FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-22023
Macrovision Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0156161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1341 Orleans Drive
Sunnyvale, California 94089
(Address of principal executive offices) (Zip code)
(408) 743-8600
(Registrant's telephone number including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title Outstanding as of April 30, 2000
Common Stock, $0.001 par value 40,258,236
<PAGE>
MACROVISION CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2000 and December 31, 1999 .............. 3
Condensed Consolidated Statements of Income
for the Three Month Periods Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Three Month Periods Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 13
Risk Factors................................................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 23
Item 5. Other Information ........................................... 24
Item 6. Exhibits and Reports on Form 8-K ............................ 24
Signatures ........................................................... 24
<PAGE>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements.
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 25,156 $ 4,317
Short-term investments ...................................... 106,601 31,452
Accounts receivable, less allowance for doubtful
accounts of $846 and $984 ................................ 13,193 11,662
Inventories ................................................. 130 178
Deferred tax assets ......................................... 2,368 2,477
Prepaid expenses and other assets ........................... 3,001 1,066
-------- --------
Total current assets .................................. 150,449 51,152
Property and equipment, net .................................... 1,647 1,655
Patents and other intangibles, net ............................. 1,313 1,647
Long-term marketable investment securities ..................... 106,697 52,241
Intangibles associated with C-Dilla Ltd
acquisition, net ............................................ 15,888 16,631
Other assets ................................................... 6,789 4,524
-------- --------
$282,783 $127,850
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,585 $ 1,267
Accrued expenses ............................................ 3,948 4,726
Deferred revenue ............................................ 4,701 3,124
Income taxes payable ........................................ 2,551 1,524
Current portion of capital lease obligation ................. 48 76
-------- --------
Total current liabilities ................................ 12,833 10,717
Deferred tax liabilities ....................................... 14,650 14,073
-------- --------
27,483 24,790
Stockholders' equity:
Common stock ................................................ 40 36
Additional paid-in capital .................................. 210,929 63,553
Accumulated other comprehensive income ...................... 25,649 25,165
Retained earnings ........................................... 18,682 14,306
-------- --------
Total stockholders' equity ............................... 255,300 103,060
-------- --------
$282,783 $127,850
======== ========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
3
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
------- -------
<S> <C> <C>
Net revenues $12,726 $ 7,163
------- -------
Costs and expenses:
Cost of revenues 1,154 671
Research and development 1,101 631
Selling and marketing 2,509 1,882
General and administrative 2,001 1,381
Amortization of intangibles from acquisition 744 --
------- -------
Total costs and expenses 7,509 4,565
------- -------
Operating income 5,217 2,598
Interest and other income, net 2,004 418
------- -------
Income before income taxes 7,221 3,016
Income taxes 2,845 1,158
------- -------
Net income $ 4,376 $ 1,858
======= =======
Computation of basic and diluted earnings per share:
Basic earnings per share $ 0.11 $ 0.05
======= =======
Shares used in computing basic earnings
per share 38,784 35,547
======= =======
Diluted earnings per share $ 0.11 $ 0.05
======= =======
Shares used in computing diluted earnings
per share 41,418 37,355
======= =======
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
4
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,376 $ 1,858
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,086 232
Amortization of prepaid future royalties to
C-Dilla Ltd. -- 69
Deferred income taxes 15 (206)
Loss on disposal of assets 416 --
Tax benefit from employee stock plans 236 --
Stock compensation 45 --
Changes in operating assets and liabilities:
Accounts receivable, inventories, and other current assets (3,262) (446)
Accounts payable, accrued expenses, deferred
revenue and income taxes payable 2,144 1,680
Other (157) 11
--------- ---------
Net cash provided by operating activities 4,899 3,198
--------- ---------
Cash flows from investing activities:
Purchases of long-term marketable investment securities (58,983) (6,512)
Sales or maturities of long-term marketable
investment securities 9,819 5,210
Purchases of short-term investments (82,199) (7,073)
Sales or maturities of short-term investments 7,005 6,377
Acquisition of property and equipment (225) (79)
Payments for patents and other intangibles (192) (93)
Purchases of strategic investments (6,200) --
Receivable from related party (156) --
Other, net -- 18
--------- ---------
Net cash used in investing activities (131,131) (2,152)
--------- ---------
Cash flows from financing activities:
Payments on capital lease obligations (28) (27)
Proceeds from stock offering, net 146,086 --
Proceeds from issuance of common stock, net 1,013 525
--------- ---------
Net cash provided by financing activities 147,071 498
--------- ---------
Net increase in cash and cash equivalents 20,839 1,544
Cash and cash equivalents at beginning of period 4,317 3,513
--------- ---------
Cash and cash equivalents at end of period $ 25,156 $ 5,057
========= =========
Supplemental cash flow information:
Interest paid $ 1 $ 1
========= =========
Income taxes paid $ 1,412 $ 87
========= =========
</TABLE>
See the accompanying notes to these condensed consolidated financial statements.
5
<PAGE>
MACROVISION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Macrovision Corporation (the "Company") in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted in accordance with such rules and regulations. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position of the Company,
and its results of operations and cash flows for those periods presented. This
quarterly report on Form 10-Q should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1999, and
other disclosures, including risk factors, included in the Company's Annual
Report on Form 10-K filed on March 30, 2000, as amended, and the Company's
Registration Statement on Form S-3 (Registration No. 333-95337).
The results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year ending December 31, 2000
or any other future interim period.
In August 1999 and March 2000, the Company issued one additional share for every
share outstanding, thus effecting 2 for 1 stock splits. All share and per share
information presented have been retroactively adjusted for the effect of such
stock splits.
NOTE 2 - CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with a maturity from date of
purchase of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks and money market 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 government bonds, government agency securities and corporate
securities. All marketable securities with maturities over one year or which the
Company's intent is to retain for the long-term 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. The Company enters into certain equity investments for the promotion of
business and strategic objectives, and typically does not attempt to reduce or
eliminate the inherent market risks on these investments. In December 1999,
Digimarc, in which the Company has a minority interest of 924,475 shares (or
approximately 7.7%), consummated an initial public offering. In January 2000,
the Company invested $4.0 million in TTR Technologies, Inc., a public company,
representing 1,880,937 shares or approximately 11.4%. The fair market valuation
for Digimarc and TTR is classified as long-term marketable investment securities
on the consolidated balance sheets. As of March 31, 2000 and December 31, 1999,
all investment securities were designated as "available-for-sale."
Available-for-sale securities are carried at fair market value based on quoted
market prices, with unrealized gains and losses, reported in comprehensive
income, as 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 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):
6
<PAGE>
<TABLE>
<CAPTION>
March 31, December
2000 31, 1999
-------- --------
<S> <C> <C>
Cash equivalents - money market funds .................. $ 24,504 $ 2,951
-------- --------
Investments:
Corporate preferred certificates ..................... -- 2,000
Corporate bonds ...................................... 131,382 --
Municipal preferred certificates ..................... -- 2,000
United States government bonds and agency securities . 30,307 33,469
Equity investments ................................... 51,609 46,224
-------- --------
213,298 83,693
-------- --------
$237,802 $ 86,644
======== ========
</TABLE>
As of March 31, 2000 and December 31, 1999, government bond securities and
equity investments totaling $106.7 million and $52.2 million, respectively, were
classified as long-term marketable investment securities in the accompanying
consolidated balance sheet.
As of March 31, 2000 and December 31, 1999, the difference between the
fair market value and the amortized cost of available-for-sale securities was a
gain of $44,109,000 and $42,634,000, respectively. These unrealized gains, net
of deferred income tax, related to short-term and long-term government bonds and
investment securities, have been recorded as a component of comprehensive
income. As of March 31, 2000 and December 31, 1999, the weighted average
portfolio duration and contractual maturity for the government bonds were
approximately ten months and eight months, respectively.
NOTE 3 - PUBLIC OFFERING, EXERCISE OF OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
On January 26, 2000, the Company consummated a public offering ("offering") of
3,820,000 shares of its Common Stock, of which 2,874,000 shares were issued and
sold by the Company and 946,000 shares were sold by stockholders of the Company.
All shares were sold for $53.44 per share. The net proceeds to the Company from
the offering, after deducting the underwriting discount and other expenses of
the offering, were approximately $146.1 million. The Company did not receive any
proceeds from the sale of shares sold by the selling stockholders.
During the quarter ended March 31, 2000, the Company issued 443,124 shares of
common stock and received proceeds of approximately $720,000 associated with the
exercise of stock options. Also during the quarter ended March 31, 2000, the
Company issued 30,978 shares of common stock under the Employee Stock Purchase
Plan and received proceeds of approximately $292,000.
NOTE 4 - INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method and consisted of the following:
March 31, December 31,
(In thousands) 2000 1999
--------- -----------
Raw materials $ 61 $ 72
Work in progress 8 26
Finished goods 61 80
--------- -----------
$ 130 $ 178
========= ===========
NOTE 5 - OTHER ASSETS
Other assets primarily consist of equity investments in private companies. The
Company intends to hold its equity investments for the long term and monitors
whether there has been an other-than-temporary decline in the value of these
investments based on management's estimates of their net realizable value taking
into account the achievement of milestones in business plans and third-party
financing. The Company records its investments using
7
<PAGE>
the cost method, and these investments are classified as other assets in the
accompanying condensed consolidated balance sheets as follows:
(In thousands)
<TABLE>
<CAPTION>
March December 31,
31, 2000 1999
------------ ------------
<S> <C> <C>
Investment in Command Audio Corporation ("CAC") (related party) $ 3,688 $ 3,688
Minority equity investments in companies 2,950 750
Deposits and other assets 151 86
------------ ------------
$ 6,789 $ 4,524
============ ============
</TABLE>
During the quarter ended March 31, 2000, the Company made a $1.0 million
strategic investment in RPK Security, Inc. ("RPK"). RPK develops encryption
technology for high data flow Internet applications such as streaming media and
digital communication. The Company also made a $1.2 million strategic investment
in InterActual Technologies, Inc. ("InterActual"). InterActual develops client
and server software which enables DVDs to be seamlessly linked to Internet web
sites, E-Commerce transactions, interactive games, and online communities. The
Company acquired 502,713 shares or 3% of e-Video TV, Inc. in connection with a
licensing agreement that the Company entered into with its affiliate, E-Video
U.S.A., Inc. ("E-Video"), to provide the Company's analog copy protection
technology for the compressed time recording programming services operated by
E-Video. The Company does not have the ability to exert significant influence
over any of these companies.
NOTE 6 - NET INCOME PER SHARE
Basic "EPS" is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period except for periods of operating loss for which no common share
equivalents are included because their effect would be antidilutive. Dilutive
common equivalent shares consist of common stock issuable upon exercise of stock
options using the treasury stock method. In August 1999 and again in March 2000,
the Company issued one additional share for every share outstanding, thus
effecting two 2 for 1 stock splits. All share information presented has been
retroactively adjusted for the effect of both such stock splits. The following
is a reconciliation of the shares used in the computation of basic and diluted
EPS (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Basic EPS - weighted average number of common shares outstanding 38,784 35,547
Effect of dilutive common equivalent shares - stock options outstanding 2,634 1,808
------ ------
Diluted EPS - weighted average number of common shares and common
equivalents shares outstanding 41,418 37,355
====== ======
</TABLE>
In the three months ended March 31, 2000 and 1999, the average number of stock
options that were not included in the diluted EPS calculation because their
effect was antidilutive totaled 175,000 and none, respectively.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
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 adopted SOP No. 98-9 on January 1,
2000, with no material effect.
8
<PAGE>
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities, Deferral of
the Effective Date of SFAS No. 133", which amends the effective date of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for based on the intended use of the derivative and whether it is designated and
qualifies for hedge accounting. The Company will adopt SFAS No. 133 for its
first quarter of fiscal 2001. The Company has not determined the impact that
SFAS No. 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of the initial
adoption.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. The Company is required to follow the
guidance in the SAB no later than the second quarter of its year 2000. Adoption
of this guidance is not expected to have a material impact on the Company's
financial position or results of operations. The SEC has recently indicated it
intends to issue further guidance with respect to the adoption of specific
issues addressed by SAB No. 101. Until such time as this additional guidance is
issued, the Company is unable to assess the impact , if any, it may have on its
financial position or results of operations.
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in three industry segments as follows: Video Copy
Protection, Video Scrambling and Computer Software Copy Protection. In the Video
Copy Protection segment, the Company licenses its anti-copy video technologies
to customers in the home videocassette, DVD and digital pay-per-view markets. In
the Video Scrambling segment, the Company licenses and sells products utilizing
the Company's PhaseKrypt video scrambling technology to manufacturers of analog
set-top decoders for sale to cable television system operators in developing
cable television markets, to television broadcasters for securing incoming
contribution circuits to network control centers and outbound rebroadcast
circuits and to the government, military and law enforcement agencies for covert
surveillance applications. In the Computer Software Copy Protection segment, the
Company 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 for 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 income.
The following segment reporting information of the Company is provided (in
thousands):
Revenue:
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
Video Copy Protection $ 9,873 $ 6,865
Computer Software Copy Protection 2,466 213
Video Scrambling 351 85
Other 36 --
----------- -----------
Total $12,726 $ 7,163
=========== ===========
9
<PAGE>
Operating Income:
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
Video Copy Protection $ 8,049 $ 5,328
Computer Software Copy Protection 1,179 (450)
Video Scrambling (191) (313)
Other 26 --
----------- -----------
Segment income 9,063 4,610
Research and development 1,101 631
General and administrative 2,001 1,381
Amortization of intangibles from acquisition 744 --
----------- -----------
Operating income 5,217 2,598
Interest and other income, net 2,004 418
----------- -----------
Income before income taxes $ 7,221 $ 3,016
=========== ===========
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is composed of the following: (in thousands):
----------------------------
Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
Net income $ 4,376 $ 1,858
Other comprehensive income (loss):
Translation gain (loss) (92) 11
Unrealized gain (loss) in investments 576 (14)
----------- -----------
$ 4,860 $ 1,855
=========== ===========
The tax effect on components of comprehensive income was an expense of $670,000
for the first three months of 2000.
NOTE 11 - BUSINESS COMBINATION
In March 2000, the Compamy announced that it signed a letter of intent to
acquire privately held GLOBEtrotter Software of San Jose, California. The
Company believes GLOBEtrotter is the leading OEM supplier of B2B
(business-to-business) electronic licensing and license management technology to
software vendors and a leading direct supplier of software asset management
products to corporate customers worldwide. The Company plans to acquire all
outstanding shares and vested stock options of GLOBEtrotter for approximately
11.2 million shares of Macrovision common stock and to assume all unvested
GLOBEtrotter stock options, subject to completion of due diligence, the approval
of Macrovision's board of directors and stockholders, regulatory approvals, and
the completion of a definitive agreement. The Company intends to account for the
transaction as a pooling of interest.
NOTE 10 - SUBSEQUENT EVENT
In April 2000, the Company invested an additional $750,000 in AudioSoft pursuant
to the agreement signed in August 1999, which required such additional
commitment if AudioSoft attained certain commercial milestones. AudioSoft is a
developer of secure e-music delivery technology and copyright management royalty
reporting systems.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements concerning future
matters such as the Company's expectations for gross margins, operating expenses
and capital needs and other statements regarding matters that are not historical
are forward-looking statements. Predictions of future events are inherently
uncertain. Actual events could differ materially from those predicted in the
forward-looking statements as a result of the risks set forth in this Form 10-Q
and in the "Risk Factors" section of the Company's 1999 Annual Report on Form
10-K filed on March 30, 2000, as amended by the Form 10K/A filed April 28, 2000
and the Company's Registration Statement on Form S-3 (Registration No.
333-95337), which was declared effective by the Securities and Exchange
Commission on January 25, 2000. There are no assurances that the Company has
identified all possible problems that the Company might face. All investors
should carefully read the annual report on Form 10-K and the amendment filed on
Form 10K/A and the Company's Registration Statement on Form S-3, together with
this Form 10-Q, and consider all such risks before making an investment decision
with respect to the Company's stock.
Overview
The Company, formed in 1983, designs, develops and markets video copy protection
and rights management technologies that provide copy protection for motion
pictures and other proprietary content 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.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
The following table provides revenue information by specific product segments
for the periods indicated (in thousands):
Three Months ended March 31,
----------------------------
$ %
2000 1999 Change Change
------- ------------------------------
Video Copy Protection
Videocassette $ 3,566 $ 4,222 $ (656) (15.5)%
DVD 3,626 1,369 2,257 165.9
Pay-Per-View (PPV) 2,681 1,274 1,407 110.4
Computer Software
Copy Protection 2,466 213 2,253 1,057.7
Video Scrambling 351 85 266 312.9
Other 36 -- 36 --
------- ------- ------
Total $12,726 $ 7,163 $5,563 77.7%
======= ======= ======
11
<PAGE>
Net Revenues
Our net revenues for the first quarter of 2000 increased 77.7% from $7.2 million
in the first quarter of 1999 to $12.7 million in 2000. Revenues from
videocassette copy protection decreased $656,000 or 15.5% from $4.2 million in
the first quarter of 1999 to $3.6 million in 2000 as the studios continue to
shift focus to their DVD business. DVD copy protection revenues increased $2.3
million or 165.9% from $1.4 million in the first quarter of 1999 to $3.6 million
in the first quarter of 2000 due to increases in DVD shipments as the market for
both DVD players and DVD titles continued to expand, including the international
market. Digital PPV copy protection revenues increased $1.4 million or 110.4%
from $1.3 million in the first quarter of 1999 to $2.7 million in the first
quarter of 2000 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 during
the past holiday season.
Computer Software/CD-ROM Copy Protection revenues increased $2.3 million or
1,057.7% from $213,000 in the first quarter of 1999 to $2.5 million in the first
quarter of 2000 as the installed base of customers implemented our SafeDisc copy
protection on their PC games and other consumer multimedia software. Revenues
from Video Scrambling products increased 312.9% from $85,000 in the first
quarter of 1999 to $351,000 in the first quarter of 2000 primarily due to
shipments of decoder boxes that incorporate our Phasekrypt technology from one
of our licensees to their customers in Brazil. Other revenue for the first
quarter of 2000 was $36,000 related to a consulting agreement.
We expect that the videocassette copy protection will remain a significant part
of our business, but that it will continue to decline as a percentage of our
revenues and profits and in absolute dollars as our copy protection business in
DVD, digital PPV and computer software continue to grow at much higher rates.
Our international and export revenues as a percentage of net revenues increased
from 42.8% for the first quarter of 1999 to49.7% for the first quarter of 2000
due to higher DVD, set-top box and Computer Software/CD-ROM revenues.
Gross Margin
Gross margin for the first quarter of 2000 remained the same as the first
quarter of 1999 at 91%. Cost of revenues increased by $483,000 or 72.0% from
$671,000 in the first quarter of 1999 to $1.2 million in the first quarter of
2000 was due primarily to the write-down of patents, assets and inventory
related to the Video Scrambling Group as the Company redirects its efforts to
other growing markets that it serves. Cost of revenues includes items such as
product costs, duplicator/replicator fees, videocassette copy protection
processor costs, patent amortization and SafeDisc royalty expense incurred prior
to our acquisition of the remaining outstanding shares of C-Dilla Ltd in June
1999. We expect future gross margins to increase as a result of the elimination
of royalty expenses, although the increased margins will be partially offset by
patent defense costs associated with current patent litigation.
Research and Development
Research and development expenses increased by $470,000 or 74.5% from $631,000
in the first quarter of 1999 to $1.1 million in 2000. The increased expenses
were a result of higher expenses relating to the software development at C-Dilla
Ltd. which was not part of Macrovision in the first quarter of 1999 offset
slightly by the reimbursement from TTR Technologies, Inc. of expenses relating
to the audio copy protection project. Research and development expenses remained
level as a percentage of net revenues at 9% for the first quarter of 2000 and
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 Ltd. and as we develop new technologies in other areas.
Selling and Marketing
Selling and marketing expenses increased by $627,000 or 33.3% from $1.8 million
in the first quarter of 1999 to $2.5 million in the first quarter of 2000. This
increase was primarily due to the increased expenses relating to the growing
Computer Software/CD-ROM Copy Protection business and the selling and marketing
expenses for C-Dilla Ltd., which was not part of Macrovision in the first
quarter of 1999. Selling and marketing expenses decreased as a percentage of net
revenues from 26.3% for the first quarter of 1999 to 19.7% for the first quarter
of 2000 due to the revenues growing at a higher rate than expenses. 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 Ltd.
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General and Administrative
General and administrative expenses increased by $575,000 or 41.6% from $1.4
million in the first quarter of 1999 to $2.0 million in the first quarter of
2000 primarily due to higher accounting, legal and consulting expenses relating
to the pending GLOBEtrotter Software, Inc. acquisition, a tax consulting project
and general and administrative expenses for C-Dilla Ltd. which were not part of
Macrovision's operations in the first quarter of 1999. General and
administrative expenses declined as a percentage of net revenues from 19.3% in
the first quarter of 1999 to 15.4% in the first quarter of 2000. In the future,
general and administrative expenses are expected to increase over the prior
periods as we continue to expand our new business development efforts.
Amortization of Intangibles from Acquisitions
The Company amortizes intangibles relating to the acquisition of C-Dilla Ltd. in
June of 1999 on a straight line basis over three to seven years based on the
expected useful lives of existing products and technologies, retention of
workforce, non-compete agreements and goodwill.
Interest and Other Income
Other income increased $1.6 million or 379.4% from $418,000 in the first quarter
of 1999 to $2.0 million in the first quarter of 2000, primarily from interest
income received on the proceeds of our public stock offering in late January
2000.
Income Taxes
Income tax expense represents combined federal and state taxes at effective
rates of 39.4% and 38.4% for the first quarter of 2000 and 1999, respectively.
The higher rate for the first quarter of 2000 is the result of taxable interest
income on the Company's investments compared to tax-exempt instruments in the
first quarter of 1999.
Net Income
Net income for the first quarter of 2000 was $4.4 million compared to $1.9
million for the first quarter of 1999. The first quarter of 2000 included the
amortization of $744,000 of intangibles associated with the acquisition of
C-Dilla Ltd.
Liquidity and Capital Resources
We have financed our operations primarily from cash generated by operations,
principally our copy protection businesses. Our operating activities provided
net cash of $4.8 and $3.2 million in the first quarter of 2000 and 1999,
respectively. In the first quarter of 2000, net cash was provided primarily by
net income before depreciation and amortization adjusted for noncash charges,
reduced by an increase in accounts receivable and prepaids offset by increases
in deferred revenue and income taxes payable. In the first quarter of 1999, net
cash was provided primarily by net income adjusted for noncash charges and an
increase in accounts payable, deferred revenue and income taxes payable, offset
slightly by an increase in accounts receivable and a decrease in accrued
expenses.
Investing activities used net cash of $131.1 million and $2.1 million in the
first quarter of 2000 and 1999, respectively. For the first quarter of 2000, net
cash used in investing activities was primarily from the funds received from the
public offering for the purchases of short and long-term investment securities
and the purchases of strategic investments. For the first quarter of 1999, net
cash used in investing activities was primarily for the net purchases of short
and long-term investment securities. We made capital expenditures of $225,000
and $79,000 in the first quarter of 2000 and 1999, respectively. We also paid
$192,000 and $93,000 in the first quarter of 2000 and 1999, respectively,
related to patents and other intangibles .
Net cash provided by financing activities was $147.1 million in the first
quarter of 2000, primarily from our January public offering. For the three
months ended March 31, 1999, the Company had net cash provided from financing
activities of $498,000 relating primarily to the issuance of common stock upon
the exercise of stock options and under the Company's stock purchase plan.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, including changes in interest rates,
foreign exchange rates and security investments. Changes in these factors may
cause fluctuations in our earnings and cash flows. We evaluate and manage the
exposure to these market risks as follows:
Fixed Income Investments. We have an investment portfolio of fixed income
securities, including those classified as cash equivalents, short-term
investments and long-term marketable investments securities of $186.8 million as
of March 31, 2000. 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 $696,000 decrease (approximately
0.4%) in the fair value of our available-for-sale securities as of March 31,
2000.
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 respective local
currency, which mitigates a portion of the exposure related to the royalties
collected.
Strategic Investments. We have expanded our technology base through strategic
investments in companies, technologies, or products. We currently hold minority
equity interests in CAC, Digimarc, AudioSoft, TTR Technologies Inc., RPK and
InterActual Technologies. These investments, totaling $58.2 million, represented
20.6% of our total assets as of March 31, 2000. We subsequently invested an
additional $750,000 in AudioSoft in April 2000. CAC, AudioSoft, RPK and
InterActual 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 these companies, and we may
in the future be required to write off all or part of one or more of these
investments. Digimarc and TTR Technologies Inc. are publicly traded companies.
In March 2000, we announced that we had signed a letter of intent to acquire
privately held GLOBEtrotter Software, Inc. GLOBEtrotter is the leading OEM
supplier of B2B (business-to-business) electronic licensing and license
management technology to software vendors and the leading direct supplier of
software asset management products to corporate customers worldwide. We plan on
acquiring all outstanding shares and vested stock options of GLOBEtrotter for
approximately 11.2 million shares of Macrovision common stock plus the
assumption of GLOBEtrotter's outstanding employee stock options. The acquisition
is subject to completion of due diligence, the final approval of Macrovision's
board of directors, approvals of our stockholders, regulatory approvals, and
satisfaction of certain other conditions which will be set forth in a definitive
agreement.
RISK FACTORS
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 77.2%, 65.5% and 56.5% of our net revenues during 1998, 1999 and the
first three months of 2000, respectively.
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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 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 with our technology, 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:
o the timing of releases of popular movies on videocassettes or DVDs
or by digital PPV transmission;
o the ability of the Motion Picture Association of America studios to
produce one or more "blockbuster" titles on an annual basis;
o the degree of acceptance of our copy protection technologies by
major motion picture studios and software companies;
o the timing of releases of computer software CD-ROM multimedia
titles: and
o the degree to which various hacking or circumvention technologies
are viewed to be successful by our customers.
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.
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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 of customers. For 1998, one
of our customers accounted for 11.9% of our net revenues. For 1999, no one
customer accounted for more than 10% of our net revenues. For the first three
months of 2000, revenues from one customer accounted for 10.7% of our net
revenues. The Motion Picture Association of America studios as a group accounted
for 45.1%, 34.4% and 32.5 % of our net revenues in 1998, 1999 and the first
three months of 2000, respectively.
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 sold 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 in our international business operations, which could
adversely affect our operating results.
International and export sales together represented 44.5%, 45.6% and 49.7% of
our net revenues in 1998, 1999 and the first three months of 2000, 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.
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 the laws of the United States., This 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 may reduce 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 in foreign countries, including:
o foreign government regulation of our business;
o changes in diplomatic and trade relationships with the foreign
countries which we conduct business;
o changes in, or imposition of, regulatory requirements of our
business;
o reliance on strong copyright laws and local enforcement;
o tariffs, taxes and other trade barriers and restrictions imposed on
our business operations; and
o difficulty in staffing and managing our 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, digital 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 such regulatory changes
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.
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Foreign currency fluctuations could adversely affect our operating results.
Our future results of operations may be materially adversely affected by
currency fluctuations. 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.
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 invalidate our property 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
involved in several legal proceedings. See "Legal Proceedings."
Litigation could harm our business and result in:
o substantial liability or related costs, including indemnification of
customers;
o diversion of management and technical resources;
o discontinuing the use and sale of infringing products;
o expending significant resources to develop non-infringing
technology; and
o 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 technologies and
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.
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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 incur
significant expense 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.
The security systems that we use in our proprietary technologies may be
circumvented by third parties, which could damage our reputation and disrupt
our business.
In our computer software copy protection products, digital code is embedded in
media content that is imperceptible in normal use but that can be read by
PC-based CD-ROM drives. The success of our products and services depends on the
security of our media commerce, anti-counterfeiting and anti-piracy systems and
self-authentication solutions. Security breaches of these systems and solutions
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. The security measures that we use in our products and
services may not prevent security breaches, and failure to prevent these
security breaches may disrupt our business. A party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions or otherwise damage our products and services and the properties
of our customers. If unintended parties obtain sensitive data and information,
or create bugs or viruses in an attempt to sabotage the functionality of our
products and services, we may receive negative publicity, incur liability to our
customers ro lose the confidence of our customers, any of which may cause the
termination or modification of our contracts.
In the computer software copy protection market, a number of individuals have
developed and posted SafeDisc hacks on the Internet. In addition, some of the
newer CD recorder devices which have recently been introduced have the
capability to circumvent our SafeDisc technology. If we are not able to generate
frequent SafeDisc software releases and new signature technology, which deters
various hacker/circumvention techniques, our customers could reduce their usage
of our technology. 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.
A limited number of DVD manufacturers may build products that either do not
contain our copy protection technology, or include features that allow consumers
to bypass copy protection. Though we believe this is in contravention of the
Digital Copyright Millennium Copyright Act, the basic DVD CSS license, or our
basic business licensing terms, proliferation of these products could cause a
decline in demand for our technologies, which could harm our business.
We may be required to expend significant capital and other resources to protect
ourselves against the threat of security breaches or to alleviate problems
caused by these breaches. 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 activities. However, protection may not be available
at a reasonable price or at all.
Our products could have unknown defects which may impact our business and our
customer relationships.
Products as complex as those we offer or develop frequently contain undetected
defects or errors. Despite testing, defects or errors may occur in existing or
new products, which could result in loss of revenue or market share, failure to
achieve market acceptance, diversion of development resources, injury to our
reputation, increased insurance costs and increased service and warranty costs,
any of which could materially harm our business. Our inability to meet customer
expectations or project milestones in a timely manner could also result in a
loss of, or delay in, revenue, loss of market share, failure to achieve market
acceptance, injury to our reputation and increased costs.
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Because customers rely on our products for critical security applications,
defects or errors in our products might discourage customers from purchasing our
products. These defects or errors could also result in product liability or
warranty claims. Although we attempt to reduce the risk of losses resulting from
these claims through warranty disclaimers and liability limitation clauses in
our sales agreements, these contractual provisions may not be enforceable in
every instance. Furthermore, although we maintain errors and omissions
insurance, this insurance coverage may not adequately cover these claims. If a
court refused to enforce the liability-limiting provisions of our contracts for
any reason, or if liabilities arose that were not contractually limited or
adequately covered by insurance, our business could be materially harmed.
We are exposed to risks associated with expanding our technology 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 five privately held companies,
Command Audio Corporation, e-Video TV, Inc., AudioSoft, RPK and Interactual and
two publicly traded companies, Digimarc and TTR.
The negotiation, creation and management of these strategic relationships
typically involve a substantial commitment of our managements 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:
o apply the SafeDisc digital signature at licensed replication
facilities;
o allow replicators to run specialized quality assurance tests to
ensure the SafeDisc technology is applied; and
o 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:
o videocassette duplicators;
o international distributors of videocassettes;
o DVD authoring facilities and replicators;
o DVD authoring tools software companies;
o DVD hardware manufacturers;
o semiconductor and equipment manufacturers;
o operators of digital PPV networks;
o consumer electronics and digital PPV set-top hardware manufacturers;
and
o CD-ROM mastering facilities and replicators.
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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. Our licensees
may develop 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, as well as in the
Reading area west of London, two of the most challenging employer environments
in the world. 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 serve
this market effectively, our revenues will be adversely affected.
While our copy protection capability is embedded in more than 35 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 as the standard solution
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. 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 our
solution 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 marketing our solution.
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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 Ltd. 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 relationship with TTR Technologies, Inc. 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, or if our solution does not achieve or sustain market
acceptance or if there is consumer resistance to this technology, our business
would be harmed.
We are expanding our product focus to include digital rights management for
various media (computer software, audio, video) and we do not know if we will
be successful in developing or selling our products in these applications.
We are developing our SafeCast product line which is intended to address the
broader application software market and Internet delivered software. We have
signed a Letter of Intent to acquire GLOBEtrotter software, which is in the
electronic licensing management business. We are devoting substantial management
and development engineering resources to these activities which are expected to
result in significant future revenues and profits. A number of competitors and
potential competitors are developing digital rights management 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 digital rights management or electronic license management 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.
If we are unable to compete successfully against competitive technologies that
may be developed in the future our business will be harmed.
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<PAGE>
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.
Problems related to the year 2000 risks may not appear for several months after
January 1, 2000.
We believe that we have successfully rendered our product, internal management
and other administrative systems and external information systems year 2000
compliant. As of March 31, 2000 we have experienced no disruptions in our
business operations as a result of year 2000 compliance problems or otherwise,
and have received no reports of any year 2000 compliance problems with our
products. To date, the total cost of our efforts to address year 2000 compliance
has not been material.
Nonetheless, some problems related to the year 2000 risks may not appear for
some time after January 1, 2000. Year 2000 issues could include problems with
our own products or with third-party products or technology that we use. Any
problems that are not identified and corrected successfully and completely could
adversely affect our business.
Investment Risks
Our anagement has broad discretion as to how to use the proceeds from our
recent offering and the proceeds may not be used appropriately.
We expect to use the net proceeds of our recent 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, 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.
JVC is entitled to cause the Company to register up to 3,161,952 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 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:
o actual or anticipated fluctuations in operating results;
o announcements of technical innovations by us or our competitors;
o new products or new contracts;
o competitors or their customers;
o governmental regulatory action;
o developments with respect to patents or proprietary rights;
o changes in financial estimates by securities analysts; and
o 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.
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Part II. Other Information
Item 1. Legal Proceedings.
We are involved in legal proceedings related to some of our intellectual
property rights.
Krypton Co., Ltd., a Japanese company, filed an invalidation claim against one
of our copy protection patents in Japan. In March 1999, the Japanese Patent
Office recommended that our patent be invalidated. Macrovision contested this
claim through the Japanese Patent Office and the Tokyo High Court. In March
2000, the Tokyo High Court ruled in favor of Macrovision and dismissed the
invalidation claim. The matter must now be confirmed by the Japanese Patent
Office.
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 injunctive relief, compensatory damages,
treble damages, costs, and attorneys' fees arising from these claims.
Cavendish's response to the complaint contained counterclaims alleging that we
have violated the Sherman Antitrust Act, the Lanham Act, California's false
advertising law, and California's Unfair Competition Act. The counterclaims seek
injunctive relief, compensatory damages, treble damages, costs, and attorneys'
fees. The counterclaims also seek 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 these allegations vigorously. In the event of an
adverse ruling, we may incur a corresponding decline in demand for our video
copy protection technology.
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. The case is being heard in the District
Court of Dusseldorf, Germany. Vitec has filed a reply brief arguing that its
product does not infringe. The District Court has ruled in favor of Vitec. We
are appealing the District Court's decision to the Court of Appeal. 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 Germany.
23
<PAGE>
Item 5 - Other Information.
In March 2000, we announced that we signed a letter of intent to acquire
privately held GLOBEtrotter Software of San Jose, California. We believe
GLOBEtrotter is the leading OEM supplier of B2B (business-to-business)
electronic licensing and license management technology to software vendors and a
leading direct supplier of software asset management products to corporate
customers worldwide. We plan to acquire all outstanding shares and vested stock
options of GLOBEtrotter for approximately 11.2 million shares of Macrovision
common stock and to assume all unvested GLOBEtrotter stock options, subject to
completion of due diligence, the approval of Macrovision's board of directors
and stockholders, regulatory approvals, and the completion of a definitive
agreement. We intend to account for the transaction as a pooling of interest.
In April 2000, the Company invested an additional $750,000 in AudioSoft pursuant
to the agreement signed in August 1999, which required such additional
commitment if AudioSoft attained certain commercial milestones. AudioSoft is a
developer of secure e-music delivery technology and copyright management royalty
reporting systems.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 - Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2000, the Company filed two Current
Reports on Form 8-K. On February 15, 2000, the Company filed a Current
Report on Form 8-K relating to the announcement of its two-for-one stock
split payable to stockholders on March 17, 2000. On March 31, 2000, the
Company filed a Current Report on Form 8-K relating to the announcement of
the signing of a letter of intent to acquire GLOBEtrotter.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Macrovision Corporation
<TABLE>
<S> <C>
Date: May 12, 2000 By: /S/ William A. Krepick
---------------------------------------------------------
William A. Krepick, President and Chief Operating Officer
Date: May 12, 2000 By: /S/ Ian R. Halifax
---------------------------------------------------------
Ian Halifax, Vice President, Finance and Administration,
Chief Financial Officer and Secretary
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of the Company for the three months ended
March 31, 2000, and is qualified in its entirety by reference to such
Consolidated Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 25,156
<SECURITIES> 106,601
<RECEIVABLES> 14,039
<ALLOWANCES> 846
<INVENTORY> 130
<CURRENT-ASSETS> 150,449
<PP&E> 5,947
<DEPRECIATION> 4,300
<TOTAL-ASSETS> 282,783
<CURRENT-LIABILITIES> 12,833
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 255,260
<TOTAL-LIABILITY-AND-EQUITY> 282,783
<SALES> 12,726
<TOTAL-REVENUES> 12,726
<CGS> 1,154
<TOTAL-COSTS> 1,154
<OTHER-EXPENSES> 6,355
<LOSS-PROVISION> (59)
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 7,221
<INCOME-TAX> 2,845
<INCOME-CONTINUING> 4,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,376
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
