FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 0-21902
StarSight Telecast, Inc.
(Exact name of registrant as specified in its charter)
California 94-3003250
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
39650 Liberty Street
Fremont, California 94538
(Address of principal executive offices)
(510) 657-9900
(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
----- -----
As of November 7, 1996, there were 25,502,806 shares outstanding of the
Registrant's Common Stock, no par value.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STARSIGHT TELECAST, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
September 30,
ASSETS 1996 December 31,
(Unaudited) 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,458 $ 8,787
Short-term investments available for sale 7,898 --
Accounts receivable 1,551 2,192
Inventories 733 441
Other 467 410
--------- ---------
Total current assets 17,107 11,830
FURNITURE, FIXTURES AND EQUIPMENT, net of accumulated
depreciation of $4,411 and $3,663 1,092 1,637
PATENTS AND LICENSES, net of accumulated
amortization of $788 and $595 2,817 2,866
--------- ---------
TOTAL ASSETS $ 21,016 $ 16,333
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,254 $ 1,570
Accrued liabilities 2,092 3,068
Deferred revenue 1,438 2,992
License fee payable 147 286
--------- ---------
Total current liabilities 4,931 7,916
--------- ---------
LONG-TERM LICENSE FEE PAYABLE -- 74
SHAREHOLDERS' EQUITY:
Common Stock, no par value: authorized 50,000,000 shares;
issued and outstanding, 25,492,139 and 21,902,018 shares, respectively 125,782 99,400
Unearned compensation (702) (371)
Accumulated deficit (108,995) (90,686)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 16,085 8,343
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,016 $ 16,333
========= =========
<FN>
See notes to condensed financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Licensing $ 1,767 $ 166 $ 3,738 $ 166
Subscription and other 443 271 1,246 832
------------ ------------ ------------ ------------
Total Revenues 2,210 437 4,984 998
------------ ------------ ------------ ------------
Cost of Goods Sold 489 129 1,078 337
Inventory reserves and write offs -- 3,300 -- 4,230
------------ ------------ ------------ ------------
Gross Profit 1,721 (2,992) 3,906 (3,569)
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
General and administrative 1,765 2,103 6,864 7,329
Litigation costs 1,113 407 4,253 2,155
Engineering and development 839 841 2,624 2,933
Marketing 2,127 1,476 4,744 5,789
Network services and other expenses 1,589 1,229 4,297 4,263
------------ ------------ ------------ ------------
Total costs and expenses 7,433 6,056 22,782 22,469
------------ ------------ ------------ ------------
OPERATING LOSS (5,712) (9,048) (18,876) (26,038)
------------ ------------ ------------ ------------
INTEREST EXPENSE (3) (7) (12) (27)
INTEREST INCOME 245 78 579 538
------------ ------------ ------------ ------------
NET LOSS $ (5,470) $ (8,977) $ (18,309) $ (25,527)
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (0.21) $ (0.43) $ (0.75) $ (1.21)
============ ============ ============ ============
NUMBER OF SHARES USED FOR
CALCULATION OF NET LOSS
PER COMMON SHARE 25,551,280 21,089,538 24,570,959 21,057,934
============ ============ ============ ============
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(18,309) $(25,527)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of unearned compensation 861 496
Depreciation and amortization 943 1,392
Inventory valuation reserve -- 4,058
Changes in assets and liabilities:
Accounts payable, accrued liabilities, and deferred revenues (2,846) (658)
Accounts receivable, inventories and other assets 292 (4,155)
------------- -----------
Net cash used in operating activities (19,059) (24,394)
------------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of furniture, fixtures and equipment (204) (547)
Sales of long-term investments held to maturity -- 3,002
Purchases of short-term investments (15,701) --
Maturities of short-term investments 7,803 16,940
Additions to patents and licenses (145) (59)
------------- -----------
Net cash provided by (used in) investing activities (8,247) 19,336
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock-net 24,625 --
Proceeds from the exercise of options for common stock 565 184
Repayment of notes payable (213) (225)
------------- -----------
Net cash provided by (used in) financing activities 24,977 (41)
------------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,329) (5,099)
CASH AND CASH EQUIVALENTS:
Beginning of period 8,787 10,141
------------- -----------
End of period $6,458 $5,042
============= ===========
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
STARSIGHT TELECAST, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1. GENERAL
The accompanying interim condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain
information and footnotes required by generally accepted accounting
principles for complete financial statements have been omitted. The
information contained herein reflects all normal and recurring
adjustments which, in the opinion of management, are necessary to a
fair presentation of the results of operations and financial position
for the interim periods. These interim condensed financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the twelve months ended
December 31, 1995.
The amounts appearing in the December 31, 1995 condensed balance sheet
are derived from the audited balance sheet included in the financial
statements in the Company's Form 10-K for the twelve months ended
December 31, 1995.
2. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND MANAGEMENT PLANS FOR 1996 AND 1997
Revenues for the nine months ended September 30, 1996 were $4,984,000.
As a result of incurring significant expenses in its development and
operating activities without generating significant revenues, the
Company has incurred significant losses and negative cash flows from
operating activities. The net loss for the nine months ended September
30, 1996 was $18,309,000 and net cash used in operating activities for
the nine months ended September 30, 1996 was $19,059,000. At September
30, 1996, the Company had an accumulated deficit of $108,995,000 and
cash and cash equivalents and short term investments of $14,356,000.
There can be no assurance that the Company will ever be able to achieve
revenues in excess of expenses. The Company expects to incur
substantial losses and substantial negative cash flow from operating
activities in the foreseeable future. The Company is dependent on sales
of StarSight(R) products and services and the licensing of its
intellectual property in order to minimize negative cash flow from
operations. Management believes that the availability in the market
place of StarSight capable televisions, VCRs, TVCRs, satellite
receivers, cable and telco converter boxes and stand alone StarSight
receivers, combined with a focused intellectual property licensing
program, is essential to the Company's 1996 and 1997 revenues and cash
flow. The Company is subject to all of the risks and expenses inherent
in the establishment of a new business enterprise. To address these
risks and expenses, the Company must, among other things, respond to
competitive developments, attract, retain and motivate qualified
personnel and support the expense of marketing a new service based upon
innovative technology. In addition, the Company must successfully
launch the commercial distribution of its products and services,
continue
<PAGE>
to finance operations and marketing efforts and successfully market its
products and services to potential customers.
In the third quarter of 1995, the Company took steps to reduce
operating expenses by concentrating on business development efforts
which are believed to be most cost effective. Such expense reductions
were a result of on-going efforts to determine which programs in each
functional area are most productive. These efforts have continued
through the nine months ended September 30, 1996.
The Company believes its existing cash and cash equivalents and short
term investments ($14,356,000 at September 30, 1996) will be sufficient
to sustain the Company's current level of operations and meet its
financial obligations through mid-1997.
3. INTELLECTUAL PROPERTY LITIGATION
The Company is a named plaintiff and counterclaimant in several legal
proceedings where the Company is primarily alleging that others are
infringing the Company's patents and other intellectual property
rights. The Company is also a named defendant in certain of the same
legal proceedings where patent infringement has been alleged against
the Company. From inception through September 30, 1996, the Company has
expensed approximately $9,953,000 in legal and other costs in
connection with such litigation, of which approximately $4,253,000 and
$2,155,000 was incurred during the nine months ended September 30, 1996
and 1995, respectively. The Company expects to incur additional legal
costs in future periods related to the enforcement of the Company's
patents involved in the current and potential future litigation. No
estimate of the total amount of such additional legal costs can be made
at this time. The outcome of these lawsuits cannot presently be
determined. Management believes, based upon the advice of counsel, that
the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial statements taken as a whole.
4. ARBITRATION SETTLEMENT
On July 23, 1996, the American Arbitration Association awarded the
Company $15,000,000 plus attorney's fees and arbitration costs against
Scientific-Atlanta, Inc. ("Scientific-Atlanta") for breach of contract,
including misappropriation of certain Company intellectual property. In
addition to the monetary award, the Company was granted injunctive
relief prohibiting Scientific-Atlanta, except under certain limited
conditions, from accepting any new customer orders for any products
incorporating an interactive electronic program guide that utilizes any
information derived either directly or indirectly from the Company for
a period of three years beginning from the date of the award. The
Company expects to recognize a gain related to this arbitration award
upon receipt of the cash damages from Scientific-Atlanta.
<PAGE>
5. INVENTORIES
Inventories are summarized as follows (in thousands):
September 30, December 31,
1996 1995
------------- --------------
Raw materials $ 733 $ 441
Finished products 3,498 5,099
------- -------
Total 4,231 5,540
Less lower of cost-or-market
valuation allowance (3,498) (5,099)
------- -------
Inventory, net $ 733 $ 441
======= =======
6. REPRICING OF EMPLOYEE STOCK OPTIONS
In January 1996, the Company repriced the exercise price of 299,201
common stock options (originally granted to certain employees at prices
from $15.00 to $5.00) to $3.50. The Company recorded unearned
compensation of $1,028,000 which was calculated based on the difference
between the market value of the Company's common stock at the repricing
date and the $3.50 exercise price. The Company has and will continue to
record compensation expense over the remaining vesting period of the
repriced options. For the three and nine months ended September 30,
1996, the Company recorded $202,000 and $549,000, respectively, in
compensation related to the repriced options.
7. NET LOSS PER SHARE
The net loss per share for the nine months ended September 30, 1996 and
1995 is based on the weighted average number of shares of common stock
outstanding during those periods. No effect has been given to
unexercised stock options and warrants because the effect would be
antidilutive.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those anticipated in these forward-looking statements as a
result of certain factors discussed herein. These forward-looking statements
include, but are not limited to, the statements regarding the Company's
expectation of continuing to incur substantial losses and substantive negative
cash flow from operating activities, the statement regarding the anticipated
impact of the Company's on-going licensing efforts to its overall operating
success, the statement regarding the Company's expectation of incurring
additional legal costs related to the enforcement of the Company's patents
involved in the current and potential future suits, the statement regarding the
anticipated use of its cash resources, and the statements below under "Liquidity
and Capital Resources" regarding the Company's future cash requirements and the
length of time that the Company's resources will be sufficient to meets it
capital requirements.
Overview
The Company was incorporated in May 1986. Since inception, the Company
has devoted substantially all of its resources toward the development and
commercial introduction of a patented on-screen interactive television program
guide and VCR control service marketed under the StarSight(R) brand name. The
Company generates revenue from subscription sales of the StarSight service to
customers, either through service providers, such as cable operators and local
telephone companies ("telco"), or directly from the Company. The Company also
generates revenues through licensing the Company's intellectual property for
non-StarSight capable products. The Company has been unprofitable since its
inception and expects to incur substantial losses for the foreseeable future. As
of September 30, 1996, the Company had accumulated a deficit of $108,995,000.
The Company has entered into technology development and licensing
agreements with key manufacturers for the manufacture of StarSight-capable
televisions, VCRs, TVCRs, C-band satellite receivers, and stand alone StarSight
receivers. These manufacturers include Thomson Consumer Electronics (RCA, GE,
ProScan) ("Thomson"), Zenith Electronics Corporation ("Zenith"), Sony
Electronics, Inc. ("Sony"), Mitsubishi Consumer Electronics America, Inc.
("Mitsubishi"), Toshiba America Consumer Products, Inc. ("Toshiba"), Matsushita
Television Company (Panasonic, Quasar) ("Matsushita"), Philips Consumer
Electronics Company (Magnavox) ("Philips"), Sharp Electronics Corporation
("Sharp"), Samsung Electronics America, Inc. ("Samsung"), LG Electronics U.S.A.,
Inc. ("GoldStar"), Uniden America ("Uniden"), and Daewoo Electronics Corp. of
America ("Daewoo"). The Company has also entered into license agreements with
General Instrument Corp. ("General Instrument"), Scientific-Atlanta and Zenith
for the incorporation of StarSight-enabling technology into cable converter
boxes to be manufactured by them for sale to cable system operators that offer
StarSight to their customers.
The Company believes its intellectual property applies to several
business segments, including but not limited to direct broadcast satellite,
PC/TV/Internet, MMDS, and non-
<PAGE>
StarSight capable cable/telco digital converter box electronic program guide
applications. Hence, the Company intends to devote significant management time
and effort to identify, negotiate and enter into royalty bearing licensing
agreements. As part of this licensing strategy, the Company has already entered
into royalty bearing licensing agreements with Thomson, Sony, Toshiba,
Panasonic, Uniden and Hughes Network Systems for the use of certain of the
Company's intellectual property in connection with certain digital satellite
system equipment. The Company believes its on-going licensing efforts are likely
to have a significant impact on the Company's overall operating success.
Results of Operations
Revenues for the three and nine months ended September 30, 1996 were
$2,210,000 and $4,984,000, respectively. Revenues for the three and nine months
ended September 30, 1995 were $437,000 and $998,000, respectively. Revenues
increased in such periods due to an increase in licensing revenues and, to a
lesser extent, increased subscription revenues. As a result of incurring
significant expenses in its development and operating activities without
generating significant revenues, the Company has incurred significant losses.
The Company's net loss was $5,470,000 and $18,309,000 for the three and nine
months ended September 30, 1996, respectively, compared to $8,977,000 and
$25,527,000 for the three and nine months ended September 30, 1995,
respectively.
During the nine months ended September 30, 1995, the Company recorded
$3,270,000 in inventory valuation reserves and expensed $960,000 of excess
work-in-process inventories related to the Company's stand alone StarSight
receiver. There was no comparable expense for the nine months ended September
30, 1996.
General and administrative expense primarily consists of salaries and
benefits of management and administrative personnel in the corporate, finance,
personnel, legal and facilities departments, professional and consulting fees
and general corporate expenditures. General and administrative expense decreased
from $2,103,000 for the three months ended September 30, 1995 to $1,765,000 for
the three months ended September 30, 1996 and from $7,329,000 for the nine
months ended September 30, 1995 to $6,864,000 for the nine months ended
September 30, 1996. The decrease in general and administrative expense was
primarily due to an overall decrease in spending levels for most categories of
general and administrative expenses, combined with a decrease in certain
compensation expenses.
The Company is a named plaintiff and counterclaimant in several legal
proceedings where the Company is primarily alleging that others are infringing
the Company's patents and other intellectual property rights. The Company is
also a named defendant in legal proceedings where patent infringement has been
alleged against the Company. From inception through September 30,1996, the
Company has expensed approximately $9,953,000 in legal and other costs in
connection with such litigation. Litigation costs increased from $407,000 for
the three months ended September 30, 1995 to $1,113,000 for the three months
ended September 30, 1996 and from $2,155,000 for the nine months ended September
30, 1995 to $4,253,000 for the nine months ended September 30, 1996. The
increase in such litigation costs is the result of the arbitration hearing
involving Scientific-Atlanta which commenced in April 1996, the United Video
patent infringement trial which began in May 1996, and the Gemstar patent
infringement trial which began in August 1996.
<PAGE>
The Company expects to incur additional legal costs in future periods related to
the enforcement of the Company's patents involved in the current and potential
future suits.
Engineering and development expense is composed primarily of personnel
costs in the areas of product design and development. Engineering efforts
include development of the broadcast network architecture and supporting
software and the design of the StarSight-enabling technology, which is to be
incorporated within televisions, VCRs, TVCRs, satellite receivers, cable and
telco converter boxes and stand alone StarSight receivers. Engineering and
development expense decreased from $841,000 for the three months ended September
30, 1995 to $839,000 for the three months ended September 30, 1996 and from
$2,933,000 for the nine months ended September 30, 1995 to $2,624,000 for the
nine months ended September 30, 1996. The decrease in engineering and
development expense was primarily due to lower staffing levels when compared to
the previous year's activity.
Marketing expense consists primarily of salaries for sales and
marketing personnel, fees paid to consultants, market research costs, trade
shows and industry awareness and consumer advertising costs. Marketing expense
increased from $1,476,000 for the three months ended September 30, 1995 to
$2,127,000 for the three months ended September 30, 1996. The increase in
marketing expense for the three months ended September 30, 1996 was primarily
due to increases in salaries due to increased headcount, increased manufacturer
assistance costs and increases in advertising expenditures for targeted
marketing programs. Marketing expense decreased from $5,789,000 for the nine
months ended September 30, 1995 to $4,744,000 for the nine months ended
September 30, 1996. The primary items contributing to the decrease in marketing
expense for the nine months ended September 30, 1996 were lower product launch
expenditures, as well as lower public relations and product awareness
expenditures compared to the previous year's activity. The Company expects
marketing expenses to continue to increase during the remainder of fiscal 1996
consistent with increases experienced in the three months ended September 30,
1996.
Network services and other expense consists of the combined cost of
purchasing television scheduling data from its TV data supplier and broadcasting
that data over the data distribution network operated by PBS. The Company's
contracts with these service providers have a base fee and a per subscriber
monthly cost with annual maximums on the cost. In addition, network and other
expenses include operating expenses related to subscription order processing and
customer support and manufacturing operations and support. Network services and
other expenses increased from $1,229,000 for the three months ended September
30, 1995 to $1,589,000 for the three months ended September 30, 1996 and from
$4,263,000 for the nine months ended September 30, 1995 to $4,297,000 for the
nine months ended September 30, 1996. The increases in network services and
other expenses were primarily attributable to increased spending for order
processing and customer support.
Liquidity and Capital Resources
The Company has financed its operations through private placements of
equity securities to individual investors and those corporations with which the
Company has strategic relationships. These private placements have yielded a net
total of approximately $77,125,000 through September 30, 1996. In addition, the
Company completed an initial public offering in August 1993, raising
approximately $42,300,000, net of issuance costs.
<PAGE>
As of September 30, 1996, the Company had an accumulated deficit of
$108,995,000. Negative cash flow from operations for the nine months ended
September 30, 1996 and 1995 was $19,059,000 and $24,394,000, respectively. Only
limited revenues have been generated to date. There can be no assurance that the
Company will be able to achieve revenues in excess of expenses. The Company
expects to incur substantial negative cash flow from operating activities for
the foreseeable future.
The Company anticipates expending a significant portion of its cash
resources for sales and marketing, expanding public awareness, engineering and
development efforts, and other operational expenses associated with the delivery
of the StarSight service to customers. The Company anticipates expending
additional cash resources to provide incentives for manufacturers to incorporate
the StarSight Electronic Program Guide ("EPG") into StarSight-capable products
manufactured by them and for legal costs in future periods related to
enforcement of the Company's patents involved in current and potential
litigation.
The Company is dependent on 1996 and 1997 licensing and subscription
revenues to minimize negative cash flow from operations. The Company believes
that the availability of StarSight-capable televisions, VCRs, TVCRs, satellite
receivers, cable and telco converter boxes and stand alone StarSight receivers
in the market place, combined with an intellectual property licensing program,
is essential to the Company's 1996 and 1997 revenues and cash flow.
The Company may seek additional investments from its current or new
strategic investors. In addition, the Company may consider issuance of debt or
equity securities. To the extent the Company raises additional cash by issuing
equity securities, ownership dilution to the existing shareholders of the
Company will result. There can be no assurance, however, that debt or equity
financing will be available when needed or on terms acceptable to the Company.
The Company's future cash requirements will depend on many factors,
including: (i) the rate at which manufacturers of televisions, VCRs, TVCRs,
satellite receivers and cable and telco converter boxes incorporate the
Company's proprietary technology into new hardware products manufactured and
marketed by them, (ii) the rate at which customers subscribe to the StarSight
service, (iii) the rate at which cable and telco operators introduce and market
StarSight's EPG to their customers, (iv) the level of marketing required to
increase customers and to attain a competitive position in the market place, (v)
the rate at which the Company is successful in licensing its intellectual
property for non-StarSight-capable products, and (vi) the rate at which the
Company invests in engineering and development and patent protection with
respect to existing and future technology.
The Company believes that its existing cash and cash equivalents and
short term investments ($14,356,000 at September 30, 1996) will be sufficient to
sustain the Company's current level of operations and meet its financial
obligations through mid-1997.
In 1995, the Company brought an arbitration action against
Scientific-Atlanta concerning Scientific-Atlanta's delay in the deployment of
StarSight-capable converters and its development of a competing electronic
program guide using the Company's technology in violation of its licensing
agreement with the Company. In response to the arbitration
<PAGE>
action, Scientific-Atlanta filed a lawsuit in February 1996 against the Company
and Philips alleging that the Company's stand alone StarSight receiver infringes
three U.S. patents owned by Scientific-Atlanta. On July 23, 1996, the American
Arbitration Association awarded the Company $15,000,000 in monetary damages plus
attorney's fees and arbitration costs against Scientific-Atlanta. In addition to
the monetary award, the Company was granted injunctive relief prohibiting
Scientific-Atlanta, except under certain limited conditions, from accepting any
new customer orders for any products incorporating an interactive electronic
program guide that utilizes any information derived either directly or
indirectly from the Company for a period of three years beginning from the date
of the award. The Company expects to recognize a gain related to this
arbitration award upon receipt of the cash damages from Scientific-Atlanta. See
Part II, Item 1: "Legal Proceedings."
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
In October 1993, the Company filed suit in the District Court for the
Northern District of California, San Jose Division, against Gemstar and Michael
R. Levine ("Levine") seeking: (1) a preliminary and permanent injunction and
treble damages for Gemstar's willful infringement of one of the Company's
patents (United States Patent No. 5,151,789, the "789 patent"); (2) a
declaration that the Company does not infringe any claim of United States Patent
No. 4,908,713 (the "713 patent") and/or that any such claim is invalid and/or
unenforceable; (3) a preliminary and permanent injunction and treble damages for
Gemstar's violation of certain antitrust laws; and (4) monetary and exemplary
damages for Gemstar's tortious business activities. Gemstar and Levine
counterclaimed on January 4, 1994 for a preliminary and permanent injunction and
treble damages for the Company's alleged infringement of the `713 patent claims
and for a declaration of noninfringement, invalidity, and/or unenforceability of
the claims of the Company's `789 patent. In addition, on December 8, 1993
Gemstar and Levine moved to dismiss the Company's antitrust claim and the
Company's declaratory relief claim to the extent it sought a declaration of the
unenforceability of the `713 patent due to Levine's alleged inequitable conduct
during the prosecution of the `713 patent. Pursuant to a court order, the
Company's antitrust claim, but not its inequitable conduct claim, was dismissed
with prejudice. The case has been phased to permit resolution of the unequitable
conduct claim, validity and infringement issues. Trial began in August 1996 to
address the unenforceability of the Levine `713 patent and is expected to
continue into 1997.
In November 1993, Gemstar filed an action against the Company in the
District Court for the Central District of California seeking: (1) a preliminary
and permanent injunction and treble damages for the Company's alleged violation
of certain federal and state antitrust laws; (2) for monetary and exemplary
damages for the Company's allegedly tortious business activities; and (3) for a
declaration of the noninfringement, invalidity, and/or unenforceability of the
claims of three of the Company's patents (United States Patent Nos. 5,151,789,
4,706,121, and 4,977,455). In May, 1994, the Central District action was ordered
to be transferred to the Northern District of California, San Jose Division, to
be consolidated with the above mentioned litigation for discovery and pre-trial
purposes. In addition, pursuant to a court order, Gemstar's declaratory relief
claims against the Company's United States Patent Nos. 4,706,121 (the "121
patent") and 4,977,455 (the "455 patent") were dismissed. Discovery is
proceeding in this case and trial date has not yet been set.
In October 1994, SuperGuide Corporation ("SuperGuide") and Gemstar
filed a further lawsuit against the Company in the District Court for the
Northern District of California, San Jose Division. In this action, SuperGuide
and Gemstar are seeking, among other things, preliminary and permanent
injunctions and treble damages for the alleged willful infringement by the
Company of one or more claims of United States Patent Nos. 4,751,578 (the "578
patent") and 5,038,211 (the "211 patent"). On December 8, 1994, the Company
filed counterclaims seeking, among other things, a declaration that the Company
does not infringe any such claims of the `578 and `211 patents, and/or that such
claims are invalid and/or unenforceable. This lawsuit also has been consolidated
with the above mentioned cases for discovery and pre-trial purposes.
<PAGE>
In October 1993, United Video and its Trakker, Inc. subsidiary brought
suit against the Company in the United States District Court for the Northern
District of Oklahoma, seeking a declaratory judgment that its interactive
program guide products do not infringe the Company's `121, `455 or `789 patents.
The Company counterclaimed charging infringement of the `121 patent. Through
subsequent procedural motions, the lawsuit expanded to include a total of 10
patents to which the Company has rights to and federal antitrust claims. The
Court has deferred consideration of all the other claims and counterclaims
pending the resolution of the infringement, validity and enforceability issues
related to the `121 patent. A phased bench trial began on May 8, 1996, with
United Video essentially presenting its case in chief on the validity and
enforceability issues related to the `121 patent. The Court has yet to set trial
dates for continuation of the bench trial and has set a status conference for
December 13, 1996, at which time a trial date is likely to be set. The Company
will present witnesses during this next phase relating the validity,
enforceability and infringement by United Video of the `121 patent.
In October 1992, the Company and Scientific-Atlanta entered into a
license agreement under which Scientific-Atlanta received, among other things,
the rights to the `121, `455 and `789 patents for the purpose of developing
converters that would accommodate the Company's electronic program guide system.
On April 13, 1995, the Company served an arbitration demand on
Scientific-Atlanta alleging breach of the license agreement, unfair competition,
breach of the covenant of good faith and fair dealing, intentional
misrepresentation and interference with prospective economic advantage. The
arbitration hearing began on April 9, 1996 and concluded on May 2, 1996. On July
23, 1996, the American Arbitration Association awarded the Company $15,000,000
in monetary damages plus attorney's fees and arbitration costs against
Scientific-Atlanta for breach of contract, including misappropriation of certain
Company intellectual property. In addition to the monetary award, the Company
was granted injunctive relief prohibiting Scientific-Atlanta, except under
certain limited conditions, from accepting any new customer orders for any
products incorporating an interactive electronic program guide that utilizes any
information derived either directly or indirectly from the Company for a period
of three years beginning from the date of the award.
In February 1996, Scientific-Atlanta filed a complaint against the
Company and Philips Electronics North America Corporation ("Philips") for patent
infringement. The lawsuit alleges that the manufacture, sale and use of the
Company's stand alone StarSight receiver infringes Scientific-Atlanta's U.S.
Patent Numbers 4,991,011, 5,477,262 and 5,247,364, and seeks damages in an
unspecified amount, injunctive relief and recovery of costs and attorneys fees.
The Company has certain indemnification obligations under an Agreement dated
October 27, 1994 between the Company and Philips, including defending Philips in
this case. This action has been stayed pending the outcome of a separate
arbitration action filed by the Company in May 1996 alleging, among other
things, that the Company is already licensed, via its October 1992 agreement
with Scientific-Atlanta, under the aforementioned patents.
The Company intends to vigorously defend the allegations against it and
to actively pursue its claims against each party. The outcome of these lawsuits
cannot presently be determined.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement regarding computation of loss per share.
27.1 Financial data schedule
(b) Reports on Form 8-K.
The Registrant filed a report on Form 8-K dated as of July 24,
1996 regarding an award by the American Arbitration
Association to the Registrant of $15 million in monetary
damages plus attorney's fees against Scientific-Atlanta, Inc.
for breach of contract, including misappropriating the
Registrant's intellectual property. In addition to the
monetary award, the Registrant was granted certain injunctive
relief prohibiting Scientific-Atlanta, Inc. from accepting any
new customer orders for any products incorporating any
interactive electronic program guide for a period of three
years from the date of the award.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
StarSight Telecast, Inc.
/s/ LARRY W. WANGBERG
Dated: November 14, 1996 -------------------------------------
LARRY W. WANGBERG
Chairman of the Board of Directors and
Chief Executive Officer
/s/ MARTIN W. HENKEL
Dated: November 14, 1996 ---------------------------------
MARTIN W. HENKEL
Executive Vice President and
Chief Financial Officer
<TABLE>
Exhibit 11.1
STARSIGHT TELECAST, INC.
Calculation of Loss Per Share
(in thousands, except share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss $ (5,470) $ (8,977) $ (18,309) $ (25,527)
============ ============ ============ ============
Weighted average shares of
common shares outstanding 25,551,280 21,089,538 24,570,959 21,057,934
Common share equivalents related
to options and warrants -- -- -- --
------------ ------------ ------------ ------------
Common share and common share equivalents 25,551,280 21,089,538 24,570,959 21,057,934
============ ============ ============ ============
Net loss per common share and
common share equivalent $ (0.21) $ (0.43) $ (0.75) $ (1.21)
============ ============ ============ ============
<FN>
The net loss per share for the three and nine months ended September 30, 1996 and 1995 is based on the weighted
average number of shares of common stock outstanding during the period. No effect has been given
to unexercised stock options and warrants because the effect would be antidilutive.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,458
<SECURITIES> 7,898
<RECEIVABLES> 1,551
<ALLOWANCES> 0
<INVENTORY> 733
<CURRENT-ASSETS> 17,107
<PP&E> 5,503
<DEPRECIATION> 4,411
<TOTAL-ASSETS> 21,016
<CURRENT-LIABILITIES> 4,931
<BONDS> 0
<COMMON> 125,782
0
0
<OTHER-SE> (109,697)
<TOTAL-LIABILITY-AND-EQUITY> 21,016
<SALES> 2,210
<TOTAL-REVENUES> 2,210
<CGS> 489
<TOTAL-COSTS> 7,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (5,470)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,470)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
