
</TABLE>
NET REVENUES. Our net revenues increased 19.1% from $17.1 million in
1996 to $20.3 million in 1997. Videocassette copy protection revenues decreased
$261,000 or 2.0% from $12.9 million in 1996 to $12.6 million in 1997.
Commencement of the DVD copy protection business in 1997 resulted in revenues of
$1.1 million in 1997 from replication of DVDs and license fees from PC and DVD
ROM manufacturers. Digital PPV revenues for 1997 were $3.7 million, reflecting
an increase of $1.6 million or 78.8% from 1996 as a result of increased
shipments of set-top boxes from licensed manufacturers. Revenues from Video
Scrambling increased $671,000 or 32.4% from $2.0 million in 1996 to $2.7 million
in 1997. Revenues from the Motion Picture Association of America studios
declined as a percentage of net revenues, representing 47.1% and 38.6% of our
net revenues for 1996 and 1997, respectively, due primarily to the growth in our
digital PPV copy protection and video scrambling businesses.
26
<PAGE>
In 1997 and 1996, international and export revenues totaled $9.5 million
and $6.5 million representing 46.5% and 37.9%, respectively, of our net revenues
during those periods. International and export revenues grew primarily as a
result of increased usage of videocassette copy protection technology by the
Motion Picture Association of America studios in international markets, overseas
shipments of copy protection enabled digital PPV set-top boxes from
manufacturers and increased growth in video scrambling products in new
geographic areas.
COST OF REVENUES. Cost of revenues as a percentage of net revenues was
15.1% in 1996 and 11.9% in 1997. The variations in cost of revenues as a
percentage of net revenues were primarily due to changes in revenue mix between
Video Scrambling product sales, which have a relatively high cost of revenues,
and licensing revenues, which have a relatively low cost of revenues. In
addition, service fee rates for duplicators were reduced, but were offset by
increased patent related expenses and processor equipment costs.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.5
million and $2.2 million, which represented 14.8% and 11.1% of net revenues, in
1996 and 1997, respectively. The decrease from 1996 to 1997 was principally due
to a decrease in consulting fees and project supplies associated with the
completion of hardware development of Video Scrambling products and our
Colorstripe technology for use in DVD and PPV applications in 1996. One of the
major projects started in 1997 was the joint development effort with Digimarc to
develop a video watermarking solution for DVD and other digital video platforms.
SELLING AND MARKETING. Selling and marketing expenses were $5.1 million
and $5.8 million, which represented 29.8% and 28.3% of net revenues, in 1996 and
1997, respectively. The increase from 1996 to 1997 was primarily a result of the
hiring of additional employees for PPV and international business development,
increased compensation and benefits, and external consulting costs associated
with PPV and international marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$3.6 million and $4.1 million, representing 20.9% and 20.4% of net revenues, in
1996 and 1997, respectively. The increase in 1997 compared to 1996 was primarily
related to the additional administrative expenses required in managing a public
company compared to a private company, increased compensation and benefits,
legal fees and bad debt expense.
INTEREST AND OTHER INCOME, NET. Interest and other income, net,
consists primarily of interest expense on a convertible note and capitalized
equipment leases, net of interest income. Interest and other expense was
$327,000 and $35,000 in 1996 and 1997, respectively. The decrease in interest
expense from 1996 to 1997 was principally attributable to the conversion of a
$3.0 million convertible note into preferred stock in July 1996 and subsequently
into common stock upon completion of our initial public offering. Interest
income was $67,000 and $513,000 in 1996 and 1997, respectively. The increase in
1997 compared to 1996 was a result of interest earned from cash and cash
equivalents, short-term investments and long-term marketable investment
securities primarily from the proceeds received from our initial public
offering.
PROVISION FOR INCOME TAXES. The Company's effective rate of taxation on
continuing operations was 40.0% and 38.7% in 1996 and 1997, respectively. The
provision for income taxes consists primarily of federal income taxes, state
taxes and international taxes withheld on foreign revenue. The rate decrease
from 1996 to 1997 was primarily due to an increase in tax credits and an
increase in tax-exempt interest.
27
<PAGE>
LOSS FROM DISCONTINUED OPERATIONS. The loss from discontinued
operations was $827,000 in 1996, net of income tax benefit. Information related
to discontinued operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------
<S> <C>
Costs and expenses...................................... $(1,081)
-------
Operating loss........................................ (1,081)
Other income, net....................................... 5
-------
Loss before income taxes.............................. (1,076)
Income tax benefit, net................................. 249
-------
Net loss.............................................. $ (827)
=======
</TABLE>
The costs and expenses in the above table represent the administration
and development costs of Command Audio Corporation, or CAC, which was
incorporated as a wholly-owned subsidiary of ours in October 1995, to
commercialize a proprietary audio-on-demand technology. In connection with the
incorporation of CAC, we contributed to CAC the patents that related to the CAC
technology. The underlying technology of CAC is distinct from the copy
protection and video scrambling technologies that underlie our core business.
From its inception until divestiture, CAC generated no revenues and concentrated
exclusively on research and development activities. In the third quarter of
1996, we divested all but 19.8% of our ownership in CAC.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly unaudited consolidated
financial data for the periods indicated, as well as the percentage of our net
revenues represented by such data. These data have been derived from our
unaudited consolidated financial statements that, in the opinion of management,
have been prepared on substantially the same basis as the audited consolidated
financial statements, and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data. Such data
should be read in conjunction with our audited consolidated financial statements
and notes thereto appearing elsewhere in this prospectus. The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
28
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
1997 1998
----------------------------------------- -----------------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................... $4,564 $4,722 $5,040 $6,014 $5,178 $5,665 $6,307 $7,284
------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of revenues..................... 681 697 444 600 398 449 592 642
Research and development............. 557 516 549 626 623 654 690 611
Selling and marketing................ 1,548 1,378 1,472 1,367 1,526 1,487 1,354 1,618
General and administrative........... 879 1,018 1,021 1,231 1,159 1,128 1,114 1,220
Amortization of intangibles.......... -- -- -- -- -- -- -- --
In process research and
development........................ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses........... 3,665 3,609 3,486 3,824 3,706 3,718 3,750 4,091
------ ------ ------ ------ ------ ------ ------ ------
Operating income................... 899 1,113 1,554 2,190 1,472 1,947 2,557 3,193
Interest and other income, net......... 24 149 138 167 131 172 382 417
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes............................ 923 1,262 1,692 2,357 1,603 2,119 2,939 3,610
Income taxes (benefit)................. 369 505 644 895 609 805 1,129 1,386
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).................. $ 554 $ 757 $1,048 $1,462 $ 994 $1,314 $1,810 $2,224
====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF NET REVENUES
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of revenues..................... 14.9 14.8 8.8 10.0 7.7 7.9 9.4 8.8
Research and development............. 12.2 10.9 10.9 10.4 12.0 11.5 10.9 8.4
Selling and marketing................ 33.9 29.2 29.2 22.7 29.5 26.3 21.5 22.2
General and administrative........... 19.3 21.5 20.3 20.5 22.4 19.9 17.7 16.8
Amortization of intangibles.......... -- -- -- -- -- -- -- --
In process research and
development........................ -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses........... 80.3 76.4 69.2 63.6 71.6 65.6 59.5 56.2
------ ------ ------ ------ ------ ------ ------ ------
Operating income................... 19.7 23.6 30.8 36.4 28.4 34.4 40.5 43.8
Interest and other income, net......... 0.5 3.2 2.8 2.8 2.6 3.0 6.1 5.8
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes............................ 20.2 26.7 33.6 39.2 31.0 37.4 46.6 49.6
Income taxes (benefit)................. 8.1 10.7 12.8 14.9 11.8 14.2 17.9 19.1
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).................. 12.1% 16.0% 20.8% 24.3% 19.2% 23.2% 28.7% 30.5%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
------------------------------
1999
------------------------------
MAR. 31 JUN. 30 SEP. 30
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues........................... $7,163 $8,057 $9,363
------ ------ ------
Costs and expenses:
Cost of revenues..................... 671 768 701
Research and development............. 631 1,108 1,167
Selling and marketing................ 1,882 2,064 2,246
General and administrative........... 1,381 1,196 1,405
Amortization of intangibles.......... -- 109 682
In process research and
development........................ -- 4,286 --
------ ------ ------
Total costs and expenses........... 4,565 9,531 6,201
------ ------ ------
Operating income................... 2,598 (1,474) 3,162
Interest and other income, net......... 418 405 375
------ ------ ------
Income (loss) before income
taxes............................ 3,016 (1,069) 3,537
Income taxes (benefit)................. 1,158 (469) 1,252
------ ------ ------
Net income (loss).................. $1,858 $ (600) $2,285
====== ====== ======
AS A PERCENTAGE OF NET
REVENUES
Net revenues........................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of revenues..................... 9.4 9.5 7.5
Research and development............. 8.8 13.8 12.4
Selling and marketing................ 26.2 25.6 24.0
General and administrative........... 19.3 14.8 15.0
Amortization of intangibles.......... -- 1.4 7.3
In process research and
development........................ -- 53.2 --
------ ------ ------
Total costs and expenses........... 63.7 118.3 66.2
------ ------ ------
Operating income................... 36.3 (18.3) 33.8
Interest and other income, net......... 5.8 5.0 4.0
------ ------ ------
Income (loss) before income
taxes............................ 42.1 (13.3) 37.8
Income taxes (benefit)................. 16.2 (5.9) 13.4
------ ------ ------
Net income (loss).................. 25.9% (7.4%) 24.4%
====== ====== ======
</TABLE>
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. Net revenues increased 19.3% from the third quarter of 1997 to
the fourth quarter of 1997 as a result of revenue increases in all technology
and product categories, particularly Video Scrambling products. Net revenues
increased 15.5% from the third quarter of 1998 to the fourth quarter of 1998 as
a result of an increase in copy protected videocassettes and DVDs for the
holiday season, along with an increase in Video Scrambling sales and license
royalties. Net revenues increased 16.2% from the second quarter of 1999 to the
third quarter of 1999 primarily due to DVD royalties from higher volumes, higher
digital PPV set-top box shipments and increased volume of computer CD-ROMs copy
protected with SafeDisc.
Our cost of revenues is subject to seasonal and quarterly fluctuations
due to changes in net revenues. In the last two quarters of 1997 and the first
quarter of 1998, cost of revenues as a percentage of net revenues was lower than
previous quarters as Video Scrambling products represented a smaller proportion
of our net revenues. Cost of revenues as a percentage of net revenues increased
in the third quarter of 1998 through the second quarter of 1999 compared to
fourth quarter of 1997 due to increased patent defense costs and royalties due
to C-Dilla for SafeDisc sales. Cost of revenues as a percentage of
29
<PAGE>
net revenues decreased in the third quarter compared to previous quarters due to
the elimination of royalties due C-Dilla as a result of its acquisition in
June 1999.
Our research and development expenses fluctuate quarterly depending on
the stages of various projects, the use of consultants and temporary employees,
and the utilization of prototype materials. The increase in research and
development expenses in the second quarter of 1999 compared to prior quarters
was due to a one time licensing fee related to technology for a project and one
time continuation bonuses paid to C-Dilla engineers. The increase in research
and development expenses in the third quarter of 1999 compared to first quarter
of 1999 is the result of absorbing the research and development expenses at
C-Dilla following its acquisition.
Our selling and marketing expenses increased in the fourth quarter of
1998 compared to the third quarter of 1998 due to higher marketing expenses in
Europe and expenses for the SafeDisc product. The increase in the first and
second quarters in 1999 compared to the fourth quarter of 1998 was due to the
selling and marketing related to the Computer Software/CD-ROM Copy Protection
business and the one-time continuation bonuses paid to sales and marketing
employees of C-Dilla in the second quarter. The increase in the third quarter of
1999 compared to the second quarter of 1999 was the result of absorbing the
selling and marketing expenses at C-Dilla following its acquisition.
General and administrative expenses in 1997 increased as a result of
costs associated with being a public company as well as additional bad debt
reserves recorded in the fourth quarter of 1997. The increase in general and
administrative expenses in the first quarter of 1999 compared to the fourth
quarter of 1998 was due to legal expenses and new business related consulting.
The increase in general and administrative expenses in the third quarter of 1999
compared to the second quarter of 1999 was the result of absorbing the general
and administrative expenses at C-Dilla following its acquisition.
We began earning interest income in the first quarter of 1997 as a
result of investing the proceeds from our initial public offering. The increase
beginning in the third quarter of 1998 was the result of investing the proceeds
from our June 1998 public offering.
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. Such factors include the timing of release of
popular titles on videocassettes or DVDs or by digital PPV transmission, the
timing of release of popular computer games on CD-ROM, the degree of acceptance
of our copy protection technologies by major motion picture studios and computer
game publishers, the mix of products sold and technologies licensed, any change
in product or license pricing, the seasonality of revenues, changes in our
operating expenses, personnel changes, the development of our direct and
indirect distribution channels, foreign currency exchange rates and general
economic conditions. We may choose to reduce royalties and fees or increase
spending in response to competition or new technologies or elect to pursue new
market opportunities. Because a high percentage of our operating expenses are
fixed, a small variation in the timing of recognition of revenues can cause
significant variations in operating results from period to period.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from cash generated by
continuing operations, principally our copy protection business. Our continuing
operations provided net cash of $2.9 million, $2.4 million, $7.7 million and
$7.1 million in 1996, 1997, 1998 and the first nine months of 1999,
respectively. In 1996, net cash from continuing operations was provided
primarily by net income before depreciation and amortization and increases in
accounts payable, accrued liabilities and deferred revenue, partially offset by
increases in accounts receivable. In 1997, net cash was provided primarily by
net income before depreciation and amortization and increases in income taxes
payable and deferred revenue, partially offset by increases in accounts
receivable. In 1998, net cash was provided by net income before depreciation and
amortization, noncash charges, increases in tax benefit from employee stock
benefit plans, accrued
30
<PAGE>
expenses and deferred revenue, partially offset by increases in accounts
receivable and prepaids and decreases in accounts payable and income taxes
payable. In the first nine months of 1999, net cash was provided primarily by
net income before depreciation and amortization 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.
Investing activities provided net cash of $48,000 in 1996 and used net
cash of $17.5 million, $34.2 million and $4.3 million in 1997, 1998 and the
first nine months of 1999, respectively. In 1996, net cash from investing
activities resulted primarily from sales or maturities of short-term
investments, largely offset by purchases of equipment, payments for patents and
other intangibles and expenses paid on behalf of CAC. In 1997, net cash used in
investing activities resulted primarily from purchases of short and long-term
marketable investment securities and investments of $1.5 million in Digimarc and
approximately $2.0 million in CAC. In 1998, net cash used in investing
activities was primarily the investment of the proceeds from our June 1998
public offering, partially offset by an investment in, and payment of royalties
to, C-Dilla and an additional investment in CAC. Subsequently, CAC paid in full
a note due to us including accrued interest. In February 1998, we acquired
approximately 19.8% of the common stock of C-Dilla for a purchase price of $3.6
million. In February 1998, we also entered into a software marketing license and
development agreement under which we obtained certain rights to C-Dilla's
proprietary copy protection technology. We paid $1.0 million in up-front license
fees, subject to offset against future royalty payments to C-Dilla of between
30% to 45% of revenues from sales of software products incorporating C-Dilla's
technology. During 1998, $143,000 of the $1.0 million offset the prepayment of
royalties to C-Dilla. In 1998 we made capital expenditures of $285,000 and paid
$666,000 related to patents and other intangibles during those periods. For the
first nine months of 1999, net cash used in investing activities was primarily
the acquisition of C-Dilla 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 our June 1998 public offering, an investment in and payment of
royalties to C-Dilla and an additional investment in CAC. In the first nine
months of 1999, we made capital expenditures of $402,000 and paid $393,000
related to patents and other intangibles.
Net cash used in financing activities was $1.6 million in 1996,
primarily to repay long-term debt and to pay cash dividends on preferred stock
then outstanding. Net cash provided by financing activities was $13.9 million,
$28.7 million and $1.1 million in 1997, 1998 and the first nine months of 1999,
respectively. In 1997, almost all the cash provided by financing activities
resulted from our initial public offering. For 1998, almost all the cash
provided from financing activities resulted from our June 1998 public offering.
For the first nine months of 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 our stock purchase plan and the
final payment of a stockholder's note receivable offset by payments on loans.
In August 1999, we participated in a convertible bridge loan to 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 funded approximately $478,000 through the period ended September 30, 1999.
Subsequent to September 30, 1999, we funded the balance of our commitment, and
in December 1999, we converted our convertible bridge loan in the amount of
$836,733 and accrued interest into preferred stock of CAC as part of a round of
third-party financing.
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 have 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
31
<PAGE>
provide an additional investment of $750,000 in AudioSoft, subject to the
achievement of specific milestones. We believe that the current available funds,
cash flows generated from operations and proceeds from this offering 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.
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.
Because 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 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. These investments, totaling $7.1 million, represented
9.0% of our total assets as of September 30, 1999. CAC and AudioSoft are
privately held companies. There is no active trading market for their securities
and our investments in them are illiquid. We may never have an opportunity 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.
In December 1999, Digimarc completed its initial public offering and its shares
are traded on the Nasdaq National Market under the symbol "DMRC." We currently
own approximately 7.7% of the outstanding shares of Digimarc.
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
32
<PAGE>
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. 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:
- hardware and software systems that we use internally in the management
of our business;
- hardware and software products that we have developed;
- the internal systems of our customers and suppliers; and
- 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 are Year 2000 ready. Beyond
awareness of the issues and scope of systems involved, the phases of activities
in progress include:
- an assessment of specific underlying computer systems, programs and/or
hardware;
- remediation or replacement of Year 2000 non-compliant technology;
- validation and testing of technologically Year 2000 ready solutions;
and
- implementation of the Year 2000 ready systems.
The table below provides the status and timing of these phased
activities:
<TABLE>
<CAPTION>
IMPACTED SYSTEMS PROCESSES STATUS/ANTICIPATED COMPLETION
- ----------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
Hardware and software Assessment completed, conducted Completed Q1 1999
products that we license or validation and testing (see details
sell below)
Hardware and software systems Assessment completed; certain Completed Q1 1999
that we use internally in components replaced; conducted
the management of our validation and testing
business
Internal systems of our Assessment on-going: no issues from In Process
customers and suppliers responding inquiries
Non-information technology Assessment completed; certain Completed Q1 1999
systems and services that components replaced, conducted
we use in the management of validation and testing
our business, internal and
external, such as telephone
systems and building
systems
</TABLE>
PRODUCTS STATUS. Our video copy protection processors and video
scrambling products have been tested and verified as Year 2000 compliant. All
computer software copy protection and rights management software products are
Year 2000 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
33
<PAGE>
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 business would be harmed.
In the worst case scenario, any Year 2000 related failure of any of our
critical suppliers or customers could cause a significant disruption of our
sales, technical operations and licensing and could result in our inability to
conduct business without interruption. If, in the worst case scenario, our
technologies are affected by date-related issues, our customers may file claims
against us. In such instance, our revenues may be adversely affected, our
maintenance, technical support and management costs could increase and our
reputation could be damaged.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, or 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 we currently
hold only one derivative instrument, we expect that the adoption of SFAS No. 133
will have no material impact on its financial position, results of operations or
cash flows. We will be required to implement SFAS No. 133 during the year ending
December 31, 2001.
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. We 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 our year ending December 31, 1999. We do not expect the
adoption of SOP No. 98-9 to have a material impact on our financial position,
results of operations or cash flows.
34
<PAGE>
BUSINESS
We design, develop and license copy protection and rights management
technologies. We are the leading provider of copyright protection technologies
for major Hollywood studios, independent video producers, PC games and
educational software publishers, digital set-top box manufacturers and digital
PPV network operators. We provide content owners with the means to protect
content such as videocassette, DVD and PPV movies, PC games and educational
software against unauthorized copying and distribution.
Our technology has been used to copy protect over 2.7 billion
videocassettes worldwide since 1985. All Motion Picture Association of America
studios use our video copy protection technologies to protect some or all of
their movie releases on videocassette or DVD. Our customers include Disney,
Paramount, Sony Pictures Entertainment, Twentieth Century Fox, Universal
Studios, Warner Brothers and DreamWorks. We believe that our video copy
protection technologies are accepted as the industry standard. The October 1998
Digital Millennium Copyright Act mandates compliance with our technology for all
VCR manufacturers that sell or import their hardware into the U.S.
We have expanded our copy protection technologies into the PC games and
educational software markets, and into rights management applications through
our recent acquisition of C-Dilla. We have licensed a majority of the top PC
games publishers, including Electronic Arts, Microsoft, Eidos, GT Interactive,
Havas, and Hasbro. We believe that our SafeDisc computer software/CD-ROM copy
protection technology has been used on approximately 30 million CD-ROMs.
Additionally, we are developing a suite of rights management technologies,
called SafeCast, that will provide our customers more options to market and
securely distribute software products using either the Internet or packaged
media.
We have built and continue to extend a large patent portfolio which
provides the basis for our licensing business model. We license our technologies
and receive high margin, recurring revenues from a variety of sources. These
include unit-based royalties on videocassettes, DVDs, CD-ROMs, and set-top
boxes, transaction or use-based royalties for PPV movies, and license fees from
a range of hardware manufacturers, and digital satellite and cable network
operators.
To further expand our copy protection capabilities, we entered into a
strategic relationship with Digimarc, a leading digital watermarking technology
company, to develop a digital watermarking copy protection solution to address
digital-to-digital copying issues. We also have a strategic relationship with
Audiosoft, a developer of secure Internet music delivery technology and
copyright management reporting systems. We recently entered into a letter
agreement with TTR Technologies to develop copy protection technology for audio
CDs. We intend to continue to evaluate and pursue additional strategic
relationships that are complementary to our existing technologies.
INDUSTRY BACKGROUND
As the world moves toward a digital media age, content owners are
increasingly vulnerable to unauthorized copying. Consumers' ability to make
unauthorized copies has increased due to the proliferation of inexpensive,
easy-to-use devices, such as VCRs, CD-ROM recorders, audio CD recorders and
personal video recorders that allow in-home copying of videocassettes, DVDs,
digital PPV programs, CD-ROMs, and audio CDs. As technological advances
facilitate digital copying at declining prices, motion picture studios and
software developers have become more concerned with protecting their
intellectual material.
Content owners lose billions of dollars every year to casual copying and
piracy. The Motion Picture Association of America estimates that in 1998 video
piracy cost the major studios more than $2.5 billion in lost revenues. The
Software Information & Industry Association estimates that computer software
35
<PAGE>
and video game companies based in the United States lost $11 billion worldwide
in 1998 due to software piracy, primarily professional counterfeiting.
With film production costs continually growing, studio profitability has
become increasingly dependent on the development of new venues, such as home
video and digital PPV, and new formats, such as DVD. Motion picture studios
generally release major movies to various venues, such as theaters and home
video in a series of "release windows" to maximize revenues from each venue. In
the United States, movies are released first to the box office, then to home
video, then to pay-per-view, then to subscription pay TV, such as HBO, and
finally to syndication broadcast TV. In the past few years, home video has
surpassed the theatrical box office as the largest source of revenues for the
motion picture industry. Further, as reported by Adams Media Research, DVD
revenues now comprise more than 15% of the studios' home video business.
The chart below shows the relative timing of releases and 1998 studio
revenues:
DESCRIPTION OF GRAPHIC FOR EDGAR:
Four triangles arranged in descending order with the following text:
Theatrical Box Office $3.3 Billion; Home Video $8.0 Billion; PPV $530 Million;
and Subscription TV $1.6 Billion. Below the triangles is a horizontal time line
marked 0 to 15, below which is the following text: Months After Theatrical
Release.
LEGISLATIVE RESPONSE. Various government and legislative initiatives in
recent years have encouraged copy protection technologies.
In the United States, the Digital Millennium Copyright Act was enacted
in October 1998. This law requires all VCRs to comply with analog copy
protection technologies beginning in May 2000. Approximately 80% of all VCRs
manufactured prior to 1999 comply. The Act includes a clause that outlaws all
circumvention devices which could be used to defeat any type of copy protection
technology. The United States law is based on a set of guidelines adopted by the
World Intellectual Property Organization in 1996 for amending basic copyright
laws to deal with the protection of digital media.
The European Union is currently discussing a proposed copyright
directive which we believe includes a provision aimed at controlling hardware or
software circumvention devices and technologies.
In Japan, a revised copyright law that went into effect in October 1999
prohibits the sale, manufacturing, and import of circumvention devices. The
Japan Industry Standard requires all digital recording devices to be responsive
to analog copy protection technologies which utilize automatic gain control
techniques.
VIDEO COPY PROTECTION.
VIDEOCASSETTE PROTECTION. Content owners wish to maximize the
economic value from each feature film or other video program over its
copyright life, currently 75 years. Independent studies show that studios and
video retailers lose videocassette sales and rental revenues when consumers make
copies of movies, whether from home video or PPV releases. The International
Recording Media Association has estimated that 50% of all households in the
United States own two or more VCRs. These households are capable of making
unauthorized copies of prerecorded videocassettes. Since almost 90% of all
United
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States households own at least one VCR, any of these households which also own a
DVD player or a digital PPV set top box, can make high quality videocassette
copies directly from their DVD players or set-top boxes, unless the programs are
copy protected. Even with the focus on digital media and growth in DVD, VCR
sales have continued at a record pace in the past two years. The Consumer
Electronics Association reported that year-to-date unit sales through
October 1999 increased by approximately 25% over the comparable period in 1998.
With over 500 million VCRs installed throughout the world, and with VCR sales
continuing at a rapid pace, we believe that VCRs will remain a home copying
threat to video content owners for many years to come.
DVD VIDEO COPY PROTECTION. DVD hardware and media became commercially
available in the United States in 1997, and to date approximately 5.5
million DVD players have been shipped by manufacturers, according to the
Consumer Electronics Association. The introduction and increasing usage of DVDs
presents serious copy protection concerns to the studios. Without effective copy
protection, any one of the approximately 500 million VCRs throughout the world,
when combined with a DVD player, can make unlimited videocassette copies of a
non-copy protected DVD that are nearly equal in quality to a professionally
prerecorded videocassette. Because of their superior picture quality, lower
manufacturing cost, relative ease of use and smaller size, DVDs are expected to
supplant videocassettes over time as the preferred home video distribution
medium. As DVD becomes the standard in home viewing, the need for reliable copy
protection is expected to become more important. DVD has experienced substantial
growth in the past two years, and a recent report by the International Recording
Media Association estimates that 165 million DVDs will be manufactured in 1999,
growing to 970 million in 2003, representing a 56% compound annual growth rate.
PPV COPY PROTECTION. Digital PPV enables consumers to view movies and
other programming in their homes through cable or satellite systems for
an additional fee for each viewing. We believe that digital PPV revenues at the
studio level were approximately $530 million in 1998. By contrast, studio
revenues from their home video business exceeded $8 billion in 1998. At present,
PPV represents less than 10% of the home video market. PPV distribution offers
motion picture studios higher profit margins than they receive from home video
rentals or sales. Studios have realized the importance of copy protection in
digital PPV networks, and many of them have required, as a condition of
licensing their PPV movies, that digital PPV system operators install copy
protection capability in their digital set-top boxes.
In an effort to protect their home video revenues, studios typically
release a movie on PPV one to three months after it is released on
videocassette or DVD. Digital PPV providers, such as DIRECTV, EchoStar, ATT and
Time Warner have demonstrated that they can substantially increase the buy rates
for PPV by offering subscribers up to 60 PPV channels per cable/DBS system, and
by promoting convenience of frequent start times and greater variety of movies.
In the United States, the digital PPV system operators have fulfilled their
studio contracts by installing copy protection capability in their digital set
top boxes. However, they have told the studios that they will not activate copy
protection until and unless the studios release their movies to the PPV system
operators much closer to when they release them to home video. This copy
protection standoff between the system operators and the studios is less of an
issue in international markets, because the PPV business is not as well defined,
the PPV operators are not as solidly entrenched with their subscriber base, and
the release window between home video and PPV is not as contentious as in the
United States.
COMPUTER SOFTWARE/CD-ROM COPY PROTECTION. With the proliferation of
inexpensive high capacity PC-based hard disc drives, the increased penetration
of Internet connections to the home, and the availability of higher speed
bandwidth, consumers now have the means to widely distribute copies of software
and audio. Many consumers have the capability to copy from a CD-ROM, download
computer software and audio CDs to their hard drives, copy those downloaded
files onto a CD-recorder device, and distribute the unauthorized copied
software/audio through CD-ROMs or electronically over the Internet. Recently,
CD-recordable drives have been introduced that are priced below $150 and are
expected to become standard features in personal computers in the near future.
In addition, blank CD-ROM discs can
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be purchased for less than $1 in the United States. As a result, computer
software and PC-based video game companies are facing an additional threat of
lost revenues due to consumer copying of CD-ROM software.
INTERNET COPY PROTECTION. The Internet is increasingly being used as a
means to distribute software and audio and video content. The proliferation of
online content providers combined with new and evolving methods of online
content delivery have created a large market opportunity for copy protection
solutions as current technologies are highly susceptible to unauthorized usage
and duplication. We believe that there is a significant need for copy protection
solutions that address these new and emerging Internet downloading and streaming
technologies.
THE MACROVISION SOLUTION
We develop and market a broad array of copy protection and rights
management technologies and solutions. We offer video copy protection
technologies and products that address the video content protection needs of
motion picture studios and other content owners, program distributors, and cable
and satellite PPV system operators. We offer CD-ROM copy protection and rights
management technologies to a variety of software publishers in the PC games,
home education, information publishing, and application software markets. We are
actively involved in developing various technologies to meet the needs of
emerging delivery systems such as downloading and streaming of media through the
Internet, as well as technologies to prevent the unauthorized copying of audio
CDs.
VIDEO COPY PROTECTION. Our video copy protection technologies allow
consumers to view programming stored on prerecorded videocassettes or DVDs or
transmitted as digital PPV programs through cable or by satellite, but deter
unauthorized consumer copying of such programming. The diagram below illustrates
the various means of implementing our video copy protection technologies in
videocassettes, DVD and PPV.
[Description of Graphic]
Heading on left labelled "Source Programming." Heading on right labelled
"Home."
Under the heading "Source Programming" are images of a videocassette
(labelled "videocassette"), satellite (labelled "Satellite DBS"), satellite
dishes and buildings (labelled "Cable Headend") and computer disk (labelled
"Digital Versatile Disc").
Under the heading "Home" are images of a VCR player (labelled
"VCR/Player"), digital PPV box (labelled "Digital PPV Set-Top Box"), DVD player
(labelled "DVD Player"), a second VCR (labelled "Recording VCR") and one
television set with a normal picture (labelled "Normal Viewing") and one
television set with a blurry picture (labelled "Unwatchable Copy"). A triangle
image is next to the Digital PPV Set-Top Box and DVD Player. Text next to
triangle: CD triangle is Macrovision technology.
Lines connect videocassette and VCR/Player, Satellite DBS and Digital
PPV Set-Top Box, Cable Headend and Digital PPV Set-Top Box, Digital Versatile
Disc and DVD Player and VCR/Player, Digital PPV Set-Top Box and DVD Player to
the television images labelled "Normal Viewing" and "Unwatchable Copy".
[SYMBOL] = MACROVISION COPY PROTECTION TECHNOLOGY
Videocassettes are encoded with our video copy protection signal as they
are manufactured. Our licensed copy protection signal generator equipment is
installed in over 230 commercial duplication facilities in 35 countries around
the world. The unique patented aspects of our copy protection signal are
transparent to a TV set, but are disruptive to the recording circuits of VCRs.
The result is that videocassettes which are encoded with our anticopy process
will play normally on a TV set, but will cause
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unwatchable copies to be made on the vast majority of VCRs. Our patented
technology takes advantage of the differences in TV signal processing circuits,
VCR playback circuits, and VCR recording circuits without the need for the
installation of any Macrovision components in VCRs.
In the DVD and digital PPV markets, we have implemented a more robust
version of our video copy protection technology. By utilizing another copy
protection component, called Colorstripe, we have made it more difficult for a
casual copier to defeat or circumvent our technology. In these digital video
applications, the copy protection is actually applied within the consumer
device. The copy protection signal generator is part of an integrated circuit
which converts digital video to analog video for output to a standard TV set or
VCR. The Macrovision capable chips remain dormant, until activated by data
commands which are either embedded in the DVD, or are sent along with the PPV
movie transmission to the subscriber's set-top box.
COMPUTER SOFTWARE/CD-ROM COPY PROTECTION. Our SafeDisc technology seeks
to prevent the copying of CD-ROM computer software by encrypting the executable
files, embedding an authenticating digital signature and adding multi-layered
anti-hacking software. This is a proprietary software-based copy protection
solution that does not require any changes to standard PC or CD-ROM hardware.
Because SafeDisc is designed to operate while the disc is in the CD-ROM drive,
it is ideally suited to PC games and home education software. The technology is
licensed directly to interactive software publishers, and to mastering and
replication facilities that embed our patented digital signature in a CD-ROM
during the manufacturing process. SafeDisc was introduced in September 1999 and
has been licensed to more than 20 software publishers and 75 replicators
worldwide.
[Description of Graphic]
Text: ORIGINAL SAFEDISC PROTECTED CD
Authentication instruction finds digital signature and plays disc
COPY OF SAFEDISC PROTECTED CD
Authentication instruction cannot find digital signature and aborts playback
[SYMBOL] = SAFEDISC COPY PROTECTED CD
GRAPHICS: Image of computer monitor and keyboard on left. Images of two computer
discs on right. Arrows connect the two computer discs to the computer. The
computer disc in the lower right has an "X" through it. Triangle in the lower
middle of the graphic next to the words "= SafeDisc copy protected CD.
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PRODUCTS UNDER DEVELOPMENT
We have four primary new product development programs in progress, which
we believe will result in commercial products in the year 2000: SafeDisc HD,
SafeCast, Audio CD copy protection and digital watermarking.
SAFEDISC HD. SafeDisc HD is a version of SafeDisc designed to extend
our copy protection technology to any application software beyond the PC games
and education software markets. Several of our customers have requested a
version of SafeDisc that deters users from installing the same software in
multiple hard drives. SafeDisc HD will allow the CD-ROM to authenticate itself
at the time of initial installation, and will autotransfer an encrypted license
manager module from the CD-ROM to the user's hard drive. This gives the software
publisher the option of periodically requiring the user to reinsert the original
disc to verify ownership, or to reinsert the disc only when the hard drive is
upgraded or replaced. SafeDisc HD is currently in beta testing with a targeted
release date in mid-2000.
SAFECAST. SafeCast is a family of digital rights management products
designed to provide software publishers with a variety of marketing options for
both packaged media and Internet delivery. SafeCast authenticates the end user's
license by transferring the software publisher's embedded digital rights
management technology from either a CD-ROM disc or from Internet downloaded
software to the user's PC hard drive at the time the application is initially
installed. SafeCast protects the launch of a licensed application by confirming
that the session conforms to the license terms established by the application's
publisher. These license terms can be promotional in nature. For example, a
software publisher may want to give the user a limited free trial period that
expires after a certain time. At the end of that period, the user would have to
pay the publisher for a permanent license. In addition to providing limited time
trials of full product versions for evaluation, electronic software distribution
publishers want to be able to support licensing networked applications beyond
Windows operating systems. Our SafeCast family of products is in various stages
of development and testing. We anticipate that we will introduce the first of
these products in the first half of 2000.
AUDIO CD COPY PROTECTION. Audio CD copy protection is a technology
based on TTR's Musicguard-TM-audio copy protection technology. We have a letter
agreement to develop an audio copy protection technology with TTR Technologies.
Our proposed joint development/joint marketing arrangement with TTR gives us the
exclusive worldwide rights to market audio copy protection technology. The major
music labels have expressed interest in a technology which would prevent the
copying of audio CDs to a PC or CD recordable device. We believe that the music
industry is a $40 billion per year industry compared to the $16 billion per year
home video industry. There has never been an effective copy protection
technology for audio because no one has been able to develop a copy protection
technique that does not interfere with the playback of the original music. We
recently began our joint development program with TTR and our goal is to
introduce the technology to the market in the second half of 2000. Because of
the limited testing and development to date, the development project should be
considered high risk, and it may not result in a commercial product.
DIGITAL WATERMARKING. Digital watermarking is a digital-to-digital copy
protection solution designed to address the next generation of digital video
recording devices. We are working with Philips and Digimarc to refine our
solution currently under evaluation by Matsushita and the Copy Protection
Technical Working Group.
THE MACROVISION STRATEGY
PURSUE MULTIPLE SOURCES OF ROYALTY-BASED LICENSING REVENUE. As the sole
provider of copy protection for prerecorded videocassettes, DVDs and
digital PPV, and as the leading provider of CD-ROM based computer software copy
protection, we seek to license our technology to content owners pursuant to
unit-based and volume-based royalty schedules. We receive royalties and other
fees from:
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- content owners;
- hardware manufacturers;
- digital PPV program distributors; and
- commercial replicators/duplicators.
We believe that there is a large and growing need for our copy
protection and rights management technologies and that we can continue to expand
our licensing business.
INTRODUCE NEW PRODUCT APPLICATIONS AND TECHNOLOGIES. We have committed
significant resources to expand our technological base, to enhance our existing
products and to develop and market additional products in order to continue to
provide customers with leading copyright protection technologies. We intend to
propagate our technologies and maintain our technology leadership by investing
significant resources in research and development, and by leveraging our role in
industry standard-setting efforts and organizations. We intend to pursue
opportunities for copy protection and rights management in the following areas:
- digital video;
- audio CDs;
- Internet downloaded and streamed audio and video files;
- Internet downloaded software files;
- DVD-ROM; and
- improved authentication, compression, and encryption technologies.
CONTINUE TO MAKE STRATEGIC INVESTMENTS. We have made strategic equity
investments in Digimarc and AudioSoft, we have entered into a letter agreement
with TTR and we acquired C-Dilla after making a strategic equity investment. We
intend to continue to expand our existing technologies and products by pursuing
licensing arrangements, joint ventures, strategic investments and acquisitions
of companies whose products or technologies extend or enhance the features or
value of our copy protection and rights management technologies.
EXPAND AND PROTECT PATENT POSITION. We believe that our future success
will depend, in part, on the continued protection of our proprietary copy
protection and rights management technologies. We have invested substantial
resources in developing and obtaining 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 such
devices and we have initiated a number of disputes relating to infringement of
these patents. We intend to continue to obtain patents and to protect and defend
our patented technologies aggressively through further technological innovation,
legal action and support of further legislative initiatives to protect content
owners.
LEVERAGE KEY CUSTOMER RELATIONSHIPS. We strive to broaden the use of
existing applications for our technologies and to offer new or enhanced copy
protection and rights management technologies to secure our customers' content
and help them maximize their revenues. We currently maintain strong
relationships with customers in various industry and market segments, including:
- content providers such as the major Hollywood studios and the leading
PC games companies;
- content distributors such as the leading cable and satellite
television system operators;
- videocassette duplication and CD/DVD replication companies; and
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- equipment manufacturers such as consumer electronics companies which
manufacture and sell DVD players, CD-ROM drives, and digital set-top
boxes.
We believe that increasing the number of content providers, distributors
and replicators, and equipment manufacturers that incorporate our copy
protection technologies into their mass market products enhances the
attractiveness of our solutions to rights owners. We intend to work with our
customers to provide them with solutions that exploit the full value,
flexibility and breadth of our technologies.
TECHNOLOGY LICENSING AND MARKETING
TECHNOLOGY LICENSING. We license, rather than sell our technologies. We
believe that content owners utilize our solutions to realize increased packaged
media sales, and increased revenues from downstream venues and to strengthen
relationships with retailers. We receive royalty payments as follows:
- content owners typically pay us a per unit licensing fee for the right
to use our proprietary technology for videocassette, DVD and CD-ROM
copy protection;
- licensed duplicators serving the low volume special interest video
content owner market pay us a per-unit fee for applying videocassette
copy protection;
- digital set-top box manufacturers typically license our video copy
protection technologies for an up-front fee and a per unit hardware
royalty;
- cable and satellite television system operators pay us a one-time
license fee for the right to incorporate our video copy protection
technology into their networks for PPV. In addition, we are entitled
to transaction-based royalty payments when copy protection for digital
PPV programming is activated by system operators;
- DVD-ROM and CD-ROM hardware manufacturers license our technology for
an up-front fee and an annual maintenance certification; and
- semiconductor manufacturers pay us a small one-time service fee to
verify proper implementation of our video copy protection technologies
in their integrated circuits.
MARKETING. We market our videocassette, DVD and digital PPV and
Computer Software/CD-ROM copy protection technologies directly to content owners
and video producers. Our primary sales strategy for major accounts is to sell at
the headquarters level, covering customers' international operations. We
supplement our direct sales efforts with a variety of marketing initiatives,
including trade show participation, trade advertisements, industry education and
newsletters.
We develop worldwide product specifications and marketing programs for
our copy protection technologies in our Sunnyvale headquarters, and sell and
support our products and technologies through our own headquarters sales force,
and through our wholly owned subsidiaries in Japan and the United Kingdom. As of
December 1, 1999, we employed 33 sales and marketing personnel and an additional
38 employees assisted in customer technical support.
CUSTOMERS
VIDEO COPY PROTECTION LICENSEES. Our copy protection technology has
been applied to more than 2.7 billion videocassettes worldwide since 1985, and
was applied to more than 550 million videocassettes in 1998. Leading studios and
over 1,500 corporate, educational and special interest content owners have
contracted with licensed duplicators to apply our copy protection process to
their videocassettes. Our packaged media copy protection technology for
videocassettes and DVDs is used by the following leading major motion picture
studios and home video suppliers:
- Artisan Home Entertainment;
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- Buena Vista Home Video (Disney);
- Columbia House;
- Columbia TriStar Home Video (Sony Pictures Entertainment);
- DreamWorks;
- HBO Home Video;
- New Line Home Video;
- NCP Marketing (Tae-Bo exercise tapes);
- Paramount Pictures;
- Twentieth Century Fox Home Entertainment;
- Universal Studios Home Video; and
- Warner Home Video.
For 1996, revenues from three customers accounted for 37% of our net
revenues. For 1997, one customer accounted for 11% of our net revenues. For
1998, revenues from another customer represented 12% of our net revenues. No
customer accounted for more than 10% of our net revenues for the first nine
months of 1999.
We also license our videocassette copy protection technology to special
interest customers that include independent video producers and corporations.
Licensed commercial duplicators act as distributors of our videocassette copy
protection technology to special interest customers. Revenues from special
interest customers in the United States accounted for approximately 17%, 12%,
11%, and 12% of our video copy protection revenues in 1996, 1997, 1998 and the
first nine months of 1999, respectively.
CONSUMER ELECTRONICS AND HARDWARE MANUFACTURERS. We believe that our
copy protection technology is currently the only digital-to-analog copy
protection solution that satisfies the principles established by the DVD
licensing and standards group. As of December 1, 1999, 129 companies that
manufacture DVD players or DVD-ROM drives had signed agreements with us to
incorporate our DVD copy protection technology in their hardware.
Our copy protection technology is embedded in more than 30 million
digital set-top boxes currently in use worldwide. We have licensed our copy
protection technology for digital PPV to 49 set-top box manufacturers,
including:
- A.B. Pace Micro Technology;
- EchoStar;
- General Instrument;
- Hughes;
- Nokia;
- Philips;
- Scientific-Atlanta;
- Sony; and
- THOMSON multimedia.
We have also authorized 49 companies to incorporate our digital PPV and
DVD copy protection technologies in their semiconductor designs. These companies
generally pay a one time service fee for
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verification of proper implementation of our video copy protection technology in
digital-to-analog application specific integrated circuits that are embedded in
digital set-top boxes and DVD hardware. They are authorized to sell their
Macrovision-capable integrated circuits to Macrovision-licensed DVD hardware
manufacturers and to Macrovision-licensed digital set-top box manufacturers.
SYSTEM OPERATORS. We have licensed our digital PPV copy protection
technology for incorporation into the networks of 15 system operators,
including:
- British Sky Broadcasting;
- DF-1;
- DIRECTV;
- EchoStar.
- Galaxy Latin America;
- Hong Kong Telecom;
- NTL;
- Sky Latin America;
- Sky Perfect; and
- VNL.
These system operators have paid a one-time license fee to us and have
entered into agreements with us pursuant to which we are entitled to
transaction-based royalty payments at such time as copy protection for digital
PPV programming is activated. Other notable system operators which have not
signed license agreements with us, but which are requiring Macrovision-capable
set-top boxes in their networks include: AT&T, Comcast, Cox Enterprises,
Deutsche Telecom, RogersCable, Time Warner and Via Digital.
COMPUTER SOFTWARE/CD-ROM PUBLISHERS. We entered the computer software
market in 1999 with our SafeDisc product, initially aimed at the PC games
market. We estimate that over 30 million discs will be copy-protected with
SafeDisc in 1999. Our packaged media copy protection technology for computer
software/CD-ROMs is used by the following leading software publishers:
- Electronic Arts;
- Eidos;
- GT Interactive;
- Hasbro;
- Havas;
- Interplay;
- Lego;
- Mattel;
- Microsoft;
- Take 2;
- 3DO; and
- Ubisoft.
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Our PC games software customers have a wide choice of licensed
replicators that they can use throughout the world. Over 75 replicators have
been licensed with the majority having already installed SafeDisc mastering and
quality assurance systems from authorized suppliers of these systems, including:
- Americ Disc;
- Cinram International;
- JVC Disc America;
- MPO Disque Compact;
- Nimbus Manufacturing; and
- Sonopress.
To expand our SafeDisc business beyond our direct licensing program with
the major publishers, we are in the process of setting up a reseller program
that will allow replicators to be our value added resellers so they can sell
SafeDisc copy protection to smaller publishers.
TECHNOLOGY
VIDEOCASSETTE COPY PROTECTION. Effective video copy protection systems
are difficult to develop because of the need to address the dual requirements of
playability and effectiveness. Consumers must be able to view the copy protected
content using a VCR and a television set without the need for any intervening
devices, while the quality of an unauthorized copy must be reduced to such an
extent that it loses its entertainment value. The extent to which the
entertainment value is reduced varies, depending on the VCR model and the VCR
and television combination that plays the unauthorized copy. To prevent VCRs
from making good copies, the copy-protected video must differ in some manner
from the standard video signal because, by design, all VCRs will make good
copies from standard video signals. Television sets are designed to play
standard or near-standard video signals. As a result, there is a risk that
making a video signal non-standard in order to prevent copying will decrease
playability by causing some television sets to generate impaired or distorted
pictures. In the tradeoff between effectiveness and playability, designers of
copy protection systems must favor playability while maintaining effectiveness.
Our videocassette copy protection technology involves the patented
technique of inserting a series of electronic pulses in the vertical blanking
interval of a standard video signal. The vertical blanking interval is the blank
space between the video fields on television sets that are refreshed at a rate
of 60 fields per second. The copy protection pulses are embedded electronically
in the prerecorded content of the videocassettes in the process of videocassette
manufacturing. The electronic pulses are not visible in the television picture.
The pulses are intended to affect the automatic gain control circuit in the
recording system of most VCRs, but not to affect a similar circuit in the
television set. Therefore, when the consumer plays a copy protected prerecorded
videocassette, the picture is clean and crisp, but when the consumer plays an
unauthorized consumer-made copy of that same videocassette, the picture
typically is very distorted and has substantially reduced entertainment value.
Our video copy protection technology is effective against most consumer copying,
but generally does not deter professional pirates who use professional
duplication and video processing equipment.
DVD AND DIGITAL PPV COPY PROTECTION. The DVD and digital PPV versions
of our video copy protection technologies employ both the electronic pulses used
in videocassettes and a second patented copy protection process called
Colorstripe. Colorstripe affects the color playback circuit of a VCR causing
colored horizontal stripes to appear in the picture of an unauthorized copy. The
combination of the two processes provides a higher level of effectiveness than
that provided by either process alone. In addition, Colorstripe is more
effective against circumvention by currently available professional duplication
equipment. Copy protection is implemented in DVD and digital PPV applications by
embedding a copy protection signal generator integrated circuit within the DVD
player or digital set-top box. The integrated
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circuit is activated by copy protection control codes, which are integrated into
the DVD media or the PPV transmission. Once the integrated circuit is activated,
it adds the copy protection signal to the analog output of the DVD player or
digital set-top box. As with videocassette copy protection, consumers are able
to see a clear picture on their television sets, but generally cannot make a
usable videocassette copy on a VCR.
COMPUTER SOFTWARE/CD-ROM COPY PROTECTION. Each CD-ROM published with
the SafeDisc technology is premastered with encrypted executable files and
contains authenticating instructions and a unique SafeDisc digital signature.
The digital signature, which cannot be copied by CD recorders or transferred
from a CD-ROM to a hard disc drive, or sent over the Internet, is added to each
original disc during the mastering/replication process. When a user inserts an
original disc in a CD-ROM drive, the authentication software reads the digital
signature, allowing the program to be decrypted and run normally. The digital
signature and authentication process is transparent to the user. If a consumer
or pirate uses a CD-recordable device or professional mastering equipment to
duplicate a CD-ROM and make an unauthorized copy, SafeDisc is designed to
inhibit the transmission of the digital signature, decryption will not take
place and the copy will not run.
SafeDisc also contains anti-hacking technology to prevent the compromise
of its security features. The anti-hacking technology is designed not only to
deter consumer copying, but also to thwart destructive hackers and commercial
hackers. Because of our widespread penetration in the PC games' market, hackers
have targeted and successfully cracked, to various degrees, several versions of
SafeDisc. In order for us to continue to be successful in this market, we must
continually stay a step ahead of the hacker community. Our customers have
indicated that if we can provide them with an approximate three-week time
between when they release a SafeDisc protected title, and when a hack is
developed on the Internet, they believe the technology is valuable since it
protects the most important period of their initial sales. We develop new
product releases approximately four to eight times per year incorporating new
anti-hacking features.
SafeDisc is covered by a pending patent application, and is compliant
with Philips' worldwide Yellow Book CD-ROM standard. We believe that SafeDisc is
the only copy protection technology that has received Philips' certification for
compliance.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on developing
enhancements to existing products, new applications for our current technologies
and new patentable technologies related to our various copy protection and
rights management markets. Our core technological competencies are in software
development, encryption, anti-hacking software, video and audio engineering,
watermarking, CD-ROM architecture, and integrated circuit designs.
We are developing with Philips and Digimarc a digital video watermarking
solution to address the digital-to-digital copying issues associated with the
next generation of DVD recording devices. Digital watermarks embedded in movies
and other video material act as an invisible identity providing basic copyright
identification information as well as various directions either to allow or to
disallow playback, viewing and copying onto another digital device. The jointly
developed technology is based on our patented play control technology,
Digimarc's patented watermarking technology, and Philips' patented watermarking
and authentication technology. Our solution can survive numerous
transformations, such as from digital to analog and back to digital, or from one
video format to another. The digital watermarks are designed to be imperceptible
to the viewer, but to be read easily by special purpose applications software or
semiconductor chips. This jointly developed technology is intended to protect
movies and other video content from unauthorized reproduction using digital
recording devices.
Following our acquisition of C-Dilla, we established their experienced
software development team as our mainstream software development organization.
This team is responsible for developing our computer software/CD-ROM and audio
CD copy protection products, as well as our Internet rights management
solutions.
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As of December 1, 1999, our research and development staff consisted of
29 engineers and technicians. In 1996, 1997, 1998 and the first nine months of
1999, our expenses for research and development were $2.5 million, $2.2 million,
$2.6 million and $2.9 million, respectively.
INTELLECTUAL PROPERTY RIGHTS
PATENTS ISSUED AND PENDING. We hold 44 United States patents and have
42 United States patent applications pending, 4 of which are patent applications
relating to computer software copy protection. Of the issued United States
patents, 27 relate to our copy protection technologies, 13 relate to video
scrambling, and 4 relate to audio scrambling. Our issued United States patents
expire between June 2000 and March 2015. The earliest of our core videocassette
and DVD copy protection patents expires in 2005. However, we have filed
applications for improvement patents, which, if issued, will extend such
expiration dates beyond 2010. We also have 213 foreign patents and 321 foreign
patent applications pending in 40 countries. Of the issued foreign patents, 152
relate to our copy protection technologies, 43 relate to video scrambling and 18
relate to audio scrambling.
CIRCUMVENTION TECHNOLOGY PATENTS. Included in the patents related to
our copy protection technologies are 10 United States and 31 foreign patents
covering a number of processes and devices that unauthorized parties could use
to circumvent our video copy protection technologies. We have historically used
these patents to limit the proliferation of devices intended to circumvent our
video copy protection technologies. We have initiated a number of patent
infringement disputes against manufacturers and distributors of such devices. We
have one lawsuit of this type pending in Germany to require the defendants to
discontinue the sale of devices that circumvent our video copy protection
technologies and infringe one or more of our circumvention patents. In the event
of an adverse ruling in this litigation or in any similar litigation, the value
of our protection technology might decline due to the legal availability of such
a circumvention device or we might have to obtain rights to the offending
devices to protect the value of our technology.
COMPETITION
VIDEO COPY PROTECTION. We believe that there are currently no
significant video copy protection competitors. Occasionally, companies have
developed hardware based on our technology for sale in small foreign markets
where we have not sought patent protection. Our video copy protection
technologies are proprietary and have broad international patent coverage. It is
possible, however, that a competitive video copy protection technology could be
developed in the future. For example, one of our customers could attempt to
promote competition by supporting the development of alternative copy protection
technologies or solutions, including solutions that deter professional
duplication.
Digimarc, Philips, and ourselves, together known as the Millennium
Group, are jointly developing a digital media copy protection solution, using
proprietary watermarking and play control technologies, to address the
digital-to-digital copying issues associated with the next generation of DVD
recording devices. Our group submitted its proposed solution to the Copy
Protection Technical Working Group, an industry standards body. A technology of
choice for the Copy Protection Technical Working Group will be selected by
Matsushita Electric Industries which is acting as the decision-maker given their
role as the lead DVD licensing entity. The Millennium Group is competing with
another consortium, the Galaxy Group, which is comprised of IBM, NEC, Sony,
Hitachi, and Pioneer. We believe that our group's solution offers a number of
advantages in security and resistance to hacking, as well as in the economics of
implementation. We also believe that our group has a dominant patent position
with 16 issued patents. The group whose digital media copy protection solution
is selected as the industry standard by Matsushita will have a significant
advantage in licensing its technology to video content owners worldwide and in
working with consumer electronics manufacturers, PC platform companies and their
suppliers to implement digital-to-digital copy protection.
COMPUTER SOFTWARE/CD-ROM COPY PROTECTION. We believe that there are a
limited number of competitors in the computer software/CD-ROM copy protection
market including TTR, LaserLock, PAN
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Technologies and Sony's DADC optical disk manufacturing subsidiary. None of
these companies appear to have made significant penetration with major
publishers in developed countries, and we believe we have captured the majority
market share of the PC games market. In the case of TTR, we have recently signed
a letter agreement to jointly develop an audio copy protection system. As part
of this arrangement, subject to satisfaction of certain conditions, we would
acquire the exclusive rights to market their audio copy protection technology,
as well as to convert their Discguard customer base to SafeDisc, and to acquire
rights to their digital signature technology for both CD-ROM and DVD-ROM
applications.
It is possible that our own customers may develop software copy
protection technologies on their own. It is also possible that personal computer
operating system and microprocessor companies like Microsoft, Sun Microsystems,
Red Hat, and Intel, may develop or license copy protection modules or systems
which are internal to the PC.
We believe that our ability to compete depends on many factors both
within and beyond our control, including:
- the performance of our technology including ease of use by software
developers, compatibility with installed base of PC and CD-ROM drives,
resistance to hackers;
- the effectiveness of our sales and marketing efforts;
- our ability to establish and support a worldwide base of licensed
replicators, and to provide through third party replication equipment
vendors the digital signature technology and associated quality
control systems; and
- our ability to match our licensing and pricing programs to the value
of our technology.
SAFEDISC HD AND SAFECAST. We do not believe we have any significant
competitors for SafeDisc HD. Our target market for SafeCast has been broadly
defined as electronic software distribution, and electronic license delivery for
application software. Both markets are new, intensely competitive, and rapidly
evolving. Our primary competition currently comes from, or is expected to come
from:
- companies offering digital rights management, electronic licensing, or
electronic software distribution technology;
- companies who have historically offered hardware dongle products and
who are shifting to software-based protection;
- companies who are operating system manufacturers or microprocessor
suppliers, who may choose to integrate rights management solutions
into their products; and
- companies who are software resellers who have developed their own
e-commerce solutions.
OPERATIONS AND TECHNICAL SUPPORT
We have a sizeable technical support/certification operation to support
our DVD manufacturer licensees, set top box licensees, authorized semiconductor
manufacturers, and our other hardware licensees. This operation is responsible
for analyzing our licensees' products to ensure that they have implemented the
video copy protection features with our specifications for both video waveforms
and security/tamper resistance.
We provide technical support to our videocassette, DVD, digital PPV and
Computer Software/CD-ROM customers in various ways:
- we support our licensed duplicators with hardware installation
assistance and quality control. In addition, we support licensed
duplicator sales personnel by providing sales training and sales
incentive programs and literature and by participating in trade shows;
- we support the efforts of television, VCR and DVD hardware
manufacturers, digital PPV system operators and PPV set-top box
manufacturers to design hardware that is compatible with our video
copy protection technologies;
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- we assist semiconductor manufacturers in incorporating our video copy
protection technologies into digital video integrated circuits for
digital to analog converters;
- we regularly test the effectiveness and transparency of our video copy
protection technologies on representative samples of consumer
televisions and VCRs to determine whether modifications or
enhancements may be necessary; and
- we provide training and application support for the SafeDisc toolkit;
and
- we test for SafeDisc compatibility with PC and CD-ROM drive
combinations.
In the Computer Software/CD-ROM copy protection business line, we have
taken the same rigorous approach to testing for compatibility and effectiveness
as we do for video copy protection. We have assembled two separate consumer test
groups, one in the United States and one in the United Kingdom, each in excess
of 500 individuals, that we utilize for major releases of software. These
individuals have a wide variety of PC and CD-ROM drive combinations, and they
are invaluable in stress testing the SafeDisc software.
We have minimal manufacturing operations. Our strategy is to license our
technologies to third parties that manufacture products incorporating our
technologies. Our manufacturing operations are limited to low volume video copy
protection hardware products that require in-house system integration and
quality control efforts.
STRATEGIC INVESTMENTS
We intend to expand our technology base in current as well as new
markets, through the strategic investments in companies with complementary or
compatible technologies or products. We have made strategic investments in the
following companies:
DIGIMARC CORPORATION. In December 1997, we invested $1.5 million in
Digimarc and we invested another $2 million in June 1999. Digimarc completed an
initial public offering in December 1999, and we currently own approximately
7.7% of the company. We have an agreement with Digimarc to jointly develop a
digital video watermarking copy protection solution to address the
digital-to-digital copying issues associated with the next generation of
recordable DVD and digital videocassette recording devices.
Digimarc is a leading provider of patented digital watermarking
technologies that allow imperceptible digital code to be embedded in traditional
and digital content, including movies, photographic images and documents such as
financial instruments, passports and event tickets. Digimarc's technologies
enable new communications capabilities related to protecting copyrights,
deterring counterfeiting or piracy and, for the first time, directly linking
physical content with the Internet.
We are working with Digimarc and Philips in a consortium known as the
Millennium Group to jointly develop a watermarking copy protection solution to
address the digital-to-digital copying issues associated with the next
generation of DVD and digital videocassette recording devices. The only other
competitor is the Galaxy Group, which is a consortium of IBM, NEC, Sony, Pioneer
and Hitachi. Both groups have proposed solutions to the Copy Protection
Technical Working Group, an industry group comprised of the Motion Picture
Association of America studios, PC manufacturers and consumer electronics
companies. Currently Matsushita Electric Industries and members of the Copy
Protection Technology Working Group are evaluating results of systems testing
and proposed terms and conditions.
TTR TECHNOLOGIES, LTD. In December 1999, we signed a letter agreement
with TTR to jointly develop and market a copy protection product designed to
inhibit casual copying of music CDs using dual-deck CD recorder systems and
personal computer based CD recordable drives. In addition, we have agreed to
purchase, subject to satisfactory completion of due diligence, an 11.4% equity
interest in TTR. TTR is a leading provider of proprietary digital anti-piracy
technologies and products.
AUDIOSOFT INTERNATIONAL. In August 1999, we invested $750,000 in
AudioSoft for approximately 7.3% of the outstanding shares of the company. We
have committed to invest an additional $750,000 should
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AudioSoft attain certain commercial milestones by March 31, 2000. As part of our
agreement with AudioSoft, we will also provide strategic marketing and technical
consulting services to AudioSoft and will assist AudioSoft in gaining adoption
of its technologies and systems. We will also work with AudioSoft to extend its
core technologies into the video domain. AudioSoft is an e-commerce solutions
company dedicated to the secure electronic distribution of music over the
Internet. AudioSoft technologies provide the music industry with a turnkey
solution to deliver copyrighted music electronically over the Internet on a
worldwide basis and to ensure that in-country music copyright collection
societies are properly compensated for performing and mechanical rights.
COMMAND AUDIO CORPORATION. In October 1995, Command Audio Corporation,
or CAC, was initially incorporated as our wholly-owned subsidiary to
commercialize a distinct and new audio-on-demand technology. CAC's
audio-on-demand system consists of a program center that provides continuously
updated news and information on a subscription basis and a hand-held portable
receiver that stores the information. The system allows consumers to control the
timing and content of the program playback. In August 1996, we divested all but
19.8% of our ownership in CAC. We assigned to CAC all rights in specified
technology and released its reversion rights in technology that we had
previously assigned to CAC. CAC agreed to pay to us royalties equal to 2.0% of
its gross revenues for 12 years, beginning when CAC has operating revenues from
certain sources or, at our election, at any time prior thereto. As of
December 1999, we have invested $3.7 million and own approximately 6.2% of the
outstanding shares of CAC.
EMPLOYEES
As of December 1, 1999, we had 129 employees. We had 33 in sales and
marketing, 29 in engineering, 38 in technical support and operations and 29 in
general and administrative capacities. 51 of these employees are based outside
of the United States. None of our employees is covered by a collective
bargaining agreement or is represented by a labor union with respect to their
employment by us. We have not experienced any organized work stoppages and
consider our relations with our employees to be good.
We use a variety of incentive programs to motivate our employees,
including annual performance-based bonuses, stock purchase plans, stock options,
special recognition awards, and a package of other benefit programs including a
401(k) plan, medical/dental benefits, compensating time for community service
and health club reimbursement.
Our engineering teams work on new products and enhancements, and also
contribute to our technical due diligence efforts when we invest in partner
companies, conclude joint development agreements, or acquire exclusive rights to
certain partner technologies. In connection with our acquisition of C-Dilla we
acquired its software development organization. C-Dilla's engineering staff
consists of highly skilled software architects, encryption specialists, and
senior software developers. We intend to use this resource to develop our
SafeCast management technology products, as well as our proposed audio copy
protection solution.
Our technical support staff provides customer sales support and conducts
extensive compatibility and effectiveness tests for our various copy protection
technologies. In addition, this staff runs an extensive certification lab to
confirm that our licensees have implemented our video copy protection
technologies properly in integrated circuits and DVD or set-top box hardware.
Our sales and marketing groups include senior executives who run our
business lines and provide executive level account management to our major
customers. Our in-house legal department provides licensing and patent counsel
to our business line vice presidents.
FACILITIES
Our principal operations are located in a 43,960 square foot building in
Sunnyvale, California. The lease for this building expires on June 30, 2002 and
we have the right to renew the lease for two additional terms of five years
each. We also lease space for sales, marketing and technical support
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operations in South Ruislip, United Kingdom and in Tokyo, Japan. C-Dilla is
based in a leased facility in Woodley, United Kingdom. We believe that our
existing facilities are adequate to meet our current needs.
LEGAL PROCEEDINGS
We are involved in legal proceedings related to some of our intellectual
property rights.
Krypton Co., Ltd., a Japanese company, has filed an invalidation claim
against one of our copy protection 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, we expect
the matter to be decided by the Tokyo High Court sometime in 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.
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 us. 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 we have 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 us is invalid and that Cavendish's products do not infringe the patent. We
intend to defend the allegations in the counterclaim vigorously.
We initiated a patent infringement lawsuit in March 1999 against Vitec
Audio und Video GmbH, a German company, which manufactures what we believe to be
a video copy protection circumvention device. Vitec has filed a reply brief
arguing that its product does not infringe. The case is being heard in the
District Court of Dusseldorf, Germany. In the event of an adverse ruling, we may
incur a corresponding decline in demand for our video copy protection
technology, which could harm our business in our Germany operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Macrovision, and their ages and
positions as of December 1, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
John O. Ryan......................... 54 Chairman of the Board of Directors, Chief Executive
Officer and Secretary
William A. Krepick................... 54 President, Chief Operating Officer and Director
Ian R. Halifax....................... 39 Vice President, Finance and Administration and Chief
Financial Officer
Richard S. Matuszak.................. 56 Vice President, Special Interest Copy Protection and
Director
Mark S. Belinsky..................... 42 Senior Vice President, New Business Development
Brian R. Dunn........................ 43 Senior Vice President, Computer Software Copy
Protection
Carol Flaherty....................... 47 Vice President, Worldwide Theatrical and Pay-Per-View
Copy Protection
Patrice J. Capitant.................. 51 Vice President, Engineering
Donna S. Birks(1).................... 44 Director
William N. Stirlen(1)................ 60 Director
Thomas Wertheimer(1)................. 61 Director
</TABLE>
- ------------------------
(1) Member, Audit Committee and Compensation Committee.
MR. RYAN is a co-founder of Macrovision and an inventor of our core copy
protection and video scrambling technologies. He has served as our Chairman of
the Board of Directors and Secretary since June 1991 and has served as our Chief
Executive Officer since June 1995. He has been a director since June 1987 and
served as our Vice-Chairman of the Board of Directors from 1987 until
June 1991. He also served as General Partner of the partnership predecessor of
Macrovision from 1985 to 1987 and as President and Secretary of the corporate
predecessor of Macrovision from 1983 to 1985. Prior to founding Macrovision,
Mr. Ryan was Director of Research and Development of Ampex Corporation's
broadcast camera group. Mr. Ryan holds more than 46 patents and has 11 patent
applications pending in the fields of video copy protection, video scrambling
and television camera technology. Mr. Ryan took undergraduate courses in Physics
and Math at the University of Galway in Ireland and received a Full
Technological Certificate in Telecommunications from the City and Guilds
Institute of London. Mr. Ryan is also a director of Command Audio Corporation.
MR. KREPICK has served as a director since November 1995 and as our
President and Chief Operating Officer since July 1995. He has been with
Macrovision since November 1988, and served as our Vice President, Sales and
Marketing until June 1992 and Senior Vice President, Theatrical Copy Protection
from July 1992 to June 1995. Prior to joining Macrovision, Mr. Krepick held
several executive marketing management positions over a ten-year period with
ROLM Corporation, a telecommunications equipment manufacturing company. He holds
a B.S. degree in Mechanical Engineering from Rensselaer Polytechnic Institute
and an M.B.A. from Stanford University.
MR. HALIFAX has served as our Vice President, Finance and Administration
and Chief Financial Officer since October 1999. From February 1999 to September
1999, he served as Chief Financial Officer of S-Vision, a private semiconductor
display technology company. From October 1997 to January 1999 he was Director,
Corporate Transactions for KPMG LLP, providing advisory services to technology
companies in the areas of technology licensing, financing, and strategic
partnering. From November 1994 to September 1997 he was Chief Financial Officer
for Thomson/Sun Interactive, the predecessor for OpenTV, Inc., a Sun
Microsystems/THOMSON multimedia joint venture in the field of interactive TV
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operating systems. He also held finance and business development positions at
Sun Microsystems in Europe and the United States. He holds a B.A. degree in
English from the University of York and an M.B.A. in Finance from Henley
Management College. Mr. Halifax is also a Certified Public Accountant and a
Certified Management Accountant.
MR. MATUSZAK has served as our Vice President, Special Interest Copy
Protection since June 1992, and as a director since May 1992. He joined
Macrovision in August 1985 and held various sales and marketing positions from
August 1985 to June 1992. From June 1984 to August 1985, Mr. Matuszak was a
Sales Manager for the Broadcast Products Division of Hitachi Corporation. He
holds an Associate degree in Applied Technologies and Electronics from DeVry
Institute of Technology.
MR. BELINSKY has served as our Senior Vice President, New Business
Development since January 1999. From October 1997 to December 1998 he was our
Senior Vice President, Theatrical and Pay-Per-View Copy Protection.
Mr. Belinsky was our Vice President, Theatrical and Pay-Per-View Copy Protection
from October 1995 to October 1997. Between June and September 1995, he was a
consultant to various companies in the Internet services and electronic commerce
fields, and, between June 1995 and August 1995, he was Chief Operating Officer
of the McKinley Group, Inc., an Internet directory services company. From
May 1993 to June 1995, Mr. Belinsky was Vice President and General Manager of
the Electronic Marketplace Systems Division of International Data Group, a
developer of online shopping malls for personal computer and software products.
He was an independent consultant between February and May 1993, and, from
October 1988 to January 1993, he was Vice President and General Manager of the
Interop Company, a division of Ziff-Davis Publishing Company. He holds a
B.A. degree in Business Administration from Wayne State University and an M.B.A.
from Harvard Business School.
MR. DUNN has served as our Senior Vice President, Computer Software Copy
Protection since June 1999. He has been with Macrovision since January 1995 and
served as our VP Computer Software Copy Protection and Vice President, Business
Development in his prior roles. From January 1989 to December 1994, he served as
Vice President, Operations, Corporate Counsel and Chief Financial Officer of
Phase 2 Automation, a factory automation company. Mr. Dunn holds a B.A. degree
in Accounting from the University of Notre Dame and a J.D. degree from Santa
Clara University School of Law. He is a Certified Public Accountant and a member
of the California State Bar.
MS. FLAHERTY has served as our Vice President, Video Copy Protection,
since April of 1999. From September 1997 to April 1999, she was Director of
Business Development for Digital Link Corporation. From April 1996 to
September 1997, Ms. Flaherty was Vice President of Sales for Multipoint
Networks, a company that provided wireless transmission equipment to
international carriers. From April 1995 to March 1996, she was Vice President of
Business Development for a division of California Microwave. Prior to joining
California Microwave, Ms. Flaherty spent nine years with GTE, serving first as
Controller of GTE Telenet's Public Data Network division and, later, as Director
of Program Management for satellite system sales under GTE Spacenet.
Ms. Flaherty holds a B.A. degree in Economics from the University of Virginia
and an M.B.A. from Golden Gate University.
DR. CAPITANT has served as our Vice President, Engineering since
October 1996. He joined Macrovision in October 1995 as Director of Engineering.
He served as Manager of Video Engineering at Radius, Inc., a computer equipment
manufacturer, from December 1994 to September 1995. Dr. Capitant held
engineering positions at Compression Labs, Inc., a telecommunications equipment
manufacturer, from September 1993 to December 1994 and Sony Corporation of
America, Advanced Video Technology Center, from September 1989 to
September 1993. He completed his undergraduate and post graduate work in
engineering and automatic control at Institut Industrial du Nord, Lille, France
and the University of Lille. Dr. Capitant holds a Ph.D. degree in Electrical
Engineering from Stanford University.
MS. BIRKS has served as a director since May 1997. Since December 1997,
she has served as Executive Vice President and Chief Financial Officer at
Adaptive Broadband Inc., a satellite and wireless communications company, and
from August 1994 to June 1997, she served as Vice President, Finance and
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Administration and Chief Financial Officer at ComStream. She has also held
senior management positions at GTE Spacenet, Macrovision Corporation and Contel
ASC. Ms. Birks holds a B.A. degree in Business Administration from George Mason
University in Fairfax, Virginia and an M.S. degree in Finance from American
University in Washington, D.C. She is a Certified Public Accountant.
MR. STIRLEN has served as a director since May 1997. He has held various
executive offices with Open Text Corporation, an intranet software company
headquartered in Waterloo, Ontario, since June 1996, serving as Chief Financial
Officer until October 1997 and as Executive Vice President of Corporate
Development since October 1998. Mr. Stirlen was a consultant to technology
companies from February 1994 to June 1996. From March 1993 to February 1994, he
served as Chief Financial Officer of Supercuts Inc. He has also held senior
management positions at Computer Consoles Inc. and Trimble Navigation Ltd.
Mr. Stirlen holds a B.A. degree from Yale University and an M.B.A. in Finance
from Northwestern University.
MR. WERTHEIMER has served as a director since July 1997. He has served
as a consultant to Universal Studios since January 1996. From 1992 to
January 1996, Mr. Wertheimer served as Executive Vice President and Chairman of
the Home Video and Television Groups of MCA, Inc. He is a member of 4MC Corp.
Board of Directors and of the Columbia Law School Board of Visitors. He also
serves as President of the KCRW Foundation. Mr. Wertheimer holds a B.A. degree
from Princeton University and an L.L.B. from Columbia University
Each director holds office until our next annual meeting of stockholders
or until his or her successor is duly elected and qualified. Officers are chosen
by, and serve at the discretion of, our Board of Directors. There are no family
relationships among our directors and officers.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of December 1, 1999, as adjusted to
reflect the sale of common stock offered by this prospectus, for:
- each person or group that we know beneficially owns more than 5% of
our common stock;
- each of our directors;
- each executive officer; and
- all of our directors and executive officers as a group.
Percentage of beneficial ownership is based on 18,410,125 shares of
common stock outstanding as of December 1, 1999, together with options that are
exercisable within 60 days of December 1, 1999 for each stockholder. Under the
rules of the Securities and Exchange Commission, beneficial ownership includes
shares over which the indicated beneficial exercises voting and/or investment
power. Shares of common stock subject to options that are currently exercisable
or will become exercisable within 60 days are deemed outstanding for computing
the percentage ownership of the person holding the option, but are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. The percentages for beneficial ownership after the offering assume that
the underwriters do not exercise their over-allotment option. Unless otherwise
indicated in the footnotes below, we believe that the persons and entities named
in the table have sole voting and investment power with respect to all shares
beneficially owned, subject to applicable community property laws. Unless
otherwise indicated, the following beneficial owners can be reached at our
principal offices.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) NUMBER OF AFTER THE OFFERING(1)(2)
------------------------- SHARES BEING -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------ --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Victor Company of Japan,
Limited(3).................... 2,010,976 10.9% 430,000 1,580,976 8.0%
Kopp Investment Advisors(4).... 1,951,773 10.6 1,951,773 9.9
The TCW Group Inc.(5).......... 1,540,500 8.4 -- 1,540,500 7.8
John O. Ryan(6)................ 1,052,519 5.7 -- 1,052,519 5.4
William A. Krepick............. 232,738 1.3 20,000 212,738 1.1
Richard S. Matuszak(7)......... 100,234 * -- 100,234 *
William N. Stirlen............. 17,968 * 5,000 12,968 *
Donna S. Birks................. 14,650 * -- 14,650 *
Thomas Wertheimer.............. 11,400 * 5,000 6,400 *
Mark S. Belinsky............... 9,228 * -- 9,228 *
Brian R. Dunn.................. 4,880 * -- 4,880 *
Patrice J. Capitant............ 1,114 * -- 1,114 *
All executive officers and
directors as a group
(9 persons)................... 1,437,732 7.8% 30,000 1,407,732 7.2%
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of common stock subject to options that are currently exercisable or
exercisable within 60 days of December 1, 1999 are deemed to be outstanding
and to be beneficially owned by the person holding such options for the
purpose of computing the percentage ownership
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<PAGE>
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Assumes that the underwriters' over-allotment option to purchase up to
256,500 shares is not exercised.
(3) These shares are held of record by Pacific Media Development Inc., an
indirect, wholly-owned subsidiary of JVC. The address of JVC is
12, 3-chome, Moriya-cho, Kanagawa-ku, Yokohama 221-8528, Japan.
(4) According to a Schedule 13G filed with the Securities and Exchange
Commission on December 8, 1999, these shares are held by Kopp Investment
Advisors, Inc., a Minnesota corporation, which is wholly-owned by Kopp
Holding Company, a Minnesota corporation, which is wholly owned by
LeRoy C. Kopp. The address of Kopp Investment Advisors, Inc. is
7701 France Avenue South, Suite 500, Edina, Minnesota 55435.
(5) According to information provided by The Carson Group, Inc. as of
September 30, 1999, these shares are held of record by The TCW Group Inc.,
a Nevada corporation, and by an individual, Robert Day, who may be deemed
to control The TCW Group Inc. The address of The TCW Group Inc. is
865 South Figueroa Street, Los Angeles, California 90017. The address of
Mr. Day is 200 Park Avenue, Suite 2200, New York, New York 10166.
(6) Represents 822,110 shares held of record by a trust of which Mr. Ryan and
his wife are the trustees, 202,078 shares held of record by Mr. Ryan, 6,999
shares held of record by Mr. Ryan as custodian for various family members,
and 21,332 shares held of record by one of his daughters.
(7) Represents 100,234 shares held of record by Mr. Matuszak of which
Mr. Matuszak claims beneficial ownership for 55,032 shares.
56
<PAGE>
UNDERWRITING
Hambrecht & Quist LLC, SG Cowen Securities Corporation, U.S. Bancorp
Piper Jaffray Inc. and ING Barings LLC are the representatives of the
underwriters. Hambrecht & Quist LLC is acting as book-running manager. SG Cowen
Securities Corporation is acting as co-lead manager, and
U.S. Bancorp Piper Jaffray Inc. and ING Barings LLC are acting as co-managers.
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, through their representatives, have severally agreed
to purchase from Macrovision and the selling stockholders the following
respective number of shares of common stock:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Hambrecht & Quist LLC....................................
SG Cowen Securities Corporation..........................
U.S. Bancorp Piper Jaffray Inc...........................
ING Barings LLC..........................................
Total....................................................
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and independent
auditors. The underwriters are committed to purchase all of the shares of our
common stock offered by us if they purchase any shares.
The underwriters propose to offer the shares of our common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After this
offering of the shares, the offering price and other selling terms may be
changed by the underwriters.
We and the selling stockholders have granted to the underwriters an
option, exercisable no later than 30 days after the date of this prospectus, to
purchase up to 256,500 additional shares of our common stock at the public
offering price, less the underwriting discount, set forth on the cover page of
this prospectus. To the extent that the underwriters exercise this option, each
underwriter will have a firm commitment to purchase approximately the same
percentage of the additional shares that the number of shares of our common
stock to be purchased by such underwriter shown in the above table bears to the
total number of shares of our common stock offered in this offering. We and our
selling stockholders will be obligated, pursuant to the option, to sell shares
to the underwriters to the extent the option is exercised. The underwriters may
exercise the option only to cover over-allotments made in connection with the
sale of our common stock offered in this prospectus.
The following table summarizes the per share and total underwriting
discounts and commissions that we and our selling stockholders will pay to the
underwriters. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' over-allotment option to purchase additional shares.
<TABLE>
<CAPTION>
WITHOUT OVER WITH OVER
ALLOTMENT EXERCISE ALLOTMENT EXERCISE
------------------ ------------------
<S> <C> <C>
Per Share.............................
Total.................................
</TABLE>
The offering of the shares is made for delivery when, as and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
57
<PAGE>
We, together with the selling stockholders, have agreed to indemnify the
underwriters against certain liabilities; including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make in respect thereof.
Certain of our stockholders, including all executive officers and
directors, who beneficially own in the aggregate 2,803,591 shares of our common
stock are subject to lock-up agreements and have agreed that they will not,
without the prior written consent of Hambrecht & Quist offer, sell, or otherwise
dispose of any shares of our common stock, options or warrants to acquire shares
of our common stock or securities exchangeable for or convertible into shares of
our common stock owned by them until 91 days following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of Hambrecht & Quist, offer, sell or otherwise dispose of any shares of our
common stock, options or warrants to acquire shares of our common stock or
securities exchangeable for or convertible into shares of our common stock until
the date 91 days following the date of this prospectus, except that we may issue
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under our stock option plans, provided that, without
the prior written consent of Hambrecht & Quist such additional options shall not
be exercisable during such period.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of our common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
this offering. A penalty bid means an arrangement permitting the underwriters to
reclaim the selling concession otherwise accruing to an underwriter or syndicate
member if the stock originally sold by the underwriter or syndicate member is
purchased by the underwriters in a syndicate covering transaction. Such
transactions may be effected on the Nasdaq National Market, in the
over-the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. During the business day prior to
the pricing of the offering before, the commencement of offers or sales of our
our common stock, passive market makers must comply with applicable volume and
price limitations and, must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $440,000.
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for us and the selling stockholders by Manatt, Phelps & Phillips, LLP, Palo
Alto, California. Partners of Manatt, Phelps & Phillips, LLP own an aggregate of
14,330 shares of our common stock. Legal matters in connection with this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
58
<PAGE>
EXPERTS
The consolidated financial statements of Macrovision Corporation and
subsidiaries as of December 31, 1997, and 1998 and for each of the years in the
three-year period ended December 31, 1998 have been included herein and in the
registration statement in reliance on the report of KPMG LLP, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT MACROVISION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that we submit at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information about
the public reference rooms. Our public submissions are also available to the
public from commercial document retrieval services and at the Internet World
Wide Web site maintained by the SEC at www.sec.gov. We also maintain an Internet
World Wide Web site where the documents may be obtained at www.macrovision.com.
In addition, our common stock is quoted on the Nasdaq National Market so you may
also inspect our reports, proxy statements and other information at the offices
of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We have filed a registration statement to register with the SEC the
shares of common stock offered in this offering. This document is a part of the
registration statement and constitutes a prospectus. As allowed by SEC rules,
this document does not contain all the information that investors can find in
the registration statement or the exhibits to the registration statement. The
SEC allows us to "incorporate by reference" information into this document,
which means that we can disclose important information to you by referring you
to another document filed separately with the SEC. The information incorporated
by reference is deemed to be a part of this document, except for any
incorporated information that is superseded by information contained directly in
this document. Thus, information in this document about any of our contracts or
any other documents is not necessarily complete. Furthermore, every time we
refer to a contract or document that is filed as an exhibit to the registration
statement or is incorporated by reference into the registration statement we
intend these references to be qualified in all respects by the filed contracts
or other documents. This document incorporates by reference the documents set
forth below that we have previously filed with the SEC. These documents contain
important business information about us and our financial condition:
<TABLE>
<CAPTION>
MACROVISION CORPORATION SEC FILINGS PERIOD
----------------------------------- ------
<S> <C>
Annual Report on Form 10-KSB............. Year ended December 31, 1998
Quarterly Reports on Form 10-Q........... Periods ended March 31, 1999, June 30,
1999 and September 30, 1999
Current Report on Form 8-K............... June 18, 1999 (as amended by Form 8-K/A
filed on August 30, 1999)
Registration Statement on Form 8-A....... January 22, 1997, setting forth a
description of our capital stock.
</TABLE>
We incorporate by reference additional documents that we may file with
the SEC between the date of this document and the date this offering terminates.
These include periodic reports, such as Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
You may obtain documents incorporated by reference through us, the SEC
or through the SEC's Internet World Wide Web site described above. To obtain
documents from the SEC you will be required to pay a fee that is set by the SEC.
Documents incorporated by reference are available from us, without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this document.
59
<PAGE>
You may obtain documents incorporated by reference in this document by
requesting them in writing or by telephone at the following:
Macrovision Corporation
1341 Orleans Drive
Sunnyvale, CA 94089,
Telephone: (408) 743-8600.
Attention: Ian R. Halifax
You should rely only on the information contained in this document or
incorporated by reference in this document to invest in the common stock offered
in this offering. We have not authorized anyone to provide you with information
that is different from what is contained in this document. This document is
dated , 2000. You should not assume that the information contained in
this document is accurate as of any date other than that date.
60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Macrovision Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Macrovision Corporation and subsidiaries (the Company) as of December 31, 1997
and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Macrovision
Corporation and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Mountain View, California
February 1, 1999,
except as to Note 9(a),
which is as of March 16, 1999
F-2
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,314 $ 3,513 $ 7,351
Short-term investments.................................... 11,241 22,877 18,196
Accounts receivable, net of allowance for doubtful
accounts of $684, $838 and $1,089 as of December 31,
1997 and 1998 and September 30, 1999, respectively...... 5,240 5,574 8,812
Inventories............................................... 433 325 211
Receivable from related party............................. 279 -- --
Deferred tax assets....................................... 1,336 1,669 2,221
Prepaid expenses and other current assets................. 430 1,008 1,365
------- ------- -------
Total current assets.................................... 20,273 34,966 38,156
Property and equipment, net................................. 1,722 1,297 1,678
Patents and other intangibles, net of accumulated
amortization of $796 and $1,034 and $1,202 as of
December 31, 1997 and 1998 and September 30, 1999,
respectively.............................................. 1,098 1,526 1,645
Long-term marketable investment securities.................. 1,763 18,795 11,662
Intangibles associated with the C-Dilla Ltd. acquisition,
net of accumulated amortization of $791 as of
September 30, 1999........................................ -- -- 15,611
Other assets................................................ 4,000 8,910 9,981
------- ------- -------
$28,856 $65,494 $78,733
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 919 $ 803 $ 1,092
Accrued expenses.......................................... 2,190 2,691 3,069
Deferred revenue.......................................... 944 1,207 2,424
Income taxes payable...................................... 846 680 1,878
Current portion of capital lease obligations.............. 108 112 105
------- ------- -------
Total current liabilities............................... 5,007 5,493 8,568
Capital lease obligations, net of current portion........... 188 76 --
Deferred tax liabilities.................................... 84 383 --
------- ------- -------
5,279 5,952 8,568
------- ------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares
authorized; none issued................................. -- -- --
Common stock, $.001 par value; 100,000,000 shares
authorized as of December 31, 1997 and 1998 and
September 30, 1999, respectively; 14,430,390, 17,605,140
and 18,331,678 shares issued and outstanding as of
December 31, 1997 and 1998 and September 30, 1999,
respectively............................................ 15 18 18
Additional paid-in capital................................ 23,269 52,608 59,763
Stockholder notes receivable.............................. (131) (78) --
Deferred stock compensation............................... (96) -- --
Accumulated other comprehensive losses.................... (214) (82) (235)
Retained earnings......................................... 734 7,076 10,619
------- ------- -------
Total stockholders' equity.............................. 23,577 59,542 70,165
------- ------- -------
$28,856 $65,494 $78,733
======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................................ $17,080 $20,340 $24,434 $17,150 $24,583
------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues...................................... 2,579 2,422 2,081 1,439 2,140
Research and development.............................. 2,527 2,248 2,578 1,967 2,906
Selling and marketing................................. 5,090 5,765 5,985 4,367 6,192
General and administrative............................ 3,566 4,149 4,621 3,401 3,982
Amortization of intangibles from acquisition.......... -- -- -- -- 791
In process research and development................... -- -- -- -- 4,286
------- ------- ------- ------- -------
Total costs and expenses............................ 13,762 14,584 15,265 11,174 20,297
------- ------- ------- ------- -------
Operating income from continuing operations............. 3,318 5,756 9,169 5,976 4,286
Interest and other income (expense), net................ (260) 478 1,102 685 1,198
------- ------- ------- ------- -------
Income from continuing operations before income
taxes............................................. 3,058 6,234 10,271 6,661 5,484
Income taxes............................................ 1,223 2,413 3,929 2,543 1,941
------- ------- ------- ------- -------
Income from continuing operations................... 1,835 3,821 6,342 4,118 3,543
Discontinued operations:
Loss from operations of Command Audio business, net of
income tax benefit of $204.......................... (663) -- -- -- --
Provision for operating losses during holding period,
net of income tax benefit of $45.................... (164) -- -- -- --
------- ------- ------- ------- -------
Net income.......................................... $ 1,008 $ 3,821 $ 6,342 $ 4,118 $ 3,543
======= ======= ======= ======= =======
Computation of basic and diluted earnings per share:
Income from continuing operations..................... $ 1,835 $ 3,821 $ 6,342 $ 4,118 $ 3,543
Preferred stock dividends............................. (587) (156) -- -- --
------- ------- ------- ------- -------
Income from continuing operations applicable to common
stock............................................... 1,248 3,665 6,342 4,118 3,543
Discontinued operations............................... (827) -- -- -- --
------- ------- ------- ------- -------
Net income applicable to common stock................. $ 421 $ 3,665 $ 6,342 $ 4,118 $ 3,543
======= ======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations................................. $ .16 $ .28 $ .40 $ .27 $ .20
Discontinued operations............................... (.11) -- -- -- --
------- ------- ------- ------- -------
Net income.......................................... $ .05 $ .28 $ .40 $ .27 $ .20
======= ======= ======= ======= =======
Shares used in computing basic earnings per share....... 7,574 12,952 16,008 15,501 18,002
======= ======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations................................. $ .15 $ .26 $ .37 $ .25 $ .19
Discontinued operations............................... (.10) -- -- -- --
------- ------- ------- ------- -------
Net income.......................................... $ .05 $ .26 $ .37 $ .25 $ .19
======= ======= ======= ======= =======
Shares used in computing diluted earnings per share..... 8,560 13,920 17,106 16,564 18,964
======= ======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
--------------------- --------------------- PAID-IN NOTES STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- -------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31, 1995... 1,666,666 $ 2 7,265,438 $ 7 $ 5,054 $ -- $ --
Comprehensive income
Net income.....................
Other comprehensive income
Translation adjustment.......
Total comprehensive income.......
Issuance of common stock upon
exercise of options............ 132,526 171
Issuance of common stock in
exchange for stockholder note
receivable..................... 116,666 157 (157)
Issuance of common stock in
connection with
recapitalization of Command
Audio.......................... 388,888 1 874
Conversion of note into 1,086,198
shares of Series A preferred
stock.......................... 1,086,198 1 3,037
Cash dividends of $.2025 per
share paid on 1,666,666 shares
of preferred stock, $.0585 per
share paid on 1,086,198 shares
of preferred stock, and $.0675
per share declared on 2,752,864
shares of preferred stock......
Deferred stock compensation
related to stock option
grants......................... 231 (231)
Spin-off of Command Audio,
including deferred stock
compensation................... (189)
Amortization of deferred stock
compensation................... 180
---------- ---- ---------- ---- ------- ------ ------
Balances as of December 31, 1996... 2,752,864 $ 3 7,903,518 $ 8 $ 9,524 $ (157) $ (240)
---------- ---- ---------- ---- ------- ------ ------
Comprehensive income
Net income.....................
Other comprehensive income
Translation adjustment.......
Unrealized gain (loss) in
investments, net...........
Total comprehensive income.......
Conversion of preferred stock to
common stock................... (2,752,864) (3) 2,752,864 3 -- -- --
Issuance of common stock in
initial public offering, net of
issuance costs of $1,531 -- -- 3,528,032 4 13,230 -- --
Issuance of common stock upon
exercise of options............ -- -- 222,684 -- 288 -- --
Issuance of common stock under
stock purchase plan............ -- -- 23,292 -- 89 -- --
Cash dividends of $.0375 per
share paid on 2,752,864 shares
of preferred stock............. -- -- -- -- -- -- --
Payment on stockholder note
receivable..................... -- -- -- -- -- 26 --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- 144
Tax benefit associated with stock
plans.......................... -- -- -- -- 138 -- --
---------- ---- ---------- ---- ------- ------ ------
Balances as of December 31, 1997... -- $ -- 14,430,390 $ 15 $23,269 $ (131) $ (96)
---------- ---- ---------- ---- ------- ------ ------
<CAPTION>
ACCUMULATED (ACCUMULATED
OTHER DEFICIT) TOTAL
COMPREHENSIVE RETAINED STOCKHOLDERS'
LOSS EARNINGS EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Balances as of December 31, 1995... $ (118) $(2,099) $ 2,846
Comprehensive income
Net income..................... 1,008 1,008
Other comprehensive income
Translation adjustment....... (17) (17)
------ -------
Total comprehensive income....... (17) 991
------ -------
Issuance of common stock upon
exercise of options............ 171
Issuance of common stock in
exchange for stockholder note
receivable.....................
Issuance of common stock in
connection with
recapitalization of Command
Audio.......................... 875
Conversion of note into 1,086,198
shares of Series A preferred
stock.......................... 3,038
Cash dividends of $.2025 per
share paid on 1,666,666 shares
of preferred stock, $.0585 per
share paid on 1,086,198 shares
of preferred stock, and $.0675
per share declared on 2,752,864
shares of preferred stock...... (587) (587)
Deferred stock compensation
related to stock option
grants.........................
Spin-off of Command Audio,
including deferred stock
compensation................... (1,253) (1,442)
Amortization of deferred stock
compensation................... 180
------ ------- -------
Balances as of December 31, 1996... $ (135) $(2,931) $ 6,072
------ ------- -------
Comprehensive income
Net income..................... -- 3,821 3,821
Other comprehensive income
Translation adjustment....... (83) (83)
Unrealized gain (loss) in
investments, net........... 4 4
------ -------
Total comprehensive income....... (79) 3,742
------ -------
Conversion of preferred stock to
common stock................... -- -- --
Issuance of common stock in
initial public offering, net of
issuance costs of $1,531 -- -- 13,234
Issuance of common stock upon
exercise of options............ -- -- 288
Issuance of common stock under
stock purchase plan............ -- -- 89
Cash dividends of $.0375 per
share paid on 2,752,864 shares
of preferred stock............. -- (156) (156)
Payment on stockholder note
receivable..................... -- -- 26
Amortization of deferred stock
compensation................... -- -- 144
Tax benefit associated with stock
plans.......................... -- -- 138
------ ------- -------
Balances as of December 31, 1997... $ (214) $ 734 $23,577
------ ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER DEFERRED
--------------------- --------------------- PAID-IN NOTES STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- -------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income
Net income.....................
Other comprehensive income
Translation adjustment.......
Unrealized gain (loss) in
investments, net...........
Total comprehensive income.......
Issuance of common stock in
secondary public offering, net
of issuance costs of $438...... -- -- 2,730,000 3 27,869 -- --
Issuance of common stock upon
exercise of options............ -- -- 370,672 -- 561 -- --
Issuance of common stock under
stock purchase plan............ -- -- 74,078 -- 292 -- --
Payment on stockholder note
receivable..................... -- -- -- -- -- 53 --
Amortization of deferred stock
compensation................... -- -- -- -- -- -- 96
Tax benefit associated with stock
plans.......................... -- -- -- -- 617 -- --
---------- ---- ---------- ---- ------- ------ ------
Balances as of December 31, 1998... -- $ -- 17,605,140 $ 18 $52,608 $ (78) $ --
---------- ---- ---------- ---- ------- ------ ------
Comprehensive income (unaudited)
Net income.....................
Other comprehensive income
Translation adjustment.......
Unrealized gain (loss) in
investments, net...........
Total comprehensive income.......
Issuance of common stock upon
exercise of options
(unaudited).................... 459,748 969
Issuance of common stock under
stock purchase plan
(unaudited).................... 47,392 331
Issuance of common stock for
payment of director fees
(unaudited).................... 1,000 25
Issuance of common stock in
acquisition of C-Dilla Ltd.
(unaudited).................... 218,398 5,073
Payment on stockholder note
receivable (unaudited)......... 78
Tax benefit associated with stock
plans (unaudited).............. 757
---------- ---- ---------- ---- ------- ------ ------
Balances as of September 30, 1999
(unaudited)...................... -- $ -- 18,331,678 $ 18 $59,763 $ -- $ --
========== ==== ========== ==== ======= ====== ======
<CAPTION>
ACCUMULATED (ACCUMULATED
OTHER DEFICIT) TOTAL
COMPREHENSIVE RETAINED STOCKHOLDERS'
LOSS EARNINGS EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
Comprehensive income
Net income..................... -- 6,342 6,342
Other comprehensive income
Translation adjustment....... (12) (12)
Unrealized gain (loss) in
investments, net........... 144 144
------ -------
Total comprehensive income....... 132 6,474
------ -------
Issuance of common stock in
secondary public offering, net
of issuance costs of $438...... -- -- 27,872
Issuance of common stock upon
exercise of options............ -- -- 561
Issuance of common stock under
stock purchase plan............ -- -- 292
Payment on stockholder note
receivable..................... -- -- 53
Amortization of deferred stock
compensation................... -- -- 96
Tax benefit associated with stock
plans.......................... -- -- 617
------ ------- -------
Balances as of December 31, 1998... $ (82) $ 7,076 $59,542
------ ------- -------
Comprehensive income (unaudited)
Net income..................... 3,543 3,543
Other comprehensive income
Translation adjustment....... 62 62
Unrealized gain (loss) in
investments, net........... (215) (215)
------ -------
Total comprehensive income....... (153) 3,390
------ -------
Issuance of common stock upon
exercise of options
(unaudited).................... 969
Issuance of common stock under
stock purchase plan
(unaudited).................... 331
Issuance of common stock for
payment of director fees
(unaudited).................... 25
Issuance of common stock in
acquisition of C-Dilla Ltd.
(unaudited).................... 5,073
Payment on stockholder note
receivable (unaudited)......... 78
Tax benefit associated with stock
plans (unaudited).............. 757
------ ------- -------
Balances as of September 30, 1999
(unaudited)...................... $ (235) $10,619 $70,165
====== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,008 $ 3,821 $ 6,342 $ 4,118 $ 3,543
Adjustments to reconcile net income to net cash provided
by continuing operations:
Depreciation and amortization........................... 1,002 1,156 931 699 1,600
Amortization of prepaid future royalties to C-Dilla
Ltd................................................... -- -- 143 70 166
Deferred income taxes................................... (451) (683) (34) (91) (2,289)
Amortization of deferred stock compensation............. 180 144 96 96 --
Loss on disposal of fixed assets........................ -- 105 17 -- --
Tax benefit from employee stock benefit plans........... -- 138 617 -- 756
In process research and development..................... -- -- -- -- 4,286
Change in provision for accounts and notes receivable... 13 467 123 77 251
Discontinued operations................................. 827 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current
assets.............................................. (590) (2,408) (958) (804) (2,944)
Accounts payable, accrued liabilities, deferred
revenue, and income taxes payable................... 916 (221) 482 1,085 1,665
Other................................................. (17) (83) (12) (67) 69
------- -------- -------- -------- --------
Net cash provided by continuing operations.......... 2,888 2,436 7,747 5,183 7,103
Net cash used in discontinued operations............ (1,227) -- -- -- --
------- -------- -------- -------- --------
Net cash provided by operating activities........... 1,661 2,436 7,747 5,183 7,103
------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of long-term marketable investment securities... -- (1,763) (19,495) (18,364) (11,635)
Purchases of short-term investments....................... -- (51,737) (56,527) (47,120) (24,345)
Sales or maturities of long-term marketable investments... -- -- 2,541 2,541 18,617
Sales or maturities of short-term investments............. 1,200 40,500 44,957 38,160 28,963
Acquisition of property and equipment..................... (476) (571) (285) (210) (402)
Payments for patents and other intangibles................ (343) (332) (666) (512) (393)
Proceeds from related party receivable.................... (329) -- 310 310 --
Receivable from related party............................. -- -- -- -- (481)
Acquisition of C-Dilla Ltd., net of cash acquired......... -- -- -- -- (11,960)
Investment in C-Dilla Ltd., Command Audio, Digimarc and
AudioSoft............................................... -- (3,480) (4,053) (4,053) (2,750)
Prepaid future royalties to C-Dilla Ltd................... -- -- (1,015) (1,015) --
Other, net................................................ (4) (67) 15 (9) 48
------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities........................................ 48 (17,450) (34,218) (30,272) (4,338)
------- -------- -------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations..................... (117) (105) (108) (80) (83)
Payments on long-term debt................................ (696) -- -- -- (247)
Proceeds from issuance of common stock upon exercise of
options................................................. 171 288 561 271 969
Proceeds from issuance of common stock under employee
stock purchase plan..................................... -- 89 292 292 331
Proceeds from issuance of common for director fees........ -- -- -- -- 25
Payment of stockholder note receivable.................... -- 26 53 53 78
Proceeds from sale of common stock, net of issuance costs
and payments of deferred offering costs................. (543) 13,777 27,872 27,869 --
Cash dividends............................................ (401) (156) -- -- --
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities........................................ (1,586) 13,919 28,670 28,405 1,073
------- -------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents........ 123 (1,095) 2,199 3,316 3,838
Cash and cash equivalents at beginning of period............ 2,286 2,409 1,314 1,314 3,513
------- -------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 2,409 $ 1,314 $ 3,513 $ 4,630 $ 7,351
======= ======== ======== ======== ========
Cash paid during the period:
Interest.................................................. $ 296 $ 12 $ 11 $ 9 $ 8
======= ======== ======== ======== ========
Income taxes.............................................. $ 1,446 $ 2,364 $ 3,209 $ 2,313 $ 2,107
======= ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Macrovision Corporation (the "Company") was formed in 1983 and designs,
develops and markets video copy protection and rights management technologies
that provide copy protection for motion pictures and other proprietary content
that is stored on videocassettes, DVDs or other media or is transmitted by
cable, satellite or microwave transmission or through the Internet. In 1998, the
Company broadened its focus to include the copy protection of other media,
including multimedia computer software on CD-ROMs. The Company is headquartered
in Sunnyvale, California and has subsidiaries in the United Kingdom and Japan.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
In August 1999, the Company issued one additional share for every share
outstanding, thus effecting a 2 for 1 stock split. All share and per share
information presented have been retroactively adjusted for the effect of such
stock split.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements as
of September 30, 1999, and for the nine months ended September 30, 1998 and
1999, have been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information set forth therein.
CASH, CASH EQUIVALENTS, AND INVESTMENTS
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks, money market funds and
certain mutual funds. All other liquid investments with maturities over three
months and less than 12 months are classified as short-term investments.
Short-term investments consisted of auction rate preferred stock, government
bonds and government agency securities. All marketable securities with
maturities over one year are classified as long-term marketable investment
securities.
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. As of December 31, 1996, 1997 and 1998, all investment
securities were designated as "available-for-sale." Available-for-sale
securities are carried at fair value based on quoted market prices, with
unrealized gains and losses, reported in comprehensive income, a separate
component of stockholders' equity.
Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in the
consolidated statements of income. The cost of securities sold is
F-8
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.
The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Cash equivalents--money market funds....... $ 622 $ 3,098 $ 6,127
------- ------- -------
Investments:
Auction rate preferred stock
certificates........................... 3,400 -- --
Municipal preferred certificates......... -- 1,000 4,000
United States government bonds and agency
securities............................. 9,604 40,672 25,858
------- ------- -------
13,004 41,672 29,858
------- ------- -------
$13,626 $44,770 $35,985
======= ======= =======
</TABLE>
As of December 31, 1997 and 1998, government bond securities totaling
$1.8 million and $18.8 million, respectively, are classified as long-term
marketable investment securities in the accompanying consolidated balance sheet.
As of September 30, 1999, government bond securities totaling $11.7 million are
classified as long-term marketable investment securities.
As of December 31, 1997 and 1998, the difference between the fair value
and the amortized cost of available-for-sale securities was a gain of $4,000 and
$148,000, respectively. As of September 30, 1999, the difference between the
fair value and the amortized costs of available-for-sale securities was a loss
of $66,000. These unrealized gains and losses, related to short-term and
long-term government bonds, have been recorded as a component in comprehensive
income. As of December 31, 1997 and 1998 and September 30, 1999, the weighted
average portfolio duration and contractual maturity was approximately six months
and ten months, respectively.
INVENTORIES
Inventories are stated at the lower of first-in, first-out cost basis or
market.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are recorded
at cost. The Company computes depreciation for all property and equipment using
the straight-line method. The estimated useful lives of assets range from three
to five years. Amortization of equipment recorded under capital leases is
computed over the shorter of the lease term or the estimated useful life of the
equipment.
F-9
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
Patent application costs of $868,000 and $1.4 million as of
December 31, 1997 and 1998, respectively, are included in patents and other
intangibles and, upon the granting of the related patent, are amortized using
the straight-line method over the shorter of the estimated useful life of the
patent or 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
OTHER ASSETS
The Company owns a minority interest in AudioSoft International SA
("AudioSoft") a developer of secure e-music delivery technology and copyright
management royalty reporting systems, Command Audio, a developer of
audio-on-demand technology, and Digimarc Corporation, a developer of proprietary
digital watermarking technology, and accounts for such investments under the
cost method. In February 1998, the Company acquired a minority interest in
C-Dilla Ltd., a developer of copy protection and rights management technologies
for CD-ROM and Internet-delivered software products. In June 1999, the Company
acquired the remaining shares of C-Dilla Ltd. Other-than-temporary declines in
the fair value of these investments are included in the consolidated statements
of income. Such investments are included in other assets on the accompanying
consolidated balance sheets. See Note 2 to Notes to Consolidated Financial
Statements.
REVENUE RECOGNITION
Advanced license fees attributable to minimum copy quantities or shared
revenues are deferred until earned. Revenue from the duplication of
videocassettes and the replication of digital versatile discs ("DVDs") and
CD-ROMs is earned based upon reported or estimated volume of each or, in the
case of agreements with minimum guaranteed payments with no specified volume, on
a straight-line basis over the life of the agreement. Retroactive rebate credits
on certain agreements that contain pricing adjustments or return provisions are
accrued based upon anticipated respective unit volumes. Nonrefundable technology
licensing revenue, which applies principally to DVD and PC subassembly
manufacturers, digital pay-per-view ("PPV"), cable and satellite system
operators, and set-top box manufacturers, is recognized upon contract signing
and performance of all significant obligations. Royalty revenues associated with
technology licenses is recognized when earned based upon reported unit sales or
transaction based fees. Revenues from the sales of encoders, decoders, and
systems incorporating the Company's video copy protection and
F-10
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
scrambling technologies are recognized upon shipment provided that the Company
has no significant additional performance obligations.
COST OF REVENUES
The Company has agreements with certain licensed duplicators and
replicators utilized by customers of the Company's video copy protection
technology. The Company has agreed to pay these duplicators and replicators a
specified service fee per unit duplicated/replicated utilizing the Company's
video copy protection technology to help offset the cost of operating the
Company's copy protection equipment and reporting the volume of copy protected
videocassettes. Such amounts are charged to cost of revenues when incurred.
These service fees amounted to $596,000, $362,000 and $428,000, for 1996, 1997
and 1998, respectively.
Cost of revenues includes outside legal costs of $30,000, $70,000 and
$227,000 in 1996, 1997 and 1998, respectively, associated with litigation to
enforce the Company's patents. Amortization of patents is also included in cost
of revenues.
Prior to June 1999, the Company had an exclusive worldwide Software
Marketing License and Development Agreement with C-Dilla to market, in the
consumer multimedia software market, C-Dilla's proprietary copy protection
technology. Pursuant to the agreement, the Company made royalty payments to
C-Dilla of between 30% to 45% of revenues from sales of software products
incorporating C-Dilla's technology. These royalty amounts were charged to cost
of revenues when incurred and were approximately $191,000 for 1998.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits of which future realization is
uncertain.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. The translation of foreign currency denominated
financial statements into United States dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenues and expense accounts using a weighted average exchange rate for the
respective periods. Adjustments resulting from such translation are included in
comprehensive income, a separate component of stockholders' equity. Gains or
losses resulting from foreign currency transactions included in the consolidated
statements of income were not material in any of the periods presented.
F-11
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards
of reporting and display of comprehensive income and its components of net
income and "other comprehensive income" in a full set of general purpose
financial statements. "Other comprehensive income" refers to revenues, expenses,
gains and losses that are not included in net income but rather are recorded
directly in stockholders' equity. SFAS No. 130 is effective for annual and
interim periods beginning after December 15, 1997 and for periods ended before
that date when presented for comparative purposes. The primary components of
other comprehensive income include unrealized gains and losses resulting from
the translation of the Company's foreign subsidiaries which have a local
functional currency and unrealized holding gains and losses related to the
Company's short and long term marketable investments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BUSINESS AND CONCENTRATION OF CREDIT RISK
The Company licenses its video copy protection, CD-ROM copy protection
and video scrambling technologies and sells its video scrambling products to
customers in the home videocassette, DVD, PPV, cable, satellite, corporate
communication markets and multimedia software markets primarily in the United
States, Europe and Asia. In 1998 and 1997, 45.1% and 38.6%, respectively of the
Company's business was attributed to the licensing of its video copy protection
technology through Motion Picture Association of America ("MPAA") movie studios.
Accordingly, the ability of the Company to grow its operations has been
dependent on MPAA movie studios continued success in the production and
distribution of movies utilizing the Company's technology. The Company also
licenses its digital PPV video copy protection technologies to satellite and
cable television operators and to the equipment manufacturers that supply the
satellite and cable television industries. The Company licenses its CD-ROM copy
protection to publishers of software in the multimedia software markets. The
Company's video scrambling technology is licensed to manufacturers of analog
cable Pay TV set-top decoders in developing cable television markets. The
Company sells encoders and decoders that incorporate other scrambling
technologies to private analog satellite networks for business communications,
education, and special interest entertainment. The Company also sells
specialized video scrambling systems in the government, military, and law
enforcement markets. In addition, 37.9%, 46.5% and 44.5% of the Company's sales
in 1996, 1997 and 1998, respectively, were from export or foreign operations.
The Company's business has been and may continue to be negatively impacted by
foreign economic conditions such as the Southeast Asian and Latin American
economic problems.
F-12
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents, marketable securities, trade accounts receivable and long-term
investments. The Company places its cash and cash equivalents and marketable
securities in deposits and money market funds with various high credit quality
financial institutions. The carrying value of the Company's financial
instruments approximates fair market value due to the relatively short
maturities of those instruments. The Company's investments in AudioSoft,
Digimarc and Command Audio are recorded at cost. Based on recent external
financings of these companies, the Company believes that the Company's recorded
value as of the dates presented approximates fair value. See Note 9(d) of Notes
to Consolidated Financial Statements regarding recent events related to
Digimarc.
The Company performs ongoing credit evaluations of its customers.
Revenues from three significant customers aggregated 37% for the year ended
December 31, 1996. Revenue from one customer accounted for 11% of net revenue
for the year ended December 31, 1997. Another customer accounted for 12% of net
revenue for the year ended December 31, 1998. At December 31, 1997 and 1998
receivables from one customer represented 25% and 16%, respectively, of net
accounts receivable.
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. 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 effecting a 2 for 1 stock split. All share and per 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>
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Basic EPS--weighted average number of common shares
outstanding........................................ 7,574 12,952 16,008 15,501 18,002
Effect of dilutive common equivalent shares--stock
options outstanding................................ 986 968 1,098 1,063 962
----- ------ ------ ------ ------
Diluted EPS--weighted average number of common shares
and common equivalents shares outstanding.......... 8,560 13,920 17,106 16,564 18,964
===== ====== ====== ====== ======
</TABLE>
STOCK BASED COMPENSATION
The Company uses the intrinsic value-based method to account for all of
its employee stock-based compensation plans.
F-13
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
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.
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.
(2) FINANCIAL STATEMENT DETAILS
INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Raw materials................................. $203 $138 $ 63
Work in progress.............................. -- -- 41
Finished goods................................ 230 187 107
---- ---- ----
$433 $325 $211
==== ==== ====
</TABLE>
F-14
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Machinery and equipment..................................... $3,263 $2,968
Leasehold improvements...................................... 950 950
Furniture and fixtures...................................... 438 444
------ ------
4,651 4,362
Less accumulated depreciation and amortization.............. 2,929 3,065
------ ------
$1,722 $1,297
====== ======
</TABLE>
Equipment recorded under capital leases aggregated $518,000 with related
accumulated amortization of $233,000 and $337,000 as of December 31, 1997 and
1998, respectively.
OTHER ASSETS
See Note 7 of Notes to Consolidated Financial Statements for a
description of the Company's investment in C-Dilla Ltd.
During 1997, the Company invested an additional $2.0 million in Command
Audio as part of various external rounds of third-party financing by Command
Audio thus maintaining its 19.8% ownership. In 1998, the Company invested
$500,000 in Command Audio in connection with a round of external third-party
financing obtained by Command Audio. This investment by the Company was less
than the 19.8% of the total investment financing made and thus reduced the
Company's previous 19.8% ownership of Command Audio to 11.9%. Subsequently,
Command Audio paid in full the note due the Company including accrued interest.
See Note 9 of Notes to Consolidated Financial Statements for additional
subsequent events regarding Command Audio.
In December 1997, the Company invested $1.5 million in Digimarc in
exchange for shares of Digimarc's preferred stock. In June 1999, the Company
invested an additional $2.0 million in Digimarc in connection with a third-party
financing obtained by Digimarc and as of September 30, 1999, the Company's
ownership in Digimarc was approximately 11.5%. Digimarc is a company that was
founded in 1995 and headquartered in Portland, Oregon. Its products include
proprietary digital watermarking technology used in information embedding,
enabling image identification, copyright protection and facilitating electronic
commerce. See Note 9 of Notes to Consolidated Financial Statements for
additional subsequent events regarding Digimarc.
In August 1999, (unaudited) the Company acquired a 7.3% ownership
interest in AudioSoft, 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
F-15
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
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 recognized the associated revenue based on consulting hours
provided to AudioSoft.
The Company intends to hold its investments for the long term and
monitors the recoverability of these investments based on management's estimates
of the net realizable value based on the achievements of milestones in business
plans and third-party financings. The carrying amounts of such investments are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Investment in Command Audio.................. $2,337 $2,837 $2,837
Investment in Digimarc....................... 1,500 1,500 3,500
Investment in C-Dilla Ltd.................... -- 3,553 --
Investment in AudioSoft...................... -- -- 750
Prepayment of royalties to C-Dilla Ltd....... -- 872 --
Long-term deferred tax assets................ -- -- 2,794
Deposits and other assets.................... 163 148 100
------ ------ ------
$4,000 $8,910 $9,981
====== ====== ======
</TABLE>
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued compensation........................................ $1,142 $1,810
Accrued professional fees................................... 409 308
Accrued rebates............................................. 30 --
Other accrued liabilities................................... 609 573
------ ------
$2,190 $2,691
====== ======
</TABLE>
F-16
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Interest income........................................ $ 67 $513 $1,062
Interest expense....................................... (284) (12) (11)
Other.................................................. (43) (23) 51
----- ---- ------
$(260) $478 $1,102
===== ==== ======
</TABLE>
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
------------ ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1996......................... $280 112 125 $267
1997......................... $267 553 136 $684
1998......................... $684 193 40 $838
</TABLE>
F-17
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) FINANCIAL STATEMENT DETAILS (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information related to noncash investing and
financing activities is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------
1996 1997 1998 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Acquisition of equipment under
capital lease...................... $ 518 -- -- --
====== ====== ====== ======
Issuance of common stock in exchange
for stockholder notes receivable... $ 157 -- -- --
====== ====== ====== ======
Conversion of convertible note into
preferred stock.................... $3,038 -- -- --
====== ====== ====== ======
Deferred stock compensation related
to stock option grants............. $ 231 -- -- --
====== ====== ====== ======
Issuance of common stock in
connection with recapitalization... $ 875 -- -- --
====== ====== ====== ======
Pro rata stock dividend distribution
in connection with spin-off........ $1,253 -- -- --
====== ====== ====== ======
Deferred stock compensation related
to spin-off........................ $ 189 -- -- --
====== ====== ====== ======
Conversion of preferred stock into
common stock....................... -- $7,433 -- --
====== ====== ====== ======
Stock issued for C-Dilla Ltd......... -- -- -- $5,073
====== ====== ====== ======
</TABLE>
(3) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES
DISCONTINUED OPERATIONS
In October 1995, Command Audio was incorporated as a wholly-owned
subsidiary of the Company to commercialize a distinctly new audio-on-demand
technology. On June 28, 1996, the Board of Directors approved the
discontinuation of the Company's involvement in Command Audio. Whose operations,
technology, and employee base were discrete and separate from those of the
Company. From its inception until separation, Command Audio generated no
revenues and concentrated exclusively on research and development activities. In
conjunction with this decision, the Company entered into a Recapitalization and
Stock Purchase Agreement whereby the Company invested an additional
$1.0 million
F-18
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(3) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
in Command Audio, provided 194,444 shares of the Company's common stock to
Command Audio pursuant to a Restricted Stock Acquisition Agreement, and
surrendered the Company's 500,000 shares of Command Audio's Series A preferred
stock in exchange for 604,000 shares of Command Audio common stock and 396,000
shares of Command Audio Series B preferred stock. Additionally, the Company
assigned to Command Audio all rights in certain technology and released its
reversion rights in technology that the Company had previously assigned to
Command Audio. In consideration of such assignment and release, Command Audio
agreed to pay to the Company royalties equal to 2% of Command Audio's gross
revenues for 12 years, beginning when Command Audio has operating revenues from
certain sources or, at the election of the Company, at any time prior thereto.
No amounts have been paid to the Company under this arrangement.
In August 1996, the Company distributed a portion of the 1,604,000
shares of Command Audio common stock to the Company's stockholders on a pro rata
basis as a dividend and the remainder of the Command Audio common stock to the
Company's employees as a stock bonus while retaining the 396,000 shares of
Command Audio Series B preferred stock, representing a 19.8% interest in Command
Audio. The Command Audio common stock that was distributed to the Company's
employees resulted in the recognition of $189,000 of deferred compensation
expense. This amount was amortized over the 17 month vesting period.
Information relating to discontinued operations for the year ended
December 31, 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Costs and expenses.......................................... $(1,081)
-------
Operating loss............................................ (1,081)
Other income, net........................................... 5
-------
Loss before income taxes.................................. (1,076)
Income tax benefit, net..................................... 249
-------
Loss from discontinued operations......................... $ (827)
=======
</TABLE>
Command Audio maintained its own set of accounts and identified expenses
directly attributable to Command Audio's operations. Where the Company provided
services to Command Audio and the specific identification of the related
expenses was not practicable, the expenses were recorded based upon an
allocation of such items. This allocation was based upon the proportional
benefit received by Command Audio and, in management's opinion, represents a
fair and reasonable estimate of expenses incurred by Command Audio. Amounts
receivable from Command Audio related to such services are included in the
accompanying consolidated balance sheets as of December 31, 1997, as receivable
from a related party.
The Company has recorded its investment in Command Audio based upon its
historical cost adjusted for losses incurred by Command Audio. The Company
intends to hold this investment for the long-term and monitors the
recoverability of this investment based on management's estimates of the fair
F-19
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(3) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
value of Command Audio based on the achievements of milestones specified in
Command Audio's business plan. In the future, the Company expects to evaluate
the recoverability of this investment based on successive rounds of third-party
financing obtained by Command Audio. The investment is classified in other
assets in the accompanying consolidated balance sheet as of December 31, 1997
and 1998. The Company is not obligated by contract to provide future funding to
Command Audio and does not have the ability to exert significant influence over
the financial and operating policies of Command Audio. The Company accounts for
this investment by the cost method.
TRANSACTIONS WITH RELATED PARTIES
The Company and JVC are parties to a Technology Application Agreement
dated November 29, 1988 (the "Application Agreement"), a Duplicator Agreement
dated June 1, 1988 (the "Duplicator Agreement") and an Agreement dated July 15,
1994 (the "Video Agreement"). Pursuant to the Application Agreement, JVC has
applied the Company's copy protection process to prerecorded videocassettes
manufactured and distributed in Japan by JVC. Pursuant to the Duplicator
Agreement, JVC has applied the Company's copy protection process to prerecorded
videocassettes manufactured and distributed in Japan by certain of the Company's
licensees. Pursuant to the Video Agreement, JVC developed a prototype of
equipment to apply a copy protection process to prerecorded videocassettes, and
granted the Company exclusive rights to purchase such equipment from JVC for
resale and to sublicense the copy protection technology for use with the
equipment. For the years ended December 31, 1996, 1997 and 1998 and for the nine
months ended September 30, 1998 and 1999 the Company recorded revenue from JVC
of approximately $78,000, $234,000, $211,000, $170,000 and $308,000,
respectively, and recorded expenses payable to JVC of approximately $12,000,
$22,000, $36,000, $16,000 and $21,000, respectively under these agreements.
In January 1997, the Company and JVC entered into a Copy Protection
Technology Agreement in which the Company has agreed to continue to license its
copy protection technologies to third parties in the event of the acquisition of
the Company by a party other than JVC. Further, the Company has granted to JVC
the right to sublicense the Company's copy protection technologies with 95% of
the royalties from such sublicenses payable to the Company or successor in the
event that the Company fails to make its copy protection technologies generally
available for licensing to third parties following an acquisition of the
Company.
During 1997, the Company entered into several agreements with JVC or its
wholly-owned subsidiaries including a Copy Protection Technology License
Agreement, a Digital Versatile Disc Player/ Digital Video Cassette Recorder
License Agreement for Anticopy Technology, and a Replicator Agreement. The terms
and conditions of these agreements are not more favorable to JVC or its
subsidiaries than the terms offered to other unrelated parties. The Company
recorded revenues from JVC of approximately $59,000, $6,000, $6,000 and $2,000
during the year ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, respectively.
In 1998, the Company entered into a Copy Protection Technology
Application and Duplicator Agreement with JVC and a third party duplicator by
which JVC agrees to pay all fees to the Company on
F-20
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(3) DISCONTINUED OPERATIONS AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
behalf of the duplicator. The terms and conditions of such agreements are not
more favorable to JVC or its subsidiaries than the terms offered to other
unrelated parties. The Company has recorded no revenue in 1998 and $5,000 in the
nine months ended September 30, 1999 under this contract.
In 1998, the Company's subsidiary, C-Dilla Ltd., and JVC Disc America, a
JVC subsidiary, entered into an Authorised Safedisc Mastering and Replication
Service Agreement. The terms and conditions of such agreement are not more
favorable to JVC or its subsidiaries than the terms offered to other unrelated
parties. No revenues are generated from this agreement and the Company pays JVC
Disc America an insignificant service fee per unit mastered or replicated.
In 1996 and 1997, the Company entered into agreements with Matsushita,
which owns approximately 52% of JVC, including a Copy Protection Technology
License Agreement, a Digital Versatile Disc Player/Digital Video Cassette
Recorder License Agreement for Anticopy Technology and a Component Supplier
Non-Assertion and Technical Services Agreement. The terms and conditions of
these agreements are not more favorable to Matsushita or its subsidiaries than
the terms offered to other unrelated parties. The Company recorded revenues from
Matsushita of approximately $56,000, $111,000, $148,000, $152,000 and $149,000
during the years ended December 31, 1996, 1997 and 1998 and the nine months
ended September 30, 1998 and 1999, respectively.
In 1998, the Company entered into agreements with Matsushita including
an Authoring and Replicator Agreement and a DVD Copy Protection Technology
Application Agreement. The terms and conditions of such agreements are not more
favorable to Matsushita or its subsidiaries than the terms offered to other
unrelated parties. The Company has recorded no revenue and paid no service fees
pursuant to these contracts.
In February, 1998, the Company entered into a Software Marketing License
and Development Agreement with C-Dilla Ltd. under which it has obtained, for an
initial five-year term, the world-wide exclusive license to market, in the
consumer multimedia software market, C-Dilla Ltd.'s proprietary copy protection
technology. In February, 1998, C-Dilla Ltd. also agreed to reimburse the Company
for specific marketing related expenses up to $500,000. As of December 31, 1998
the Company had received the full amount reimbursable, under the co-marketing
agreement with C-Dilla Ltd.
(4) STOCKHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
The Company's Certificate of Incorporation provides for the issuance of
up to 5,000,000 shares of preferred stock, of which 1,376,432 shares were
designated as Series A. In June 1991, the Company issued to Pacific Media, a
wholly-owned indirect subsidiary of JVC (the "Purchaser") 1,666,666 (after
consideration of 2 for 1 stock split) shares of Series A convertible preferred
stock for gross proceeds of $4.5 million. The shares were converted into the
Company's common stock on a one-for-one basis in connection with its initial
public offering. Each share of Series A convertible preferred stock entitled its
holder to one vote for each share of common stock into which such shares could
be converted, not to exceed voting rights equivalent to 49% of the outstanding
voting stock. Cumulative dividends at the rate of
F-21
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) STOCKHOLDERS' EQUITY (CONTINUED)
$.27 per share per year were payable quarterly to the holder of the Series A
convertible preferred stock. The holder of the Series A convertible preferred
stock is entitled to $2.70 per share in the event of any liquidation,
dissolution, or winding up of the Company, plus an amount equal to all declared
but unpaid dividends, prior and in preference to any distribution to the holders
of common stock.
In conjunction with the issuance of the Series A convertible preferred
stock and the convertible note, the Company agreed to grant certain rights to
the Purchaser, which included a first right to purchase a pro rata share of any
equity offering of the Company excluding shares issued for (a) an initial public
offering or (b) an acquisition of another corporation, if such exclusions will
not reduce the purchaser's pro rata ownership share of the Company below 25%,
(c) stock dividend or splits, and (d) stock compensation plans. Further, the
purchaser has entered into an agreement with the holders of common stock and
optionees of the Company as of June 12, 1991, giving the purchaser the right to
acquire all of their shares of common stock and options at a predetermined price
upon notice from the Company that it has filed a registration statement in
connection with an initial public offering. In January 1997, the Company and
Pacific Media entered into a Waiver Agreement, pursuant to which Pacific Media
waived its right to purchase shares of the Company's common stock from
stockholders and optionholders triggered by the filing of the registration
statement in connection with the initial public offering and any pre-effective
amendments thereto filed prior to April 1, 1997. Upon the completion of the
initial public offering, all rights of Pacific Media to purchase common stock of
the Company from such persons expired.
RESTRICTED STOCK
On June 7, 1996, the Company issued 116,666 shares of common stock at a
price of $1.35 per share pursuant to a restricted stock purchase agreement to an
officer of the Company in exchange for a full recourse promissory note secured
by the shares in the principal amount of $157,000. Interest accrued at the rate
of 6.58% per annum. Principal and accrued interest, if any, were due and payable
on June 7, 2001. The Company had the right to repurchase the stock at the
original sales price upon the termination of the purchaser's employment with the
Company. The repurchase right lapsed at a rate of 1/6 after June 7, 1997, 1/3
after June 7, 1998, and 1/2 after June 7, 1999. As of December 31, 1998, there
were 58,334 shares subject to the repurchase right and the remaining principal
of the note was $78,000. As of September 30, 1999, (unaudited) there were no
shares subject to the repurchase right and the note had been paid in full.
STOCK OPTION AND PURCHASE PLANS
In December 1996, the Company adopted the 1996 Equity Incentive Plan
(the "Equity Incentive Plan"), which serves as the successor to the Company's
1988 Stock Option Plan (the "1988 Plan"). Options granted under the 1988 Plan
before its termination continue to remain outstanding in accordance with their
terms, but no further options may be granted under the 1988 Plan. Nonstatutory
stock options and incentive stock options granted under the 1988 Plan were
exercisable at prices not less than 85% and 100%, respectively, of the fair
value of the Company's common stock on the date of grant, as determined by the
Company's Board of Directors. The options were generally exercisable over a
3-year vesting period and expire 7 to 10 years from date of grant.
F-22
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the Equity Incentive Plan, the Company's Board of Directors
has reserved 2,544,444 shares of common stock for issuance. In May 1998, an
additional 800,000 shares were reserved by approval of the Board of Directors
and stockholders. The Equity Incentive Plan provides for the grant of stock
options, stock appreciation rights, and restricted stock awards by the Company
to employees, officers, directors, consultants, independent contractors, and
advisers of the Company. During 1998, no stock options were granted to
consultants, independent contractors or advisers of the Company. The Equity
Incentive Plan permits the grant of either incentive or nonqualified stock
options at the then current market price. Options granted under the Equity
Incentive Plan will have a maximum term of ten years and generally vest over
three years at the rate of 1/6, 1/3 and 1/2, respectively.
In December 1996, the Company's Board of Directors adopted the 1996
Employee Stock Purchase Plan (the "Purchase Plan") and reserved 280,000 shares
of common stock for issuance thereunder. The Purchase Plan was effective upon
the Company's initial public offering. The Purchase Plan permits eligible
employees to purchase common stock, through payroll deductions of between 1% and
20% of the employee's compensation, at a price equal to 85% of the lower of the
fair market value of the common stock on the first day of the offering period or
on the last day of the purchase period. The Company's stockholders approved the
Purchase Plan in February 1997. In 1997 and 1998, the Company issued 23,292 and
74,078 shares, respectively, pursuant to the Purchase Plan.
In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 120,000 shares
of common stock for issuance thereunder. The Directors Plan provides for the
initial grant of a nonqualified option to purchase 10,000 shares of common stock
on the date the eligible director first becomes a director and the additional
grant of a nonqualified option to purchase 6,000 shares of Common Stock annually
thereafter. Options will vest at the rate of 2.08% per month so long as the
director continues to serve on the Board on such dates. The Company's
stockholders approved the Directors Plan in February 1997. On April 23, 1999,
(unaudited) the Board of Directors approved the following changes to the
"Macrovision Corporation 1996 Directors Stock Option Plan" and outside
directors' compensation.
1. The initial option grant to new outside directors will increase from
10,000 to 20,000 shares.
2. The option granted on each outside director's anniversary date after
the initial option grant will increase from 6,000 to 15,000 shares.
3. The vesting for all such options will be monthly over a 3 year
period (reduced from 4 years).
4. Each outside director will be paid in addition to meeting fees, a
retainer of $10,000 in stock or at the director's option, in equal amounts
of cash and stock, on an annual basis.
During 1997 and 1998, the Company granted outside directors options to purchase
30,000 and 18,000 shares, respectively, of common stock.
The Company uses the intrinsic value-based method to account for all of
its employee stock-based compensation plans. Accordingly, no compensation cost
has been recognized in the accompanying consolidated financial statements for
its plans because the exercise price of each option equaled or
F-23
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) STOCKHOLDERS' EQUITY (CONTINUED)
exceeded the fair value of the underlying common stock as of the grant date for
each stock option, except for options and restricted stock granted in May and
June 1996. With respect to the options and restricted stock granted in May and
June 1996, the Company has recorded deferred stock compensation of $231,000 for
the difference at the grant date between the exercise price and the fair value,
as determined by an independent valuation, of the restricted stock and the
common stock underlying the options. This amount is being amortized on a
straight-line basis over the vesting period of the individual options and
restricted stock, generally three years.
If compensation cost for the Company's stock-based compensation plans
had been determined in a manner consistent with the fair value approach
described in SFAS No. 123, the Company's net income and net income per share as
reported would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to common
stock........................... As reported $ 421 $3,665 $6,342
Adjusted pro forma 344 3,388 5,091
Basic net income per share........ As reported .05 .28 .40
Adjusted pro forma .04 .26 .32
Diluted net income per share...... As reported .05 .26 .37
Adjusted pro forma .04 .24 .30
</TABLE>
The provisions of SFAS No. 123 are effective for options granted
beginning January 1, 1996. Options vest over several years and new options are
generally granted each year. Because of these factors, the pro forma effect
shown above may not be representative of the pro forma effect of SFAS No. 123 in
future years.
F-24
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option is estimated on the date of grant using
the Black-Scholes method in 1997 and 1998, and the minimum value method in 1996
with the following weighted average assumptions for options and the Purchase
Plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
OPTION PLANS:
Dividends................................... None None None
Expected term............................... 4.0 years 4.56 years 4.34 years
Risk free interest rate..................... 5.82% 6.07% 6.45%
Volatility rate............................. None 64.7% 66.8%
PURCHASE PLAN:
Dividends................................... N/A None None
Expected term............................... N/A 1.25 years 1.24 years
Risk free interest rate..................... N/A 5.42% 5.47%
Volatility rate............................. N/A 62.4% 62.6%
</TABLE>
Activity under the Company's option plans is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding as of December 31, 1995............ 1,415,778 $ 1.33
Granted........................................ 284,100 2.13
Canceled....................................... (166,222) 1.35
Exercised...................................... (132,526) 1.29
---------
Outstanding as of December 31, 1996............ 1,401,130 1.50
Granted........................................ 252,308 5.91
Canceled....................................... (34,068) 2.09
Exercised...................................... (222,684) 1.30
---------
Outstanding as of December 31, 1997............ 1,396,686 2.31
Granted........................................ 412,790 8.56
Canceled....................................... (25,544) 6.48
Exercised...................................... (370,672) 1.52
---------
Outstanding as of December 31, 1998............ 1,413,260 4.27
Granted (unaudited)............................ 1,257,576 23.69
Canceled (unaudited)........................... (474,154) 22.50
Exercised (unaudited).......................... (459,748) 2.11
---------
Outstanding as of September 30, 1999
(unaudited).................................. 1,736,934 $13.92
=========
</TABLE>
F-25
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Options exercisable at end of year............... 730,516 758,084 697,458
Weighted average fair value of options granted
during the period.............................. $ .44 $ 3.44 $ 5.00
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- --------- ---------------- ---------------- ----------- ----------------
<C> <C> <S> <C> <C> <C>
$ 1.35 - 1.35 709,234 5.93 years $ 1.35 628,972 $ 1.35
$ 3.60 - 7.50 628,226 8.77 6.53 66,114 5.17
$10.00 - 13.88 75,800 9.68 12.94 2,372 10.68
--------- -------
1,413,260 7.39 4.27 697,458 1.75
========= =======
</TABLE>
(5) INCOME TAXES
Income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $1,146 $2,031 $2,119
Foreign........................................... 71 383 354
State............................................. 208 544 873
------ ------ ------
Total current................................... 1,425 2,958 3,346
------ ------ ------
Deferred:
Federal........................................... (305) (554) (34)
State............................................. (146) (129) --
------ ------ ------
Total deferred.................................. (451) (683) (34)
------ ------ ------
Charges in lieu of income taxes associated with the
exercise of stock options......................... -- 138 617
------ ------ ------
$ 974 $2,413 $3,929
====== ====== ======
</TABLE>
F-26
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(5) INCOME TAXES (CONTINUED)
The Company's effective tax rate differs from the statutory federal tax
rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense......................... $674 $2,120 $3,492
State tax expenses, net of federal benefit............ 98 274 576
Tax credits........................................... (45) (87) (304)
Foreign taxes......................................... 15 47 192
Exempt interest....................................... (13) (144) (320)
Write-off of discontinued operations deferred tax
asset............................................... 203 -- --
Other................................................. 42 203 293
---- ------ ------
$974 $2,413 $3,929
==== ====== ======
</TABLE>
Total tax expense (benefit) has been allocated as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Continuing operations............................... $1,223 $2,413 $3,929
Discontinued operations............................. (249) -- --
------ ------ ------
$ 974 $2,413 $3,929
====== ====== ======
</TABLE>
F-27
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(5) INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and reserves.......................... $ 673 $ 826
Allowance for doubtful accounts........................... 272 341
Depreciation and amortization............................. 707 483
Deferred revenue.......................................... 382 502
------ ------
Total gross deferred tax assets......................... 2,034 2,152
Deferred tax liabilities:
Patents................................................... 782 866
------ ------
Net deferred tax assets................................. $1,252 $1,286
====== ======
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(6) COMMITMENTS
LEASES
The Company leases its facilities and certain equipment pursuant to
noncancelable operating lease agreements. Additionally, the Company leases
certain equipment pursuant to a capital lease agreement.
F-28
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(6) COMMITMENTS (CONTINUED)
Future minimum lease payments pursuant to these leases as of
December 31, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
-------- ---------
<S> <C> <C>
1999.................................................... $116 $ 507
2000.................................................... 78 505
2001.................................................... -- 519
2002.................................................... -- 307
2003 and thereafter..................................... -- 154
---- ------
Total................................................... $194 $1,992
==== ======
Less amounts representing interest...................... 6
----
Present value of minimum capital lease payments......... 188
Less current portion of capital lease liability......... 112
----
Capital lease liability, net of current portion......... $ 76
====
</TABLE>
Rent expense was $441,000, $469,000, and $501,000 as of December 31,
1996, 1997 and 1998, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to
contribute up to 20% of their compensation, which contribution was limited to
$10,000 in 1998. Employee contributions and earnings thereon vest immediately.
The Company is not required to contribute to the 401(k) plan and had made no
voluntary contributions. The Company made matching contributions to the 401(k)
plan equal to 20% of each participating employee's contribution, up to a maximum
annual matching contribution of $1,900, $1,900 and $2,000 in 1996, 1997 and
1998, respectively. Matching contributions aggregated $60,000, $54,000 and
$60,000 for the year ended December 31, 1996, 1997 and 1998, respectively, and
are fully vested after three years of service.
STRATEGIC INVESTMENTS (UNAUDITED)
As discussed in Note 2 to Consolidated Financial Statements, the Company
is committed to invest an additional $750,000 in AudioSoft in the event
AudioSoft attains certain commercial milestones by March 31, 2000.
(7) ACQUISITION (UNAUDITED)
In June 1999, the Company acquired the remaining shares of C-Dilla Ltd.,
developers of copy protection and rights management technologies for CD-ROM and
Internet-delivered software products. The Company paid approximately $12.8
million in cash and acquisition costs and 218,398 shares of the
F-29
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(7) ACQUISITION (UNAUDITED) (CONTINUED)
Company's stock valued at $5.1 million. The transaction has been accounted for
under the purchase method. The excess purchase price over the net tangible
assets acquired was $20.7 million of which, based on management's estimates
prepared in conjunction with a third party valuation consultant was allocated as
follows (in thousands):
<TABLE>
<S> <C>
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
=======
</TABLE>
In connection with the purchase of C-Dilla Ltd., the Company allocated
$4.3 million of the $21.4 million 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. The Company 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 the Company
currently expects 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 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
F-30
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(7) ACQUISITION (UNAUDITED) (CONTINUED)
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 noncompete 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, the Company 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.
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):
<TABLE>
<S> <C>
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
=======
</TABLE>
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the year ended
December 31, 1998 and nine months ended
F-31
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(7) ACQUISITION (UNAUDITED) (CONTINUED)
September 30, 1999 assuming C-Dilla Ltd. had been acquired as of the beginning
of the periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------- -----------------
1998 1999
---- ----
<S> <C> <C>
Net revenues................................................ $25,728 $25,253
Net income attributed to common stockholders................ $ 138 $ 4,843
Basic net income per share.................................. $ .01 $ .27
Shares used in pro forma per share computation.............. 16,226 18,002
</TABLE>
The pro forma results are not neccessarily indicative of what would have
occurred if the acquisition had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect the synergies that might be achieved from combined operations.
(8) SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three industry segments as follows: Video Copy
Protection, Computer Software/CD-ROM Copy Protection and Video Scrambling. The
Company licenses its technologies to customers in the videocassette, DVD,
digital pay-per-view markets and multimedia software markets. The Company also
licenses products utilizing the Company's video scrambling technology. The
Computer Software/CD-ROM Copy Protection licenses copy protection technology in
the multimedia software market.
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.
F-32
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
The following segment reporting information of the Company is provided
(dollars in thousands):
NET REVENUES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------ NINE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Video Copy Protection......... $14,953 $17,412 $22,626 $22,012
Computer Software/CD-ROM Copy
Protection.................. -- -- 344 2,121
Video Scrambling.............. 2,068 2,739 1,464 378
Other......................... 59 189 -- 72
------- ------- ------- -------
Total......................... $17,080 $20,340 $24,434 $24,583
======= ======= ======= =======
</TABLE>
OPERATING INCOME:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------ NINE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Video Copy Protection......... $10,704 $12,509 $17,115 $17,197
Computer Software/CD-ROM Copy
Protection.................. -- -- (126) (319)
Video Scrambling.............. (605) 309 (504) (680)
Other......................... (688) (665) (117) 53
------- ------- ------- -------
Segment income.............. 9,411 12,153 16,368 16,251
Research and development...... 2,527 2,248 2,578 2,906
General and administrative.... 3,566 4,149 4,621 3,982
Amortization of intangibles
from acquisition............ -- -- -- 791
In process research and
development................. -- -- -- 4,286
------- ------- ------- -------
Operating income from
continuing operations..... 3,318 5,756 9,169 4,286
Interest and other income
(expense), net.............. (260) 478 1,102 1,198
------- ------- ------- -------
Income from continuing
operations before taxes... $ 3,058 $ 6,234 $10,271 $ 5,484
======= ======= ======= =======
</TABLE>
F-33
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
DEPRECIATION AND AMORTIZATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Video Copy Protection............................ $ 352 $ 451 $ 311
Computer Software/CD-ROM Copy Protection......... -- -- 13
Video Scrambling................................. 205 281 221
Other............................................ 60 73 --
Research and development......................... 183 169 206
General and administrative....................... 202 182 180
------- ------- -------
Total............................................ $ 1,002 $ 1,156 $ 931
======= ======= =======
</TABLE>
INFORMATION ON REVENUES BY SIGNIFICANT PRODUCT GROUP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Video Copy Protection:
Videocassette.................................. $12,877 $12,616 $15,770
DVD............................................ -- 1,084 3,096
PPV............................................ 2,076 3,712 3,760
Video Scrambling:
Video Scrambling Systems....................... 1,197 756 477
Components and Licensing....................... 871 1,983 987
Computer Software/CD-ROM Copy Protection......... -- -- 344
Other............................................ 59 189 --
------- ------- -------
Total............................................ $17,080 $20,340 $24,434
======= ======= =======
</TABLE>
INFORMATION ON REVENUES BY GEOGRAPHIC AREAS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
United States.................................... $10,611 $10,878 $13,563
Japan............................................ 1,877 2,181 2,738
Export and Foreign Operations.................... 4,592 7,281 8,133
------- ------- -------
Total Revenue.................................... $17,080 $20,340 $24,434
======= ======= =======
</TABLE>
Geographic area information is based upon country of destination for
products shipped and country of contract holder for royalties and license fees.
Both the United States and Japan account for over
F-34
<PAGE>
MACROVISION CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(INFORMATION AS OF SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(8) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
10% of the Company's revenues in 1996, 1997 and 1998. Revenues from three
customers of the Video Copy Protection accounted for 37% of net revenues for the
year ended December 31, 1996 and each accounted for more than 10% of the
Company's net revenues. Revenue from one customer of the Video Copy Protection
accounted for 11% of net revenues for the year ended December 31, 1997. Another
customer of the Video Copy Protection accounted for 12% of net revenues for the
year ended December 31, 1998. At December 31, 1997 and 1998 receivables from one
customer of the Video Copy Protection represented 25% and 16%, respectively, of
net accounts receivable.
(9) SUBSEQUENT EVENTS (UNAUDITED, EXCEPT FOR (A))
(a) In October 1995, Joseph Swyt, one of the Company's former officers and
directors, filed suit against the Company in the Superior Court of the State of
California alleging monetary damages suffered as a result of alleged fraud,
misrepresentation and other malfeasance in connection with our grant of stock
options to him. Mr. Swyt maintains that the Company induced him to accept
employment by falsely representing to him that the options granted to him
eventually would have substantial value. Between August 1990 and December 1993,
the Company granted to him options to purchase approximately 400,000 shares with
per-share exercise prices of $1.125 or $1.35. Substantially all of these options
expired unexercised within three months following his departure from the Company
in June 1995. In December 1996, the court ordered this matter to binding
arbitration in accordance with a written agreement between Mr. Swyt and the
Company. The arbitration agreement contains limitations on the types of damages
available to him and expressly precludes punitive damages. Mr. Swyt filed his
claim in arbitration for this matter with the American Arbitration Association
in June 1997 and arbitration hearings were completed in February 1999. On
March 16, 1999, a decision in favor of the Company was rendered by a majority of
the arbitrators in the Swyt litigation, finding that we had no liability to
Mr. Swyt on any of his claims and that his claims were without merit. The
arbitrators decision was confirmed by the Superior Court in July 1999.
(b) In December 1999, the Company entered into a letter agreement with TTR
Technologies Ltd, to develop and market a copy protection system, which will
inhibit casual copying of Music CDs using dual-deck CD recorder systems and
personal computer systems. The two companies intend to work cooperatively with
encoder manufacturers and CD replicators to implement the manufacturing and
quality control systems necessary to commercialize the jointly developed Music
CD copy protection technology. As part of the strategic partnership agreement,
the Company intends to make an 11.4% equity investment in TTR, subject to the
the completion of the Company's due diligence review.
(c) In December 1999, the Company converted its convertible bridge loan in
the amount of $836,733 and accrued interest to Command Audio into equity shares
as part of a round of third-party financing.
(d) In December 1999, Digimarc (NASDAQ symbol DMRC), in which the Company
has a minority interest, consummated an initial public offering of 4,000,000
shares at a price of $20. The Company did not participate in the offering and
currently holds 924,475 shares of Digimarc.
F-35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of Common Stock being registered hereby.
All amounts are estimates except for the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... 37,000
NASD filing fee............................................. 15,000
Nasdaq National Market filing fee........................... 18,000
Accounting fees and expenses................................ 75,000
Legal fees and expenses..................................... 145,000
Printing expenses........................................... 100,000
Road show expenses.......................................... 35,000
Blue sky fees and expenses.................................. 5,000
Transfer agent, registrar and custodian fees and expenses... 5,000
Miscellaneous............................................... 5,000
--------
Total..................................................... 440,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation includes a provision that eliminates
the personal liability of its directors to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws of
the Registrant provide that: (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law; (ii) the Registrant may, in its discretion, indemnify other
officers, employees and agents as set forth in the Delaware General Corporation
Law; (iii) upon receipt of an undertaking to repay such advances if
indemnification is determined to be unavailable, the Registrant is required to
advance expenses, as incurred, to its directors and executive officers in
connection with a proceeding; (iv) the rights conferred in the Bylaws are not
exclusive and the Registrant is authorized to enter into indemnification
agreements with its directors, officers, employees and agents; (v) the
Registrant may not retroactively apply any amendment of the Bylaw provisions
relating to indemnity; and (vi) to the fullest extent permitted by the Delaware
General Corporation Law, a director or executive officer will be deemed to have
acted in good faith if his or her action is based on the records or books of
account of the Registrant or on information supplied to him or her by officers
of the Registrant in the course of their duties or on the advice of legal
counsel for the Registrant or on information or records given or reports made to
the Registrant by independent certified public accountants or appraisers or
other experts.
The Registrant has entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that directors and executive officers will be indemnified and held harmless to
the fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts actually
and reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
II-1
<PAGE>
directors, officers, employees or agents of any other company or enterprise when
they are serving in such capacities at the request of the Registrant.
The indemnification agreement requires a director or executive officer
to reimburse the Registrant for expenses advanced only to the extent that it is
ultimately determined that the director or executive officer is not entitled,
under Delaware law, the Bylaws, his or her indemnification agreement or
otherwise to be indemnified for such expenses. The indemnification agreement
provides that it is not exclusive of any rights a director or executive officer
may have under the Certificate of Incorporation, Bylaws, other agreements, any
vote of the stockholders or vote of directors or otherwise.
The indemnification provision in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act.
As authorized by the Registrant's Bylaws and approved by the
Registrant's Board of Directors, the Registrant maintains directors and officers
liability insurance.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
5.01 Opinion of Manatt, Phelps & Phillips, LLP regarding legality
of the securities being issued.
10.01* Letter Agreement dated November 24, 1999 between the
Registrant and TTR Technologies, Inc.
23.01 Consent of Manatt, Phelps & Phillips, LLP (included in
Exhibit 5.01).
23.02 Consent of KPMG LLP.
24.01 Power of Attorney (included on page II-4).
</TABLE>
- ------------------------
* The Registrant has requested confidential treatment for portions of this
exhibit.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) For determining liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be
II-2
<PAGE>
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 24 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Sunnyvale, State of California, on December 23, 1999.
<TABLE>
<S> <C> <C>
MACROVISION CORPORATION
By: /s/ WILLIAM A. KREPICK
------------------------------------------
William A. Krepick
President and Chief Operating Officer
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints John O. Ryan, William A. Krepick and Ian
R. Halifax, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution, for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his,
her or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
Chairman of the Board of
/s/ JOHN O. RYAN Directors, Chief
------------------------------------------- Executive Officer and December 23, 1999
John O. Ryan Director
PRINCIPAL FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER:
/s/ IAN R. HALIFAX Vice President, Finance and
------------------------------------------- Administration and Chief December 23, 1999
Ian R. Halifax Financial Officer
ADDITIONAL DIRECTORS:
/s/ WILLIAM A. KREPICK
------------------------------------------- Director December 23, 1999
William A. Krepick
/s/ RICHARD S. MATUSZAK
------------------------------------------- Director December 23, 1999
Richard S. Matuszak
/s/ DONNA S. BIRKS
------------------------------------------- Director December 23, 1999
Donna S. Birks
/s/ WILLIAM N. STIRLEN
------------------------------------------- Director December 23, 1999
William N. Stirlen
/s/ THOMAS WERTHEIMER
------------------------------------------- Director December 23, 1999
Thomas Wertheimer
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
1.01 Form of Underwriting Agreement.
5.01 Opinion of Manatt, Phelps & Phillips, LLP regarding legality
of the securities being issued.
10.01 * Letter Agreement dated November 24, 1999 between the
Registrant and TTR Technologies, Inc.
23.01 Consent of Manatt, Phelps & Phillips, LLP (included in
Exhibit 5.01).
23.02 Consent of KPMG LLP.
24.01 Power of Attorney (included on page II-4).
</TABLE>
- ------------------------
* The Registrant has requested confidential treatment for portions of this
exhibit.
<PAGE>
DRAFT
MACROVISION CORPORATION
1,710,000 SHARES
COMMON STOCK
UNDERWRITING AGREEMENT
January , 2000
HAMBRECHT & QUIST LLC
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY INC.
ING BARINGS LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Macrovision Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell 1,250,000 shares of its authorized but
unissued Common Stock, $0.001 par value (herein called the Common Stock), and
the stockholders of the Company named in Schedule II hereto (herein collectively
called the Selling Securityholders) propose to sell an aggregate of 460,000
shares of Common Stock of the Company (said 1,710,000 shares of Common Stock
being herein called the Underwritten Stock). The Company and the Selling
Securityholders propose to grant to the Underwriters (as hereinafter defined) an
option to purchase up to an aggregate of 256,500 additional shares of Common
Stock (herein called the Option Stock and with the Underwritten Stock herein
collectively called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 4(b) hereof). You represent and
<PAGE>
warrant that you have been authorized by each of the other Underwriters to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement
on Form S-3 (No. 333- ), including the related preliminary prospectus, for
the registration under the Securities Act of 1933, as amended (herein called
the Securities Act), of the Stock. Copies of such registration statement and
of each amendment thereto, if any, including the related preliminary
prospectus (meeting the requirements of Rule 430A of the rules and
regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a Rule 462(b) registration statement)
and, in the event of any amendment thereto after the effective date of such
registration statement (herein called the Effective Date), shall also mean (from
and after the effectiveness of such amendment) such registration statement as so
amended (including any Rule 462(b) registration statement). The term Prospectus
as used in this Agreement shall mean the prospectus, including the documents
incorporated by reference therein, relating to the Stock first filed with the
Commission pursuant to Rule 424(b) and Rule 430A (or, if no such filing is
required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus, including the documents incorporated by reference
therein, included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the several Underwriters that:
(a) The Registration Statement has been prepared by the Company in
conformity with the requirements of the Securities Act, and the rules and
regulations (herein called the Rules and Regulations) of the Commission
thereunder, and has been filed with the Commission. The Company has prepared and
has filed or proposes to file prior to the effective date of such registration
statement an amendment or amendments to such registration statement, which
amendment or amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
-2-
<PAGE>
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related Preliminary Prospectus have been delivered to you
in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information and, except to the
extent that you shall agree to a modification, shall be in all substantive
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the extent
not completed at such date and time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Preliminary
Prospectus) as the Company shall have previously advised you would be included
or made therein.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Securities Act and
the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each of the
Closing Dates hereinafter mentioned, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, will contain all material
statements and information required to be included therein by the Securities Act
and the Rules and Regulations and will in all material respects conform to the
requirements of the Securities Act and the Rules and Regulations, and neither
the Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information contained
in or omitted from any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter, directly or through the Representative, specifically for use in
the preparation thereof.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21.01 to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998. The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, with full power and
authority (corporate and other) to own and lease their properties and conduct
their respective businesses as described in the Prospectus; the Company owns all
of the outstanding capital stock of its subsidiaries free and clear of all
claims, liens, charges and encumbrances; the Company and each of its
subsidiaries are in possession of and operating in compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and each of its subsidiaries are duly qualified to
do business and in good standing as foreign corporations in each jurisdiction in
which
-3-
<PAGE>
the ownership or leasing of properties or the conduct of their respective
businesses requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect upon the Company
and its subsidiaries, taken as a whole; and no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) As of September 30, 1999, the Company had an authorized and
outstanding capital stock as set forth under the heading "Capitalization" in the
Prospectus, subject to the assumptions set forth therein; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform in all material respects to the description thereof contained in the
Prospectus. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(e) The Stock to be sold by the Company has been duly authorized and,
when issued, delivered and paid for in the manner set forth in this Agreement,
will be validly issued, fully paid and nonassessable, and will conform in all
material respects to the description thereof contained in the Prospectus. No
preemptive rights or other rights to subscribe for or purchase exist with
respect to the issuance and sale of the Stock by the Company pursuant to this
Agreement. No stockholder of the Company has any right which has not been waived
to require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by this
Agreement. No further approval or authority of the stockholders or the Board of
Directors of the Company will be required for the transfer and sale of the Stock
to be sold by the Selling Securityholders or the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries, and will
not conflict with, result in the breach or violation of, or constitute, either
by itself or upon notice or the passage of time or both, a default under any
-4-
<PAGE>
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of its respective
properties may be bound or affected, any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its subsidiaries or any of their respective properties, which breach,
violation or default could have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other governmental
body is required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement, except for
compliance with the Securities Act, the Securities Exchange Act of 1934, as
amended (herein called the Exchange Act), the Blue Sky laws applicable to the
public offering of the Common Shares by the several Underwriters and the
clearance of such offering with the National Association of Securities Dealers,
Inc. (herein called the NASD).
(g) KPMG LLP, which has expressed its opinion with respect to the
consolidated financial statements filed with the Commission as a part of the
Registration Statement and included in the Prospectus and in the Registration
Statement, is an independent accountant as required by the Securities Act and
the Rules and Regulations. The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific authorizations;
(ii) transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(h) The consolidated financial statements of the Company and its
subsidiaries, and the related notes thereto, included in the Registration
Statement and the Prospectus present fairly in all material respects the
financial position of the Company and its subsidiaries as of the respective
dates of such financial statements, and the results of operations and changes in
financial position of the Company and its subsidiaries for the respective
periods covered thereby. Such statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis as certified by the independent accountant named in subsection 2(g). No
other financial statements or schedules are required to be included in the
Registration Statement. The consolidated financial data set forth in the
Prospectus under the captions "Summary Consolidated Financial Information,"
"Capitalization" and "Selected Consolidated Financial Data" fairly present in
all material respects the information set forth therein on the basis stated in
the Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
violations, defaults or breaches which individually or in the aggregate would
not be material to the Company and its subsidiaries, taken as a whole, neither
the Company nor any of its subsidiaries is in violation or default of any
provision of its certificate of incorporation or bylaws, or other organizational
-5-
<PAGE>
documents, or is in breach of or default with respect to any provision of any
agreement, judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party or by
which it or any of its properties are bound; and there does not exist any state
of facts which constitutes an event of default on the part of the Company or any
such subsidiary as defined in such documents or which, with notice or lapse of
time or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any of its subsidiaries, nor to the best of the Company's knowledge,
any other party is in breach of or default under any of such contracts.
(k) Except as described in the Registration Statement and the
Prospectus, there are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or of which property
owned or leased by the Company or any of its subsidiaries is or may be the
subject, or related to environmental or discrimination matters, which actions,
suits or proceedings might, individually or in the aggregate, prevent or
adversely affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise), properties,
business or results of operations of the Company and its subsidiaries, taken as
a whole; and no labor disturbance by the employees of the Company or any of its
subsidiaries exists or is imminent which might be expected to affect materially
and adversely such condition, properties, business or results of operations.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements herein above described (or elsewhere in the Prospectus), subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those,
if any, reflected in such financial statements (or elsewhere in the Prospectus),
or (ii) those which are not material in amount and do not adversely affect the
use made and proposed to be made of such property by the Company and its
subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company and its
subsidiaries, taken as a whole. Except as disclosed in the Prospectus, the
Company owns or leases all such properties as are necessary to its operations as
now conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could result in a material reduction in the
-6-
<PAGE>
future net income of the Company and its subsidiaries, taken as a whole; (ii)
the Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock and the Company and its subsidiaries are not
in default in the payment of principal or interest on any outstanding material
debt obligations; (iv) there has not been any change in the capital stock (other
than upon the sale of the Stock hereunder) or indebtedness material to the
Company and its subsidiaries, taken as a whole (other than in the ordinary
course of business); and (v) there has not been any material adverse change in
the condition (financial or otherwise), business, properties or results of
operations of the Company and its subsidiaries, taken as a whole.
(n) The Company and its subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade names,
mask works, copyrights, licenses, inventions, trade secrets and rights described
in the Prospectus as being owned by it or necessary to conduct their businesses
as now conducted. As of the date the Registration Statement became effective,
the descriptions of the patents and patent applications set forth in the
Registration Statement and the Prospectus under the caption "Business --
Intellectual Property Rights" do not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. Except as otherwise set forth in the Registration Statement and the
Prospectus, the expiration of any patent rights, trademarks, trade names, mask
works, copyrights, licenses would not have a material adverse effect on the
condition (financial or otherwise), business or results of operations of the
Company or its subsidiaries, taken as a whole. The Company has no knowledge of
any infringement or other violation by it or its subsidiaries of any patent
rights, trademark, trade name rights, mask works, copyrights, licenses, trade
secret or other similar rights of others, and there is no claim being made
against the Company or its subsidiaries regarding any patent, trademark, trade
name, mask work, copyright, license, trade secret or other infringement which
could have a material adverse effect on the condition (financial or otherwise),
business or results of operations of the Company and its subsidiaries, taken as
a whole.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations; except
where failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business or results of operations of the
Company and its subsidiaries, taken as a whole.
(p) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns and have paid all taxes shown
as due thereon; and the Company has no knowledge of any tax deficiency which has
been or might be asserted or threatened against the Company or its subsidiaries
which could materially and adversely affect the business, operations or
properties of the Company and its subsidiaries, taken as a whole.
-7-
<PAGE>
(q) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the offering and
sale of the Stock other than the Prospectus, the Registration Statement and the
other materials permitted by the Securities Act.
(s) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Stock.
(v) The Company is eligible to use a registration statement on Form
S-3 in the registration of the Stock.
(w) The documents incorporated by reference in the Prospectus and the
Registration Statement, when they were first filed with the Commission, complied
with the requirements of the Exchange Act and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue statement
of a material fact required to be stated therein or necessary to make the
statement therein not misleading.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS.
(a) Each of the Selling Securityholders severally represents and
warrants to, and agrees with, the several Underwriters that:
(i) Such Selling Securityholder has, and on the First Closing
Date hereinafter mentioned will have, good and marketable title to the Stock
proposed to be sold by such Selling Securityholder hereunder on such Closing
Date and full right, power and authority to enter into this Agreement and to
sell, assign, transfer and deliver such Common Shares hereunder, free and
clear of all voting trust arrangements, liens, encumbrances, equities,
security interests, restrictions and claims whatsoever; and upon delivery of
and payment for such Stock hereunder, the Underwriters will acquire good and
valid title thereto, free and clear of all liens, encumbrances,
-8-
<PAGE>
equities, claims, restrictions, security interests, voting trusts or other
defects of title whatsoever, provided that the Underwriters are purchasing such
Stock in good faith and without notice of any adverse claim.
(ii) Such Selling Securityholder has executed and delivered a
Power of Attorney and a Custody Agreement (hereinafter collectively referred to
as the "Securityholders Agreements") and in connection herewith such Selling
Securityholder further represents, warrants and agrees that such Selling
Securityholder has deposited in custody, under the Securityholders Agreement,
with the agent named therein (the "Agent") as custodian, certificates in
negotiable form for the Stock to be sold hereunder by such Selling
Securityholder, for the purpose of further delivery pursuant to this Agreement.
Such Selling Securityholder agrees that the Stock to be sold by such Selling
Securityholder on deposit with the Agent are subject to the interests of the
Company and the Underwriters, that the arrangements made for such custody are to
that extent irrevocable, and that the obligations of such Selling Securityholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Securityholders Agreement, by any act of such Selling Securityholder, by
operation of law, by the death or incapacity of such Selling Securityholder or
by the occurrence of any other event. If the Selling Securityholder should die
or become incapacitated, or if any other event should occur, before the delivery
of the Stock hereunder, the documents evidencing Stock then on deposit with the
Agent shall be delivered by the Agent in accordance with the terms and
conditions of this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Agent shall have received notice
thereof. This Agreement and the Securityholders Agreement have been duly
executed and delivered by or on behalf of such Selling Securityholder and the
form of such Securityholders Agreements has been delivered to you.
(iii) The performance of this Agreement and the Securityholders
Agreements and the consummation of the transactions contemplated hereby and by
the Securityholders Agreements will not result in a breach or violation by such
Selling Securityholder of any of the terms or provisions of, or constitute a
default by such Selling Securityholder under, any indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement, lease, franchise, license
or other agreement or instrument to which such Selling Securityholder is a party
or by which such Selling Securityholder or any of its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Securityholder or any of
its properties, in which such breach, violation or default would adversely
affect the ability to such Selling Securityholder to perform its obligations
pursuant to this Agreement or the Securityholders Agreements or could otherwise
have a material adverse effect on such Selling Securityholder.
(iv) Such Selling Securityholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Stock.
(v) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus, and, although such Selling Securityholder has not
independently verified the
-9-
<PAGE>
accuracy or completeness of the information contained therein (other than the
information regarding such Selling Securityholder and its affiliates, if any,
set forth under the captions "Management" and "Principal and Selling
Securityholders"), nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that (A)
on the effective date thereof the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading or (B) on the date of the Prospectus, the Prospectus contained and,
on the Closing Date, contains any untrue statement of a material fact or omitted
or omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(vi) Such Selling Securityholder's decision to sell the Stock
that may be sold by it pursuant to this Agreement is not prompted by any adverse
information regarding the Company which is not disclosed in the Registration
Statement and the Prospectus.
(b) Each of the Selling Securityholders agrees with the Company and
the Underwriters not to directly or indirectly, sell, offer, contract or grant
any option to sell, make any short sale (including without limitation any "short
vs. the box"), pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into shares
of Common Stock currently or hereafter owned either of record or beneficially
(as defined in Rule 13d-3 under Exchange Act) by the such Selling
Securityholder, or publicly announce such Selling Securityholder's intention to
do any of the foregoing, for a period commencing on the date hereof and
continuing to a date 90 days after the first date any of the Stock are released
by you for sale to the public, except that, each of the Selling Securityholders
may sell or otherwise transfer shares of Common Stock (i) pursuant to this
Agreement or (ii) as a BONA FIDE gift or gifts, provided that undersigned
provides prior written notice of such gift or gifts to you, and the donee or
donees thereof agree to be bound by the restrictions set forth herein. Each of
the Selling Securityholders also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of any of the Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
4. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
1,250,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $ per share. The obligation of each Underwriter to the Company
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and each of the Selling Securityholders shall be to purchase from the Company
and the Selling Securityholders that number of shares of the Underwritten Stock
which represents the same proportion of the total number of shares of the
Underwritten Stock to be sold by each of the Company and the Selling
Securityholders pursuant to this Agreement as the number of shares of the
Underwritten Stock set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of the Underwritten Stock to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 4, the agreement of each
Underwriter is to purchase only the respective number of shares of the
Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 9 or 10 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the shares
of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares, the number of shares of the Stock which each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares which the defaulting Underwriter or Underwriters agreed to
purchase; PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be
obligated to purchase the shares which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such shares
on the terms herein set forth. In any such case, either you or the Company and
the Selling Securityholders shall have the right to postpone the First Closing
Date determined as provided in Section 6 hereof for not more than seven business
days after the date originally fixed as the First Closing Date pursuant to said
Section 6 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company and the Selling Securityholders
shall make arrangements within the 24-hour periods stated above for the purchase
of all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken
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hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholders grant an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of
256,500 shares of the Option Stock from the Company at the same price per share
as the Underwriters shall pay for the Underwritten Stock. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten Stock by
the Underwriters and may be exercised in whole or in part at any time (but not
more than once) on or before the thirtieth day after the date of this Agreement
upon written or telegraphic notice by you to the Company setting forth the
aggregate number of shares of the Option Stock as to which the several
Underwriters are exercising the option. Delivery of certificates for the shares
of Option Stock, and payment therefor, shall be made as provided in Section 6
hereof. The number of shares of the Option Stock to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Stock to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such manner as you
deem advisable to avoid fractional shares.
5. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page, the final paragraphs on the inside front cover, and under "Underwriting"
in the Registration Statement, any Preliminary Prospectus and the Prospectus
relating to the Stock filed by the Company (insofar as such information relates
to the Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration Statement, any
Preliminary Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
6. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 4(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the First Closing Date), and payment therefor, shall be
made at the office of Manatt, Phelps & Phillips, LLP, 3030 Hansen Way, Suite
100, Palo Alto, California , Palo Alto, California, at 7:00 a.m., San Francisco
time, on the fourth business day after the date of this Agreement, or at such
time on such other day, not later than seven full business days after such
fourth business day, as shall be agreed upon in writing by the Company, the
Selling Securityholders and you. The date and hour of such delivery and payment
are herein called the First Closing Date.
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(b) If the option granted by Section 4(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
First Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Manatt, Phelps & Phillips, LLP,
3030 Hansen Way, Suite 100, Palo Alto, California at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option. The date and
hour of such delivery of such Option Stock and payment therefor are herein
called the Second Closing Date.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in same day funds or by wire transfer to an account. Such payment shall
be made upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the First Closing Date, in the case of Underwritten Stock,
and at least one business day prior to the Second Closing Date, in the case of
the Option Stock. The First Closing Date and Second Closing Date are
collectively referred to herein as the "Closing Dates." Such certificates will
be made available to the Underwriters for inspection, checking and packaging at
the offices of Lewco Securities Corporation, 2 Broadway, New York, New York
10004 on the business day prior to the Closing Dates or, in the case of the
Option Stock, by 3:00 p.m., New York time, on the business day preceding the
date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the First Closing Date or the
Second Closing Date, as the case may be. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
7. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS. Each
of the Company and the Selling Securityholders respectively covenants and agrees
as follows, as applicable:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any
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notification with respect to the suspension of the qualification of the Stock
for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the First Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of counsel
for the Company or of counsel for the Underwriters, to supplement or amend the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser of the Stock,
the Company will forthwith prepare and file with the Commission a supplement to
the Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time such Prospectus
is delivered to such purchaser, not misleading. If, after the initial public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
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(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company and, unless otherwise paid by the Company, the Selling
Securityholders jointly and severally agree to pay all costs and expenses
incident to the performance of their obligations under this Agreement (without
obligating the Selling Securityholders with respect to the obligations of the
Company under Section 8 hereof), including all costs and expenses incident to
(i) the preparation, printing and filing with the Commission and the NASD of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 7 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 7, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 7 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees. The Underwriters may deem the Company to be the primary obligor with
respect to all costs, fees and expenses to be paid by the Company and by the
Selling Stockholders. Except as provided in this Section 7, Section 8 and
Section 10(e) hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the blue sky laws and the blue
sky memoranda referred to in Section 7(j)). The Selling Stockholders will pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) any fees and expenses of
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counsel for any Selling Stockholders other than Manatt, Phelps & Phillips, LLP
and (ii) all expenses and taxes incident to the sale and delivery of the Stock
to be sold by such Selling Stockholders to the Underwriters hereunder.
(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for blue
sky fees and related disbursements (including counsel fees and disbursements and
cost of printing memoranda for the Underwriters) paid by or for the account of
the Underwriters or their counsel in qualifying the Stock under state securities
or blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 90 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to
sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (i)
the Company's (A) issuance of the Stock to be sold to the Underwriters pursuant
to this Agreement, (B) issuance of Common Stock upon the exercise of warrants
and stock options that are presently outstanding and described as such in the
Prospectus or which may be issued hereafter under the option plans described in
the Registration Statement and the Prospectus and (C) grant of options pursuant
to the option plans described in the Registration Statement and the Prospectus,
(ii) the Company's issuance of Common Stock under the employee stock purchase
plan described in the Registration Statement and the Prospectus, and (iii) the
Company's issuance of shares of Common Stock in an acquisition of another
corporation or entity provided that (1) such shares represent less than 20% of
the Company's then outstanding shares of Common Stock and (2) the individuals or
entities to whom such shares are issued agree that such shares may not be resold
during the 90 days following the first date that any of the shares of Common
Stock are released by the Underwriters for sale to the public.
(m) The Company agrees to use its best efforts to cause all directors
and officers of the Company to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 90 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase
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any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
8. INDEMNIFICATION.
(a) The Company, William A. Krepick, William N. Stirlen and Thomas
Wertheimer (each of Messrs. Krepick, Stirlen and Wertheimer may be referred to
herein as an "Indemnifying Securityholder" and collectively they may be referred
to as the "Indemnifying Securityholders"), severally and not jointly, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of the Securities Act against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company and a majority in interest of the Indemnifying Securityholders) insofar
as such losses, claims, damages, liabilities or expenses (or actions in respect
thereof as contemplated below) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state in any of them a material fact required to be
stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part, in the case of the
Company, on any inaccuracy in the representations and warranties of the Company
contained herein or any failure of the Company to perform its obligations
hereunder or under law or, in the case of an Indemnifying Securityholder, on any
inaccuracy in the representations or warranties of such Indemnifying
Securityholder contained herein or any failure of such Indemnifying
Securityholder to perform its obligations hereunder or under law; and will
reimburse each Underwriter and each such controlling person for any legal and
other expenses as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that neither the Company nor an Indemnifying
Securityholder will be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 5(b) hereof; and
provided further that, with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this subsection (a) shall not inure to the
benefit of any Underwriter from whom the person asserting any such loss, claim,
damage or liability purchased Stock (or to the benefit of any such person
controlling such Underwriter) to the extent that any such loss, claim, damage,
liability or expense of such Underwriter or controlling person results from the
fact that a copy of the Prospectus was not sent or given to such
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person at or prior to the written confirmation of the sale of such Stock to such
person as required by the Securities Act, and if the untrue statement or
omission concerned has been corrected in the Prospectus, unless such failure is
the result of noncompliance by the Company with Section 7(c) hereof.
Notwithstanding the foregoing, the Indemnifying Securityholders shall not be
required to provide indemnification pursuant to this Section 8(a) unless the
Underwriter or controlling person seeking indemnification shall have first made
a written demand for payment to the Company with respect to any losses, claims,
damages, liabilities or expenses for which the Company and the Indemnifying
Securityholders are required to indemnify the Underwriters pursuant to this
Section 8(a) and the Company shall have failed to make such demanded payment
within one hundred twenty (120) days after receipt thereof. The Company and the
Indemnifying Securityholders may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be responsible. In addition
to its other obligations under this Section 8(a), the Company and the
Indemnifying Securityholders, severally and not jointly, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, or any inaccuracy in the representations and
warranties of the Company (in the case of the Company) or an Indemnifying
Securityholder (in the case of such Indemnifying Securityholder) herein or
failure to perform its obligations hereunder, all as described in this Section
8(a) and subject to the limitations set forth in this Section 8(a), they will
reimburse each Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's or the Indemnifying Securityholders' obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company or the
Indemnifying Securityholders as applicable, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement, shall bear interest at the Prime Rate from,
in the case of the Company, the date of such request and, in the case of the
Indemnifying Securityholders, one hundred twenty (120) days after the date of
such request. This indemnity agreement will be in addition to any liability
which the Company or the Indemnifying Securityholders may otherwise have.
(b) Each of the Selling Securityholders other than the Indemnifying
Securityholders, severally and not jointly, agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Securities Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Selling Securityholders holding a
majority of the Stock being sold by the Selling Securityholders other than the
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Indemnifying Securityholders pursuant to this Agreement), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto in reliance upon and in conformity with information furnished
in writing by such Selling Securityholder, or (ii) arise out of or are based in
whole or in part, on any inaccuracy in the representations or warranties of such
Selling Securityholder contained herein or any failure of such Selling
Securityholder to perform its obligations hereunder or under law; and will
reimburse each Underwriter and each such controlling person for any legal and
other expenses as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that, with respect to any untrue statement or
omission or alleged untrue statement or omission made in any Preliminary
Prospectus, the indemnity agreement contained in this subsection (b) shall not
inure to the benefit of any Underwriter from whom the person asserting any such
loss, claim, damage or liability purchased Stock (or to the benefit of any such
person controlling such Underwriter) to the extent that any such loss, claim,
damage, liability or expense of such Underwriter or controlling person results
from the fact that a copy of the Prospectus was not sent or given to such person
at or prior to the written confirmation of the sale of such Stock to such person
as required by the Securities Act, and if the untrue statement or omission
concerned has been corrected in the Prospectus, unless such failure is the
result of noncompliance by the Company with Section 7(c) hereof. In addition to
its other obligations under this Section 8(b), each Selling Securityholder other
than the Indemnifying Securityholders, severally and not jointly, agrees that,
as an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any such statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of any Selling Securityholder (in the case of
such Selling Securityholder) herein or failure to perform its obligations
hereunder, all as described in this Section 8(b) and subject to the limitations
set forth in this Section 8(b), they will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Selling
Securityholder's obligation to reimburse each Underwriter for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter shall
promptly return it to the Selling Securityholders, as applicable, together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement, shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to any
liability which the Selling Securityholders may otherwise have.
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(c) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Securityholders and each person, if any, who controls the
Company or any Selling Securityholder within the meaning of the Securities Act,
against any losses, claims, damages, liabilities or expenses, joint or several,
to which the Company, or any such director, officer, Selling Securityholder or
controlling person may become subject, under the Securities Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 5(b) hereof; and will reimburse the Company, or any such director,
officer, Selling Securityholder or controlling person for any legal and other
expenses as such expenses are reasonably incurred by the Company, or any such
director, officer, Selling Securityholder or controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action. In addition to its other
obligations under this Section 8(c), each Underwriter severally agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 8(c)
which relates to information furnished to the Company pursuant to Section 5(b)
hereof, it will reimburse the Company (and, to the extent applicable, each
officer, director, Selling Securityholder or controlling person) on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company (and, to the extent applicable, each officer, director, Selling
Securityholder or controlling person) for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Company (and, to the extent applicable, each
officer, director, Selling Securityholder or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Securityholder) within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made
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against an indemnifying party under this Section, notify the indemnifying party
in writing of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party for contribution or otherwise than under the indemnity
agreement contained in this Section or to the extent that it is not prejudiced
as a proximate result of such failure. In case any such action is brought
against any indemnified party and such indemnified party seeks or intends to
seek indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be a conflict between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Representatives in the case of paragraph (a)
or (b), representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, in each of which
cases the reasonable fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) If the indemnification provided for in this Section 8 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Securityholders, on the one hand, and the Underwriters,
on the other hand, from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Securityholders, on the one hand, and the Underwriters, on the other
hand, in connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The respective relative benefits received by the Company and the
Selling Securityholders, on the one hand, and the Underwriters, on the other
hand, shall be deemed to be in
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the same proportion, in the case of the Company and the Selling Securityholders,
as the total price paid to the Company and to the Selling Securityholders,
respectively, for the Stock sold by them to the Underwriters (net of
underwriting commissions but before deducting expenses), and in the case of the
Underwriters as the underwriting commissions received by them bears to the total
of such amounts paid to the Company and to the Selling Securityholders and
received by the Underwriters as underwriting commissions. The relative fault of
the Company and the Selling Securityholders, on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact or the inaccurate
or the alleged inaccurate representation and/or warranty relates to information
supplied by the Company, the Selling Securityholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in subparagraph (d) of this Section 8, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subparagraph (d) of this
Section 8 with respect to notice of commencement of any action shall apply if a
claim for contribution is to be made under this subparagraph (e); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subparagraph (d) for purposes of
indemnification. The Company, the Selling Securityholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount of the total underwriting commissions received by
such Underwriter in connection with the Stock underwritten by it and distributed
to the public. No person guilty of fraudulent misrepresentation (within the
meaning of Section 8(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8 are several
in proportion to their respective underwriting commitments and not joint.
(f) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 8(a), 8(b) and 8(c)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event that the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 8(a), 8(b) and 8(c)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 8(a), 8(b) and 8(c) hereof.
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(g) The Company will not, without the prior written consent of each
Underwriter, and the Underwiter will not, without the prior written consent of
the Company, settle or compromise or consent to the entry of any judgement in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter, the Company and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
(h) The liability of a Selling Securityholder for a breach of a
representation or warranty set forth in Section 3 hereof or pursuant to the
indemnity, contribution, reimbursement and other provisions of this Section 8
shall be limited to an amount equal to the product obtained by multiplying the
number of shares sold by such Selling Securityholder pursuant to this Agreement
by the price set forth in Section 4(a) above.
9. TERMINATION. This Agreement may be terminated by you at any time prior
to the First Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in major hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of major hostilities or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis or change
in economic or political conditions in the financial markets of the United
States would, in the Underwriters' reasonable judgment, make the offering or
delivery of the Stock impracticable, (iii) suspension of trading in securities
generally or a material adverse decline in value of securities generally on the
New York Stock Exchange, the American Stock Exchange, or The Nasdaq Stock
Market, or limitations on prices (other than limitations on hours or numbers of
days of trading) for securities on either such exchange or system, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, any court, legislative body, agency or other governmental
authority which in the Underwriters' reasonable opinion materially and adversely
affects or will materially or adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by either federal or New York
State authorities or (vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal affairs which in
the Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States. If this Agreement shall be terminated
pursuant to this Section 9, there shall be no liability of the Company or the
Selling Securityholders to the Underwriters and no liability of the Underwriters
to the Company or the Selling Securityholders; PROVIDED, HOWEVER, that in the
event of any such termination the Company and the Selling Securityholders agree
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 7 hereof.
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10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the First Closing Date by Wilson Sonsini Goodrich & Rosati, P.C., counsel for
the Underwriters.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance reasonably
satisfactory to you, except as otherwise expressly provided below:
(i) An opinion of Manatt, Phelps & Phillips, LLP, counsel for the
Company, addressed to the Underwriters and dated the First Closing Date, or the
Second Closing Date (but without the opinion set forth in paragraphs (16)-(18)
below), as the case may be, to the effect that:
(1) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, is duly qualified to do business as a
foreign corporation and is in good standing in all other jurisdictions where the
ownership or leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect on the Company and its subsidiaries, and has
full corporate power and authority to own its properties and conduct its
business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in the
Prospectus; all necessary and proper corporate proceedings have been taken in
order to authorize validly such authorized Common Stock; all outstanding shares
of Common Stock (including the Underwritten Stock and any Option Stock) have
been duly and validly issued, are fully paid and nonassessable, were issued in
compliance with federal and state securities laws, to such counsel's knowledge
were not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase any securities and conform in all material
respects to the description thereof contained in the Prospectus; without
limiting the foregoing, to such counsel's knowledge there are no preemptive or
other rights to subscribe for or purchase any of the Stock to be sold by the
Company hereunder;
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(3) All of the issued and outstanding shares of the
Company's subsidiaries have been duly and validly authorized and issued, are
fully paid and nonassessable and are owned beneficially by the Company free and
clear of all liens, encumbrances, equities, claims, security interests, voting
trusts or other defects of title whatsoever;
(4) The certificates evidencing the Stock to be delivered
hereunder are in due and proper form under Delaware law, and when duly
countersigned by the Company's transfer agent and registrar, and delivered to
you or upon your order against payment of the agreed consideration therefor in
accordance with the provisions of this Agreement, the Stock represented thereby
will be duly authorized and validly issued, fully paid and nonassessable, will
not have been issued in violation of or subject to any preemptive rights or
other rights known to such counsel to subscribe for or purchase securities and
will conform in all respects to the description thereof contained in the
Prospectus;
(5) Except as disclosed in or specifically contemplated by
the Prospectus, to such counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
(6) The documents incorporated by reference in the
Registration Statement and the Prospectus (except for the financial statements
included therein and the financial data derived therefrom, as to which such
counsel need express no opinion) when they became effective or were filed with
the Commission, as the case may be, complied as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission thereunder.
(7) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument known to
such counsel to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of its or their property may
be bound or affected which is material to the Company and its subsidiaries, or
violate any of the provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or any of its subsidiaries or, so
far as is known to such counsel, violate any statute, judgment, decree, order,
rule or regulation of any court or governmental body having jurisdiction over
the Company or any of its subsidiaries or any of its or their property;
(8) Neither the Company nor any subsidiary is in violation
of its certificate of incorporation or bylaws, or other organizational
documents, or to such counsel's knowledge, in breach of or default with respect
to any provision of any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such counsel to which
the Company or any such subsidiary is a party or by which it or any of its
properties may be bound
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or affected, except where such default would not materially adversely affect the
Company and its subsidiaries;
(9) To such counsel's knowledge, no holders of securities of
the Company have rights which have not been waived or satisfied to the
registration of shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the offering contemplated
hereby;
(10) The information set forth in the Prospectus under the
captions "Risk Factors -- Investment Risks," "Capitalization," "Business --
Intellectual Property Rights" and "Principal and Selling Stockholders," insofar
as such information relates to issuances of securities of the Company or
purports to summarize provisions of any contract, plan or law, fairly describes
such issuances or provisions.
(11) The Company is eligible to use a registration statement
on Form S-3 for the registration of the Stock; the Registration Statement has
become effective under the Securities Act, and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
any required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) of the Rules and Regulations has been made in the manner and within
the time period required by such Rule 424(b);
(12) The Registration Statement, the Prospectus and each
amendment or supplement thereto (except for the documents incorporated by
reference therein, the financial statements included therein and the financial
data derived therefrom, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Securities Act
and the Rules and Regulations;
(13) To such counsel's knowledge, there are no franchises,
leases, contracts, agreements or documents of a character required to be
disclosed in the Registration Statement or Prospectus or to be filed as exhibits
to the Registration Statement which are not disclosed or filed (or incorporated
by reference), as required;
(14) To such counsel's knowledge, there are no legal or
governmental actions, suits or proceedings pending or threatened against the
Company which are required to be described in the Prospectus which are not
described as required;
(15) The Company has full right, power and authority to
enter into this Agreement and to sell and deliver the Stock to be sold by it to
the several Underwriters; this Agreement has been duly and validly authorized by
all necessary corporate action by the Company, has been duly and validly
executed and delivered by and on behalf of the Company, and is a valid and
binding agreement of the Company in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
generally and except as to those provisions relating to indemnity or
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contribution for liabilities arising under the Securities Act as to which no
opinion need be expressed; and no approval, authorization, order, consent,
registration, filing, qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is required for the
execution and delivery of this Agreement by the Company or the performance by
the Company of its obligations pursuant to this Agreement, except such as have
been obtained and are in full force and effect under the Securities Act and such
as may be required under applicable Blue Sky laws in connection with the
purchase and distribution of the Stock by the Underwriters and the clearance of
such offering with the NASD;
(16) To such counsel's knowledge, (a) this Agreement and the
Securityholders Agreements have been duly executed and delivered by or on behalf
of each of the Selling Securityholders (other than Pacific Media) and (b) the
Agent has been duly and validly authorized to act as the custodian of the Stock
to be sold by each such Selling Securityholder; and (c) the performance by the
Selling Securityholders (other than Pacific Media) of their respective
obligations pursuant to this Agreement and the Securityholders Agreements will
not result in a breach of, or constitute a default under, any material
indenture, mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or instrument known to
such counsel to which any of the Selling Securityholders (other than Pacific
Media) is a party or by which any of the Selling Securityholders (other than
Pacific Media) or any of their properties may be bound, or violate any statute,
judgment, decree, order, rule or regulation known to such counsel of any court
or governmental body having jurisdiction over any of the Selling Securityholders
(other than Pacific Media) or any of their properties if such breach or
violation would adversely affect a Selling Securityholder's ability to perform
such Selling Securityholder's obligations pursuant to this Agreement or the
Securityholders Agreements; and to such counsel's knowledge, no approval,
authorization, order or consent of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the Securityholders Agreements or the consummation by the
Selling Securityholders (other than Pacific Media) of the transactions
contemplated by this Agreement, except such as have been obtained and are in
full force and effect under the Securities Act and such as may be required under
applicable Blue Sky laws in connection with the purchase and distribution of the
Stock by the Underwriters and the clearance of such offering with the NASD;
(17) To such counsel's knowledge, the Selling
Securityholders (other than Pacific Media) have full right, power and authority
to enter into this Agreement and the Securityholders Agreements and to sell,
transfer and deliver the Stock to be sold on such Closing Date by such Selling
Securityholders hereunder and upon delivery of and payment for the Stock to be
sold by the Selling Securityholders (other than Pacific Media) as provided in
this Agreement and upon registration of such Stock in the names of the
Underwriters (or their nominees) in the stock records of the Company, the
Underwriters will be the owners of such Stock, free and clear of any adverse
claim, provided that the Underwriters are purchasing such Stock in good faith
and without notice of any adverse claim; and
(18) To such counsel's knowledge, this Agreement and the
Securityholders Agreements are valid and binding agreements of each of the
Selling Securityholders
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(other than Pacific Media) in accordance with their terms except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
generally and except with respect to those provisions relating to indemnities or
contributions for liabilities under the Securities Act, as to which no opinion
need be expressed.
In rendering such opinion, Manatt, Phelps & Phillips, LLP may rely as to
matters of local law or the laws of a state other than California or the
corporate law of the State of Delaware, on opinions of local or foreign counsel
that are satisfactory in form and scope to counsel for the Underwriters. Copies
of any opinions so relied upon shall be delivered to the Representatives and to
counsel for the Underwriters and the foregoing opinion shall also state that
Manatt, Phelps & Phillips, LLP knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel. Manatt, Phelps &
Phillips, LLP may rely as to matters of fact on certificates of officers of the
Company and of governmental officials, without verification except as specified,
in which case their opinion is to state that they are so doing and that the
Underwriters and their counsel are justified in relying on such opinions or
certificates. Manatt, Phelps & Phillips, LLP shall also include a statement to
the effect that nothing has come to their attention that would lead them to
believe that either at the effective date of the Registration Statement or at
the applicable Closing Date the Registration Statement or the Prospectus, or any
such amendment or supplement, contains any untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
Manatt, Phelps & Phillips, LLP may base the opinions set forth in
paragraphs (16)-(18) above solely upon the representations and warranties
contained in this Agreement, or Securityholders Agreements executed by each
Selling Securityholder, provided that they confirm that it has no reason to
believe that such representations or warranties are materially inaccurate.
In addition to the matters set forth above, the opinion of Manatt, Phelps &
Phillips, LLP shall also include a statement to the effect that, although it has
not independently verified the accuracy or completeness of the statements in the
Registration Statement and the Prospectus, nothing has come to its attention
that causes it to believe that the Registration Statement (except as to the
financial statements and the financial data derived therefrom, as to which it
need not express any opinion or belief) at the Effective Date contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus (except as to the financial statements and the financial
data derived therefrom, as to which it need not express any opinion or belief)
at the Effective Date contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus (except as to
the financial statements and the financial data derived therefrom, as to which
it need not express any opinion or belief) as of its date or at the First
Closing Date or Second Closing Date, as the case may be, contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statement therein, in the light of the
circumstances under which the statement was made, not misleading. With respect
to such statement, Manatt, Phelps &
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Phillips, LLP may state that its belief is based upon the procedures set forth
therein, but is without independent check or verification.
(ii) An opinion of George Hohnsbeen, Esq., counsel to Pacific
Media, addressed to the Underwriters and dated the First Closing Date to the
effect that:
(1) To such counsel's knowledge, (a) this Agreement and the
Securityholders Agreement have been duly authorized, executed and delivered by
or on behalf of Pacific Media and (b) the Agent has been duly and validly
authorized to act as the custodian of the Stock to be sold by Pacific Media; and
the performance by Pacific Media of its obligations pursuant to this Agreement
and the Securityholders Agreement will not result in a breach of, or constitute
a default under, any material indenture, mortgage, deed of trust, trust
(constructive or other), loan agreement, lease, franchise, license or other
agreement or instrument known to such counsel to which Pacific Media is a party
or by which Pacific Media or any of its properties may be bound, or violate any
statute, judgment, decree, order, rule or regulation known to such counsel of
any court or governmental body having jurisdiction over Pacific Media or any of
its properties if such breach or violation would adversely affect a Pacific
Media's ability to perform such Pacific Media's obligations pursuant to this
Agreement or the Securityholders Agreement; and to such counsel's knowledge, no
approval, authorization, order or consent of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the Securityholders Agreement or the
consummation by the Pacific Media of the transactions contemplated by this
Agreement, except such as have been obtained and are in full force and effect
under the Securities Act and such as may be required under the rules of the NASD
and applicable Blue Sky laws;
(2) To such counsel's knowledge, Pacific Media has full
right, power and authority to enter into this Agreement and the Securityholders
Agreement and to sell, transfer and deliver the Common Shares to be sold on such
Closing Date by Pacific Media hereunder and upon delivery of and payment for the
Stock to be sold by Pacific Media as provided in this Agreement and upon
registration of such Stock in the names of the Underwriters (or their nominees)
in the stock records of the Company, the Underwriters will be the owners of such
Stock, free and clear of any adverse claim, provided that the Underwriters are
purchasing such Stock in good faith and without notice of any adverse claim; and
(3) To such counsel's knowledge, this Agreement and the
Securityholders Agreement are valid and binding agreements of Pacific Media in
accordance with their terms except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally and except with respect to
those provisions relating to indemnities or contributions for liabilities under
the Securities Act, as to which no opinion need be expressed.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, of the State of California or the
corporate laws of the State of Delaware upon opinions of local or foreign
counsel satisfactory in form and scope to counsel for the
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<PAGE>
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
(iii) An opinion of Skjerven, Morrill, MacPherson, Franklin &
Friel, the Company's intellectual property counsel, addressed to the
Underwriters and dated the First Closing Date or the Second Closing Date, as the
case may be, to the effect that:
(1) To such counsel's knowledge, the Company owns all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, maskworks, copyrights, licenses, inventions, trade
secrets and rights described in the Prospectus as being owned by it or necessary
for the conduct of its business, and such counsel is not aware of any claim to
the contrary or any challenge by any other person to the ownership rights of the
Company with respect to the foregoing;
(2) No fact has come to such counsel's attention that would
lead such counsel to believe that the patents presently issued and held by the
Company are not valid and enforceable.
(3) Such counsel is not aware of any material fact with
respect to the patent applications of the Company presently on file that (a)
would preclude the issuance of patents with respect to such applications or (b)
would lead such counsel to believe that such patents when issued would not be
valid and enforceable.
(4) Such counsel is not aware of any legal actions, claims
or proceedings pending or threatened against the Company alleging that the
Company has infringed or currently is infringing or otherwise violating any
patents rights, trademarks, service marks, trade name rights, maskworks,
copyrights, licenses, inventions, trade secrets and similar rights owned by any
other person or entity and no fact has come to such counsel's attention that any
of the Company's present or proposed products or processes described in the
Prospectus have infringed or currently infringe any patents, trademarks,
trademark registrations, service marks, service mark registrations, trade names,
maskworks, copyrights, licenses, inventions, trade secrets and rights owned by
any other person or entity.
(5) Such counsel has reviewed the descriptions of patents
and patent applications under the caption "Business -- Intellectual Property
Rights" in the Registration Statement and Prospectus, and, to the extent they
constitute matters of law or legal conclusions, these descriptions are true and
correct in all material respects and fairly present the patent situation of the
Company; and
(6) Nothing has come to such counsel's attention that causes
such counsel to believe that, as of the date the Registration Statement became
effective and as of the date of such opinion, the statements set forth under the
caption "Business -- Intellectual Property Rights" in the Registration Statement
and Prospectus contain any untrue statement of a material fact or omit
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<PAGE>
to state a material fact necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading.
(iv) Such opinion or opinions of Wilson, Sonsini, Goodrich &
Rosati Professional Corporation, counsel for the Underwriters dated the First
Closing Date or the Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate proceedings and
other legal matters relating to this Agreement, the validity of the Stock, the
Registration Statement and the Prospectus and other related matters as you may
reasonably require, and the Company and the Selling Securityholders shall have
furnished to such counsel such documents and shall have provided to them such
papers and records as they may reasonably request for the purpose of enabling
them to pass upon such matters. In connection with such opinions, such counsel
may rely on representations or certificates of officers of the Company and
governmental officials.
(v) A certificate of the Company executed by the Chairman of the
Board or President and the chief financial or accounting officer of the Company,
dated the First Closing Date or the Second Closing Date, as the case may be, to
the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as the
case may be, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied on or prior to each
such Closing Date;
(2) To their knowledge (a) the Commission has not issued any
order preventing or suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any amendment
thereto; (b) no stop order suspending the effectiveness of the Registration
Statement has been issued; and (c) no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus; in his opinion
and to the best of his knowledge, neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or event has
occurred which is required to be set forth in an amendment to the Registration
Statement or in a supplement to or amendment of any prospectus which has not
been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as disclosed
in or contemplated by the Prospectus, (a) there has not been any material
adverse change or a development involving a material adverse change in the
condition (financial or otherwise), business, properties, results of operations
or
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<PAGE>
management of the Company and its subsidiaries, taken as a whole, (b) no legal
or governmental action, suit or proceeding is pending or threatened against the
Company or any of its subsidiaries which is material to the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, or which may adversely affect the transactions
contemplated by this Agreement, (c) neither the Company nor any of its
subsidiaries has entered into any verbal or written agreement or other
transaction which is not in the ordinary course of business or which could
result in a material reduction in the future net income of the Company and its
subsidiaries, taken as a whole, or incurred any material liability or
obligation, direct, contingent or indirect, made any change in its capital
stock, made any material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital stock, and (d)
the Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to Securityholders of
record on a date prior to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as disclosed
in or contemplated by the Prospectus, the Company and its subsidiaries have not
sustained a material loss or damage by strike, fire, flood, windstorm, accident
or other calamity (whether or not insured).
(vi) On the First Closing Date or the Second Closing Date, as the
case may be, a certificate, dated such Closing Date and addressed to you, signed
by or on behalf of each of the Selling Securityholders to the effect that the
representations and warranties of such Selling Securityholder in Section 3 of
this Agreement are true and correct, as if made at and as of the First Closing
Date or the Second Closing Date, as the case may be, and that such Selling
Securityholder has complied with all the agreements and satisfied all the
conditions on his part to be performed or satisfied prior to the First Closing
Date or the Second Closing Date, as the case may be.
(vii) You shall have received from KPMG, a letter or letters,
addressed to the Underwriters and dated the First Closing Date and the Second
Closing Date confirming that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the Original Letter), but carried out
to a date not more than three business days prior to the First Closing Date or
Second Closing Date (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the First
Closing Date or Second Closing Date, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock or
the purchase of the Option Stock as contemplated by the Prospectus.
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<PAGE>
(viii) On or prior to the First Closing Date, you shall have
received from all directors, officers, and Selling Securityholders agreements,
in form reasonably satisfactory to Hambrecht & Quist LLC, stating that, without
the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person or entity will not, for a period of 90 days following
the commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in whole or
in part, any of the economic consequences or ownership of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
(ix) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 7 hereof.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Wilson Sonsini Goodrich & Rosati, P.C., counsel for the
Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
reasonably request. Any certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters as
to the statements made therein.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises,
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<PAGE>
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required, (vii) the
representations and warranties of the Company herein are true and correct in all
material respects as of the First Closing Date or the Second Closing Date, as
the case may be, and (viii) there has not been any material change in the market
for securities in general or in political, financial or economic conditions from
those reasonably foreseeable as to render it impracticable in your reasonable
judgment to make a public offering of the Stock, or a material adverse change in
market levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(e) In case any of the conditions specified in this Section 10 shall
not be fulfilled, this Agreement may be terminated by you by giving notice to
the Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in paragraphs
(i) and (j) of Section 7 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company or the
Selling Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
11. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 7 hereof.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the
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<PAGE>
provisions of Section 8 hereof, the several parties (in addition to the Company,
the Selling Securityholders and the several Underwriters) indemnified under the
provisions of said Section 8, and their respective personal representatives,
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Stock from any of the
several Underwriters.
NOTICES. Except as otherwise provided herein, all communications hereunder
shall be in writing or by telegraph and, if to the Underwriters, shall be
mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street, San
Francisco, California 94104, Attention: Mr. Timothy W. Baughman, with a copy to
Wilson Sonsini Goodrich & Rosati, P.C., at 650 Page Mill Road, Palo Alto,
California 94304-1050, Attention: Jeffrey D. Saper, Esq.; and if to the Company,
shall be mailed, telegraphed or delivered to it at its office, 1341 Orleans
Drive, Sunnyvale, California 94089, Attention: John O. Ryan; and if to the
Selling Securityholders, shall be mailed, telegraphed or delivered to the
Selling Securityholders in care of (i) the Company at 1341 Orleans Drive,
Sunnyvale, California 94089 Attention: John O. Ryan with a copy to Manatt,
Phelps & Phillips LLP and (ii) Pacific Media Development, Inc., c/o Victor
Company of Japan, Limited, 12, 3-chome, Moriya-cho, Kanagawa-ku Yokohama 221,
Japan, with a copy to George H. Hohnsbeen II, Esq., 314 Lytton Avenue, Suite
200, Palo Alto, California 94301. All notices given by telegraph shall be
promptly confirmed by letter.
13. MISCELLANEOUS. The reimbursement and indemnification agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
the Selling Securityholders or their respective directors or officers, and (c)
delivery and payment for the Stock under this Agreement; PROVIDED, HOWEVER, that
if this Agreement is terminated prior to the First Closing Date, the provisions
of paragraphs (l) and (m) of Section 7 hereof shall be of no further force or
effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
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<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
MACROVISION CORPORATION
By: ____________________________
John O. Ryan, Chairman of the Board of Directors and Chief Executive
Officer
SELLING SECURITYHOLDERS:
By: ____________________________
John O. Ryan (Attorney-in-Fact)
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
SG COWEN SECURITIES CORPORATION
U.S. BANCORP PIPER JAFFRAY, INC.
ING BARINGS LLC
By Hambrecht & Quist LLC
By: ____________________________
Tim Baughman, Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
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<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES TO BE PURCHASED
- ------------ --------------------------------
<S> <C>
Hambrecht & Quist LLC __________
SG Cowen Securities Corporation __________
U.S. Bancorp Piper Jaffray Inc. __________
ING Barings LLC __________
Total....................................... __________
</TABLE>
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<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NAME OF SECURITYHOLDERS NUMBER OF SHARES TO BE SOLD
- ----------------------- ---------------------------
<S> <C>
Victor Company of Japan 430,000
William A. Krepick 20,000
William N. Stirlen 5,000
Thomas Wertheimer 5,000
Total....................................... ____________
</TABLE>
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EXHIBIT 5.01
December 23, 1999
Macrovision Corporation
1341 Orleans Drive
Sunnyvale, CA 94089
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as counsel to Macrovision Corporation, a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission on or about December 23, 1999. The
Registration Statement is being filed in connection with the registration under
the Securities Act of 1933, as amended, of an aggregate of 1,966,500 shares of
the Company's common stock (the "Common Stock"), 1,250,000 of which shares will
be issued and sold by the Company, 450,000 of which shares are presently issued
and outstanding and 10,000 of which shares are subject to director stock options
and will be sold by certain selling stockholders named in the Registration
Statement (the "Selling Stockholders"), 192,000 of which shares may be purchased
by the underwriters under an option to be granted to them by the Company and
64,500 shares of which may be purchased by the underwriters under an option to
be granted to them by the Selling Stockholders to cover over-allotments, if any,
pursuant to proposed terms of an Underwriting Agreement to be entered into by
and among the Company, the Selling Shareholders and Hambrecht & Quist LLC, SG
Cowen Securities Corporation, U.S. Bancorp Piper Jaffray Inc. and ING
Barings LLC (collectively, the "Underwriters").
In rendering the opinions herein, we have been furnished with and
examined only the following documents:
1. Amended and Restated Articles of Incorporation of the Company, as
amended to date;
2. Bylaws of the Company as amended to date;
3. The Registration Statement, together with the Exhibits filed as a part
thereof;
4. Records of proceedings of the Board of Directors and the shareholders of
the Company pertaining to the issuance of the Shares.
In rendering the opinions expressed below, we have relied as to certain
factual matters upon certificates and communications executed by officers of the
Company and also of governmental authorities. We did not independently verify
such matters.
With respect to the foregoing documents, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies.
Based upon and subject to the foregoing, it is our opinion that:
(1) The 514,500 shares of Common Stock to be sold by the Selling
Stockholders pursuant to the Registration Statement from shares of Common Stock
currently outstanding are validly issued, fully paid and nonassessable;
(2) The 10,000 shares of Common Stock to be sold by the Selling Stockholders
pursuant to the Registration Statement from shares of Common Stock currently
subject to outstanding stock options, when issued upon the exercise of such
stock options in accordance with the terms and conditions of the option grants,
will be validly issued, fully paid and nonassessable; and
(3) The 1,442,000 shares of Common Stock to be sold by the Company, when
issued and sold as described in the Registration Statement, will be validly
issued, fully paid and nonassessable.
<PAGE>
Macrovision Corporation
December 23, 1999
Page 2
This opinion is limited to the current laws of the State of California,
the State of Delaware and the federal law of the United States of America, to
present judicial interpretations thereof and to facts as they presently exist.
We have no obligation to revise or supplement this opinion if the current laws
of the State of California, the State of Delaware or the federal law of the
United States of America are changed by legislative action, judicial decision or
otherwise.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of this firm under the heading
"Legal Matters" in the Prospectus constituting a part of the Registration
Statement.
Very truly yours,
/s/ MANATT, PHELPS & PHILLIPS, LLP
MANATT, PHELPS & PHILLIPS, LLP
<PAGE>
EXHIBIT 10.1
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
LETTER AGREEMENT
CONFIDENTIAL
This Letter Agreement, effective as of November 24, 1999 (the
"Effective Date") sets forth the essential elements of an agreement between
Macrovision Corporation, Delaware corporation having its principal place of
business at 1341 Orleans Drive, Sunnyvale, California 94089, USA, facsimile
number +1 408 743-8610 together with its subsidiary C-Dilla, Ltd., with
offices at Woodley House, Crockhamwell Road, Woodley, Reading, Berkshire, RG5
3JP, United Kingdom, facsimile number +44 118 969 1161, on the one part
(collectively "Macrovision"), and, on the other part, TTR Technologies, Inc.
a Delaware corporation having its principal place of business at 1841
Broadway, New York, NY 10023 and an operating subsidiary TTR Technologies,
Ltd. with offices at 2 Hanagar Street, Kfar-Saba, 44425, Israel, facsimile
number 011-972-9-766-2394 ("collectively TTR"), related to (i) Macrovision's
intent to make a US$4 Million equity investment in TTR, (ii) the parties'
intent for Macrovision to market under exclusive license certain music CD
Copy Protection Technology to be jointly developed by TTR and Macrovision,
and (iii) TTR's intent to exclusively license the CD-Technology (as defined
in Section 11 below) to Macrovision.
1. MUSIC CD COPY PROTECTION PROJECT DESCRIPTION
TTR and Macrovision agree to jointly develop and market music copy protection
technology for optical media, including but not limited to copy protection
for CDs and DVDs (the "Technology") throughout the term of this Letter
Agreement. The Technology shall include, but not be limited to, a process
specification, LBR encoder modules, manufacturing test modules, and quality
control modules. The parties intend that the Technology meet the following
functional requirements:
a. The quality of the protected disk, when played on [*] of the
worldwide installed base of CD players (red book and yellow
book, including but not limited to portable players with
anti-shock capability), shall match the quality of the
original unprotected disk [*].
b. The protected disk, when played on [*] of the installed base
of CD players (red book and yellow book, including but not
limited to portable players with anti-shock capability), [*]
1
<PAGE>
[**CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
DOCUMENT]
and otherwise perform in the same manner as the original
unprotected disk.
c. Copies of protected disks sourced from at least [*]
of the worldwide installed base of CD-Readers as described in
subsection (d) below shall be degraded, such that the
commercial entertainment value of the music has been
eliminated, when played on the worldwide installed base of CD
players (red book and yellow book, including but not limited
to portable players with anti-shock capability) and mini-disc
players.
d. The tracks recorded on a protected disc shall not be
transferrable (directly or indirectly, except if the
commercial value of the music is eliminated during the
transfer through the CD Reader - PC Data Interface) from at
least [*] of the worldwide installed base of CD-Readers onto
the hard-drive of a PC using file formats such as .WAV or
.BIN, including but not limited to by using software programs
such as Goldenhawk CDRWin, Adaptec Easy CD Creator, and Nero.
2. PROJECT RESPONSIBILITIES OF TTR
TTR shall develop a complete product specification as well as a completed
product suitable for Commercial Launch (as defined below), including
completely functional LBR encoder modules for the DCA, Eclipse, and
Mediamorphics mastering systems. The parties intend that three LBR encoder
modules shall be developed no later than [*], one being for the
Doug Carson Associates mastering system, one being for the Eclipse
Corporation mastering system, and one being for the Mediamorphics mastering
system. TTR shall also perform all ongoing technology development,
enhancement, and 2nd level technical support activities.
3. PROJECT RESPONSIBILITIES OF MACROVISION
Macrovision shall perform all sales, marketing, installation, and replicator
liaison, and first level technical support activities. Macrovision shall have
the option in its sole discretion, in coordination with TTR, to contribute to
the development of LBR encoder modules and to perform ongoing technology
development and enhancements.
4. TECHNOLOGY DEVELOPMENT AND PROJECT MANAGEMENT
TTR agrees to assign a sufficient number of technical personnel for a [*]
year period beginning on the Effective Date of this Letter Agreement, to
develop, enhance, and maintain the Technology. During the period beginning on
the Effective Date and ending three months following the date on which the
"Commercial Launch" (as such term is defined in Section 7 below) has
occurred, TTR agrees to cause [*] to be
assigned on a full time basis to develop, enhance, and maintain the
2
<PAGE>
Technology and to perform such activities on a three quarter time (i.e.,
three weeks out of every four) basis at Macrovision's C-Dilla offices located
in Woodley, UK. TTR shall pay all travel and lodging expenses related to [*]
work in the UK during this period. Macrovision agrees to designate at least
one technical liaison to interact with [*] and the other TTR personnel who
are involved with the Technology. At Macrovision's option, up to three
project status meetings may be held at Macrovision's Sunnyvale, California
office, and in each such case TTR agrees to cause [*] to attend, and
Macrovision agrees to reimburse TTR for the reasonable travel (coach class
airfare) and lodging costs of [*] related to each such meeting. Telephone
conference calls will also be held weekly at mutually agreed upon times.
TTR also agrees to, upon request from Macrovision, cause [*] to be present at
TTR's expense (except as described below) at Macrovision's Sunnyvale, CA USA
location, or at any other location in the USA, England (except for Woodley,
UK where [*] will be working on a three quarter time basis as described
above) or Western Europe as requested by Macrovision for up to one week per
month beginning on the Effective Date and ending three months following the
date on which the "Commercial Launch" (as such term is defined in Section 7
below) has occurred. Macrovision agrees to reimburse TTR for the reasonable
travel (coach class airfare) and lodging costs of [*] or other TTR personnel
if they are requested by Macrovision to travel to the USA.
All engineers and other staff which may be assigned by TTR or Macrovision to
develop the Technology shall at all times be employees of TTR or Macrovision,
respectively. TTR and Macrovision may, at their option, individually employ
the services of contractors or consultants to assist in the development of
the Technology so long as such contractors or consultants are bound by
appropriate confidentiality agreements and have agreed to assign all right,
title and interest to their work product to TTR or Macrovision as
appropriate. TTR or Macrovision, as appropriate, shall be financially
responsible for the salaries, benefits, expenses, and equipment required by
their respective engineers, contractors, consultants, and other staff.
5. OWNERSHIP OF THE TECHNOLOGY
TM and Macrovision shall each individually own all right title and interest
to those portions of the Technology which can be shown to have been developed
independently by them. In addition, Macrovision acknowledges TTR's ownership
of the intellectual property comprising the CD-Technology, as defined in
Section 11 below. All other portions of the Technology shall be owned jointly
by TTR and Macrovision ("Jointly Owned Technology"). Each party agrees to
file and prosecute, and shall bear the expense of filing and prosecuting, at
least in the United States of America, Canada, Mexico, United Kingdom,
France, Benelux, Scandinavia, Germany, Spain, Italy, Korea
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DOCUMENT]
and Japan, any patents on those portions of the Technology it owns as of the
Effective Date or which it independently develops subsequent to the Effective
Date and which are commercially important to protecting the intellectual
property rights underlying the Technology.
Except as prohibited by law, the parties shall jointly file, with respect to
Jointly Owned Technology, such patent and copyright applications and
amendments thereof as the parties agree are useful to protect their joint
interests in the Technology, and shall thereafter use commercially reasonable
diligence to prosecute and maintain in force such applications and any
resultant patents and copyrights. The costs and expenses (including
attorneys' fees) incurred in the filing, prosecution and maintenance of such
patents and copyrights shall be shared equally by the parties. As an
additional right, either party, at its own expense, may file patent and
copyright applications covering the Technology in those countries where the
parties do not mutually agree to file such applications. All patent and
copyright applications for Jointly Owned Technology developed under this
Letter Agreement shall be filed in the name of both parties.
6. LICENSE GRANT
Subject to the terms of this Letter Agreement, TTR grants to Macrovision,
during the full term of this Letter Agreement, an exclusive, worldwide,
royalty-bearing license, within the Field of Use (as defined below),
including the right to sublicense, to use all patent rights, software
algorithms, encoder modules, applicable trademarks and tradenames including
but not limited to MusicGuard, and other intellectual property owned by or
licensed to TTR, or developed by TTR, which is required to develop and
generate commercial benefit from the Technology. "Field of Use" shall mean
music (including music video) copy protection for optical media, including
but not limited to copy protection for CDs and DVDs, and for internet digital
rights management for music applications.
TTR will ensure, no less frequently than monthly, that Macrovision has a full
copy of the latest version of the Technology (including copies of all
pertinent notes, plans, diagrams, schematics, source code, object code and
technical specifications), it being understood that the intent of the parties
herein is to provide for Macrovision to be able to fully utilize the
Technology in the event of a dissolution or corporate reorganization of TTR
and/or in the event that [*] ceases to be in the employ of TTR.
7. LICENSE FEES
Except as provided below in this Section 7 Macrovision agrees to pay to TTR
thirty percent (30%) of the Net Revenues received by Macrovision from
customers, distributors, OEM partners, or other sublicensees of the
Technology. For purposes of this Letter Agreement, "Net Revenues" shall mean
gross revenues reduced by returns,
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DOCUMENT]
distributor discounts, and rebates, but not reduced by cost of goods sold. In
the event that the "Commercial Launch" as defined herein has not been
achieved on or before [*], then, beginning [*] and for the remaining term of
this Letter Agreement, the percentage payable by Macrovision to TTR as
described above shall be reduced to twenty five percent (25%) of Net
Revenues. For purposes of this Letter Agreement, "Commercial Launch" shall
mean the date by which the first of the following two events have occurred:
(i) [*] of the [*] major music labels [*] have each manufactured at least [*]
Music CDs which have been copy protected using the Technology, or (ii) [*] of
the [*] major music labels [*] has manufactured at least [*] Music CDs which
have been copy protected using the Technology and an aggregate total of [*]
Music CDs (including Music CDs manufactured by such major music label) have
been manufactured. Macrovision intends to license the Technology as a
separate product or service, however, TTR agrees to negotiate with
Macrovision in good faith the allocation of revenue to the Technology in the
event Macrovision desires to license the Technology as a portion of another
product or service it offers to its customers, distributors, OEM partners, or
sublicensees. Macrovision agrees that it shall not license the Technology as
a portion of another product or service until the allocation of revenue to
the Technology has been mutually agreed by Macrovision and TTR
Macrovision agrees to provide reports to TTR on a quarterly basis (for
quarters ending March 31, June 30, September 30, and December 31 each year
during the term of this Letter Agreement) which indicate the total number of
Music CDs manufactured to which Macrovision is aware that the Technology has
been applied, each such report shall be delivered to TTR within 45 days
following the end of each such calendar quarter. The first such report shall
be delivered to TTR within 45 days following the end of the calendar quarter
in which the Commercial Launch has occurred. Macrovision agrees to pay to TTR
its share of Net Revenues from the Technology based upon actual cash receipts
received. Such payments shall be made to TTR on the last day of each calendar
month during the Term of this Letter Agreement with respect to cash receipts
received in the immediately preceding month.
8. MINIMUM FEES
In consideration for the exclusive license granted to Macrovision by TTR
hereunder, Macrovision shall pay to TTR, beginning twelve months following
the Commercial Launch of the Technology, a minimum annual guaranteed royalty
advance, recoupable against royalties actually earned by TTR as its share of
Net Revenues generated from the Technology, of [*], such annual guaranteed
royalty to be [*] in each ensuing year; i.e. [*] in the second year following
commercial launch,
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DOCUMENT]
[*] in the third year, and [*] in the fourth year. In the fifth through ninth
years following Commercial Launch, such minimum guaranteed royalty would be
[*]. Failure to make any of these payments when due shall cause Macrovision's
exclusive license hereunder to revert to nonexclusive status. The initial [*]
minimum annual guaranteed royalty advance shall be paid by Macrovision to TTR
in one lump sum when due. Minimum annual guaranteed royalty advances for the
ensuing years shall be paid by Macrovision to TTR in [*] installments, the
first such installment of which shall be paid on the annual anniversary of
the Commercial Launch of the Technology.
Notwithstanding the above, if the Commercial Launch of the Technology is
achieved prior to [*], or if the Commercial Launch of the Technology is not
achieved by [*], then all minimum fees described in this Section 8 shall be
waived. In the event that the minimum fees described in this Section 8 are
waived as described in this Section 8 and Macrovision shall not have paid to
TTR a minimum of [*] in aggregate royalties or royalty advances, including
royalties paid under the terms of Section 7 above, by the second annual
anniversary following the Commercial Launch, then Macrovision's exclusive
license hereunder shall revert to nonexclusive status.
9. SALES, MARKETING, AND LICENSING OF THE TECHNOLOGY
Macrovision shall in its sole discretion determine the staffing and other
resources to be allocated by Macrovision to commercializing the Technology,
including but not limited to LBR encoder development or testing, product
management, sales, marketing and promotion of the Technology. However,
Macrovision agrees to allocate commercially reasonable staffing and other
resources to commercializing the Technology consistent with Macrovision's
good faith determination of the commercial potential of the Technology.
Macrovision shall in its sole discretion determine the naming, branding, and
pricing for the Technology, except that Macrovision agrees (i) to include
mention in the text of all press releases related to the Technology that the
Technology has been developed jointly by Macrovision and TTR, (ii) to include
mention in the small-type copyright/trademark sections of advertising and
related marketing collaterial materials that the Technology has been
developed jointly by Macrovision and TTR, and (iii) not to license the
Technology free of charge to customers, distributors, OEM partners, or other
sublicensees other than for promotional purposes. TTR agrees that Macrovision
shall in its sole discretion determine the degree of prominence afforded to
the mention of TTR described in subsections (i) and (ii) of this Section 9.
10. COOPERATIVE MARKETING AND DEVELOPMENT PAYMENTS
TTR recognizes the unique one-time costs which will be incurred by
Macrovision to co-develop and launch the Technology into the commercial
market and agrees to reimburse
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DOCUMENT]
Macrovision for its staffing and other costs related to development and
testing, product management, sales, product naming/branding, marketing, and
promotion expenses incurred by Macrovision with respect to the Technology
during the [*]period ending [*], up to an aggregate maximum reimbursement of
US$1 Million. Reimbursements shall be paid by TTR to Macrovision on the last
day of each month with respect to reimbursable expenses (including direct
overheads related to such expenses) incurred by Macrovision in the prior
month, based upon invoices submitted by Macrovision to TTR for each such
prior month, until the earlier of the date on which TTR has paid to
Macrovision [*] in aggregate reimbursements, or [*]. The first such
reimbursement shall be paid by TTR to Macrovision on or before [*] with
respect to reimbursable expenses incurred by Macrovision during the month of
[*]. Notwithstanding the above, no such reimbursements shall be payable by
TTR to Macrovision prior to the closing of Macrovision's US$4 Million
investment in, TTR as contemplated herein.
11. TTR'S EXISTING DISCGUARD CD-ROM SOFTWARE COPY PROTECTION TECHNOLOGY
TTR shall (i) grant to Macrovision, effective upon the closing of
Macrovision's US$4 Million investment in TTR as contemplated herein, an
exclusive, worldwide license, including the right to incorporate into other
Macrovision products and the right to sublicense, to all patents, software
algorithms, CD and DVD signatures, encoder modules, other technology,
DiscGuard and related tradenames, and other intellectual property related to
TTR's CD-ROM software copy protection technology ("CD Technology"), and (ii)
deliver to Macrovision all available documentation related to the
CD-Technology, including but not limited to the CD and DVD signature portions
thereof. Such license shall be [*] with respect to the CD and DVD signature
portions of the CD-Technology and shall be [*] with respect to all other
portions of the CD-Technology, such royalty to be negotiated separately
between the parties in the event that Macrovision desires to incorporate such
other portions of the CD-Technology into other Macrovision products,
including but not limited to products related to software, video, and data
publishing copy protection or internet digital rights management TTR shall,
within 5 business days of the closing of Macrovision's US$4 Million
investment in TTR as contemplated herein, notify all existing CD-Technology
customers and prospects in writing that it has made an agreement with
Macrovision to transition all TTR CD-Technology customers and prospects to
Macrovision's SafeDisc technology and that such a transition will be
implemented within the next [*] days and, further, that TTR's CD-Technology
will [*] for license following such [*] day period. TTR shall, within [*]
business days of the closing of Macrovision's US$4 Million investment in TTR
as contemplated herein, TTR will deliver to Macrovision all pertinent notes,
plans, diagrams, schematics, source code, object code and technical
specifications related to the CD and DVD signatures, it being understood
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that the intent of the parties herein is for Macrovision to be able to fully
utilize such signatures under the royalty free license described above.
Notwithstanding the above,
a. Macrovision shall pay to TTR, for the [*] period beginning [*]
and ending [*], a royalty equal to [*] percent of the Net
Revenues Macrovision generates from its SafeDisc technology from
customers, distributors, or sublicensees in the People's
Republic of China ("PRC"), and
b. The rights of the existing TTR CD-Technology licensee in the
PRC [*] shall be respected through October 15, 2001, the end of
the term of such license. Notwithstanding the above, TTR and
Macrovision will work cooperatively to transition [*] to a
SafeDisc license so that the CD-Technology can be withdrawn
from the PRC market as soon as possible.
12. MACROVISION `S RIGHT OF FIRST REFUSAL TO OTHER TTR TECHNOLOGIES
TTR shall grant to Macrovision an exclusive right of first refusal, during
the term of this Letter Agreement, with respect to (a) the right to purchase
or (b) the worldwide exclusive marketing rights related to (i) the Technology
outside of the Field of Use and (ii) any future packaged media copy
protection or internet digital rights management technologies developed by
TTR which are applicable to music, music video, video, software or data
publishing products or markets. Terms and conditions related to such
Macrovision right of first refusal shall be equivalent to the terms and
conditions proposed to TTR by any bonafide third party, unless mutually
agreed otherwise by Macrovision and TTR.
13. EQUITY INVESTMENT BY MACROVISION IN TTR
Subject to (i) the satisfactory completion of Macrovision's due diligence
review by December 31, 1999, and (ii) the approval of both parties' Boards of
Directors, Macrovision and TTR agree as follows:
a. TTR shall grant to Macrovision the exclusive right, on or before
January 15, 2000, to invest the sum of US$4 Million in the
equity of TTR or in such other form as may be mutually
agreeable to Macrovision and TTR to allow Macrovision to
record the investment as an asset on Macrovision's. balance
sheet and to use the "cost method" of accounting for such
investment. The valuation for such investment shall be US$35
Million on a post money basis. Between the date of execution
of this Letter Agreement and the date of closing for the
contemplated US$4 Million investment, TTR agrees not to
solicit, initiate discussions with, or engage in further
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discussions with any other party relating to the purchase of a
material equity interest in TTR. TTR will conduct its business
in the usual manner and will consult with Macrovision on any
proposed material matters which are outside of the ordinary
course of its business. TTR shall allow Macrovision all
reasonable access to its books and records, as well as to its
professional advisors, for the purpose of enabling Macrovision
to quickly and conveniently conduct the due diligence reviews
contemplated herein.
b. Macrovision shall, on or before January 15, 2000
invest the sum of US$4 Million in the equity of TTR, or in
such other form as may be mutually agreeable to Macrovision
and TTR, to allow Macrovision to record the investment as an
asset on Macrovision's balance sheet and to use the "cost
method" of accounting for such investment. The valuation for
such investment shall be US$35 Million on a post money basis.
Notwithstanding the above, TTR agrees that Macrovision's
investment in TTR shall be contingent upon receipt by
Macrovision no later than January 10, 2000, of TTR financial
statements in accordance with United States Generally Accepted
Accounting Principles (Balance Sheet as of a date no earlier
than October 31, 1999, Statements of Income, Cash Flows, and
Stockholders' Equity or Deficit, for the year ending December
31, 1998 and the ten months ending October 31, 1999,
including, for each period, a full set of US GAAP-compliant
footnotes thereon), audited by the Israeli office or affiliate
of a "Big 5" public accounting firm (i.e., Deloitte and
Touche, KPMG Peat Marwick, Price WaterhouseCoopers, Arthur
Andersen, or Ernst and Young), such audited Balance Sheet
showing an excess of liabilities due within 18 months of the
date of the Balance Sheet over cash and cash equivalents of no
more than US$[*]. TTR agrees to bear all expenses
associated with such audit.
c. The following additional terms shall apply to Macrovision's
US$4 Million investment in TTR as described in this Section
13:
(i) Macrovision shall have the exclusive right of first
refusal, for the term of this Letter Agreement, with
respect to any third party offer from a party who may
propose to acquire a majority equity interest in TTR, to
acquire such majority equity interest. Terms and
conditions related to such Macrovision right of first
refusal shall be equivalent to the terms and conditions
proposed to TTR by any bonafide third party, unless
mutually agreed otherwise by Macrovision and TTR.
Macrovision shall also have the option, but not the
obligation, to participate pro rata in any future TTR
financing rounds to the extent such future financing
rounds are private financings (i.e., not public offerings
for which offering documents are filed with the
Securities and Exchange Commission) greater than US$[*].
(ii) The investment shall be structured in such a way that
Macrovision's outside auditors approve the "cost method"
of accounting for the investment.
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(iii) The investment documents shall include covenants and
other provisions which place the Technology and the
CD-Technology in an escrow status acceptable to
Macrovision such that Macrovision's rights in and to the
Technology survive any and all forms of possible TTR
corporate reorganizations or bankruptcy events, or claims
on such technologies which might otherwise be senior to
the claims of Macrovision and which may impair
Macrovision's exclusive licenses described herein.
(iv) Shares in TTR represented directly or indirectly by
Macrovision's $4 million investment in TTR as
contemplated herein shall be registered shares subject to
sale by Macrovision in a private or public market
transaction beginning 60 days after the closing of such
investment transaction.
(v) Macrovision shall be granted observer status on TTR's
board of directors, such observer status to include all
rights and privileges of board of directors members
except for voting privileges.
(vi) Employment agreements for the twelve months ending
December 31, 2000 reasonably satisfactory to Macrovision
shall be entered into between TTR and up to four key
employees of TTR, including but not limited to [*] and [*].
(vii) Certain current TTR employees shall be terminated as
mutually agreed by Macrovision and TTR.
14. CONFIDENTIALITY
This Letter Agreement is subject to the terms of the nondisclosure agreement
entered into by the parties on October 20, 1999. Except as provided in
Section 15 below, the existence of this Letter Agreement and all terms and
conditions of this Letter Agreement are confidential to TTR and Macrovision.
15. PUBLIC ANNOUNCEMENT
TTR and Macrovision agree that at a future date it will be desirable to issue
a mutually acceptable press release announcing the signing of this Letter
Agreement and announcing the development of the Technology. It is anticipated
that this public announcement will occur within 10 days following the closing
of Macrovision's US$4 Million investment in TTR as contemplated herein.
Notwithstanding the above, Macrovision acknowledges thatTTR may be required
to file form 8-K with the United States Securities and Exchange Commission
and that if TTR's counsel reasonably determines that TTR is required to file,
it shall not constitute a breach of this Letter Agreement. TTR agrees,
however, that Macrovision shall have the option to review and comment on such
8-K filing before it is filed, the intent being to minimize the inclusion of
detailed items in this Letter Agreement to that information
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specifically required by law or by SEC regulations. Macrovision agrees that,
no later than five business days following TTR's 8-K filing, Macrovision will
issue a press release announcing the signing of this Letter Agreement and the
development of the Technology, the content of such press release to be
determined by Macrovision in its sole discretion. Following the issuance of
such press release by Macrovision, Macrovision agrees that TTR may issue a
separate press release announcing the signing of this Letter Agreement and
the development of the Technology, the content of such press release to be
approved prior to issuance by Macrovision, such approval not to be
unreasonably withheld.
16. LONG FORM AGREEMENTS
Upon execution of this Letter Agreement by both parties, Macrovision and TTR
shall use their respective reasonable efforts to prepare and execute, on or
before January 15, 2000, such long-form agreements and related documentation
which incorporates the terms herein and incorporates such other terms and
conditions as TTR and Macrovision may deem reasonable or necessary to
accomplish the agreement set forth herein. Notwithstanding the foregoing,
this Letter Agreement when executed by Macrovision and TTR shall represent,
Subject to Section 20 hereof, a binding agreement between the parties which
reflects the essential terms related to the development and marketing of the
Technology, until such time as a long form agreement which supersedes this
Letter Agreement has been executed by the parties.
Each party, subject to the confidentiality provisions herein, shall make
available to the other party such financial, technological, and other
business information that such other party may reasonably request as part of
such other party's due diligence activities related to the preparation of
such long form agreement.
17. DISCLAIMER OF AGENCY
Nothing contained in this Letter Agreement is intended or will be construed
so as to constitute the parties to this Letter Agreement as partners or as
agents of each other. Neither party will have any express or implied right or
authority to assume or create any obligations on behalf of or in the name of
the other party or to bind the other party in any contract, agreement or
undertaking with any third party.
18. CHOICE OF LAW
This Letter Agreement will be governed by and interpreted in accordance with
the laws of the State of California, as such laws are applied to agreements
between California residents entered into and to be wholly performed within
California. In any dispute, litigation, or arbitration between the parties
arising out of or related to this Agreement, the prevailing party therein
shall be entitled to have its reasonable and actual attorneys' fees,
reasonable expenses, related litigation costs and costs of suit (if any) paid
by the non-prevailing party.
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Except for claims regarding ownership or infringement of the Technology, any
dispute between the parties arising out of, or relating to, the validity,
construction, interpretation or performance of this Letter Agreement that
cannot be resolved amicably shall be submitted to binding arbitration, to be
held in San Francisco, California, USA, in accordance with the rules of the
American Arbitration Association. Any such arbitration proceeding shall be
conducted before an arbitration panel composed of three (3) arbitrators; each
party shall designate one (1) arbitrator, and the two (2) arbitrators so
designated shall designate the third arbitrator. The decision and award of
the arbitrators shall (i) be in writing, (ii) state the reasons therefor,
(iii) be based solely on the terms and conditions of this Agreement, as
interpreted under the laws of the State of California, USA, and (iv) shall be
final and binding upon the parties. The decision and award of the arbitrators
in any such arbitration proceeding may be enforced in any court of competent
jurisdiction. The parties to any such arbitration shall be entitled to
conduct such discovery as they would have been entitled to conduct had the
action been filed in the appropriate Federal or State court in San Francisco
County, California, USA.
19. AUDIT RIGHTS
Both parties will have the right during the term of this Letter Agreement and
for one (1) year thereafter to have an independent "Big 5" certified public
accounting firm (i.e., Deloitte and Touche, Arthur Andersen,
PriceWaterhouseCoopers, KPMG Peat Marwick, or Ernst & Young) review or audit
the other party's relevant records for the purpose of certifying compliance
with this Letter Agreement. All audits will be at the auditing party's
expense and conducted during regular business hours, and begun upon at least
one (1) month's prior written notice. Any discrepancy revealed by such audits
will be corrected within ten (10) days of the written notice of the official
results of the audit being delivered by the auditor.
20. TERM AND TERMINATION
The term of this Letter Agreement shall begin on the Effective Date and end
on December 31, 2009. Notwithstanding the above, this Letter Agreement may be
terminated earlier:
a. by either party upon five days' written notice if the investment
by Macrovision in TTR as contemplated herein is not closed
(i.e., funded) for any reason whatsoever by January 31, 2000;
or
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b. by either party upon thirty days written notice to the other
if the other party materially breaches this Letter Agreement
and such material breach is not cured within ninety days of
notice to cure such breach.
Notwithstanding anything to the contrary in this Letter Agreement, if this
Letter Agreement is terminated by TTR in accordance with Section 20 (a)
above, then each party shall immediately return to the other party all
technology and related materials of such other party and neither party shall
have any liability whatsoever to the other party, except with respect to
claim related to infringement of intellectual property rights.
21. EXPENSES
The parties shall each bear their own legal expenses and the expenses of
their professional advisors, including any brokerage fees, with respect to
the transactions contemplated herein.
22. ACCEPTANCE AND AGREEMENT
This Letter Agreement is accepted and agreed on behalf of Macrovision and TTR
by the signatures of their authorized representatives named below. This
Letter Agreement shall not be binding until executed by both Macrovision and
TTR. The parties agree that this Letter Agreement may be executed via
exchange of signed facsimile copies.
MACROVISION CORPORATION TTR TECHNOLOGIES, INC.
/s/ William Krepick /s/ Mark Tockayer Nov. 24, 1999
- ----------------------------- ---------------------------------
Signature/Date Signature/Date
William Krepick Mark Tockayer
- ----------------------------- ---------------------------------
Printed Name Printed Name
President/CEP Chairman
- ----------------------------- ---------------------------------
Title Title
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EXHIBIT 23.02
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Macrovision Corporation and Subsidiaries:
We consent to the use of our report included herein and to the reference
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
KPMG LLP
Mountain View, California
December 21, 1999
