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Macrovision 10-Q 2007
Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2830 De La Cruz Boulevard, Santa Clara, CA 95050

(Address of principal executive offices) (Zip Code)

(408) 562-8400

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of August 1, 2007

Common stock, $0.001 par value   54,889,008

 



Table of Contents

MACROVISION CORPORATION

FORM 10-Q

INDEX

 

          Page
   PART I - FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006    1
   Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006    2
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006    3
   Notes to Condensed Consolidated Financial Statements    4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    27

Item 4.

   Controls and Procedures    28
   PART II - OTHER INFORMATION   

Item 1.

   Legal Proceedings    29

Item 1A.

   Risk Factors    30

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    30

Item 3.

   Defaults Upon Senior Securities    30

Item 4.

   Submission of Matters to a Vote of Security Holders    30

Item 5.

   Other Information    30

Item 6.

   Exhibits    31
Signatures    32


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     June 30,
2007
    December 31,
2006
 

Current assets:

    

Cash and cash equivalents

   $ 133,978     $ 159,666  

Advance payments for acquisition of Mediabolic

     —         40,241  

Short-term investments

     279,252       121,559  

Accounts receivable, net

     42,396       66,723  

Deferred tax assets

     3,234       —    

Taxes receivable

     3,169       —    

Prepaid expenses and other current assets

     16,471       14,402  
                

Total current assets

     478,500       402,591  

Long-term marketable investment securities

     129,589       175,165  

Restricted cash

     12,000       12,000  

Deferred tax assets

     41,147       28,730  

Property and equipment, net

     22,290       21,818  

Other intangibles from acquisitions, net

     27,507       25,368  

Patents and other assets

     17,526       17,894  

Goodwill

     171,022       136,049  
                

Total assets

   $ 899,581     $ 819,615  
                

LIABILITIES AND STOCKHOLDERS' EQUITY

    

Current liabilities:

    

Accounts payable

   $ 3,656     $ 4,378  

Accrued expenses

     28,454       34,073  

Income taxes payable

     —         37,632  

Deferred revenue

     33,457       33,831  
                

Total current liabilities

     65,567       109,914  

Convertible senior notes

     240,000       240,000  

Taxes payable, non-current

     41,615       —    

Other non current liabilities

     1,915       3,559  
                

Total liabilities

     349,097       353,473  

Stockholders’ equity:

    

Common stock

     60       57  

Treasury stock

     (88,448 )     (88,448 )

Additional paid-in capital

     447,109       372,412  

Accumulated other comprehensive income

     12,416       10,974  

Retained earnings

     179,347       171,147  
                

Total stockholders’ equity

     550,484       466,142  
                

Total liabilities and stockholders’ equity

   $ 899,581     $ 819,615  
                

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007    2006

Net Revenues:

           

Licenses

   $ 40,609    $ 43,326    $ 89,095    $ 88,369

Services

     16,457      15,023      33,173      26,998
                           

Total revenues

     57,066      58,349      122,268      115,367

Cost of revenues:

           

License fees

     1,985      2,568      3,817      4,930

Service fees*

     9,451      8,265      19,811      14,487

Amortization of intangibles from acquisitions

     3,598      3,490      7,211      6,733
                           

Total cost of revenues

     15,034      14,323      30,839      26,150

Gross profit

     42,032      44,026      91,429      89,217

Operating expenses:

           

Research and development*

     12,759      13,615      27,878      26,330

Selling and marketing*

     16,719      16,426      35,385      33,318

General and administrative*

     9,420      8,475      19,172      17,293

Restructuring and other charges

     2,894      —        5,070      —  
                           

Total operating expenses

     41,792      38,516      87,505      76,941
                           

Operating income

     240      5,510      3,924      12,276

Interest and other income, net

     3,313      2,106      6,215      4,155
                           

Income before income taxes

     3,553      7,616      10,139      16,431

Income taxes

     1,061      841      1,939      7,184
                           

Net income

   $ 2,492    $ 6,775    $ 8,200    $ 9,247
                           

Basic net earnings per share

   $ 0.05    $ 0.13    $ 0.16    $ 0.18
                           

Shares used in computing basic net earnings per share

     53,488      52,262      52,803      51,985
                           

Diluted net earnings per share

   $ 0.05    $ 0.13    $ 0.15    $ 0.18
                           

Shares used in computing diluted net earnings per share

     54,633      53,090      53,961      52,679
                           

*Equity-based compensation by category is as follows:

 

           

Cost of revenues – Service fees

   $ 355    $ 461    $ 698    $ 915

Research and development

     525      1,557      1,845      3,305

Selling and marketing

     484      1,858      2,090      3,964

General and administrative

     1,538      1,536      3,172      3,057

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

MACROVISION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 8,200     $ 9,247  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     5,179       4,288  

Amortization of intangibles from acquisitions

     7,211       6,733  

Amortization of note issuance costs

     724       —    

Equity-based compensation

     8,646       11,241  

Deferred taxes from equity-based compensation

     —         (2,199 )

Tax benefit from stock options exercises

     —         2,673  

Excess tax benefits from equity-based compensation

     —         (479 )

Changes in operating assets and liabilities:

    

Accounts receivable, net

     24,271       5,943  

Deferred revenue

     (1,694 )     4,265  

Other assets

     (3,398 )     (5,612 )

Other liabilities

     (3,888 )     13,688  
                

Net cash provided by operating activities

     45,251       49,788  

Cash flows from investing activities:

    

Purchases of long and short-term investments

     (410,156 )     (195,512 )

Sales or maturities of long and short-term investments

     299,744       157,167  

Payments made relating to the acquisition of eMeta, net of cash acquired

     (900 )     (34,622 )

Payments made relating to the acquisition of Mediabolic, net of cash acquired

     (1,466 )     —    

Acquisition of property and equipment

     (4,029 )     (8,784 )

Payments for patents

     (868 )     (858 )
                

Net cash used in investing activities

     (117,675 )     (82,609 )

Cash flows from financing activities:

    

Proceeds from issuance of common stock from options and stock purchase plans

     47,658       16,565  

Excess tax benefits from equity-based compensation

     —         479  

Other financing activities

     (664 )     —    
                

Net cash provided by financing activities

     46,994       17,044  

Effect of exchange rate changes on cash and cash equivalents

     (258 )     593  
                

Net decrease in cash and cash equivalents

     (25,688 )     (15,184 )

Cash and cash equivalents at beginning of period

     159,666       135,625  
                

Cash and cash equivalents at end of period

   $ 133,978     $ 120,441  
                

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

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 and its subsidiaries (the “Company”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC.”) Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted in accordance with such rules and regulations. However, the Company believes the disclosures are adequate to make the information not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are considered necessary to present fairly the results for the periods presented. This quarterly report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto and other disclosures, including those items disclosed under the caption “Risk Factors” contained in our 2006 Annual Report on Form 10-K.

The consolidated results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year ending December 31, 2007, for any future year, or for any other future interim period.

In May 2007, the Company’s board of directors approved an organizational structure change that included a reduction in headcount and the creation of four new segments. See Notes 6 and 11, respectively, for further discussion.

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) effective January 1, 2007. FIN 48 prescribes a new recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon its adoption of FIN 48, the Company applied the provisions of FIN 48 to all income tax positions. The cumulative effect of applying the provisions of FIN 48 have been reported as an adjustment to the opening balance of Additional Paid-in-Capital in the Condensed Consolidated Balance Sheet as of the beginning of 2007.

The Company adopted the provisions of Emerging Issues Task Force, or EITF, Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),” effective January 1, 2007. EITF No. 06-03 allows companies to choose either the gross basis or net basis of income statement presentation for taxes collected from customers and remitted to governmental authorities and requires companies to disclose such policy. The Company applies the net basis presentation for taxes collected from customers and remitted to governmental authorities.

 

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NOTE 2 – EQUITY-BASED COMPENSATION

Stock Options

Currently, the Company grants options from the 2000 Equity Incentive Plan ("2000 Plan") and the 1996 Directors Stock Option Plan (the “Directors Plan”). The 2000 Equity Incentive Plan succeeded the 1996 Equity Incentive Plan (“1996 Plan”) in August 2000.

Restricted Stock

Restricted stock awards are issued from the 2000 Plan and vest annually over four years. Restricted stock awards are considered outstanding at the time of the grant, as the stockholders are entitled to dividends and voting rights. As of June 30, 2007, the number of shares awarded but unvested was 775,266.

As of June 30, 2007, the Company had 18.6 million shares reserved and 4.8 million shares remained available for issuance under the 2000 Plan. The 2000 Plan provides for the grant of stock options, stock appreciation rights, and restricted stock awards by the Company to employees, officers, directors, consultants, independent contractors, and advisers of the Company. The 2000 Plan permits the grant of either incentive or nonqualified stock options at the then current market price. Option vesting periods are generally three years under the 2000 Plan where one-sixth vests in the first year, one-third vests in the second year and one-half vests in the third year. Option grants have contractual terms ranging from five to ten years.

As of June 30, 2007, the Company had 1.0 million shares reserved under the Directors Plan and 0.2 million shares remained available for issuance. The Directors Plan provides for the grant of stock options to non-employee directors of the Company. The Directors Plan permits the grant of nonqualified stock options at the then current market price. Option vesting periods are generally one year under the Directors Plan. Option grants have terms ranging from five to ten years.

Employee Stock Purchase Plan

The Company’s 1996 Employee Stock Purchase Plan (the “ESPP”) allows eligible employee participants to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of the Company’s common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.

As of June 30, 2007, the Company had reserved 4.3 million shares of common stock for issuance under the ESPP and 2.4 million shares remained available for future issuance.

Valuation and Assumptions

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The fair value of equity-based payment awards on the date of grant is determined by an option-pricing model using a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

Estimated volatility of the Company’s common stock for new grants is determined by using a combination of historical volatility and implied volatility in market traded options. The expected term of options granted is determined by calculating the average term from historical stock option exercise experience. The risk-free interest rate used in the option valuation model is from U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not

 

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anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. In accordance with SFAS 123(R), the Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record equity-based compensation expense only for those awards that are expected to vest. The assumptions used to value equity-based payments are as follows:

 

     Three months ended
June 30,
  Six Months ended
June 30,
     2007   2006   2007   2006

Option Plans:

        

Dividends

   None   None   None   None

Expected term

   3.1 years   3.5 years   3.2 years   3.3 years

Risk free interest rate

   4.7%   5.0%   4.7%   4.7%

Volatility rate

   36%   40%   36%   41%

ESPP Plan:

        

Dividends

   N/A   N/A   None   None

Expected term

   N/A   N/A   1.3 years   1.3 years

Risk free interest rate

   N/A   N/A   5.1%   4.6%

Volatility rate

   N/A   N/A   33%   41%

As of June 30, 2007, there was $25.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested equity-based payments granted to employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures and is expected to be recognized over a weighted average period of 1.9 years.

The weighted average fair value of options granted during the three and six months ended June 30, 2007 was $8.06 and $8.14, respectively. The weighted average fair value of options granted during the three and six months ended June 30, 2006 was $7.81 and $7.01, respectively. The weighted average grant date fair value of an employee purchase share right granted during the six months ended June 30, 2007 was $7.71. The weighted average grant date fair value of an employee purchase share right granted during the six months ended June 30, 2006 was $7.60.

The total intrinsic value of options exercised during the three and six months ended June 30, 2007 was $14.5 million and $19.5 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

NOTE 3 – BUSINESS COMBINATION AND ASSET PURCHASES

Mediabolic, Inc.

In January 2007, the Company acquired Mediabolic, Inc. (“Mediabolic”), a privately held company based in San Mateo, California, for $43.4 million of cash consideration, of which $40.2 million was paid in 2006 and $3.2 million was paid in 2007. Mediabolic is a provider of software solutions for connected consumer electronics devices, such as televisions, set-top boxes and digital video recorders. The acquisition of Mediabolic extends the Company’s capabilities in the delivery and enhancement of digital content to a wide variety of connected consumer electronics devices for the digital home. Mediabolic’s results have been included in the Company’s Embedded Solutions segment. The condensed consolidated financial statements include the results of operations of Mediabolic since January 1, 2007, the effective date of the acquisition.

 

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The following is a summary of the estimated fair values of the tangible assets acquired and liabilities assumed at the date of the acquisition (in thousands):

 

     As of
January 1, 2007
 

Cash and cash equivalents

   $ 2,005  

Accounts receivable

     35  

Other assets

     749  
        

Total tangible assets acquired

     2,789  
        

Accounts payable & accrued liabilities

     (1,312 )

Deferred revenue

     (1,341 )
        

Total liabilities assumed

     (2,653 )
        

Net assets acquired

   $ 136  
        

The following is a summary of goodwill and identifiable intangible assets acquired in the acquisition of Mediabolic (in thousands):

 

Cash paid

   $  43,713  

Net assets acquired

     (136 )
        

Total goodwill and intangible assets acquired

   $ 43,577  
        

 

Intangible Assets

   Amount    Amortization Period
in Years

Existing technology

   $ 6,996    4

Core technology

     1,011    3

Customer Relationships

     979    5

Covenant Not to compete

     358    1

Goodwill

     34,233    Not Applicable
         

Total

   $ 43,577   
         

As of June 30, 2007, the amount allocated to goodwill may be further adjusted during the year as a result of changes in deferred tax assets. The weighted average amortization period for amortizable Mediabolic intangible assets is 3.9 years.

 

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The amortization schedule for Mediabolic intangibles is as follows (in thousands):

 

Year ending:

   $

Remainder of 2007

   $ 1,320

2008

     2,282

2009

     2,282

2010

     1,945

2011

     195
      

Total

   $ 8,024
      

eMeta Corporation

In February 2006, the Company acquired eMeta Corporation (“eMeta”), a privately held company based in New York, for $36.1 million of purchase consideration. eMeta provided software solutions that enable companies to manage and sell digital goods and services online. During 2006, the Company had paid $35.2 million in cash consideration. During the first quarter of 2007, the Company paid the remaining $0.9 million to shareholders, which was included in the original purchase price.

NOTE 4 – GOODWILL AND OTHER ACQUIRED INTANGIBLES

In June 2007, the Company reorganized its structure into four new segments. See Note 11 for further details and discussion.

The following table summarizes the Company’s goodwill activity (in thousands):

 

Goodwill, net at December 31, 2006

   $  136,049

Acquisition of Mediabolic, Inc.

     34,233

Changes due to foreign currency exchange rates

     740
      

Goodwill, net at June 30, 2007

   $ 171,022
      

In connection with the reorganization of segments discussed in Note 11, the Company is in the process of completing an assessment of its reporting units. Based on information available, the Company has not identified any evidence of impairment of goodwill.

The Company’s intangible assets from acquisitions subject to amortization as of December 31, 2006 and June 30, 2007 are as follows (in thousands):

 

     December 31, 2006
     Gross Costs    Accumulated
Amortization
    Net

Amortized intangibles:

       

Existing technology

   $ 45,039    $ (28,956 )   $ 16,083

Existing contracts

     13,725      (9,231 )     4,494

Patents and trademarks

     9,663      (4,872 )     4,791
                     
   $ 68,427    $ (43,059 )   $ 25,368
                     

 

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     June 30, 2007
     Gross Costs    Accumulated
Amortization
    Net

Amortized intangibles:

       

Existing technology

   $ 53,068    $ (34,231 )   $ 18,837

Existing contracts

     15,147      (10,408 )     4,739

Patents and trademarks

     9,721      (5,790 )     3,931
                     
   $ 77,936    $ (50,429 )   $ 27,507
                     

As of June 30, 2007, the Company’s estimates its amortization expense in future periods to be as follows (in thousands):

 

     Amortization
Expense

Remainder of 2007

   $ 7,125

2008

     10,984

2009

     6,221

2010

     2,991

2011 and thereafter

     186
      

Total amortization expense

   $ 27,507
      

NOTE 5 – STRATEGIC INVESTMENTS

As of June 30, 2007 and December 31, 2006, the adjusted cost of the Company’s strategic investments totaled $24.8 million and $22.7 million, respectively. The Company’s strategic investments include public and non-public companies. As of June 30, 2007, the adjusted cost of the Company’s strategic investments consisted of its investment in Digimarc, a publicly traded company, and its investment in a privately-held digital watermarking company.

In 2006, the Company invested $5.0 million in a privately-held digital watermarking company which has been recorded at cost as a strategic investment and classified on the balance sheet under “Prepaid expenses and other current assets.”

The Company holds investments in other privately-held companies, which had no carrying value as of June 30, 2007.

The investment in Digimarc has been classified on the balance sheet as “Long-term marketable investment securities.”

There were no impairment charges related to the Company’s strategic investments during the three and six months ended June 30, 2007 and 2006.

NOTE 6 – RESTRUCTURING AND OTHER CHARGES

In May 2007, the Company’s board of directors approved an organizational structure change which included the creation of four new segments. The organizational realignment enables the Company to increase its focus on long-term growth, market opportunities and meeting customer needs. The reorganization included a workforce reduction in headcount of approximately eight percent, resulting in a charge of $2.9 million. All affected employees were notified of their termination prior to June 30, 2007. See Note 11 for further discussion on the four new segments.

 

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In January 2007, the Company’s board of directors approved a restructuring program, which included a workforce reduction, a restructuring of certain business functions and an abandonment of certain facilities. The workforce reduction resulted in a charge of $1.3 million. All affected employees were notified of their termination prior to March 31, 2007. The restructuring of certain business functions included the cancellation of certain service contracts and asset losses, resulting in a charge of $0.5 million. The abandonment of certain leased facilities resulted in a charge of $0.4 million.

A summary of restructuring activities for the three and six months ended June 30, 2007 follows (in thousands):

 

     Termination
Benefits
    Contract
Terminations
    Abandonment
of Facilities
    Asset
Impairment
    Total  

Charged in Quarter Ended March 31, 2007

   $ 1,302     $ 302     $ 371     $ 201     $ 2,176  

Cash Payments

     (1,119 )     (49 )     (65 )     —         (1,233 )

Restructuring Charges

     —         —         —         (201 )     (201 )
                                        

Accrual Balance as of March 31, 2007

     183       253       306       —         742  

Charged in Quarter Ended June 30, 2007

     2,894       —         —         —         2,894  

Non-cash equity-based compensation

     (841 )     —         —         —         (841 )

Cash Payments for Q1 Action

     (155 )     (253 )     (58 )     —         (466 )

Cash Payments for Q2 Action

     (1,195 )     —         —         —         (1,195 )
                                        

Accrual Balance as of June 30, 2007

   $ 886     $ —       $ 248     $ —       $ 1,134  
                                        

The Company has accounted for its restructuring charges and accruals in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and its asset impairment charges in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."

NOTE 7 – EARNINGS PER SHARE

Basic net earnings per share (“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 anti-dilutive.

 

     Three months ended
June 30,
   Six months ended
June 30,
     2007    2006    2007    2006
     (in thousands)    (in thousands)

Basic EPS – weighted average number of common shares outstanding

   53,488    52,262    52,803    51,985

Effect of dilutive common equivalent shares

   1,145    828    1,158    694
                   

Diluted EPS – weighted average number of common shares and common equivalent shares outstanding

   54,633    53,090    53,961    52,679
                   

 

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The following weighted average potential common shares were excluded from the computation of diluted net earnings per share as their effect would have been anti-dilutive:

 

     Three months ended
June 30,
   Six months ended
June 30,
     2007    2006    2007    2006
     (in thousands)    (in thousands)

Stock options (1)

   1,164    5,676    1,455    6,353

Restricted stock (1)

   —      —      —      —  

Convertible senior notes (2)

   —      —      —      —  

Warrants (1)

   7,955    —      7,955    —  
                   

Total weighted average potential common shares excluded from diluted net earnings per share

   9,119    5,676    9,410    6,353
                   

(1) These potential common share units were excluded from the computation of diluted net earnings per share because their impact is anti-dilutive.
(2) Potential common shares related to the convertible senior notes were excluded from the computation of diluted net income per share because the effective conversion price was higher than the average market price of our common stock during the period, and therefore the effect was anti-dilutive.

NOTE 8 – COMPREHENSIVE INCOME

The components of comprehensive income, net of taxes, are as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
     2007     2006     2007    2006

Net income

   $ 2,492     $ 6,775     $ 8,200    $ 9,247

Other comprehensive income:

         

Unrealized gains (losses) on investments

     (604 )     (1,589 )     1,018      347

Foreign currency translation adjustments

     443       1,875       424      2,076
                             

Comprehensive income

   $ 2,331     $ 7,061     $ 9,642    $ 11,670
                             

NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that SFAS 159 will have on its consolidated financial statements.

 

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NOTE 10 – INCOME TAXES

The Company recorded income tax expense of $1.1 million and $0.8 million for the three months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, the Company recorded income tax expense of $1.9 million and $7.2 million, respectively. Income tax expense is based upon an annual effective tax rate forecast, including estimates and assumptions that could change during the year, including the amount of foreign reinvested earnings. A discrete tax benefit of $0.8 million was recorded during the second quarter of 2007 from disqualifying dispositions of shares issued under the Company’s employee stock purchase plan and incentive stock options.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible, as well as tax planning strategies.

Based on projections of future taxable income over the periods in which the deferred tax assets are deductible and the history of the Company’s profitability, the Company believes that it is more likely than not that the benefits of these deductible differences, net of valuation allowances as of June 30, 2007, will be realized. There were no adjustments to the valuation allowance balance in the three months ended June 30, 2007.

The Company adopted FIN 48 effective January 1, 2007. As a result of adopting FIN 48, the Company recorded a credit of approximately $16.3 million to additional paid-in-capital as of January 1, 2007. As of the adoption date, the Company had gross tax effected unrecognized tax benefits of $35.6 million which, if recognized, would affect the effective tax rate. Also as of the adoption date, the Company had accrued interest expense related to unrecognized tax benefits of $4.5 million. During the first quarter of 2007, the Company reclassified $40.1 million from current taxes payable to non-current taxes payable. The Company recognized accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.

The Company conducts business globally and, as a result, files U.S. federal, state and foreign income tax returns in various jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including Japan, the Netherlands, the United Kingdom and the U.S. With few exceptions, the Company is no longer subject to income tax examinations for years before 2003. The Company is currently under audit by the Internal Revenue Service (IRS) for the 2003 and 2004 tax years. As part of the audit, the Company has responded to IRS information requests regarding Company stock option granting practices.

NOTE 11 – SEGMENT AND GEOGRAPHIC INFORMATION

In June 2007, the Company announced an organizational structure change which included the creation of four new segments: Embedded Solutions, Entertainment, Software and Distribution and Commerce. The organizational realignment enables the Company to increase its focus on long-term growth, market opportunities and meeting customer needs. Segment information is presented based upon the Company’s management organization structure, in place beginning June 5, 2007, and has reclassified prior periods’ segment data to reflect the four new segments. Future changes to this internal financial structure may result in changes to the segments disclosed. Prior to June 2007, the Company’s two segments were Entertainment Technologies and Software Technologies.

Each segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by the President and CEO.

The Company derives its segment results from its internal management reporting system. Management measures the performance of each reportable segment based upon several metrics including

 

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net revenue and segment operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company does not allocate to its segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include equity-based compensation, amortization of intangibles, corporate marketing and general and administrative expenses. In addition, the Company does not allocate to its segments restructuring and other charges related to restructuring actions. Management has excluded such unallocated costs from segment operating income since they are not used to measure segment performance.

The Embedded Solutions segment focuses on hardware manufacturers with solutions enabling them to protect and enhance digital content in digital set top boxes for cable/satellite TV and a variety of PC and consumer electronics video playback and record devices, including the Company's analog copy protection (ACP) technology and middleware platform. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Entertainment segment focuses on the Company’s worldwide entertainment and studio customers, including the continuing relationships with the Motion Picture Association of America (MPAA) and Independent studios. The Entertainment solutions include various digital content protection and enhancement products and services for digital content owners and system operators. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Software segment focuses on independent software vendors and enterprise IT departments with solutions including the FLEXnet suite of electronic license management, electronic license delivery, and software asset management products; Installer Products; and Admin Studio. Prior to June 2007, these products were formerly part of the Software Technologies segment.

The Distribution and Commerce segment focuses on serving the digital distribution and managed content requirements of providers of digital goods. The Distribution and Commerce unit will include solutions targeted at digital distribution services for games and other content areas, as well as the Company's RightAccess and RightCommerce solutions. Prior to June 2007, these products were formerly part of both the Entertainment and Software Technologies segments.

Information regarding the Company’s segments for the three and six months ended June 30, 2007 and 2006 is as follows:

Segment data:

The following tables summarize segment revenue and operating results for each segment. Segment operating income is based on the segment’s revenue less the respective segment’s cost of revenues, selling and research and development expenses. Operating results for each segment is further reconciled to operating income:

 

     Three months ended
June 30,
   Six months ended
June 30,
     2007    2006    2007    2006
     (in thousands)

Segment Revenue:

           

Embedded Solutions

   $ 14,270    $ 7,914    $ 33,899    $ 21,822

Entertainment

     9,030      14,682      23,310      29,127

Software

     29,054      30,562      54,733      55,366

Distribution and Commerce

     4,712      5,191      10,326      9,052
                           

Total segment revenue

   $ 57,066    $ 58,349    $ 122,268    $ 115,367
                           

 

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     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  
     (in thousands)  

Segment Operating Results:

        

Embedded Solutions

   $ 11,067     $ 7,151     $ 26,931     $ 20,325  

Entertainment

     4,352       7,741       13,528       14,825  

Software

     12,945       12,065       21,949       19,027  

Distribution and Commerce

     (6,740 )     (2,109 )     (13,743 )     (2,779 )
                                

Segment operating income

     21,624       24,848       48,665       51,398  

Unallocated costs

     (18,490 )     (19,338 )     (39,671 )     (39,122 )

Restructuring and other charges

     (2,894 )     —         (5,070 )     —    
                                

Operating income

   $ 240     $ 5,510     $ 3,924     $ 12,276  
                                

Information on Revenue by Geographic Areas:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007    2006
     (in thousands)

United States

   $ 28,883    $ 36,041    $ 63,660    $ 65,139

International

     28,183      22,308      58,608      50,228
                           
   $ 57,066    $ 58,349    $ 122,268    $ 115,367
                           

Geographic area information is based upon country of destination for products shipped and country of contract holder for royalties and license fees.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases its facilities and certain equipment pursuant to noncancelable operating lease agreements expiring through 2017. The Company’s corporate headquarters are located in Santa Clara, California and such leases expire in January 2017. The Company also leases office space, including those located in Illinois, San Francisco, New York, the United Kingdom and Japan, which expire at various dates from 2008 through 2016. The Company has recorded rent expense on a straight-line basis based on contractual lease payments. Allowances from lessors for tenant improvements have been included in the straight-line rent expense for applicable locations. Tenant improvements are capitalized and depreciated over the remaining life of the applicable lease. The Company also leases certain computer software and equipment under capital lease agreements which expire on March 1, 2009. The current and long-term portions of the capital lease have been recorded in “Accrued expenses” and “Other non current liabilities,” respectively, on the condensed consolidated balance sheet as of June 30, 2007. Depreciation of assets recorded under the capital lease is included in depreciation expense.

 

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Future minimum lease payments pursuant to these leases as of June 30, 2007 were as follows (in thousands):

 

     Operating
Leases
   Capital Lease  

Remainder 2007

   $ 4,257    $ 813  

2008

     7,472      1,625  

2009

     6,166      406  

2010

     6,145      —    

2011

     6,259      —    

Thereafter

     31,583      —    
               

Total minimum lease payments

   $ 61,882    $ 2,844  
         

Less: Amounts representing interest

        (164 )
           

Present value of minimum lease payments

        2,680  

Less: current portion of obligations under capital leases

        (1,497 )
           

Long-term portion of obligations under capital leases

      $ 1,183  
           

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s products. Historically, costs related to these indemnification provisions have not been significant and the Company is not able to estimate the maximum potential impact of these indemnification provisions on its future results of operations.

Restricted Cash and Investments

For one of our products, the Company has offered a maximum indemnity of $12.0 million to a collective group of customers under current contracts. Funds totaling $12.0 million have been segregated from the rest of the Company’s cash and investments and are restricted to use for customer claims under such indemnification provisions.

Legal Proceedings

The Company has not been required to pay a penalty to the Internal Revenue Service (“IRS”) for failing to make disclosures required with respect to any transaction that has been identified by the IRS as abusive or that has a significant tax avoidance purpose.

USPTO Interference Proceedings Between Macrovision Corporation and Intertrust Technologies

The Company received notice on September 4, 2003 that the USPTO had declared an interference between our U.S. Patent No. 5,845,281 (“the ’281 patent”) together with two of our continuation applications, and a patent application from Intertrust Technologies Corporation (“Intertrust”). On or about December 28, 2005, the Board of Patent Appeals (“BPA”) issued its final ruling in the case, holding that the ‘281 patent had priority over the two Intertrust patent applications at issue, but also that the inventor of the ‘281 patent had committed inequitable conduct during the prosecution of that patent. As a result of this decision, the Company’s ‘281 patent was rendered unenforceable.

On December 19, 2003, the Company received notice from the USPTO declaring another interference, this time between two of its patent applications and four of Intertrust’s patents. On or about April 11, 2005, the BPA issued its final ruling, holding that the Intertrust patents had priority over the Company’s two applications at issue.

 

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Intertrust and Macrovision filed lawsuits on July 28, 2006 and July 31, 2006, respectively, in the U.S. District Court for the Northern District of California against the other party, seeking to overturn the BPA’s rulings adverse to the parties in the two interference proceedings. In June 2007, the parties reached a settlement of the matter whereby both parties dismissed their respective claims with prejudice. The other terms of the settlement are confidential.

InstallShield Software Corporation Liquidating Trust vs. Macrovision

On October 27, 2005, the Company received notice of an arbitration proceeding filed by InstallShield Software Corporation Liquidating Trust (the “Trust”). The Trust has demanded arbitration of certain disputes between the Trust and Macrovision pursuant to the Asset Purchase Agreement dated June 16, 2004 by and among InstallShield Software Corporation, Macrovision Corporation, Macrovision Europe Limited, and Macrovision International Holding L.P. (the “Agreement”). Under the Agreement, the Company could have been required to make an additional contingent payment of up to $20 million based on post-acquisition revenue performance through June 30, 2005. Based upon the revenue results through June 30, 2005, the Company concluded that no additional payment was required under the terms of the Agreement. The Trust alleges that the post-acquisition revenue performance targets were not reached due to the Company’s conduct in violation of the Agreement, and therefore is seeking the contingent payment in an amount exceeding $15 million. The Company denies these allegations and intends to vigorously defend itself in the arbitration proceeding. The parties are engaged in discovery. A hearing is scheduled to begin on December 3, 2007.

As of June 30, 2007, for all the abovementioned matters, it was not possible to estimate the liability, if any, in connection with the pending matters. Accordingly, no accruals for these contingencies have been recorded.

From time to time, the Company has been involved in other disputes and legal actions arising in the ordinary course of business. In management’s opinion, none of these other disputes and legal actions is expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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Item 2. 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 in our Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the SEC.

Overview

Macrovision Corporation provides a broad set of solutions that enable businesses to protect, enhance and distribute their digital goods to consumers across multiple channels. Macrovision solutions are deployed by companies in the entertainment, consumer electronics, gaming, software, information publishing and corporate IT markets to solve industry-specific challenges and bring greater value to their customers.

In June 2007, we announced an organizational structure change which included the creation of four new segments: Embedded Solutions, Entertainment, Software and Distribution and Commerce. The organizational realignment enables us to increase our focus on long-term growth, market opportunities and meeting customer needs.

The Embedded Solutions segment focuses on hardware manufacturers with solutions enabling them to protect and enhance digital content in digital set top boxes for cable/satellite TV and a variety of PC and consumer electronics video playback and record devices, including the our analog copy protection (ACP) technology and middleware platform. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Entertainment segment focuses on our worldwide entertainment and studio customers, including the continuing relationships with the Motion Pictures Association of America (MPAA) and Independent studios. The Entertainment solutions include various digital content protection and enhancement products and services for digital content owners and system operators. Prior to June 2007, these products were formerly part of the Entertainment Technologies segment.

The Software segment focuses on independent software vendors and enterprise IT departments with solutions including the FLEXnet suite of electronic license management, electronic license delivery, and software asset management products; Installer Products; and Admin Studio. Prior to June 2007, these products were formerly part of the Software Technologies segment.

The Distribution and Commerce segment focuses on serving the digital distribution and managed content requirements of providers of digital goods. The Distribution and Commerce unit will include solutions targeted at digital distribution services for games and other content areas, as well as our RightAccess and RightCommerce solutions. Prior to June 2007, these products were formerly part of both the Entertainment and Software Technologies segments.

 

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The following tables provide revenue and operating income information by segment for the periods indicated (dollars in thousands):

 

     Three months ended June 30,  
     2007     2006     $ Change     % Change  

Segment Revenue:

        

Embedded Solutions

   $ 14,270     $ 7,914     $ 6,356     80 %

Entertainment

     9,030       14,682       (5,652 )   -38 %

Software

     29,054       30,562       (1,508 )   -5 %

Distribution and Commerce

     4,712       5,191       (479 )   -9 %
                          

Total segment revenue

   $ 57,066     $ 58,349     $ (1,283 )   -2 %
                          

Segment Operating Income:

        

Embedded Solutions

   $ 11,067     $ 7,151     $ 3,916     55 %

Entertainment

     4,352       7,741       (3,389 )   -44 %

Software

     12,945       12,065       880     7 %

Distribution and Commerce

     (6,740 )     (2,109 )     (4,631 )   220 %
                          

Total segment operating income

   $ 21,624     $ 24,848     $ (3,224 )   -13 %
                          

 

     Six Months ended June 30,  
     2007     2006     $ Change     % Change  

Segment Revenue:

        

Embedded Solutions

   $ 33,899     $ 21,822     $ 12,077     55 %

Entertainment

     23,310       29,127       (5,817 )   -20 %

Software

     54,733       55,366       (633 )   -1 %

Distribution and Commerce

     10,326       9,052       1,274     14 %
                          

Total segment revenue

   $ 122,268     $ 115,367     $ 6,901     6 %
                          

Segment Operating Income:

        

Embedded Solutions

   $ 26,931     $ 20,325     $ 6,606     33 %

Entertainment

     13,528       14,825       (1,297 )   -9 %

Software

     21,949       19,027       2,922     15 %

Distribution and Commerce

     (13,743 )     (2,779 )     (10,964 )   395 %
                          

Total segment operating income

   $ 48,665     $ 51,398     $ (2,733 )   -5 %
                          

Segment operating income excludes equity-based compensation, amortization of intangibles, corporate marketing and general and administrative expenses. Segment operating income also excludes restructuring and other related charges.

 

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The following table provides the percentage of total net revenue represented by each segment for the periods indicated:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Embedded Solutions

   25 %   14 %   28 %   19 %

Entertainment

   16     25     19     25  

Software

   51     52     45     48  

Distribution and Commerce

   8     9     8     8  
                        
   100 %   100 %   100 %   100 %
                        

Embedded Solutions

Revenues from our Embedded Solutions segment increased 80%, or $6.4 million, from the second quarter of 2006 to the comparable period in 2007. Revenues from our Embedded Solutions segment increased 55%, or $12.1 million from the six months ended June 30, 2006 to the comparable period in 2007. Operating income from our Embedded Solutions segment increased 55%, or $3.9 million, from the second quarter of 2006 to the comparable period in 2007. Operating income from our Embedded Solutions segment increased 33%, or $6.6 million from the six months ended June 30, 2006 to the comparable period in 2007. The increases in revenue and operating income from Embedded Solutions are due to the proliferation of digital set-top boxes and other CE devices using our technology.

We actively engage in activities focused on identifying third parties who did not report to us the amount of royalties owed under license agreements with us. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. We cannot predict the amount or timing of such revenues.

We anticipate that future revenues and operating income from our Embedded Solutions segment will continue to increase in absolute terms, but may vary as a percentage of our total revenues.

Entertainment

Revenues from our Entertainment segment decreased $5.7 million, or 38% from the second quarter of 2006 to the same period in 2007. Entertainment segment revenues decreased $5.8 million or 20% from the six months ended June 30, 2006 to the same period in 2007. Operating income from our Entertainment segment decreased $3.4 million, or 44% from the second quarter of 2006 to the same period in 2007. Operating income from our Entertainment segment decreased $1.3 million or 9% from the six months ended June 30, 2006 to the same period in 2007. These decreases in revenue and operating income from our Entertainment segment were due to declines in royalty volumes from our studio customers.

We actively engage in activities focused on identifying studios who have misreported to us the amount of royalties owed under license agreements with us. As a result, from time to time, we may not receive timely replicator reports, and therefore, we may recognize revenues that relate to activities from prior periods. These royalty recoveries may cause revenues to be higher or lower than expected during a particular reporting period and may not occur in subsequent periods. We cannot predict the amount or timing of such revenues.

 

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We anticipate that future revenues and operating income from our Entertainment segment will continue to be a significant part of our revenues, but may vary as a percentage of our total revenues.

Software

Revenues from our Software segment decreased $1.5 million, or 5% from the second quarter of 2006 to the same period in 2007. Revenues slightly decreased $0.6 million, or 1% from the six months ended June 30, 2006 to the same period in 2007. The decreases in our Software revenue are primarily related to a decline in significant licensing arrangements from the prior year. The decreases were partially offset by increases in support revenue due to the growth of our customer base.

Operating income from our Software segment increased $0.9 million, or 7% from the second quarter of 2006 to the same period in 2007. Operating income from our Software segment increased $2.9 million, or 15% from the six months ended June 30, 2006 to the same period in 2007. The increases in operating income, despite the decline in revenue, are primarily due to reduced research and development costs in the comparable periods.

We believe that revenues and operating income from our Software segment will continue to increase in the future in absolute terms, but may vary as a percentage of our total revenues.

Distribution and Commerce

Revenues from the Distribution and Commerce segment decreased $0.5 million, or 9%, from the second quarter of 2006 to the same period in 2007 primarily due to the decline in licensing revenues from our digital distribution products. Revenues from the Distribution and Commerce segment increased $1.3 million, or 14%, from the six months ended June 30, 2006 to the same period in 2007 primarily due to higher volumes in our digital distribution services for games, partially offset by the decline in licensing revenues from our RightCommerce products.

Operating loss from the Distribution and Commerce segment increased $4.6 million from the second quarter of 2006 to the same period in 2007. Operating loss from the Distribution and Commerce segment increased $11.0 million from the six months ended June 30, 2006 to the same period in 2007. These increases are primarily due to significant investment in the infrastructure in addition to the decline in licensing revenues from our commerce products.

We believe that revenues and operating income from our Distribution and Commerce segment may vary in the future in absolute terms and as a percentage of our total revenues.

Seasonality of Business

We have experienced significant seasonality in our business, and our consolidated 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. We believe that this trend in has been principally due to the tendency of certain of our customers to manufacture and release new video and games titles during the year-end holiday shopping season, while our operating expenses are incurred more evenly throughout the year. We have also found that typical software and enterprise customers tend to spend up to one-third of their annual capital budgets in the fourth calendar quarter.

Costs and Expenses

Our cost of revenues consists primarily of service costs, replicator fees, patent amortization and other related costs. Service costs include customer support, professional services costs, hosting, bandwidth and equipment maintenance costs. Cost of revenues also includes amortization of intangibles from

 

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acquisitions. Our research and development expenses are comprised primarily of employee compensation and benefits, tooling and supplies and an allocation of overhead and facilities costs. Our selling and marketing expenses are comprised primarily of employee compensation and benefits, travel, advertising and an allocation of overhead and facilities costs. Our general and administrative expenses are comprised primarily of employee compensation and benefits, travel, accounting and tax fees and an allocation of overhead and facilities costs.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, equity-based compensation, valuation of strategic investments, goodwill and intangible assets, impairment of long lived assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Other than the critical accounting policy described below, there have been no significant changes in our critical accounting estimates during the three and six months ended June 30, 2007 as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Income Taxes

We account for income taxes using the asset and liability method of SFAS 109, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We account for uncertainty in income taxes using the cumulative probability method under FIN48. Management must make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset, and for unrecorded tax benefits resulting from uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amount provided for income taxes in our consolidated financial statements.

 

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Results of Operations

The following tables present our condensed consolidated statements of income compared to the prior year periods (in thousands).

 

    

Three Months Ended

June 30,

            
     2007    2006    $ Change     % Change  

Net Revenues:

          

Licenses

   $ 40,609    $ 43,326    $ (2,717 )   -6 %

Services

     16,457      15,023      1,434     10 %
                        

Total revenues

     57,066      58,349      (1,283 )   -2 %

Cost of revenues:

          

License fees

     1,985      2,568      (583 )   -23 %

Service fees

     9,451      8,265      1,186     14 %

Amortization of intangibles from acquisitions

     3,598      3,490      108     3 %
                        

Total cost of revenues

     15,034      14,323      711     5 %

Gross profit

     42,032      44,026      (1,994 )   -5 %

Operating expenses:

          

Research and development

     12,759      13,615      (856 )   -6 %

Selling and marketing

     16,719      16,426      293     2 %

General and administrative

     9,420      8,475      945     11 %

Restructuring and other charges

     2,894      —        2,894     100 %
                        

Total operating expenses

     41,792      38,516      3,276     9 %
                        

Operating income

     240      5,510      (5,270 )   -96 %

Interest and other income, net

     3,313      2,106      1,207     57 %
                        

Income before income taxes

     3,553      7,616      (4,063 )   -53 %

Income taxes

     1,061      841      220     26 %
                        

Net income

   $ 2,492    $ 6,775    $ (4,283 )   -63 %
                        

 

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Six Months Ended

June 30,

            
     2007    2006    $ Change     % Change  

Net Revenues:

          

Licenses

   $ 89,095    $ 88,369    $ 726     1 %

Services

     33,173      26,998      6,175     23 %
                        

Total revenues

     122,268      115,367      6,901     6 %

Cost of revenues:

          

License fees

     3,817      4,930      (1,113 )   -23 %

Service fees

     19,811      14,487      5,324     37 %

Amortization of intangibles from acquisitions

     7,211      6,733      478     7 %
                        

Total cost of revenues

     30,839      26,150      4,689     18 %

Gross profit

     91,429      89,217      2,212     2 %

Operating expenses:

          

Research and development

     27,878      26,330      1,548     6 %

Selling and marketing

     35,385      33,318      2,067     6 %

General and administrative

     19,172      17,293      1,879     11 %

Restructuring and other charges

     5,070      —        5,070     100 %
                        

Total operating expenses

     87,505      76,941      10,564     14 %
                        

Operating income

     3,924      12,276      (8,352 )   -68 %

Interest and other income, net

     6,215      4,155      2,060     50 %
                        

Income before income taxes

     10,139      16,431      (6,292 )   -38 %

Income taxes

     1,939      7,184      (5,245 )   -73 %
                        

Net income

   $ 8,200    $ 9,247    $ (1,047 )   -11 %
                        

License Revenues. Our license revenues decreased $2.7 million, or 6%, from the second quarter of 2006 to the second quarter of 2007 primarily due to the decline in royalty volumes from studios and software license arrangements, partially offset by the increase in revenue from our Embedded Solutions products.

License revenues increased $0.7 million, or 1% for the six months ended June 30, 2007 compared to the same period in 2006. This increase was primarily due to the increase in Embedded Solutions revenue, partially offset by the decline in studio royalty volumes and software license arrangements.

Service Revenues. Our service revenues increased $1.4 million, or 10%, from the second quarter of 2006 to the second quarter of 2007 primarily due to increases in software support revenue driven by a growing customer base and higher volumes in our digital distribution services for games.

Service revenues increased $6.2 million, or 23% for the six months ended June 30, 2007 compared to the same period in 2006 due to increases in software support revenue driven by a growing customer base and higher volumes in our digital distribution services for games and increases in consulting services.

Cost of Revenues – License Fees. Cost of revenues from license fees as a percentage of license revenues decreased slightly from 6% to 5% for the three months ended June 30, 2007 compared to the same period in 2006, and from 6% to 4% for the six months ended June 30, 2007 compared to the same period in 2006. Cost of revenues from license fees decreased $0.6 million from $2.6 million in the second quarter of 2006 to $2.0 million in the second quarter of 2007. Year to date, cost of revenues from license fees decreased $1.1 million, from $4.9 million for the six months ended June 30, 2006 to $3.8 million for the same period in 2007. The decline in cost of revenues – license fees as a percentage of revenues is primarily due to the growth in Embedded Solutions products which have high gross margins.

 

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We anticipate our cost of revenues from license fees may increase as we continue to increase activity in our licensing products and expand our customer base.

Cost of Revenues – Service Fees. Cost of revenues from service fees as a percentage of service revenues increased from 55% in the second quarter of 2006 to 57% for the second quarter of 2007. Cost of revenues from service fees increased $1.2 million from $8.3 million in the second quarter of 2006 to $9.5 million in the second quarter of 2007.

Cost of revenues from service fees as a percentage of service revenues increased from 54% for the six months ended June 30, 2006 to 60% for the same period in 2007. Cost of revenues from service fees increased $5.3 million, from $14.5 million for the six months ended June 30, 2007 to $19.8 million.

These increases in cost of revenues from service fees are primarily due to costs related to the Mediabolic business which was acquired on January 1, 2007.

We anticipate our cost of revenues from service fees may increase as we continue to increase activity in our service products and expand our customer base.

Cost of Revenues – Amortization of Intangibles from Acquisitions. Cost of revenues from amortization of intangibles increased $0.1 million and $0.5 million from the three and six months ended June 30, 2006 to the comparable periods in 2007, respectively, primarily due to the amortization of intangibles from the acquisition of Mediabolic in January 2007.

Research and Development. Research and development expenses decreased by $0.9 million, or 6%, from $13.6 million in the second quarter of 2006 to $12.8 million in the second quarter of 2007. Research and development expenses decreased slightly as a percentage of net revenues from 23% in the second quarter of 2006 to 22% the same period in 2007. These decreases are primarily due to a decline in headcount as a result of the reorganization in June 2007, partially offset by costs related to the Mediabolic business.

Research and development expenses increased by 6%, or $1.5 million, from $26.3 million in the six months ended June 30, 2006 to $27.9 million in the same period in 2007. This increase was due to the acquisition of Mediabolic in January 2007, partially offset by the decline in headcount as a result of the reorganization in June 2007. Research and development expenses as a percentage of net revenues were comparable for both periods at 23%.

We expect research and development expenses to increase in absolute terms as a result of expected increases in research and development activity to support our new technologies, but decrease as a percentage or net revenues.

Selling and Marketing. Selling and marketing expenses increased by $0.3 million, or 2%, from $16.4 million in the second quarter of 2006 to $16.7 million in the same period in 2007. Selling and marketing expenses, as a percentage of net revenues, increased from 28% in the second quarter of 2006 to 29% in the second quarter of 2007.

Selling and marketing expenses increased by $2.1 million, or 6%, from $33.3 million in the six months ended June 30, 2006 to $35.4 million in the same period in 2007. Selling and marketing expenses, as a percentage of net revenues was consistent in the six months ended June 30, 2006 to the same period in 2007.

The increases in sales and marketing expenses from the prior year periods is primarily due to an increase in costs related to the acquisition of Mediabolic in January 2007, partially offset by a decline in headcount related expenses as a result of the reorganization in June 2007.

 

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We expect selling and marketing expenses to increase in absolute terms and vary as a percentage of total revenues as we continue our efforts to increase our market share and grow our business.

General and Administrative. General and administrative expenses increased by $0.9 million, or 11%, from $8.5 million in the second quarter of 2006 to $9.4 million in the second quarter of 2007. General and administrative expenses as a percentage of net revenues increased from 15% for the three months ended June 30, 2006 to 17% for the three months ended June 30, 2007. General and administrative expenses increased by $1.9 million, or 11%, from $17.3 million in the six months ended June 30, 2006 to $19.2 million in the same period in 2007. General and administrative expenses as a percentage of net revenues for the six months ended June 30 increased slightly from 15% in 2006 to 16% in 2007. These increases are primarily due to additional headcount to support the overall growth of the business. We expect our general and administrative expenses to increase in absolute terms and vary as a percentage of total revenues as we continue our efforts to grow our business.

Restructuring and other charges. In June 2007, we announced an organizational structure change which included the creation of four new segments. The organizational realignment enables us to increase our focus on long-term growth, market opportunities and meeting customer needs. The reorganization included a workforce reduction in headcount of approximately eight percent, resulting in a charge of $2.9 million. All affected employees were notified of their termination prior to June 30, 2007.

In January 2007, our board of directors approved a restructuring program, which included a workforce reduction, a restructuring of certain business functions and an abandonment of certain facilities. The workforce reduction resulted in a charge of $1.3 million. All affected employees were notified of their termination prior to March 31, 2007. The restructuring of certain business functions included the cancellation of certain service contracts and asset losses, resulting in a charge of $0.5 million. The abandonment of certain leased facilities resulted in a charge of $0.4 million.

Interest and Other Income, Net. Net interest and other income increased $1.2 million, or 57%, from $2.1 million in the second quarter of 2006 to $3.3 million in the second quarter of 2007. Interest and other income increased $2.1 million, or 50%, from $4.2 million in the six months ended June 30, 2006 to $6.2 million in the same period in 2007. In August 2006, we issued $240 million in principal amount of 2.625% convertible senior notes due 2011. Proceeds from the convertible senior notes resulted in higher invested balances and increased interest income, partially offset by an increase in interest expense related to the senior notes.

Income Taxes. We recorded income tax expense of $1.1 million and $0.8 million for the second quarters of 2007 and 2006, respectively. Our effective tax rate was 30% and 11% for the second quarters of 2007 and 2006, respectively. The change in effective tax rate in the second quarter of 2007 compared to the second quarter of 2006 was primarily due to the change in the proportion of profit generated by certain foreign operations which the Company plans to indefinitely reinvest outside the U.S. and for which no U.S. tax was provided, as well as a discrete tax benefit of $0.8 million during the second quarter of 2007 from disqualifying dispositions of shares issued under our employee stock purchase plan and incentive stock options.

Income tax expense decreased $5.2 million to $1.9 million for the six months ended June 30, 2007 from $7.2 million for the six months ended June 30, 2006. The decrease is primarily due to $3.6 million recorded during the quarter ended March 31, 2006 as a discrete item related to a change in estimate for income tax accrued on an intercompany transfer of assets.

 

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Liquidity and Capital Resources

We have financed our operations primarily from cash generated by operations. Our operating activities provided net cash of $45.3 million and $49.8 million in the six months ended June 30, 2007 and 2006, respectively. Cash provided by operating activities decreased $4.5 million from the six months ended June 30, 2006 to the same period in 2007, primarily due to the timing of receivables collections and payment of liabilities. The availability of cash generated by our operations in the future could be affected by other business risks including, but not limited to, those factors set forth under the caption “Risk Factors” contained in this Quarterly Report in Item 1A.

We used $35.1 million more cash for investing activities in the first six months of 2007 than for the same period in 2006, primarily due to higher net purchases of long- and short-term marketable investment securities. These increases were partially offset by $32.3 million less in payments for acquisitions and $4.8 million less in capital expenditures.

Net cash provided by financing activities increased $30.0 million from the prior year period, primarily due to an increase in cash proceeds from stock option exercises and employee stock purchases.

In May 2002, our Board of Directors authorized a stock repurchase program, which allows us to purchase up to 5.0 million shares of common stock in the open market from time-to-time at prevailing market prices, through block trades or otherwise, or in negotiated transactions off the market, at the discretion of our management. In 2002, we repurchased 3.0 million shares of common stock under this program, which have been recorded as treasury stock and resulted in a reduction of stockholders’ equity.

In August 2006, our Board of Directors authorized the purchase of up to $100 million of our common stock from time-to-time (inclusive of the stock repurchase program mentioned above). In connection with our offering of 2.625% Convertible Senior Notes due 2011, our Board authorized the purchase of up to $50 million of our common stock under this new stock repurchase program. In the year ended December 31, 2006, we repurchased approximately 2.3 million shares of common stock for $50.0 million, which was recorded as treasury stock and resulted in a reduction of stockholders’ equity. As of June 30, 2007, treasury stock consisted of 5.3 million shares of common stock that we had repurchased, with a cost basis of approximately $88.4 million.

As of June 30, 2007, we had $134.0 million in cash and cash equivalents, $279.3 million in short-term investments, and $129.6 million in long-term marketable investment securities, which includes $19.8 million in fair market value of our holdings in Digimarc. We anticipate that capital expenditures for the remainder of the year will aggregate approximately $9.0 million in order to support the growth of our business and strengthen our operations infrastructure.

We have future minimum lease payments of approximately $64.7 million under operating and capital leases. We believe that the current available funds and cash flows generated from operations will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future. We may also use cash to acquire or invest in additional businesses or to obtain the rights to use certain technologies in the future.

During the first six months of 2007, we reclassified $40.9 million from current taxes payable to non-current taxes payable.

In February 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.

 

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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 currency 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 investment securities of $460.3 million as of June 30, 2007. Most of 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 $1.3 million decrease (approximately 0.3%) in the fair value of our fixed income available-for-sale securities as of June 30, 2007.

Foreign Currency 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, as well as expenses, are typically denominated in U.S. 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. Many of our subsidiaries operate in their local currency, which mitigates a portion of the exposure related to the respective currency collected.

Strategic Investments. We currently hold interests in a number of companies. These investments, at book value totaling $24.8 million and $22.7 million, represented 2.8% and 2.8% of our total assets as of June 30, 2007 and December 31, 2006, respectively. In 2006, we made a $5.0 million investment in a privately-held digital watermarking company for strategic purposes. As of June 30, 2007, the adjusted cost of our strategic investments consisted of our investment in Digimarc, a publicly traded company, and our investment in the privately-held digital watermarking company. In addition, we hold investments in a number of other privately held companies, which have no carrying value as of June 30, 2007. Digimarc is subject to price fluctuations based on the public market. Because there is no active trading market for the securities of privately held companies, our investments in them are illiquid. As such, we may never have an opportunity to realize a return on our investment in these private companies, and we may in the future be required to write off all or part of one or more of these investments.

Long-term Debt. The fair market value of the 2.625% convertible senior notes is subject to interest rate market price risk and equity risk due to the convertible feature of the notes and other factors. Generally the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair market value of the notes will also increase as the market price of our stock rises and decrease as the market price of our stock falls. Interest rate and market value changes affect the fair market value of the notes but do not impact our financial position, cash flows or results of operations.

The notes may be converted, under certain circumstances, based on an initial conversion rate of 35.3571 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $28.28 per share), into an aggregate of 8.5 million shares. Prior to June 15, 2011, holders may convert their notes into cash and our common stock, at the applicable

 

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conversion rate, under any of the following circumstances: 1) during any fiscal quarter after the calendar quarter ending September 30, 2006, if the last reported sale price of our common stock for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 120% of the applicable conversion price in effect on the last trading day of the immediately preceding fiscal quarter; 2) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such day; or 3) upon the occurrence of specified corporate transactions, as defined in the indenture. On and after June 15, 2011 until the close of business on the scheduled trading day immediately preceding the maturity date of August 15, 2011, holders may convert their notes into cash and shares of our common stock, if any, at the applicable conversion rate, at any time, regardless of the foregoing circumstances. In addition, in the event of a significant change in our corporate ownership or structure, the holders may require us to repurchase all or any portion of their notes for 100.00% of the principal amount.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting. During the quarter ended June 30, 2007, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We have not been required to pay a penalty to the Internal Revenue Service (“IRS”) for failing to make disclosures required with respect to any transaction that has been identified by the IRS as abusive or that has a significant tax avoidance purpose.

USPTO Interference Proceedings Between Macrovision Corporation and Intertrust Technologies

We received notice on September 4, 2003 that the USPTO had declared an interference between our U.S. Patent No. 5,845,281 (“the ’281 patent”) together with two of our continuation applications, and a patent application from Intertrust Technologies Corporation (“Intertrust”). On or about December 28, 2005, the Board of Patent Appeals (“BPA”) issued its final ruling in the case, holding that the ‘281 patent had priority over the two Intertrust patent applications at issue, but also that the inventor of the ‘281 patent had committed inequitable conduct during the prosecution of that patent. As a result of this decision, the ‘281 patent was rendered unenforceable.

On December 19, 2003, we received notice from the USPTO declaring another interference, this time between two of our patent applications and four of Intertrust’s patents. On or about April 11, 2005, the BPA issued its final ruling, holding that the Intertrust patents had priority over our two applications at issue.

Intertrust and Macrovision filed lawsuits on July 28, 2006 and July 31, 2006, respectively, in the U.S. District Court for the Northern District of California against the other party, seeking to overturn the BPA’s rulings adverse to the parties in the two interference proceedings. In June 2007, the parties reached a settlement of the matter whereby both parties dismissed their respective claims with prejudice. The other terms of the settlement are confidential.

InstallShield Software Corporation Liquidating Trust vs. Macrovision

On October 27, 2005, we received notice of an arbitration proceeding filed by InstallShield Software Corporation Liquidating Trust (the “Trust.”) The Trust has demanded arbitration of certain disputes between the Trust and Macrovision pursuant to the Asset Purchase Agreement dated June 16, 2004 by and among InstallShield Software Corporation, Macrovision Corporation, Macrovision Europe Limited, and Macrovision International Holding L.P. (the “Agreement”). Under the Agreement, we could have been required to make an additional contingent payment of up to $20 million based on post-acquisition revenue performance through June 30, 2005. Based upon the revenue results through June 30, 2005, we concluded that no additional payment was required under the terms of the Agreement. The Trust alleges that the post-acquisition revenue performance targets were not reached due to our conduct in violation of the Agreement, and therefore is seeking the contingent payment in an amount exceeding $15 million. We deny these allegations and intend to vigorously defend ourselves in the arbitration proceeding. The parties are engaged in discovery. A hearing is scheduled to begin on December 3, 2007.

As of June 30, 2007, for all the abovementioned matters, it was not possible to estimate the liability, if any, in connection with the pending matters. Accordingly, no accruals for these contingencies have been recorded.

From time to time, we have been involved in other disputes and legal actions arising in the ordinary course of business. In management’s opinion, none of these other disputes and legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

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Item 1A. Risk Factors

A description of the risk factors associated with our business is included under “Risk Factors” contained in Item 1A. of our 2006 Annual Report on Form 10-K and is incorporated herein by reference. There have been no material changes in our risk factors since the filing of our 2006 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

At our annual meeting of stockholders held on April 26, 2007, each of the following matters were voted on: (1) election of directors and (2) ratification and appointment of KPMG, LLP as our independent registered public accounting firm for the year ending December 31, 2007.

Each of the following individuals was elected to the board of directors to hold office until the 2008 annual meeting of stockholders, or until a successor is duly elected and qualified or the director’s earlier death, resignation or removal:

 

     Votes For    Votes Withheld

John O. Ryan

   47,093,622    2,104,303

Alfred J. Amoroso

   48,511,785    686,140

Donna S. Birks

   48,505,408    692,517

Steven G. Blank

   46,634,276    2,563,649

Andrew K. Ludwick

   48,511,830    686,095

Robert J. Majteles

   47,528,139    1,669,786

William N. Stirlen

   48,348,181    849,744

The proposal to ratify the appointment of KPMG, LLP as our independent registered public accounting firm for the year ending December 31, 2007 was approved by the following vote:

 

Votes For    Votes Against    Abstentions
46,634,581    1,581,594    19,895

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit
Number
 

Exhibit Description

  

Incorporated by Reference

  

Filed
Herewith

    

Form

   Date    Number   
10.01  

2007 Business Unit Management Incentive Plan

   8-K    6/5/07    10.01   
10.02  

2007 Senior Executive Company Incentive Plan

            X
10.03  

2007 Business Unit Management Incentive Plan

            X
10.04  

Severance Agreement with Loren Hillberg dated May 28, 2007

            X
10.05  

Form of Executive Severance and Arbitration Agreement

            X
10.06  

Executive Severance and Arbitration Agreement with James Budge dated August 6, 2007

            X
10.07  

Executive Severance and Arbitration Agreement with Alfred J. Amoroso dated August 6, 2007

   8-K    8/7/07    10.1   
31.01  

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

            X
31.02  

Certification of the Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

            X
32.01  

Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

            X
32.02  

Certification of the Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

            X

 

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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

Authorized Officer:

 

Date: August 8, 2007   By:  

/s/ Alfred J. Amoroso

 
    Alfred J. Amoroso  
    Chief Executive Officer  

Principal Financial Officer and Principal Accounting Officer:

 

Date: August 8, 2007   By:  

/s/ James Budge

 
    James Budge  
    Chief Financial Officer  

 

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