SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-21902
STARSIGHT TELECAST, INC.
(Exact name of registrant as specified in its charter)
California 94-3003250
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
39650 Liberty Street, Fremont, CA 94538
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (510) 657-9900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 18, 1997 as reported on The Nasdaq National Market System, was
approximately $108,328,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of February 18, 1997, Registrant had outstanding 25,612,585 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K (the "Report")
are forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth in the last paragraph under "General," "Sales,
Marketing and Licensing," "Manufacturing," "Intellectual Property - Patents,
Trademarks, Copyrights and Proprietary Information," "Competition," "Engineering
and Development," "Government Regulation," "Employees," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and elsewhere in
this Report.
General
StarSight Telecast, Inc., a California corporation, (the "Company" or
the "Registrant") was founded in 1986 to design and market an easy-to-use and
accurate method of identifying, selecting and recording television programming.
The Company has developed and markets a patented on-screen interactive
television program guide and VCR control service under the StarSight(R) brand
name into three distinct distribution channels: consumer electronics, service
providers, such as cable or local telephone companies ("telcos"), and licensing
the Company's intellectual property for non-StarSight products which provide
guide features based on the Company's proprietary technology and patented
inventions. Customers can currently subscribe to the StarSight service directly
from the Company for use with StarSight-capable televisions, VCRs, TVCRs,
satellite integrated receiver descramblers ("satellite receivers") and stand
alone StarSight receivers. StarSight capability is currently available to
consumers in limited quantities of set-top boxes, televisions, VCRs, TVCRs,
satellite receivers and stand alone StarSight receivers. The Company also
anticipates that customers will be able to subscribe to the StarSight service
through service providers, such as their local cable or telco operators. The
StarSight Electronic Program Guide ("EPG") offers the following primary
features:
Program Schedules. The StarSight EPG enables customers to
conveniently view (i) up to seven days of up-to-date television
program schedule information covering substantially all of the
numerous available channels and (ii) information about programs in
progress as the viewer changes from one channel to another, even
during commercials.
Program Selection. The StarSight EPG enables customers to easily
select a desired program by the program's title or by the
program's theme, as well as by the traditional method of selection
by channel number.
One Button Recording. With the touch of a button on a remote
control, the StarSight EPG enables customers to record a current
or future television program or series of related programs (for
example, a soap opera or miniseries) by selecting the program
title to be recorded.
Customized Channel Set-Up. The StarSight EPG enables customers to
set the order of channels by preference and to delete never or
infrequently watched channels from the program schedule
information.
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StarSight and the StarSight logo are registered United States
trademarks of the Company, and STARSIGHT & STAR DESIGN and STAR DESIGN are
trademarks of the Company. This Report also includes trade names which may be
trademarks of companies other than the Company.
Proposed Merger with Gemstar
On December 23, 1996, the Company and Gemstar International Group
Limited, a British Virgin Islands corporation, ("Gemstar") agreed to merge
pursuant to and subject to the terms and conditions of an Agreement and Plan of
Merger ("Merger Agreement"), whereby a wholly-owned subsidiary of Gemstar will
merge with and into the Company. The Company will survive the merger and become
a wholly-owned subsidiary of Gemstar (the "Merger"). At the closing of the
Merger, shareholders of the Company will be entitled to receive 0.6062 shares of
Gemstar's ordinary shares, $0.01 par value ("Ordinary Shares"), for each share
of the Company's Common Stock. Each outstanding option and each outstanding
warrant to purchase shares of the Company's Common Stock will be adjusted to
reflect the exchange ratio of 0.6062 and will be assumed by Gemstar.
Consummation of the Merger is subject to, among other things, (i) approval of
the Merger Agreement by the Company's shareholders, (ii) approval by the holders
of Gemstar's Ordinary Shares of the issuance of shares in connection with the
Merger, (iii) certain government regulatory approvals, (iv) the filing and
effectiveness of a registration statement for the Gemstar Ordinary Shares to be
issued with the Securities and Exchange Commission (the "Commission"), and (v)
the satisfaction or waiver of certain other customary conditions to closing of
the Merger. See "Item 12 -- Changes in Control" for a more detailed description
of the Merger, related agreements and the terms and conditions of the Merger
Agreement.
Market Overview
The Company believes that there is a significant market opportunity for
an easy-to-use, on-screen, interactive television guide such as the StarSight
EPG. Based upon industry studies, the Company estimates that 97 million
households in the United States own at least one television and 85 million
households in the United States own a VCR. The Company further estimates, based
upon industry studies, that approximately 65 million households in the United
States (representing approximately 67% of all television households) subscribe
to a cable service and 8% have satellite programming access, such as C-band and
direct broadcast satellite ("DBS"). Based upon industry trade publications, as
of November 1996, the Company estimates that there were 53 channels available to
the average cable subscriber. Cable operators are also providing consumers with
increasingly wide choices of pay-per-view movies and other pay-per-view
programming. The Company estimates that in this environment cable television
viewers may presently choose from approximately 7,500 programs per week,
depending on geographic area and channel capacity. In addition, cable operators
have announced their intention to expand channel capacity in the future.
The Company believes that the recent increase in the number of channels
is being accompanied by a proliferation of viewing choices as the libraries of
films and syndicated programs available for broadcast grow and television
stations demonstrate an increasing willingness to embrace 24 hour programming
schedules. Consequently, the number of weekly programs available for television
viewers may increase significantly. Currently available program schedule guides
consist primarily of printed guides, such as TV Guide, local cable television
guides and local newspaper and advertising guides. Based upon industry studies,
the Company estimates that approximately 74% of households owning televisions
obtain television schedule information from printed program guides. For example,
based upon published data, the Company estimates that more than 14 million
customers use TV Guide. In
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addition to such printed guides, non-interactive on-screen scrolling program
guides are available on most cable systems.
The Company believes that the traditional sources of program schedule
information will become increasingly inconvenient as the number and the
diversity of programming choices increase. Printed schedule guides, generally
produced in one-week intervals, cannot be updated to reflect changes in program
scheduling which occur after such guides are printed and distributed to
television viewers and are thus inherently susceptible to inaccuracies. In
addition, the volume of information which can be presented in printed guides is
constrained by space, format and cost limitations. The majority of currently
commercially available on-screen program guides generally present schedule
information in a non-interactive scrolling format. Such non-interactive program
guides typically provide users with only a few hours of current programming
information, and viewers must wait for such guides to scroll to the desired
channel. In addition, in order to display the currently available on-screen
scrolling guides, a cable operator must dedicate a channel which could otherwise
be used to broadcast commercial programming. Both printed and scrolling
programming guides generally organize and present information only by air time
and channel number rather than program title or program theme. See
"Competition."
The Company believes that the recent and expected future growth in the
number of television channels, along with the proliferation of viewing choices,
has created a need for an easy-to-use, cost effective and accurate method of
identifying, selecting and recording television programs. The Company believes
that as consumer needs for improved television schedule information grow, the
need for accurate and convenient methods of program selection and recording will
also grow.
Business Strategy
The Company offers the easy-to-use StarSight interactive program guide which:
(i) meets the existing demand for accurate and up-to-date television program
schedule information, (ii) can accommodate the anticipated proliferation of
viewing choices, (iii) enables customers to record a program or series of
programs with the touch of one button, and (iv) allows customers to set the
order of channels by preference and to delete never or infrequently watched
channels. The integration of StarSight formatted program information into both
the broadcast data stream and the StarSight-capable hardware that receives
StarSight data gives the StarSight EPG the ability to display program
information on the television screen, to tune to desired programs by
highlighting the title of the program and to program the viewer's VCR at the
touch of one button. The Company believes that StarSight's on-screen interactive
format, extensive television/VCR functionality and ability to search for and
select programs by title or theme, as well as by channel number, make it easier
to use and more convenient than both printed and on-screen scrolling guides. The
Company's business strategy is focused on three distinct distribution channels:
consumer electronics, service providers, such as cable or telco, and licensing
the Company's intellectual property for non-StarSight products ("Licensing").
The Company believes this three pronged strategy will not only maximize both
demand for StarSight EPG products and services but also facilitate its delivery
to a large and diverse base of customers. The Company intends to provide
customers in the consumer electronics and service provider distribution channels
with as many StarSight-capable hardware choices as possible by broadly marketing
its EPG products and services to hardware manufacturers across the consumer
electronics and service provider distribution channels. The Company licenses its
intellectual property to others for use in products which provide certain guide
features based on the Company's proprietary technology and patented inventions.
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The Company has entered into strategic relationships with major
marketing and distribution partners and with prominent manufacturers presently
providing hardware across the targeted distribution channels.
In the consumer electronics distribution channel, the Company has
entered into technology development and licensing agreements with Thomson
Consumer Electronics, Inc. ("TCE"), a wholly-owned subsidiary of THOMSON
multimedia S.A. ("THOMSON") (RCA, GE, ProScan brands), Zenith Electronics
Corporation ("Zenith"), Sony Electronics, Inc. ("Sony"), Mitsubishi Consumer
Electronics America, Inc. ("Mitsubishi"), Toshiba America Consumer Products,
Inc. ("Toshiba"), Matsushita Television Company ("Matsushita") (Panasonic,
Quasar brands), Philips Consumer Electronics Company ("Philips") (Magnavox and
Philips brands), Sharp Electronics Corporation ("Sharp"), Samsung Electronics
America, Inc. ("Samsung"), LG Electronics U.S.A., Inc. ("GoldStar"), and Daewoo
Electronics Corp. of America ("Daewoo") for the incorporation of
StarSight-enabling technology into televisions, VCRs and TVCRs. In addition, the
Company has entered into an agreement with Uniden America ("Uniden") for the
marketing and distribution of StarSight-capable satellite receivers to C-band
satellite service customers.
On March 8, 1996, the Company finalized strategic and financial
agreements with THOMSON which included an equity investment by THOMSON of
$25,000,000. This relationship includes commitments by THOMSON for the
manufacture and promotion of StarSight-capable consumer electronic products
across a broad range of products. The commitments by THOMSON are driven in part
by strategic and financial incentives available to THOMSON which increase with
the manufacture of higher unit volumes of StarSight-capable products. The
Company believes that as a result of significant changing conditions in the
marketplace, including increased competition, certain aspects of these strategic
business agreements with THOMSON, such as THOMSON's volume commitments and the
Company's technology transfer commitments, will be renegotiated in the near term
as soon as market conditions have been clarified.
The Company has also manufactured a limited number of stand alone
StarSight receivers, so that cable and telco customers and over-the-air
broadcast viewers without StarSight-capable hardware can subscribe to the
StarSight service from the service provider or directly from the Company. See
"Manufacturing."
In certain instances, the Company's licensed consumer electronics
manufacturers have experienced significant delays in the development and
commercial release of StarSight-capable hardware and, although certain
manufacturers have indicated their intention to make such equipment available to
their customers in 1997, there can be no assurance that significant volumes of
StarSight-capable hardware will become available to customers. Further delays in
the availability of StarSight-capable hardware will have an adverse effect on
the Company's business. See "Manufacturing."
With respect to the service provider distribution channel, the Company
is currently distributing the StarSight EPG to cable customers on a limited
basis in cable systems in various regions of Northern and Southern California.
In addition, the StarSight EPG is distributed on a limited basis with other
cable operators, primarily in the eastern United States. Recent consolidation in
the cable industry has affected the execution of the Company's marketing and
distribution strategy with certain cable and teleco operators. See "Sales,
Marketing and Licensing." The Company has entered into license agreements with
General Instrument Corp. ("General Instrument"), Scientific-Atlanta, Inc.
("Scientific-Atlanta") and Zenith for the incorporation of StarSight-enabling
technology into set-top boxes to be manufactured by them for sale to cable
system operators who offer StarSight to their customers.
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In 1995, the Company brought an arbitration action against
Scientific-Atlanta concerning Scientific-Atlanta's alleged delay in the
deployment of StarSight-capable set-top boxes and its development of a competing
electronic program guide allegedly using the Company's technology in violation
of its licensing agreement with the Company. On July 23, 1996, the American
Arbitration Association ("AAA") awarded the Company $15,000,000 in monetary
damages plus attorney 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. On December 11, 1996, the U.S. District Court for the
Northern District of California confirmed the AAA arbitration panel award of
$15,000,000, plus attorney fees and arbitration costs. In addition, the court
confirmed the AAA panel's injunction prohibiting Scientific-Atlanta for a period
of three years from shipping to third parties any consumer product incorporating
an interactive program guide, except for orders already committed to in writing
as of July 23, 1996, the date of the AAA panel ruling. See "Item 3 -- Legal
Proceedings" and Note 5 to Financial Statements.
As a part of the Company's licensing business and strategy, the Company
has entered into licensing agreements with TCE, Sony, Toshiba, Panasonic, Uniden
and Hughes Network Systems ("HNS") for use of the Company's intellectual
property in certain non-StarSight digital satellite system ("DSS") equipment. In
addition, on December 20, 1996, the Company entered into an agreement with
Microsoft Corporation ("Microsoft") to license certain of its technologies to
Microsoft. Under the agreement, Microsoft paid the Company a non-refundable
"lump sum" royalty payment of $20,000,000 for a non-exclusive, worldwide license
for the Company's intellectual property related to electronic program guides,
which technology will be used by Microsoft for future software products and
services on the PC platform. Additionally, Microsoft provided the Company with a
royalty free license under certain of its intellectual property related to
electronic program guides. See Note 4 to Financial Statements.
The Company intends to continue to actively explore additional
opportunities to license its intellectual property. See "Sales, Marketing and
Licensing."
Company Products and Services
StarSight EPG
The StarSight EPG offers several program schedule, selection and
recording functions. Since there is not yet a significant market for the
StarSight EPG, there can be no assurance that an acceptable level of consumer
demand will be achieved. If significant demand does not develop or is low due to
lack of market acceptance, technological change, competition or other factors,
the Company's business would be materially adversely affected.
Program Schedules. The StarSight EPG provides an up-to-date and
accurate on-screen program schedule, listing all programs by title. The database
for this television schedule information is comprised of program data purchased
by the Company from data providers who provide similar information to newspapers
and other printed television listings. Unlike printed listings, however, the
Company's database is updated daily for program schedule changes. Unlike
currently available on-screen scrolling guides, the StarSight EPG provides
customers with 24 hours per day of schedule information for up to seven days of
programming. The Company believes that this will keep the StarSight service more
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accurate, up-to-date and informative than any other currently available printed
or on-screen scrolling guide. StarSight offers the following program schedule
features:
Program Selection by Grazing. The StarSight EPG allows viewers
to obtain information on programs in progress while changing channels or
"grazing," even during commercials. As the viewer switches from channel to
channel, a brief description of the program then airing appears on the screen.
The StarSight EPG displays the program title, the broadcast time remaining, and
a brief description of the program and theme. With the touch of a button, the
viewer is able to receive a more detailed description of the program in
progress.
Program Selection by Browsing. The StarSight browsing feature
allows the viewer to continue to watch and listen to the current television
program while "browsing" through the program titles and descriptions for other
programs in progress.
On-Screen TV Program Listings. At the touch of a button, the
StarSight EPG provides the TV viewer with an on-screen localized program
schedule displayed in a "grid" or "column" format similar to that of traditional
TV schedules. The grid guide includes TV schedule information for up to seven
days in advance for the vast majority of channels on the viewer's television.
The viewer is able to change the information on the screen to see what is on the
other channels and to see what is on later in that seven day period. A menu bar
at the bottom of the screen shows the highlighted program's channel number and
network and also displays the current time and date. StarSight's program
schedule automatically opens to the current time and date whenever it is
activated.
Grid Guide Pop-up Information. While viewing the grid guide,
the StarSight EPG provides detailed information for any program within the
StarSight program schedule simply by pressing a button. A pop-up screen gives
the viewer a description of the selected program title, broadcast date and time,
duration and program theme.
Program Guide By Channel. The StarSight EPG allows the viewer
to see a listing of all the programs on a particular channel. For example, a
customer can view all of the programming for Channel 4 on a given day. The user
is able to change the information on the screen to see what will air later in
the day or in that seven day period on Channel 4.
Program Selection. The StarSight EPG offers a variety of methods for
customers to select a television program from the on-screen schedule. Customers
are able to choose and tune to a program by its title, as well as by the
traditional method of selection by channel number. This process eliminates the
significance of channel numbers and the confusion consumers face in selecting
programs by network or station channel numbers that are often reallocated by
cable operators or assigned to non-corresponding channel numbers in cable
channel line-ups. Customers also are able to select and view program titles and
descriptions for up to the following seven days from a list of displayed themes,
such as movies, sports and educational programs. The following describes the
steps a viewer might go through using the StarSight EPG to select a television
program by theme.
Step 1. A customer is able to choose programs according to a
favorite viewing category, such as sports, movies or comedy.
For example, a viewer interested in watching sports would
highlight the "Sports" theme from the on-screen theme display
list.
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Step 2. After the viewer has selected "Sports," a list of
subcategorize pops-up and the viewer then is able to select
from a list of sports. For example, a list of "Sports"
sub-themes includes "All Sports," "Football," "Basketball,"
"Soccer" and "Golf."
Step 3. After the viewer has selected the desired theme, an
up-to-seven-day chronological display of those programs
falling into that subcategory appears. The list shows the
channel, day, start time, title and duration of the relevant
programs. The viewer would select a desired program, for
example, "New York Knicks at Orlando Magic," from the list of
"Sports--Basketball," then press a button to obtain additional
information regarding this program.
Step 4. If the desired program is in progress, the viewer can
then press a single button and tune the television to that
program. Alternatively, the viewer can choose to activate or
set the VCR to record the program.
One Button Recording. Once the customer has chosen the desired program
by its title, the StarSight EPG enables the customer to record the program by
touching one button. The customer has the choice of recording the program once
for just that episode, daily for each day's episode for shows like soap operas
or talk shows, or weekly for programs that are on once each week.
Recordings. This feature provides the customer with a screen that
indicates which programs the customer has selected to be recorded. It shows the
channel, the day, the time, the program title and the length of each show to be
recorded.
Series To Be Recorded. This screen displays programs selected to be
recorded daily and weekly. It shows the channel, the day, the time, the program
title and the length of each show to be recorded.
Customized Channel Set-up. The StarSight EPG allows customers to set
the order of channels by preference and to delete never or infrequently watched
channels from the program schedule information. This enables StarSight customers
to customize the program schedule information to reflect their viewing
preferences and reduce the time spent grazing through the program schedule.
Deleted channels may be reselected if the viewer so desires. The StarSight EPG
also allows a customer to arrange the line-up of channels in the program
schedule in order of preference. For example, the viewer can choose CNN, Comedy
Central and Nickelodeon, in that order, to be at the top of the line-up.
StarSight Service
The Company charges customers approximately $4.99 per month for direct
service, before promotional discounts, and the monthly fee may be potentially
less if offered by cable and telco operators as part of a package to their
customers. StarSight EPG subscription rates are currently being offered with
various free trial periods and are subject to a one-time activation fee. The
Company's determination of such monthly service fees depends on a number of
factors, including the amounts which customers are currently paying for printed
guides, the willingness of customers to pay for special cable services or
programs, the monthly price the market can be expected to support and any effect
the Cable Television and Consumer Protection Act of 1992 ("1992 Cable Act")
and/or the Telecommunications Act of 1996 ("1996 Telecommunications Act") has or
may have on the pricing of subscription services by cable and telco operators.
See "Government Regulation." The Company's pricing structure also takes
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into account information derived from market research, including data which have
been gathered by market research firms commissioned by the Company to conduct
qualitative and quantitative research, including national consumer focus groups.
Data have been gathered from potential consumers regarding their responses to
various proposed pricing levels for the subscription service, activation fees
and the cost of acquiring StarSight-capable hardware. The Company analyzes this
data, as well as the market response to the current pricing, to determine the
appropriate pricing levels, manner and frequency of billing and subscriber
incentive programs to attempt to maximize subscriber penetration and revenues.
Sales, Marketing and Licensing
The Company targets the consumer electronics and service provider
channels for the distribution of the StarSight service to customers. In the
consumer electronics distribution channel, the Company markets the StarSight
service directly to customers who have purchased televisions, VCRs, TVCRs,
satellite receivers or stand alone StarSight receivers into which the Company's
enabling technology has been incorporated and who do not subscribe through an
affiliated cable or telco system offering the StarSight service or who choose to
receive the StarSight EPG directly from the Company. In the service provider
distribution channel, the Company intends to market the StarSight EPG through
cable and telco operators who offer the StarSight service to their own
customers.
Over time the Company anticipates that the marketing and promotion of
the StarSight service across the consumer electronics and service provider
distribution channels will become the most significant operating expense
incurred to support the StarSight service. Currently, the Company's marketing
efforts include public relations efforts, trade show and industry awareness
programs, newspaper and other printed advertising. The Company intends to
continue to promote the StarSight EPG using its own marketing resources, in
addition to those of affiliated cable operators and manufacturers of
StarSight-capable hardware. The Company currently expects that cooperative
marketing expenditures with the manufacturers and distributors of
StarSight-capable products could enhance recognition among potential subscribers
once more than limited quantities of StarSight-capable consumer electronics
products are available in the market place. If significant consumer demand does
not develop or is low due to lack of market acceptance, technological change,
competition or other factors, the Company's business would be materially
adversely affected.
Consumer Electronics. For the consumer electronics distribution
channel, the Company is marketing the StarSight EPG directly to the owners of
StarSight-capable televisions, VCRs, TVCRs and a limited number of stand alone
StarSight receivers. Annually there are approximately 26 million new televisions
and approximately 13 million new VCRs sold in the United States. The Company has
entered into license agreements with TCE (RCA, GE and ProScan brands), Zenith,
Sony, Mitsubishi, Toshiba, Matsushita (Panasonic and Quasar brands), Philips
(Magnavox and Philips brands), Sharp, Samsung, GoldStar, and Daewoo for the
incorporation of StarSight-enabling technology into televisions, VCRs and TVCRs.
The Company's current consumer electronics manufacturing partners produce
approximately 70% of all televisions, VCRs and TVCRs sold in the United States;
however, to date only limited quantities of StarSight-capable televisions and
VCRs have been introduced into the consumer electronics market place. There can
be no assurance that the Company's agreements with third party manufacturers
will result in the availability of sufficient quantities of StarSight-capable
televisions and VCRs to allow the Company to achieve significant penetration of
the consumer electronics distribution channel. The Company has also manufactured
and distributed a limited number of stand alone StarSight receivers. See Note 9
to Financial Statements.
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In March 1996, the Company entered into strategic and financial
agreements with THOMSON, pursuant to which THOMSON has agreed to aggressively
promote and incorporate StarSight into selected product lines in return for a
share of the Company's revenues received in connection with the Company's
consumer electronics business. The commitments by THOMSON are driven, in part,
by strategic and financial incentives available to THOMSON which increase with
the manufacture of higher unit volumes of StarSight-capable products. Adverse
market conditions or a lack of wide ranging consumer acceptance could negatively
impact the level at which THOMSON promotes and incorporates the StarSight EPG
into THOMSON's selected product lines. The Company believes that as a result of
significant changing conditions in the marketplace, including increased
competition, certain aspects of these strategic business agreements with
THOMSON, such as THOMSON's volume commitments and the Company's technology
transfer commitments, will be renegotiated in the near term as soon as market
conditions have been clarified.
Customers who have C-band satellite receivers are able to receive the
StarSight service via StarSight-capable satellite receivers marketed by
StarSight licensees. The Company has a license agreement with Uniden pursuant to
which Uniden has manufactured and distributed a limited number of
StarSight-capable C-band satellite receivers. Presently 4% of all television
households have C-band satellite programming access. Currently, the C-band
satellite market represents a small opportunity for the Company due to
significant growth in the DBS market. The Company believes that DBS technology
represents additional opportunities for the StarSight EPG and for licensing of
the Company's intellectual property.
The Company's consumer electronics distribution channel marketing
strategy includes joint efforts with television, VCR and TVCR manufacturers to
promote the StarSight EPG through in-store promotion, as well as through package
insert promotion, targeted at first-time buyers. In addition, the Company
provides marketing and sales incentive programs for retailers to promote
StarSight-capable consumer electronics products. The Company receives the
greatest revenue per subscriber from the distribution of the StarSight service
in this market channel but also incurs all billing, technical support, marketing
and other distribution costs.
Service Providers. The Company believes that the most efficient method
of reaching a large number of potential customers is to market the StarSight
service primarily through a relatively small number of service providers, such
as major cable and telco operators. The Company's service provider distribution
strategy requires that cable and telco operators order new StarSight-capable
set-top boxes from manufacturers for distribution to new customers and, in the
case of cable, to existing customers as replacements for obsolete or
nonfunctioning set-top boxes or, alternatively, for distribution to existing and
new customers as such cable and telco operators build, rebuild or upgrade their
systems. The Company believes that delays in the availability of set-top boxes
incorporating new analog and digital technology have caused cable operators to
defer purchases of new set-top boxes. As a result, the deployment of
StarSight-capable set-top boxes has been delayed. The Company has previously
entered into agreements with Viacom Cable, KBLCOM Incorporated ("KBLCOM"), The
Providence Journal Company ("Providence Journal"), and Cox Communications Inc.
("Cox") regarding the marketing of the StarSight service to their respective
cable subscribers. However, recent consolidation in the cable industry has
affected the distribution of the StarSight service by those cable operators. In
particular, TWI Cable, Inc., a subsidiary of Time Warner Companies, Inc. ("Time
Warner"), has purchased KBLCOM, and Continental Cable has acquired Providence
Journal's cable operation, Colony Cable. During 1996, Viacom Inc. ("Viacom")
completed the sale of Viacom Cable to Tele-Communications Inc. ("TCI"). The
unstated or uncertain commitment of the new operators of these cable systems to
offer the StarSight service has contributed to delays in the execution of the
Company's strategy for cable distribution. There can be no assurance that the
Company's agreements and arrangements with cable operators will result in the
successful marketing of the StarSight EPG to cable customers or in the
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commercial acceptance and viability of the StarSight service. In addition, there
can be no assurance that the Company will be able to enter into discussions or
affiliation agreements with a sufficient number of significant cable and telco
operators to achieve commercial acceptance. Finally, there can be no assurance
that the Company's current or potential future agreements with third party
manufacturers will result in the availability of sufficient quantities of
StarSight-capable set-top boxes to allow the Company to achieve significant
penetration of the service provider distribution channel.
Given the large number of customers who can be reached through a single
service provider, the Company is directing its StarSight marketing efforts to
complement the marketing efforts of service providers. The Company's current
plans provide for several options for offering the StarSight service to service
provider customers. These options are either a single "premium" service separate
from other services offered by a cable or telco operator, or as part of a "tier"
of services which are sold as a package, or as part of the "basic" service
provided to all subscribers on that system. The Company and the service provider
each receive a portion of the subscriber revenue generated by the StarSight
service that depends, in part, on the relative amounts of billing, technical
support, marketing and other distribution efforts of each party and, in part, on
whether the subscriber is paying for the StarSight service as a premium, tier or
basic service. To the extent that the service provider undertakes the billing,
technical support, marketing and other distribution efforts, the Company
receives a smaller portion of the revenue per subscriber. The Company generally
receives a larger portion of the revenue per subscriber in cases where a service
provider offers the StarSight service as a premium service and a smaller portion
of the revenue per subscriber when the service is offered as part of a basic or
tier service. However, inclusion of the StarSight EPG as part of a basic or tier
service is a desirable marketing method due to the larger number of customers
involved. Finally, the Company receives a smaller portion of the revenue per
subscriber as the percentage of StarSight customers in a particular cable or
telco system increases. To date, the majority of the Company's existing
agreements provide for the StarSight EPG as part of a basic service.
On October 28, 1994, the Company and Bell Atlantic Video Services
Company ("Bell Atlantic") entered into a strategic agreement pursuant to which
the Company granted Bell Atlantic the right to distribute StarSight on an
exclusive basis to homes having access to open video systems ("OVS") provided by
Bell Atlantic companies. Subsequent to this agreement, Bell Atlantic, in
conjunction with Nynex and Pacific Telesis, formed a joint venture, TeleTV. This
joint venture was originally established to provide programming services to
their customers via MMDS (a microwave transmission technology) currently in
development. Recently, parts of TeleTV were disbanded and it is uncertain as to
Bell Atlantic's future involvement in the joint venture. As a result, Bell
Atlantic has not informed the Company of its intention to deploy the StarSight
EPG and, correspondingly, there can be no assurance that the StarSight service
will ever be implemented by Bell Atlantic.
In February 1996, the Company entered into a License of Services
Agreement with GTE Communication Systems Corporation ("GTE"), under which GTE
will offer the StarSight service to the subscribers of GTE's OVS systems, cable
television systems, or any other GTE multichannel systems, where technically
feasible in exchange for certain license fees to be paid by GTE to the Company.
In late 1996, GTE announced the initial deployment of set-top boxes containing
the StarSight EPG to customers in the Tampa Bay area of Florida.
Licensing. The Company's strategy for the licensing of its intellectual
property has resulted in the signing of several licensing agreements. In 1995,
the Company entered into agreements with TCE and Sony. The TCE and Sony
agreements provide for the licensing of certain of the Company's intellectual
property rights which are incorporated in certain DSS equipment manufactured and
distributed by TCE and Sony. In 1996, the Company entered into similar licensing
agreements with
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Toshiba, Matsushita, Uniden and HNS for certain DSS equipment to be manufactured
and distributed by them. Such agreements generally require the periodic payment
of per unit royalties to the Company based on units manufactured or sold.
On December 20, 1996, the Company entered into a licensing agreement
with Microsoft to license certain of its technologies to Microsoft. Under the
agreement, Microsoft paid the Company a non-refundable "lump sum" royalty
payment of $20,000,000 for a non-exclusive, worldwide license for the Company's
intellectual property related to electronic program guides, which technology
will be used by Microsoft for future software products and services on the PC
platform. Additionally, Microsoft provided the Company with a royalty free
license under certain of its intellectual property related to electronic program
guides. See Note 4 to Financial Statements.
To support and further the Company's licensing business and other
business segments, the Company is pursuing U.S. and international protection for
its proprietary information, technology and inventions. The Company intends to
continue to actively explore additional opportunities to license the Company's
intellectual property.
Manufacturing
The Company believes that securing the availability of
StarSight-capable hardware is crucial to the widespread commercial distribution
of the StarSight EPG. The Company's manufacturing strategy calls for third party
manufacturers to incorporate the StarSight technology into cable and telco
set-top boxes, televisions, VCRs, TVCRs and satellite receivers produced by such
manufacturers. Currently, the Company does not manufacture such hardware itself.
Given the Company's limited size and resources, the large size of the potential
market for the StarSight EPG and the advantages of employing the resources and
expertise of experienced manufacturers, the Company believes that manufacturing
by third parties represents the optimal strategy for maximizing the availability
of StarSight-capable consumer electronics products. It is possible that
manufacturers will reduce or delay the manufacture of StarSight-capable consumer
electronics products as a result of the announcement, expectation or
consummation of the Merger. The Company recorded an inventory valuation
allowance in the fourth quarter of Fiscal 1996 due to delays in the manufacture
of StarSight-capable consumer electronics products which the Company believes
were attributable, in part, to uncertainties regarding the effects of the
Merger. Such manufacturing delays and uncertainties are expected to continue at
least in the near term. See Note 9 to Financial Statements.
To date, the Company has entered into a number of manufacturing
arrangements and continues to have discussions with other companies regarding
the incorporation of StarSight into a wide range of consumer electronics
products. The Company has license agreements for televisions, TVCRs and/or VCRs
with TCE (RCA, GE and ProScan brands), Zenith, Sony, Mitsubishi, Toshiba,
Matsushita (Panasonic and Quasar brands), Philips (Magnavox and Philips brands),
Sharp, Samsung, GoldStar, and Daewoo. In order to provide incentive for
manufacturers of consumer electronics products to manufacture StarSight-capable
products, the Company has agreed in initial manufacturing agreements to waive
licensing and royalty fees for deploying the StarSight EPG and, in some cases,
to reimburse such manufacturers for a portion of the cost of modifying their
products to accept StarSight technology. For the manufacture of
StarSight-capable set-top boxes, the Company has agreements with General
Instrument, Scientific-Atlanta and Zenith. During 1996, in an arbitration action
involving Scientific-Atlanta, the Company was awarded $15,000,000 in damages
plus attorney fees and arbitration costs, as well as certain injunctive relief.
See "Legal Proceedings" and Note 5 to Financial Statements.
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Initially, the Company has not charged manufacturers a license fee for
manufacturing StarSight-capable products which incorporate StarSight's
proprietary technology. Ultimately, the Company hopes that increased sales and
market penetration will allow it to negotiate manufacturing agreements that
allow the Company to charge license fees for the StarSight technology to
contracting manufacturers for StarSight-capable consumer electronic products.
There can be no assurance that the availability of set-top boxes, televisions,
VCRs and TVCRs incorporating the Company's proprietary technology will allow the
StarSight EPG to achieve market acceptance or that the manufacturing entities
will devote manufacturing or distribution resources adequate to achieve such
market acceptance. In addition, there can be no assurance that such
manufacturers will in fact incorporate the StarSight EPG into their products,
that these manufacturing agreements will not be terminated and, if terminated,
that the Company would be able to negotiate alternative manufacturing
relationships on commercially acceptable terms.
The Company has, in the past, manufactured a limited number of stand
alone StarSight receivers. Currently, the Company is no longer manufacturing the
stand alone StarSight receiver due to low consumer acceptance in the market
place. See Note 9 to Financial Statements.
The incorporation of the StarSight EPG into set-top boxes, televisions,
VCRs, TVCRs, satellite receivers, and stand alone StarSight receivers requires a
chip set comprised of three separate integrated circuits embodying different
portions of the StarSight technology. The Company has arranged with certain
integrated circuit manufacturers for the design and manufacture of the
integrated circuits which are sold to consumer electronics manufacturers that
have agreed to incorporate the StarSight EPG into their products. The three
integrated circuits are produced by two separate integrated circuit
manufacturers and are available only from those manufacturers. The three
integrated circuits are manufactured by Zilog, Inc. ("Zilog") and Motorola, Inc.
As part of a plan to lower the cost of incorporating StarSight
technology into consumer electronics products, the Company has entered in an
agreement with Zilog and now has StarSight technology incorporated into Zilog's
new Z89300 digital television controller series. Although the Company believes
that alternative sources of such components are available, qualification of such
alternative sources would require significant lead time. The Company's inability
to provide for sufficient quantities of such integrated circuits could delay the
incorporation of the StarSight EPG into StarSight-capable products, which would
have a material adverse effect on the Company's business. In particular,
development efforts with manufacturers of StarSight-capable hardware have
progressed more slowly than anticipated due in part to delays in the development
of the integrated chip set required for the incorporation of the StarSight EPG
into equipment. In addition, there can be no assurance that the Company will
continue to be successful in its efforts to incorporate its technology in such
integrated circuits or that the manufacturers of set-top boxes, televisions,
VCRs, TVCRs and satellite receivers will be successful in incorporating the
integrated circuits into their products. Furthermore, there can be no assurance
that the integrated circuit manufacturers will successfully produce sufficient
volumes of integrated circuits to ensure the timely availability of
StarSight-capable products in commercial quantities or that such integrated
circuits will be made available on commercially reasonable terms. A failure in
any one of the steps leading to the successful incorporation of the StarSight
technology into such StarSight-capable products would have a material adverse
effect on the Company's business.
Currently manufacturers incorporating the StarSight technology into
StarSight-capable products use the StarSight-capable integrated circuits for
their initial product offering rather than develop such integrated circuits
in-house in order to minimize time to market. The Company's engineering
personnel are available to meet with each manufacturer's development team either
at the Company or the
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manufacturer's location to provide development assistance regarding the use of
the StarSight chip set as part of the technology transfer to the manufacturer.
The agreement with Zilog provides for Zilog to design and manufacture cell based
display integrated circuits for use by product manufacturers to incorporate the
StarSight system. Zilog has enhanced its Z89300 family of digital television
controllers to incorporate the StarSight technology. In addition, Zilog has
designed an integrated circuit, currently available to manufacturers, which
further integrates various components of the StarSight hardware which, in turn,
reduces the cost of including the StarSight EPG in televisions and VCRs. To
date, the Company has not charged any fee or royalty for the use of the chip set
by a manufacturer. The Company will retain the right to approve the manner in
which the StarSight technology is incorporated in the manufacturer's product in
order to maintain a consistent look and feel for the StarSight consumer
interface.
StarSight Delivery System
The StarSight delivery system consists of a program schedule database,
a transmission network and order processing and customer support.
Program Schedule Database. The Company purchases television program
schedule data and cable television channel line-up information in an electronic
format from data providers who provide similar information to newspapers and
other printed listings. The data is processed at the Company's computer facility
in Fremont, California to include subscriber authorization information, which
allows a customer's StarSight-capable hardware to receive only that portion of
the program schedule data which corresponds to the customer's geographic area,
method of reception (cable, broadcast or satellite) and system configuration.
The program schedule data is then distributed over the transmission network to
StarSight-capable hardware in customers' homes. Pursuant to an agreement with
the Company, TV Data Technologies ("TVDT") is the initial provider of program
schedule data for the StarSight EPG, which data is delivered on a daily basis.
As a result, the StarSight EPG will contain more accurate program schedule
information than printed guides, since the latter cannot incorporate new or
changed information once they have gone to press. TVDT currently updates
schedule data 4-6 times per 24-hour period based on receiving program change
information from programming sources. TVDT has also developed and implemented
procedures for cable system channel line-up collection and maintenance which
allows the Company to stay informed of changes by cable operators in such
line-ups and to adjust the delivered schedule information accordingly.
Transmission Network. The transmission network for the StarSight
service functions as follows: program schedule data and channel line-up
information is delivered by TVDT via leased data line from the TVDT Data Center
in Glens Falls, New York to the StarSight network support computer in Fremont,
California. Using computer workstations, the Company's employees modify the TVDT
data for use in the StarSight EPG, add authorization information and transmit
the data via a leased data circuit to the Public Broadcasting Service ("PBS")
Network Control Center in Alexandria, Virginia. Such authorization information
provides the security mechanism for the StarSight data transmissions by allowing
only authorized subscribers to receive the service.
Under television standards mandated by the National Television
Standards Committee, American television pictures are comprised of 525
horizontal lines which are scanned across the television screen to create a
visible image. The first 21 of these lines are known as the vertical blanking
interval ("VBI"). Since the VBI is generally not visible on properly functioning
television screens, each of these lines can carry separate signals to be used
for purposes other than viewing, such as data for on-screen program schedules.
Pursuant to a network service and joint development agreement between
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the Company and National Datacast, Inc. ("NDI"), a subsidiary of PBS, PBS
inserts the program schedule data into its VBI at its Network Control Center and
then transmits it via satellite to approximately 168 participating master PBS
stations across the country. Under this agreement, the Company is committed to
pay a monthly fee based on the number of designated market areas. If services
are provided nationwide and subscriptions exceed a certain level, these fees may
increase to a maximum of $7,000,000 per year prior to adjustments for inflation
and based upon the level of usage.
These participating master PBS stations are equipped with a StarSight
provided "station node," a network computer which receives the nationwide feed
of schedule and authorization information and filters out information that is
not applicable to that station's geographic coverage area so as to minimize the
time needed to send schedule information to subscribers and maximize the number
of subscribers to be supported. These master PBS stations forward this
information to an additional 100 PBS stations, bringing coverage to
approximately 268 full power PBS stations across the country, representing
approximately 98% of all United States television households. In addition,
Viacom has agreed to use reasonable efforts to carry the StarSight-embedded VBI
signal on certain of the cable program networks, over-the-air broadcast
television stations and analog satellite-delivered services owned and operated
by Viacom, although the Company currently is not using the VBI signal on
Viacom's over-the-air broadcast stations. The Company also has an agreement with
Trinity Broadcasting Network ("TBN") to insert the StarSight program schedule
into the VBI at its uplink facility in Tustin, California for satellite delivery
of StarSight program data to customers with StarSight-capable satellite
receivers.
After it is processed through the station nodes, the StarSight data is
transmitted on the VBI to StarSight customers who receive the signal via local
cable system operators, satellite broadcast and over-the-air broadcast.
Customers access the information on StarSight-capable cable set-top boxes,
televisions, VCRs, satellite receivers or stand alone StarSight receivers. This
hardware receives and descrambles the data and gives customers on-screen access
to the StarSight EPG.
Local cable system operators are currently required under federal law
to include PBS programming in their channel line-up although this requirement is
under judicial challenge. Cable operators which choose not to carry StarSight
might remove the VBI containing the StarSight program schedule data from their
signal transmissions. In addition, other interference within the transmission of
StarSight program schedule data could occur. The Company is aware of a limited
number of instances where StarSight data has not been passed on to customers.
Although StarSight customers can nevertheless receive the StarSight service
through the VBI contained in the over-the-air broadcast transmissions of PBS,
the removal of the StarSight program schedule data transmitted over cable
systems makes it more difficult for cable customers to receive the StarSight
service and thereby could limit the Company's penetration of the cable market.
Increased costs or delays associated with finding alternative means to
distribute the StarSight EPG to a potentially large number of cable subscribers
could have a material adverse effect on the Company's business. There can be no
assurance, however, that VBI problems which affect the transmission of StarSight
data will not occur nor that the Company will not be required to re-engineer the
StarSight EPG to eliminate such problems.
In the case of satellite delivery of the StarSight service to customers
with StarSight-capable satellite receivers, the insertion of the StarSight
program schedule data into the VBI is at the PBS Network Control Center in
Alexandria, Virginia and at the TBN uplink facility in Tustin, California. From
there, the StarSight data is transmitted via satellite directly to receiving
dishes at the homes of customers.
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Order Processing and Customer Support. For the customers who subscribe
to the StarSight service directly from the Company, a third-party service
provider bills customers, coordinates authorizations with the Company and
manages customer payments. Technical questions from customers are answered and
order taking services are performed by the Company. In the case of customers
receiving the StarSight EPG through the service provider distribution channel,
the service provider, rather than the Company, performs the required billing
functions associated with the service. As a result, such service providers
receive a portion of the revenue received from such customers to cover the costs
of fulfilling such billing functions. The Company has developed an "in-house"
technical support group responsible for maintaining customer satisfaction in
those cases where technical expertise is sought by customers. When the order is
taken by the Company, regardless of whether the customer receives the StarSight
EPG through the consumer electronics or service provider distribution channel,
the Company or the service provider maintains control over the customer
authorization process by means of a conditional access security chip contained
in the StarSight-capable hardware.
The following chart illustrates the transmission of StarSight program
schedule data across the consumer electronics (including satellite) and service
provider (i.e., cable) delivery systems to various StarSight-capable hardware
devices. The StarSight data network signal is available in more than 98% of all
United States television households.
- ------------------
Description of graphic:
Graphic representation of the transmission of StarSight program data to the end
user. This graphic depicts the transmission of TV schedule data from the data
supplier to the Company's facilities to the various uplink facilities through
various satellite transponders to the end users.
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Strategic Relationships
Relationship with Viacom
General. In September 1991, Viacom and the Company entered into a
Series C Preferred Stock Purchase Agreement (the "Stock Agreement") pursuant to
which Viacom purchased shares of the Company's Preferred Stock. In connection
with this transaction, the Company, Viacom, Michael Faber, Patrick Young, Scott
Wilson and Jeremiah Milbank (Messrs. Faber, Young, Wilson and Milbank being
hereinafter referred to as the "Principal Shareholders") entered into a
Corporate Partnership Agreement (the "Partnership Agreement") pursuant to which
the Company granted to Viacom certain Warrants to purchase additional shares of
capital stock of the Company and certain rights with respect to Viacom's equity
ownership. In April 1993, the Company entered into a network service agreement
with Viacom Cable (the "Network Service Agreement"). In November 1994, the
Company entered into a service agreement with Viacom Cable (the "Service
Agreement"). The following is a summary of the rights and obligations of the
parties under the Stock Agreement, the Partnership Agreement, the Network
Service Agreement and the Service Agreement.
Right of First Refusal/Top-Up Right. Pursuant to the terms of the Stock
Agreement, the Company granted to Viacom a right of first refusal to purchase
all or part of any new securities issued by the Company, other than certain
issuances by the Company. This right of first refusal terminates at such time as
Viacom holds less than 3,173,508 shares of Common Stock of the Company.
Additionally, pursuant to the terms of the Partnership Agreement, in the event
the Company or any shareholder of the Company engages or proposes to engage in a
transaction that would result in a new shareholder of the Company holding
greater than 25% of the Company's outstanding capital stock, on an as-defined
fully diluted basis ("25% Shareholder"), Viacom has the right to purchase, at
the fair market value of the Common Stock as determined by the average of the
closing prices for a share of Common Stock of the Company on the ten consecutive
trading days preceding the date of exercise, additional shares of Preferred
Stock to enable it to maintain up to a 1.4:1 ratio between its percentage
ownership of the Company, on an as-defined fully diluted basis, and that of the
new 25% Shareholder, provided that Viacom may not, pursuant to this right,
increase its percentage ownership to greater than 51% of the Company's
outstanding capital stock on an as-defined fully diluted basis (the "Top-Up
Right"). Viacom at its option may elect to purchase a like number of shares of
Common Stock at the same price if Preferred Stock is not available. In
connection with the THOMSON investment of approximately $25,000,000 in the
Company, Viacom agreed that THOMSON may acquire greater than 25% of the
Company's outstanding capital stock without initiating Viacom's Top-Up Right.
The Top-Up Right expires at such time as Viacom holds less than 3,173,508 shares
of Common Stock of the Company. In connection with the Merger, Viacom waived its
right of first refusal and Top-Up Right with respect to the option to purchase
up to 5,276,034 shares of the Company's Common Stock (the "Company Stock
Option"), issued to Gemstar. See "Item 12 -- Changes in Control -- Related
Agreements."
Special Registration Right. Viacom has the right, in certain
circumstances, to require the Company on not more than one occasion, to file a
registration statement under the Securities Act at the Company's expense with
respect to the shares of Common Stock held by Viacom. This registration right is
in addition to registration rights granted to Viacom which are equivalent, and
expire concurrent with, to the registration rights held by certain other
shareholders of the Company.
Co-Sale Rights. Pursuant to the terms of the Partnership Agreement,
Viacom and the Principal Shareholders have granted each other the right, in the
event that one or more of the other parties proposes to sell at any time in the
future shares of capital stock representing at least 25% of the Company on an
as-defined fully diluted basis, to participate on a pro rata basis in such sale.
Viacom also has a right of first refusal in the event of a sale or transfer of
shares of Common Stock by the Principal Shareholders.
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Board Representation. In the event that, pursuant to the Articles of
Incorporation of the Company and California law, Viacom should hold an
insufficient number of shares of the Common Stock to elect its nominee to the
Board of Directors, the Company and the Principal Shareholders have agreed to
take such action as may be necessary to nominate and elect Viacom's designated
representative until such time as Viacom holds less than 3,173,508 shares of
Common Stock of the Company. Mr. Edward D. Horowitz, Executive Vice
President-Advanced Development at Citicorp and former Senior Vice President
Technology, Viacom Inc., and Mr. John W. Goddard, former President of Viacom
Cable, currently serve as Directors on the Company's Board in this capacity. Mr.
Thomas E. Dooley, Deputy Chairman, Executive Vice President, Corporate
Development and Communications of Viacom Inc., also serves on the Company's
Board of Directors as a representative of Virgin Interactive Entertainment Inc.
("Virgin") by virtue of Viacom's majority interest in Virgin.
Network Service Agreement. The Company entered into a five-year Network
Service Agreement with Viacom, pursuant to which Viacom agreed to use reasonable
efforts to insert the StarSight signal into the VBI of each of a number of
Viacom's network services, including Nickelodeon, MTV, VH-1, Showtime, The Movie
Channel, analog satellite-delivered services and Viacom's owned and operated
over-the-air broadcast television stations. The Company currently is not
transmitting the StarSight signal on the VBI of Viacom's broadcast television
stations.
Viacom Cable Services Agreement. The Company had entered into an
agreement with Viacom Cable to make StarSight available to its subscriber base
in the upgraded fiber-optic cable system in Castro Valley, California. As
previously discussed, Viacom has recently completed the sale of Viacom Cable to
TCI. The Company is currently analyzing the effect of the sale on the Company's
previous agreement with Viacom Cable.
Proposed Merger with Gemstar. In connection with the Merger with
Gemstar, Viacom agreed to certain modifications to its right of first refusal,
top-up right and special registration right, solely as such rights apply to the
option granted to Gemstar by the Company in connection with the Merger and
related transactions. See "Item 12 -- Changes in Control -- Related Agreements."
Relationship with THOMSON multimedia S.A.
General. On March 8, 1996, THOMSON purchased 3,333,333 shares of the
Company's Common Stock at $7.50 per share for a total of $25,000,000 pursuant to
a Securities Purchase Agreement (the "Stock Agreement") entered into between
THOMSON and the Company in February 1996. In connection with this transaction,
the Company granted certain Warrants to THOMSON to purchase additional shares of
capital stock of the Company. See Note 22 of Notes to Financial Statements. In
addition, the Company and THOMSON entered into a Right of First Refusal
Agreement (the "Rights Agreement") pursuant to which the Company granted to
THOMSON certain rights with respect to THOMSON's equity ownership. Also in
connection with this transaction, the Company, Viacom and THOMSON entered into a
Shareholders Agreement (the "Shareholders Agreement") with respect to the
election of directors as described below. The Company and THOMSON also entered
into a Strategic Cooperation Agreement (the "Cooperation Agreement") pursuant to
which THOMSON has agreed to incorporate the Company's technology into a
significant portion of THOMSON's suitable products (namely, high end TVs, VCRs
and/or TVCRs) in exchange for a share of the Company's revenues derived from the
Company's consumer electronics business, among other things. The following is a
summary of the rights and obligations of the parties under the Stock Agreement,
the Rights Agreement and the Cooperation Agreement.
Right of First Refusal. Pursuant to the terms of the Rights Agreement,
the Company granted to THOMSON a right of first refusal to purchase all or part
of any new securities issued by the Company, other than certain issuances by the
Company. This right of first refusal expires at such time as THOMSON holds less
than 3,173,508 shares of Common Stock of the Company. In connection with the
Merger, THOMSON waived
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its right to first refusal in connection with the Company's issuance of an
option to purchase up to 5,276,034 shares of the Company's Common Stock. See
"Item 12 -- Changes in Control -- Related Agreements."
Special Registration Right. THOMSON has the right, in certain
circumstances, to require the Company on not more than one occasion, to file a
registration statement under the Securities Act at the Company's expense with
respect to the shares of Common Stock held by THOMSON. This registration right
is in addition to registration rights granted to THOMSON which are equivalent
to, and expire concurrent with, the registration rights held by certain other
shareholders of the Company.
Board Representation. Under the Shareholders Agreement, the Company has
agreed to nominate, and Viacom has agreed to vote the shares held by Viacom in
favor of, the election of two representatives of THOMSON to the Company's Board
of Directors for so long as THOMSON holds in excess of 10% of the outstanding
shares of Common Stock of the Company. Under the terms of the Shareholders
Agreement, THOMSON has agreed to vote the shares held by THOMSON for the
election of two representatives of Viacom to the Company's Board of Directors
for so long as Viacom holds in excess of 3,173,508 shares of Common Stock of the
Company. Mr. James E. Meyer, Executive Vice President, Marketing &
Sales-Americas, Thomson Consumer Electronics, Inc., a wholly-owned subsidiary of
THOMSON multimedia S.A., and Mr. Jacques Thibon, Vice President, Corporate
Business Development, THOMSON multimedia S.A., currently serve as Directors on
the Company's Board in this capacity.
Cooperation Agreement. The Company has entered into a ten-year
Strategic Cooperation Agreement with THOMSON, with THOMSON having the option to
extend the term for an additional five years, pursuant to which the parties have
agreed to jointly develop a program to incorporate and aggressively promote the
Company's technology and related services throughout a range of selected
consumer electronics products distributed by THOMSON in North America. In
consideration of THOMSON's commitment to incorporate the Company's technology
into THOMSON's suitable products, the Company has agreed to, among other things,
pay THOMSON a certain percentage of the Company's revenues derived from the
Company's consumer electronics business. In addition, the parties have agreed to
each contribute specific dollar advertising commitments to the promotion of
their brand identities and services in 1997 and 1998. The Company believes that
as a result of significant changing conditions in the marketplace, including
increased competition, certain aspects of these strategic business agreements
with THOMSON, such as THOMSON's volume commitments and the Company's technology
transfer commitments, will be renegotiated in the near term as soon as market
conditions have been clarified.
Proposed Merger with Gemstar. In connection with the proposed merger
with Gemstar, THOMSON agreed to certain modifications to its right of first
refusal, top-up right and special registration right, solely as such rights
apply to the options granted to Gemstar by the Company in connection with the
Merger and related transactions. See "Item 12 -- Changes in Control -- Related
Agreements."
Intellectual Property - Patents, Trademarks, Copyrights and Proprietary
Information
As part of its business strategy, the Company has aggressively pursued
and continues to aggressively pursue a strong patent portfolio to protect its
technology. In the United States, the Company currently holds eight issued
patents. In addition, the Company has a number of U.S. and foreign patent
applications pending. The Company pursues foreign patent protection in those
countries that present market and licensing opportunities for the StarSight EPG
and currently has three issued foreign patents.
Because the Company has intellectual property rights and, in
particular, has obtained patents covering many of the features of the Company's
products and services, the Company believes that competitors will have
difficulty producing and marketing a commercially desirable scheduling service
with program schedule, program selection, one button recording and channel
set-up functions similar to the StarSight EPG products without
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infringing on the Company's intellectual property. The Company believes that
several of its competitors are currently offering or propose to offer
competitive products which may violate the Company's intellectual property. The
Company considers its patents and other intellectual property to be important to
the success of its business and believes that its patent strategy enhances its
competitive position. The Company plans to vigorously enforce its patents and to
protect its trade secrets and other know-how to the full extent of the law. The
Company could incur substantial cost in prosecuting patent infringement suits
against competitors, and there can be no assurance that the Company would be
successful in such actions. See "Legal Proceedings" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." In addition,
there can be no assurance that the Company's patents or patent applications will
be adequate to ensure the Company's competitive position or that competitors
will not be able to produce non-infringing competitive products and services.
The following is a summary of the Company's issued U.S. patents:
TV Schedule. This patent, granted in the United States in 1987, covers
a wide variety of program schedule and selection features, relating to: (i)
controlling a television tuner to tune by program title, (ii) providing program
description and title upon each channel change (program selection by grazing),
(iii) sorting of program schedule information by theme (program selection by
theme), (iv) the continuous update of program schedules (on-screen TV program
listings), (v) the display of time remaining in a given program (program pop-up
information), (vi) the linking of programs in a series (series to be recorded),
(vii) the control of the program recorder through the supply of broadcast
information and serial recording demands, and (viii) the use of menus and menu
selection for recording and the update of a recording calendar from a stored
database of pending recordings as schedule changes occur (one button recording).
In December 1991, a potential competitor of the Company requested that the
United States Patent and Trademark Office (PTO) conduct a re-examination of this
patent, claiming that the patent was invalid. In response to this request, the
Company introduced to the PTO all prior art of which it was aware. After the
re-examination process was completed, the PTO upheld the validity of the patent.
VCR Scheduling. This patent, granted in the United States in 1990,
covers certain features relating to StarSight playback indexing and the
interactive consumer information service currently under development. Some of
the features covered by this patent include recording and indexing broadcast
information where the recording device stores and indexes by program title and
allows interactive selection and recording of supplemental broadcast information
pertaining to the primary broadcast upon user response to an on-screen cue. A
re-examination of this patent was also requested in March 1992 by a potential
competitor claiming that the patent was invalid. After review, the PTO upheld
the validity of this patent.
Automatic Unattended Recording of Cable Television Programs. This
patent was granted in the United States in 1992. The patent covers primarily the
recording features of the StarSight EPG when a cable decoder box is present as
well as certain other features related to future services currently under
development. This patent covers features that, either through schedules
installed in a recording device or implemented in an external device, control
the cable decoder in a variety of ways, including automatically changing the
cable decoder channel to the requested channel at the time of recording.
Background TV Schedule Guide. This patent was granted in the United
States in 1994. This patent covers TV schedule guide features relating to
operational characteristics as the guide is moved between foreground and
background modes of operation.
TV Schedule Guide (Channel Ordering). This patent was granted in the
United States in 1995. The patent relates to an interactive television schedule
display system providing for irregular cursor movement over
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an irregular grid of television schedule information and configured to allow the
user to select the order in which TV channels are listed.
TV Schedule Grid (Program Note Overlay). This patent was granted in the
United States in 1995. This patent, related to the channel ordering patent
described above, includes the TV schedule display system with the irregular
cursor movement combined with the ability to display program note overlays
describing a cursor selected program.
Background TV Schedule System. This patent was granted in the United
States in 1996. The technology covered by this patent provides the TV viewer
with a means of obtaining program schedule information without having to leave
the program currently viewed. As a result, the viewer can obtain information
about other programs currently in progress or scheduled for showing at a later
time.
"Seamless" Guide for Multiple Program Sources. This patent was granted
in the United States in 1996. This patent provides for the merging of television
schedule information received from multiple program sources, such as cable TV
and DBS, into a unified or "seamless" guide.
The Company has an exclusive patent license agreement with Personalized
Media Communications ("PMC") in the field of Program Schedule Navigation and
Navigation Information for a series of patents including PMC's six issued and
other pending patent applications. Under the agreement, the two companies will
jointly complete development work and apply for patents. In consideration for
the license agreement, the Company paid a license fee consisting of a one-time
payment of $500,000 in March 1994 and monthly installments of $25,000 over a
three year period. See Note 7 to Financial Statements. In addition, the Company
will pay all costs, including all patent office fees and attorney fees,
associated with filing and prosecution, and grant to PMC 20,000 shares of Common
Stock of the Company for each of the patents for which the Company elects to
receive an exclusive license under the agreement.
While the Company has obtained patents covering many of the features of
StarSight EPG products and services, competitors or other third parties may
assert claims that StarSight EPG products and services infringe patents or
rights of such third parties. Litigation may be necessary to defend the Company
against such claims. The resolution of such claims would generally involve
complex legal and factual questions and would consequently be highly uncertain.
In particular, any litigation involving such claims would entail considerable
cost to the Company and the diversion of the efforts of management. See "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In the event of an adverse determination in any such
litigation, the Company could be required to expend significant resources to
develop non-infringing technology or to obtain licenses with respect to the use
of the infringing technology. There can be no assurance that the Company would
be successful in such development or that third-party licenses would be
available on acceptable terms. In the event that a third party was to make a
successful claim against the Company or its customers, or that the Company was
unable to obtain a license with respect to such third-party technology on
commercially reasonable terms, the commercialization of the StarSight EPG
products and services could be delayed or foreclosed and the Company's business
would be materially adversely affected.
The Company enters into confidentiality agreements with its employees
and consultants that prohibit the disclosure of confidential information to
anyone outside the Company both during and subsequent to employment. Such
agreements also require disclosure to the Company of ideas, discoveries or
inventions relating to or resulting from work performed for the Company and
assignment to the Company of all proprietary rights to such ideas, discoveries
or inventions. The Company also relies on trade secrets and proprietary know-how
that it seeks to protect, in part, through the non-disclosure agreements with
its employees and consultants and by requiring similar agreements in connection
with its manufacturing and other strategic relationships. There can be no
assurance that these agreements will be not be breached, that the Company would
have adequate
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remedies for any breach, or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.
Competition
The market for delivery of television program schedule information is
highly competitive. To compete successfully in this market, a company must
produce and provide products or services which are relatively low in cost and
easy for consumers to use. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company who produce
and market television schedule information in various formats which compete or
will compete with the StarSight EPG. These alternative formats currently include
printed television schedules, on-screen, passive (non-interactive) scrolling
program guides, interactive program guides and other interactive electronic
scheduling products or services that will compete more directly with the
StarSight EPG.
Printed television schedule competitors of the Company include TV
Guide, local cable television guides and local newspaper guides, all of which
have a significant presence in the market place resulting from their familiarity
to television viewers, their broad base of distribution and their presentation
of feature articles and entertainment news. The Company believes that the
StarSight EPG will compete effectively with printed program guides on the basis
of accuracy and timeliness of program schedule information, the ability to
accommodate ever increasing viewer choices, the ability to present program
information by broadcast time, by title or by theme, as well as by channel, the
convenience of on-screen presentation, the ability to interact with the
television, VCR, or other StarSight device, and ease of use. The Company
believes that the StarSight EPG will compete effectively on the basis of price
with printed program guides offered for sale, such as TV Guide, and on the basis
of enhanced features with printed program guides distributed for free. While the
Company believes the StarSight EPG will compete effectively with respect to
these factors, the established market presence of printed program guides gives
them a competitive advantage. In addition, there can be no assurance that
publishers of printed guides will not be able to produce publications in the
future that meet growing consumer demands.
The Company also competes with companies producing passive electronic
program guides for the cable market such as that offered by Prevue Networks,
Inc. ("Prevue"). The Company believes that the StarSight EPG will compete
effectively with passive electronic program guides on the basis of accuracy and
timeliness of program schedule information, convenience to the user, the ability
to interact with the television, VCR, or other StarSight device, and
profitability to the cable operator. Although such guides are typically offered
as a part of the basic cable service, the Company believes the StarSight EPG
will compete effectively based on its enhanced features. However, there can be
no assurance that existing or planned electronic guide companies will not
develop and market interactive electronic program guides that offer features
similar to the StarSight EPG.
Several companies have announced their intentions to market electronic
program guides in set-top boxes which appear to be very similar to the StarSight
EPG. Prevue has announced its intention to offer several levels of interactive
services which will work in concert with the Prevue Channel and provide user
control of the scroll and which will include features such as direct tune, one
touch record reminders, sorting by genre and browse features and up to seven
days of listings. Prevue has also announced that it plans to offer Quickvue,
which will deliver data directly into set-top boxes and offer 30 minutes to two
hours of program information, as well as varying amounts of program descriptions
and days of listings, depending on the capabilities of the set-top box. Many of
such companies have significantly greater resources than the Company to devote
to the development and commercialization of such products. If developed and
commercialized as currently described, such products would present a significant
competitive challenge to the Company.
In 1995 VideoGuide, Inc. ("VideoGuide") (since December 1996 a
wholly-owned subsidiary of Gemstar) introduced a stand alone set-top box with an
on-screen guide allowing users to display one week of television
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program information. Additional features include direct tuning of set-top boxes
and televisions, automated VCR recording and remote control consolidation.
VideoGuide also offers news, sports and weather information services with its
product. VideoGuide delivers the data to the end user via the BellSouth Mobile
Comm paging company. Customers subscribe directly from VideoGuide to receive the
service. National distribution of the VideoGuide product began in September
1995.
An additional product which may present a competitive challenge to the
StarSight EPG is VCR Plus. VCR Plus, which is produced by Gemstar, is a product
designed to simplify VCR programming. VCR Plus works in conjunction with printed
program guides that include code numbers adjacent to certain shows in their
program listings. VCR Plus only competes with the VCR control functions of the
StarSight EPG; it does not contain on-screen program schedule information or
program selection capabilities. With respect to the VCR control functions, the
Company believes that the StarSight EPG will compete effectively with this
product on the basis of convenience of on-screen presentation of program
information. The VCR Plus system requires codes printed in the newspaper to
utilize the service. Introduction of another Gemstar product, IndexPlus,
occurred in VCRs in late 1995. This technology utilizes VBI to provide on-screen
index of programs taped in videocassette.
In November 1995 Gemstar announced that it had entered into an alliance
with News Corporation's TV Guide to deliver a new interactive electronic program
guide to consumers. TV Guide Plus+ is intended to be incorporated into
television sets and VCRs. TV Guide Plus+ is an interactive on-screen guide with
listings for television programs up to 48 hours in advance. As announced, the
product integrates the video picture into the program listing, allowing the
viewer to watch a television program even when accessing program listings.
Additionally, the product offers the users the ability to display program
information by theme. TV Guide Plus+ will also incorporate Gemstar's VCR Plus+
recording technology, allowing simplified VCR recording. Products incorporating
the TV Guide Plus+ feature were introduced in the consumer electronics market
place in late 1996.
On December 23, 1996, the Company and Gemstar International Group
Limited, a British Virgin Islands corporation, ("Gemstar") agreed to merge
pursuant to and subject to the terms and conditions of the Merger Agreement,
whereby a wholly-owned subsidiary of Gemstar will merge with and into the
Company. The Company will survive the Merger and become a wholly-owned
subsidiary of Gemstar. At the closing of the Merger, shareholders of the Company
will be entitled to receive 0.6062 shares of Gemstar's Ordinary Shares for each
share of the Company's Common Stock. Each outstanding option and each
outstanding warrant to purchase shares of the Company's Common Stock will be
adjusted to reflect the exchange ratio of 0.6062 and will be assumed by Gemstar.
Consummation of the Merger is subject to, among other things, (i) approval of
the Merger Agreement by the Company's shareholders, (ii) approval by the holders
of Gemstar's Ordinary Shares of the issuance of shares in connection with the
Merger, (iii) certain government regulatory approvals, (iv) the filing and
effectiveness of a registration statement for the Gemstar Ordinary Shares to be
issued with the Commission, and (v) the satisfaction or waiver of certain other
conditions to closing of the Merger. See "Item 12 -- Changes in Control" for a
more detailed description of the Merger, related agreements and the terms and
conditions of the Merger Agreement.
Viewers who receive television programming via satellite have access to
a subscription service called SuperGuide offered by Satellite Service Company.
SuperGuide provides satellite subscribers with on-screen program schedule
information. Using a remote control, SuperGuide subscribers can tune to shows by
program title and can also call up brief text descriptions of programs.
SuperGuide automatically updates program listings daily storing up to 12 days of
schedules for 60 channels. SuperGuide presents a competitive service to the
StarSight service in the satellite distribution channel and would present an
additional competitive challenge if extended to other distribution channels.
Manufacturers of set-top boxes have indicated that the next generation
of set-top boxes will be able to provide an interactive guide which would
provide some features similar to those to the StarSight EPG. Final
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features and delivery schedule of these products are unclear at this time and,
therefore, the competitive effect on the StarSight EPG is currently unknown.
Many of these companies have significantly greater resources than the Company to
devote to the development and commercialization of such products. If developed
and commercialized as currently described, such products would present a
significant competitive challenge to the Company.
The personal computing industry has made strides in the areas of
multimedia and has begun announcing products that resemble televisions. Included
in the functionality of these products are interactive electronic program guides
that offer potential competition to the Company. Companies such as Gateway 2000
have announced their intention to offer PCTVs using an interactive program guide
developed by Harman Interactive Group, a subsidiary of Harman International
Corporation. (Certain assets of Harman Interactive Group were recently acquired
by Intel Corporation.) In addition, many other entities have announced
internet-based guide products which have many features similar to the StarSight
EPG. The cost of any entity to create such a guide is minimal. The combination
of these internet-based guides and the present and future widespread
availability of internet enabled consumer electronics devices (including TVs)
could pose a significant competitive challenge to the Company's products. While
there is no evidence that such a product will ever be successfully introduced,
it is possible that this emerging category will give birth to a new wave of
interactive program guide companies that will compete directly with the Company.
Although the Company believes that its competitive position is strong
with respect to known competitors, there may be competitors with significant
competitive strengths which are not known to the Company or discussed herein.
Such potential competitors may include larger, more established companies in
both the interactive multimedia services and interactive television fields that
could enter the on-screen program guide delivery market. There can be no
assurance that the StarSight EPG will achieve market acceptance or that it will
be able to compete successfully with such known or unknown competitors, some of
which may possess substantially greater financial, sales and marketing resources
than those of the Company.
Engineering and Development
The Company currently concentrates its engineering and development
efforts on completing or acquiring hardware and software to: (i) enable customer
support personnel to efficiently access customer authorization and network
status data, (ii) improve on aspects of the PBS data network, (iii) make
available alternate data delivery technologies to various service providers,
such as cable and telco operators, (iv) integrate the StarSight EPG into
televisions, VCRs, TVCRs and other applicable consumer electronics products, (v)
reduce the cost to consumer electronic manufacturers for incorporation of the
StarSight EPG into TVs, VCRs, TVCRs and other consumer electronics products, and
(vi) integrate the StarSight EPG in set-top boxes for the cable and telco
industry, including the development of advanced analog and digital applications
of StarSight technology.
Rapid technological developments are expected to occur in the
interactive television services industry. The Company believes that its success
will depend upon its ability to develop, market and introduce products which
meet changing user needs and which successfully anticipate or respond to
technological changes on a cost effective and timely basis. There can be no
assurance that technological changes or other significant changes in the
television industry will not render the Company's products and services obsolete
or that the Company will be able to keep pace with technological developments.
Many of the Company's present and potential future competitors have, or may
have, substantially greater resources than the Company to devote to further
technological and new product developments.
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Government Regulation
The cable television and telco industries are subject to extensive
regulations by federal, state and local agencies. These regulations, while not
directly affecting the Company, do affect cable operators and telcos, upon which
the Company will significantly rely for the marketing and distribution of the
StarSight service to potential customers. As such, these regulations may
adversely affect the Company's business. In October 1992, Congress enacted the
1992 Cable Act, as an amendment to the Communication Act of 1934, which provides
a significant regulatory framework for the operation of cable television
systems. The 1992 Cable Act introduced substantial rate regulation for certain
services and equipment provided by most cable systems in the United States.
Pursuant to the 1992 Cable Act, the Federal Communications Commission ("FCC")
adopted regulations with respect to rates charged for certain cable services and
for equipment to receive those services. The FCC also imposed new regulations
under the 1992 Cable Act in the areas of customer service, technical standards,
rates for leased access channels and disposition of a customer's home wiring. In
addition, the FCC also imposed new regulations in the area of compatibility of
cable equipment with other consumer electronic equipment such as "cable ready"
televisions and VCRs.
In January 1996, Congress passed the 1996 Telecommunications Act which
substantially amends but does not replace the Communications Act of 1934. The
1996 Telecommunications Act, among other things, sets forth rules for the
development of competitive markets in telecommunications, deregulates certain
cable rates, enables telcos and other common carriers to provide video
programming to subscribers, abolishes the FCC's video dialtone ("VDT")
regulations (although allows existing VDT systems to continue to exist), and
directs the FCC to require TV set manufacturers to install "V-chips" in TV sets
to allow users to block the reception of objectionable programming. With respect
to telcos and other entities entering the video market place, the 1996
Telecommunications Act establishes a regulatory regime called OVS, which is
meant to replace VDT. The 1996 Telecommunications Act directs the FCC to
prescribe regulations to prohibit OVS operators from discriminating against
unaffiliated video programming providers with regard to program selection
material provided to subscribers and, specifically, to prohibit them from
omitting unaffiliated video programming services carried on the system from any
navigational device, guide or menu.
Depending on the outcome of the Company's business strategy in the
cable and telco distribution channels and the availability of StarSight-capable
set-top boxes through third party licensed manufacturers, the Company may derive
a significant portion of its customer revenue from the distribution of the
StarSight service through cable and telco operators. The extent to which the
effects of the 1992 Cable Act on cable operators and the regulatory requirements
for telcos may be somewhat lessened under the 1996 Telecommunications Act will
depend to a significant degree on the final form and implementation of the
regulations to be adopted by the FCC. To the extent that the 1992 Cable Act and
the 1996 Telecommunications Act and regulations adopted thereunder adversely
affect cable operators and/or telcos and the manner in which they can market the
StarSight EPG, such regulations could also adversely affect the Company's
business. It is uncertain the extent to which the 1996 Telecommunications Act
will increase the number of service providers in a market and what effect it
will have on the Company's business strategy in the cable and telco distribution
channels or on the adoption and distribution of the StarSight EPG.
Employees
As of January 31, 1997, the Company employed 127 individuals, of whom
26 were engaged directly in engineering and development activities, 13 in
administrative positions, 36 in sales and marketing, and 52 in operations and
customer service. The Company believes that it has been successful to date in
attracting and retaining qualified personnel. The Company believes that its
future success will depend in part on its continued ability to recruit, retain
and motivate qualified management, sales, marketing and technical personnel. The
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Company's operating results would be adversely affected if the Company were
unable to attract, assimilate or retain these personnel. None of the Company's
employees is represented by a labor union. The Company has not experienced any
work stoppages and considers its relations with its employees to be good.
The Company has experienced and expects to continue to experience
growth in the number of employees, consultants and subcontractors necessary to
support the Company's business operations. This growth has placed and will
continue to place a substantial strain on the Company's management, operational,
financial and accounting resources. The need to support the Company's
engineering and development and proposed marketing efforts will require the
Company to increase the number of employees, consultants and subcontractors,
which in turn will require a substantial amount of training and other resources.
The Company's need to manage growth effectively will also require it to continue
to implement and improve its operational, financial and management information
systems and to motivate and manage its employees and consultants. The Company's
failure to manage growth effectively would have a material adverse effect on the
Company's business. Presently it is uncertain what effect, if any, the Merger
with Gemstar will have on the Company's future personnel needs and growth in the
number of employees, consultants and subcontractors.
ITEM 2. PROPERTIES
The Company leases approximately 60,000 square feet in Fremont,
California pursuant to leases that expire in March 2002. The Company believes
that its existing office space will serve its foreseeable needs through the end
of 1997 and believes that sufficient additional space will be available to it at
that time, either in its current building or at another location, on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Gemstar Litigation
The Company and Gemstar are currently in litigation with each other
over their respective intellectual property rights as described more fully
below. The Company and Gemstar, however, have agreed to cease ("stay") all
activity with respect to the pending litigation between them until the earlier
of the consummation of the Merger or termination of the Merger Agreement.
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 was dismissed with prejudice. In addition, the case
has been phased to permit resolution of validity and infringement issues prior
to resolving all other disputed issues. The court conducted trial in August 1996
regarding Levine's alleged unequitable conduct. A decision has not been rendered
in view of the aforementioned stay.
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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. A trial date has not
yet been set and discovery has been stayed pursuant to the Merger Agreement.
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. On May 5, 1995, SuperGuide amended its
complaint to add a count asserting that the Company's `121 patent is invalid
and/or unenforceable and is not infringed upon by SuperGuide. The Company filed
a motion to dismiss SuperGuide's causes of action with respect to the `121
patent for lack of subject matter jurisdiction (based on no case or
controversy); on August 8, 1995, the Company's motion was granted. This lawsuit
also has been consolidated with the above mentioned cases for discovery and
pre-trial purposes. A trial date has not yet been set and discovery has been
stayed pursuant to the aforementioned Merger Agreement.
United Video Litigation
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 ten
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
of 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 set the trial date for the next
phase for May 5, 1997. The Company will present witnesses during this next phase
relating to the validity, enforceability and infringement of the `121 patent.
Scientific-Atlanta Arbitration and Litigation
In 1995, the Company brought an arbitration action against
Scientific-Atlanta concerning Scientific-Atlanta's alleged delay in the
deployment of StarSight-capable set-top boxes and its development of a competing
electronic program guide allegedly using the Company's technology in violation
of its licensing agreement with the Company. In apparent response to the
arbitration action, Scientific-Atlanta filed a lawsuit in the United States
District Court for the Northern District of Georgia (the "Atlanta suit") in
February 1996 against the Company and Philips alleging that the Company's stand
alone StarSight receiver infringed on three U.S. patents owned by
Scientific-Atlanta. The Company filed a demand on April 30, 1996 for arbitration
on the issue of whether the Company is licensed to use Scientific-Atlanta's
patents. The arbitrators have been selected, but
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there has been no discovery and no hearing date has been set. The judge in the
Atlanta suit has stayed proceedings pending the outcome of the April 30, 1996
arbitration. On July 23, 1996, the American Arbitration Association ("AAA")
awarded the Company $15,000,000 in monetary damages plus attorney 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. On December 11, 1996, the
U.S. District Court for the Northern District of California confirmed the AAA
arbitration panel award of $15,000,000, plus attorney fees and arbitration
costs. In addition, the court confirmed the AAA panel's injunction prohibiting
Scientific-Atlanta for a period of three years from shipping to third parties
any consumer product incorporating an interactive program guide, except for
orders already committed to in writing as of July 23, 1996, the date of the AAA
panel ruling. On December 24, 1996, Scientific-Atlanta appealed $10,000,000 of
the award to the U.S. District Court of Appeals for the Ninth Circuit. The
matter is currently pending and no briefs have been filed.
In January 1997, the Company received a payment of $7,715,000 for a
portion of the award, consisting of $5,000,000 in damages, $2,485,000 for
attorney fees and arbitration costs and $230,000 in accrued interest. See Note 5
to Financial Statements.
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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq National Market
under the symbol "SGHT." The following table indicates the quarterly high and
low sale prices per share of the Common Stock of the Company as reported on The
Nasdaq National Market for the period from January 1, 1995 through December 31,
1996:
High Low
Quarter ended March 31, 1995 $9.75 $5.50
Quarter ended June 30, 1995 7.75 4.63
Quarter ended September 30, 1995 6.00 3.25
Quarter ended December 31, 1995 6.88 2.25
Quarter ended March 31, 1996 7.50 4.50
Quarter ended June 30, 1996 11.75 5.38
Quarter ended September 30, 1996 10.25 5.25
Quarter ended December 31, 1996 10.00 5.88
As of February 18, 1997, there were 339 holders of record of the
Company's Common Stock.
The Company has never declared or paid cash dividends and currently
intends to retain any future earnings for use in the development and operation
of its business. Accordingly, the Company does not expect to pay cash dividends
in the foreseeable future.
28
<PAGE>
<TABLE>
ITEM 6: SELECTED FINANCIAL DATA
<CAPTION>
Six Months
ended
Statement of Twelve Months ended December 31, December 31, Twelve Months ended June 30,
Operations Data: 1996 1995 1994 1994 1993 1992
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 8,698 $ 1,913 $ 70
Cost of goods sold 1,544 676
Inventory reserves and
write-offs 801 4,931 1,450
------------ ------------ ------------
Gross profit (loss) 6,353 (3,694) (1,380)
------------ ------------ ------------
Costs and expenses:
General and administrative 10,311 9,848 8,302 $ 8,228 $ 3,767 $ 1,765
Litigation costs 4,776 2,880 1,644
Engineering and
development 3,420 3,539 2,128 6,843 3,131 1,563
Marketing 7,480 6,823 4,325 4,478 2,044 332
Network services and
other expenses 6,127 5,570 3,292 2,682 913 514
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses 32,114 28,660 19,691 22,231 9,855 4,174
Interest income, net 712 574 810 1,676 168 150
------------ ------------ ------------ ------------ ------------ ------------
Loss before cumulative
effect of accounting
change (25,049) (31,780) (20,261) (20,555) (9,687) (4,024)
Cumulative effect of
accounting change (1,172)
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (25,049) $ (31,780) $ (21,433) $ (20,555) $ (9,687) $ (4,024)
============ ============ ============ ============ ============ ============
Loss per common share:
Loss before cumulative
effect of accounting
change $ (1.01) $ (1.50) $ (0.97) $ (1.08) $ (0.70) $ (0.29)
Cumulative effect of
accounting change (0.06)
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (1.01) $ (1.50) $ (1.03) $ (1.08) $ (0.70) $ (0.29)
============ ============ ============ ============ ============ ============
Number of shares used
for calculation of net
loss per common share 24,783,159 21,163,768 20,799,445 19,082,759 13,762,475 13,755,743
============ ============ ============ ============ ============ ============
December 31, June 30,
-------------------------------------------- --------------------------------------------
Balance Sheet Data: 1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $25,708 $8,787 $10,141 $24,087 $25,690 $4,196
Short-term investments 1,989 16,940 13,883
Working capital 15,603 3,914 23,939 36,422 23,900 3,122
Long-term investments 5,004 10,024
Total assets 35,031 16,333 40,831 56,695 28,037 5,175
Long-term license fee payable 74 363 502 64 85
Long-term deferred revenue 9,700
Accumulated deficit (115,735) (90,686) (58,906) (37,473) (16,918) (7,231)
Total shareholders' equity 9,838 8,343 34,179 52,768 25,366 3,987
</TABLE>
29
<PAGE>
ITEM 7. 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 in 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 meet its
capital requirements.
Proposed Merger with Gemstar
On December 23, 1996, the Company and Gemstar agreed to merge pursuant
to and subject to the terms and conditions of the Merger Agreement, whereby a
wholly-owned subsidiary of Gemstar will merge with and into the Company. The
Company will survive the merger and become a wholly-owned subsidiary of Gemstar.
At the closing of the Merger, shareholders of the Company will be entitled to
receive 0.6062 shares of Gemstar's Ordinary Shares, for each share of the
Company's Common Stock. Each outstanding option and each outstanding warrant to
purchase shares of the Company's Common Stock will be adjusted to reflect the
exchange ratio of 0.6062 and will be assumed by Gemstar. Consummation of the
Merger is subject to, among other things, (i) approval of the Merger Agreement
by the Company's shareholders, (ii) approval by the holders of Gemstar's
Ordinary Shares of the issuance of shares in connection with the Merger, (iii)
certain government regulatory approvals, (iv) the filing and effectiveness of a
registration statement for the Gemstar Ordinary Shares to be issued with the
Commission, and (v) the satisfaction or waiver of certain other customary
conditions to closing of the Merger. See "Item 12 -- Changes in Control" for a
more detailed description of the Merger, related agreements and the terms and
conditions of the Merger Agreement.
Overview and Recent Developments
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 brand name. The
Company generates revenue from subscription sales of the StarSight service to
customers, either through service providers, such as cable operators and telcos,
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 December 31, 1996,
the Company had accumulated a deficit of $115,735,000.
In September 1994, the Company changed its fiscal year from one ending
June 30 to one ending December 31 beginning on January 1, 1995. Accordingly, the
accompanying financial statements are for the twelve months ended December 31,
1996 and 1995 ("Fiscal 1996" and "Fiscal 1995," respectively),
30
<PAGE>
the six months ended December 31, 1994 ("Transition 1994") and the twelve months
ended June 30, 1994 ("Fiscal 1994").
The Company has entered into technology development and licensing
agreements with key manufacturers for the manufacture of StarSight-capable
televisions, VCRs, TVCRs and C-band satellite receivers. These manufacturers
include TCE, Zenith, Sony, Mitsubishi, Toshiba, Matsushita, Philips, Sharp,
Samsung, GoldStar, and Daewoo. The Company has also entered into license
agreements with General Instrument, Scientific-Atlanta and Zenith for the
incorporation of StarSight-enabling technology into set-top boxes to be
manufactured by them for sale to cable system operators who offer StarSight to
their customers. It is possible that manufacturers will reduce or delay the
manufacture of StarSight-capable consumer electronics products as a result of
the announcement, expectation or consummation of the Merger. The Company
recorded an inventory valuation allowance in the fourth quarter of Fiscal 1996
due to delays in the manufacture of StarSight-capable consumer electronics
products which the Company believes were attributable, in part, to uncertainties
regarding the effects of the Merger. Such manufacturing delays and uncertainties
are expected to continue at least in the near term. See Note 9 to Financial
Statements.
The Company believes its intellectual property applies to several
business segments, including but not limited to DBS, PC/TV, the Internet, MMDS,
and cable/telco digital set-top box electronic program guide applications.
Hence, the Company devotes significant management time and effort to identify,
negotiate and enter into royalty bearing licensing agreements. As part of this
licensing business and strategy, the Company has entered into royalty bearing
license agreements with TCE, Sony, Toshiba, Panasonic, Uniden and HNS for the
use of certain of the Company's intellectual property in connection with certain
DSS equipment manufactured and distributed by them. Such agreements generally
require the periodic payment of per unit royalties to the Company based on units
manufactured or sold.
On December 20, 1996, the Company entered into a licensing agreement
with Microsoft to license certain of its technologies to Microsoft. Under the
agreement, Microsoft paid the Company a non-refundable "lump-sum" royalty
payment of $20,000,000 (the "Royalty Payment") for a non-exclusive, worldwide
license for the Company's intellectual property related to electronic program
guides, which technology will be used by Microsoft for future software products
and services on the PC platform. Additionally, Microsoft provided the Company
with a royalty free license under certain of its intellectual property related
to electronic program guides. Microsoft also agreed to pay the Company certain
additional per unit royalties related to additional features of StarSight
licensed product and a percentage of advertising revenues derived from Microsoft
licensed products. The Company agreed to pay Microsoft a percentage of
subscription revenues derived from StarSight licensed products. The Company will
recognize revenue related to the Royalty Payment ratably during the initial two
year period of the agreement based on the projected installed units of Microsoft
licensed product.
The Company believes its on-going licensing efforts are likely to have
a significant impact on the Company's overall operating success.
In March 1996, the Company and THOMSON finalized agreements to form a
long-term strategic relationship to aggressively incorporate and promote
StarSight technology and related services in selected THOMSON product lines. The
key terms and conditions of these agreements follow:
o The Company sold 3,333,333 shares of its Common Stock to
THOMSON at $7.50 per share or $25,000,000 in total.
31
<PAGE>
o The Company granted THOMSON a warrant to purchase 2,000,000
shares of the Company's Common Stock as follows: up to
1,000,000 shares at $7.50 per share on or prior to February 1,
1998 and up to the balance of the shares at $10.00 per share
on or prior to February 1, 1999. The total number of shares
purchasable by THOMSON under the warrant is limited to 19.6%
of the Company's issued and outstanding Common Stock.
o THOMSON will put StarSight capability into a significant
portion of THOMSON's suitable consumer electronic products
over the ten year life of the agreement.
o The Company will pay THOMSON a per subscriber fee for new
subscribers using a THOMSON StarSight-capable product. Fees
under this agreement are limited to certain annual maximums
through the year 2000.
o The Company will pay THOMSON a percentage of all subscription
fees derived from THOMSON StarSight-capable products. Fees
under this agreement begin after the achievement of an
agreed-upon minimum of THOMSON StarSight-capable products
manufactured or procured by THOMSON. In addition, the Company
will pay THOMSON a percentage of all revenues related to
consumer electronics products whether or not the subscriber is
using a THOMSON StarSight-capable product. Such fees under
this agreement begin after the achievement of an agreed-upon
minimum of THOMSON StarSight-capable products manufactured or
procured by THOMSON. This agreement expires in 2010.
o The Company and THOMSON each agree to contribute significant
specific dollar advertising commitments in each year 1997 and
1998 for advertising and promotion of THOMSON
StarSight-capable products.
The Company believes that as a result of significant changing
conditions in the marketplace, including increased competition, certain aspects
of these strategic business agreements with THOMSON, such as THOMSON's volume
commitments and the Company's technology transfer commitments, will be
renegotiated in the near term as soon as market conditions have been clarified.
Results of Operations
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 losses were $25,049,000 for
Fiscal 1996, $31,780,000 for Fiscal 1995, $21,433,000 for Transition 1994 and
$20,555,000 for Fiscal 1994.
Revenues for Fiscal 1996, Fiscal 1995 and Transition 1994 were
$8,622,000, $1,913,000 and $70,000, respectively. The Company had no revenues in
Fiscal 1994. Revenues increased in such periods due to an increase in license
revenues and, to a lesser extent, increased subscription revenues. Fiscal 1996
license revenues were derived principally from license agreements incorporating
non-StarSight-capable DSS equipment manufactured and distributed by TCE, Sony
and other consumer electronics manufacturers.
Cost of goods sold was $1,544,000 and $676,000 in Fiscal 1996 and
Fiscal 1995, respectively, and primarily represents costs associated with
license revenues. In Fiscal 1996, the Company recorded an additional lower of
cost or market inventory valuation allowance of $801,000 related to raw
materials (i.e., integrated circuits and other components) purchased for
manufacturers for use in StarSight-capable consumer electronics products. This
inventory valuation allowance was due to delays in the manufacture of
StarSight-capable
32
<PAGE>
consumer electronics products which the Company believes were attributable, in
part, to uncertainties regarding the effects of the Merger. Fiscal 1995 and
Transition 1994 include inventory reserves and write-offs of $4,931,000 and
$1,450,000, respectively, related to the Company's agreement with a third party
manufacturer (the "Manufacturer") for the manufacture of as many as 100,000
stand alone StarSight receivers ("Receivers") on a subcontract basis. In
connection with this agreement, the Company provided the Manufacturer certain
raw materials to complete the manufacture of the Receivers. At December 31,
1994, the Company had recorded an inventory valuation allowance of $1,450,000
related to this agreement covering approximately 25,000 Receivers which the
Company had committed to purchase. Such inventory valuation allowance
represented the Company's estimate of the excess of cost over net realizable
value on work-in-process and finished products inventories to reflect the
anticipated sales price of the Company's stand alone StarSight receiver at the
time.
During the first quarter of 1995, the Company committed to purchase
another 10,000 Receivers and recorded an additional inventory valuation
allowance of $930,000. In September 1995, the Company canceled its commitment to
purchase the remaining 65,000 Receivers from the Manufacturer. Such cancellation
did not result in any additional cost or liability to the Company. However, in
September 1995, as a result of the completion of this agreement with the
Manufacturer and a significant reduction in the anticipated sales price of the
Receivers, the Company recorded an additional lower of cost or market inventory
valuation allowance of $2,340,000. In addition, the Company expensed $960,000 of
excess work-in-process inventories originally acquired for use in the
manufacture of the remaining 65,000 receivers. In the fourth quarter of 1995,
the Company recorded an additional lower of cost or market inventory valuation
allowance of $701,000. As a result, the total 1995 inventory reserve and
write-off was $4,931,000.
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 for
Fiscal 1996, Fiscal 1995, Transition 1994, and Fiscal 1994 was $10,311,000,
$9,848,000, $8,302,000 and $8,228,000, respectively. The increase in Fiscal 1996
is primarily the result of certain professional advisors' and
transaction-related costs in connection with the Merger with Gemstar. The
increase in Fiscal 1995, when compared to Transition 1994, was primarily due to
$668,000 in expenses in connection with the hiring of the Company's new
President and Chief Executive Officer and $700,000 in executive bonuses. The
increase in general and administrative expense for Transition 1994 compared to
Fiscal 1994 was primarily due to $3,117,000 for manufacturer reimbursements
pursuant to an agreement to reimburse a manufacturer for specific incremental
manufacturing costs of incorporating StarSight technology into certain
StarSight-capable products offset by only six months of activity.
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 December 31, 1996, the
Company has expensed $10,472,000 in legal and other costs in connection with
such litigation. Litigation costs increased to $4,776,000 in Fiscal 1996 from
$2,880,000 in Fiscal 1995 and $1,644,000 for Transition 1994. The increase in
such litigation costs over the past two fiscal periods 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. Effective July 1,
1994, the Company changed its method of accounting to expense legal costs
incurred in connection with the aforementioned patent infringement litigation.
Previously all such
33
<PAGE>
legal costs were capitalized and amortized over the remaining useful lives of
the related patents. The Company believes that this change in method is
preferable because it conforms to the predominant industry practice. The
cumulative effect at July 1, 1994 of adopting this accounting change was an
increase in the Company's net loss for Transition 1994 of $1,172,000 ($0.06 per
share). See Item 3, "Legal Proceedings." The Company expects to incur additional
litigation 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
incorporated within televisions, VCRs, TVCRs, satellite receivers, cable and
telco set-top boxes, and stand alone StarSight receivers. Engineering and
development expense decreased slightly in Fiscal 1996 to $3,420,000 from
$3,539,000 in Fiscal 1995. The decrease was primarily due to lower staffing
levels when compared to the previous year's activity. Engineering and
development expense increased from $2,128,000 in Transition 1994 to $3,539,000
in Fiscal 1995, representing twelve months of activity, compared with six months
for Transition 1994. Engineering and development expense decreased to $2,128,000
for Transition 1994 compared to $6,843,000 in Fiscal 1994. A portion of this pro
rata decrease is attributable to the gradual shifting of the Company's focus
from early development and engineering efforts to preparation for manufacturing
and commercial operations. In addition, during Fiscal 1994, the Company expensed
approximately $1,322,000 in connection with an exclusive patent license
agreement with another company. See Note 7 to Financial Statements.
Marketing expense consists primarily of salaries for sales and
marketing personnel, product launch costs, advertising, manufacturing
incentives, consultants, market research costs, and trade show and industry
awareness costs. Marketing expense for Fiscal 1996 increased to $7,480,000 from
$6,823,000 for Fiscal 1995. The increase is primarily due to manufacturer
incentives of $812,000 and certain target market advertising expense. For Fiscal
1995, marketing expense increased to $6,823,000 compared to $4,325,000 for
Transition 1994. The increase principally represents the effect of twelve months
of activity compared with six months for the prior fiscal period.
Network services and other expenses consist primarily of the combined
cost of purchasing television scheduling data from a television data supplier
(TVDT) 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 customer monthly cost with annual maximums on the cost. The combined cost
for the purchase and broadcast of the television scheduling data through these
contracts is limited to $8,115,000 per year (for each year in which the
contracts overlap) subject to annual adjustments related to changes in the
consumer price index. In addition, network and other expenses include operating
expenses related to subscription order processing, customer and technical
support and manufacturing operations and support. Network services and other
expenses increased to $6,127,000 in Fiscal 1996 from $5,570,000 in Fiscal 1995,
$3,292,000 for Transition 1994 and $2,682,000 in Fiscal 1994. The increase was
primarily attributable to an increase in expenses related to the operation of
the data distribution network for the StarSight service and costs related to
order processing and customer and technical support.
Interest income was $726,000 for Fiscal 1996, $607,000 for Fiscal 1995,
$833,000 for Transition 1994 and $1,695,000 in Fiscal 1994. The decrease in
interest income is attributable to a decrease in the Company's cash and cash
equivalents, short-term investment and long-term investment balances during the
last three fiscal periods.
34
<PAGE>
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 licensing and subscription revenues of
StarSight products and services in order to minimize negative cash flow from
operations. Because of its limited commercial operating history, 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 be successful in
the commercial distribution of its products and services, obtain adequate
financing to fulfill its marketing plan and successfully market its products and
services to potential subscribers and license its intellectual property for
non-StarSight-capable products.
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
total of $77,125,000 through December 31, 1996 (including $24,625,000 in Fiscal
1996). In addition, the Company completed an initial public offering in August
1993, raising $42,300,000, net of issuance costs. In December 1996, the Company
received $20,000,000 in connection with a license agreement with Microsoft for
use of the Company's intellectual property in future software products and
services on the PC platform. See Note 4 to Financial Statements. At December 31,
1996, the Company had cash and cash equivalents and short-term investments
available for sale of $27,697,000. In January 1997, the Company received a
partial payment of its arbitration award of $7,715,000 from Scientific-Atlanta.
See Note 5 to Financial Statements.
The Company may seek additional investments from its current or new
strategic investors. In addition, the Company may consider issuance of other
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. Debt or equity financing may not be available when
needed or on terms acceptable to the Company.
As of December 31, 1996, the Company had an accumulated deficit of
$115,735,000. The accumulated deficit increased from $90,686,000 as of December
31, 1995.
Negative cash flow from operations was $5,506,000 for Fiscal 1996,
$27,608,000 for Fiscal 1995, $17,092,000 for Transition 1994 and $19,717,000 in
Fiscal 1994. The large reduction in negative operating cash flow in Fiscal 1996
was primarily due to the Royalty Payment of $20,000,000 received in December
1996 related to the Microsoft licensing agreement.
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 and other expenses
associated with the delivery of StarSight to customers. The Company anticipates
expending additional cash resources to provide incentives for manufacturers to
incorporate the StarSight EPG into StarSight-capable products manufactured by
them. For a description of certain future commitments of the Company, see Note
12 to Financial Statements.
35
<PAGE>
Through December 31, 1996, the Company expensed $10,472,000 in legal
and other costs in connection with patent infringement litigation (see Note 7 to
Financial Statements). 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. No estimate of the total amount of such
additional litigation costs can be made at this time.
The Company is dependent on 1997 license and subscription revenue to
minimize negative cash flow from operations. The Company believes that the
availability of StarSight-capable TVs, VCRs, TVCRs, satellite receivers, cable
and telco set-top boxes, and stand alone StarSight receivers in the market
place, combined with an intellectual property licensing program, is essential to
the Company's 1997 revenues and cash flow.
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 set-top 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 EPG
products and services to their customers, (iv) the level of marketing required
to increase subscribers 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 will be sufficient to sustain the Company's current level
of operations and meet its financial obligations through the end of 1997.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the independent auditors' report
appear on pages F-1 through F-25 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
37
<PAGE>
PART III
<TABLE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>
Name Age Position Director Since
<S> <C> <C> <C>
Larry W. Wangberg 54 Chairman of the Board of Directors and Chief Executive 1993
Officer
Brian L. Klosterman 39 President, Chief Operating Officer and Director 1996
Martin W. Henkel(1) 50 Executive Vice President, Chief Financial Officer and Director 1992
Jack C. Clifford (1)(2) 63 Director 1993
Ajit M. Dalvi (1) 55 Director 1993
Donn M. Davis (3) 34 Director 1995
Thomas E. Dooley (1)(3) 40 Director 1995
John F. Doyle (3) 67 Director 1990
John W. Goddard (1)(2) 55 Director 1994
Edward D. Horowitz 49 Director 1993
James E. Meyer (1) 42 Director 1996
Jacques Thibon 33 Director 1996
<FN>
- ----------------
(1) Member of the Finance Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
</FN>
</TABLE>
There is no family relationship between any director or executive
officer of the Company.
Mr. Wangberg has served as the Chairman of the Board of Directors and
Chief Executive Officer since April 1996. From February 1995 to April 1996, Mr.
Wangberg served as the Company's President and Chief Executive Officer. Mr.
Wangberg was elected to the Board of Directors of the Company in May 1993. From
1983 to February 1995, Mr. Wangberg served as President and Chief Executive
Officer of Times Mirror Cable Television, Inc., a provider of broadband-based
network and cable television services. Mr. Wangberg simultaneously served as
Senior Vice President of the parent The Times Mirror Company, a major
information provider. Mr. Wangberg is a past chairman of the National Cable
Television Association (NCTA). Mr. Wangberg has also served on the boards of
directors of Zilog, Inc. and USCS International, Inc. since April 1996.
38
<PAGE>
Mr. Klosterman has served as the Company's President and Chief
Operating Officer since April 1996 and was elected to the Board of the Company
in April 1996. From March 1995 to April 1996, Mr. Klosterman served as the
Company's Senior Vice President, Marketing, and from March 1993 to March 1995,
he served as Senior Vice President, Consumer Electronics Marketing. From 1988 to
1993, Mr. Klosterman held various positions with Sony Corporation of America,
most recently as Vice President. From 1985 to 1988, Mr. Klosterman served in
various positions with THOMSON Consumer Electronics, Inc., including his last
position as Manager of Television Marketing.
Mr. Henkel has served as Executive Vice President since December 1994
and as Chief Financial Officer since November 1991. From November 1991 to
December 1994, Mr. Henkel served as Vice President, Operations. He became a
director of the Company in July 1992. From 1989 to January 1992, Mr. Henkel
served as Vice President of Operations and Chief Financial Officer of Phylon
Communications, Inc., an integrated circuit design and hardware manufacturing
company. From 1987 to 1989, Mr. Henkel was President of Martin Henkel
Consulting, a financial and administrative consulting firm. From 1985 to 1987,
Mr. Henkel was Corporate Controller of Telcom General Corporation. Mr. Henkel
was a divisional Controller at Apple Computer, Inc. from 1982 to 1985.
Mr. Clifford was elected to the Board of Directors of the Company in
May 1993. Since February 28, 1997, Mr. Clifford has been a self-employed
consultant. From 1996 to February 28, 1997, Mr. Clifford was Executive Vice
President, Broadcasting, Programming & Electronic Media, of The Providence
Journal Company, and from 1989 to 1996, he was Vice President-Telecommunications
of The Providence Journal Company. From 1982 to October 1995, he also served as
Chairman of Colony Communications, a cable operator and former subsidiary of The
Providence Journal Company.
Mr. Dalvi was elected to the Board of Directors of the Company in
November 1993. Mr. Dalvi has served as Senior Vice President of Marketing and
Programming for Cox Communications, a cable operator, since 1987. Since joining
Cox in 1982 as Director of Marketing, Mr. Dalvi has held several positions
there, including Vice President of Marketing and Programming from 1985 to 1987
and Vice President of Marketing, Planning and Development from 1984 until 1985.
Mr. Dalvi also serves on the boards of The Discovery Channel and E!
Entertainment Television.
Mr. Davis was elected to the Board of Directors of the Company in
August 1995. Mr. Davis has served as President of Tribune Ventures, a
development unit of Tribune Company, since February 1995. From August 1992 to
February 1995, he served as Senior Counsel for the Tribune Company. Previously,
he was an attorney in private practice at Sidley & Austin. Mr. Davis also serves
on the board of Excite, Inc.
Mr. Dooley was elected to the Board of Directors of the Company in
April 1995. Mr. Dooley was appointed a Director and Deputy Chairman of Viacom
Inc. ("Viacom") in January 1996 and has been an executive officer of Viacom
since 1987 In March 1994, he was elected Executive Vice President - Finance,
Corporate Development and Communications of Viacom. From July 1992 to March
1994, Mr. Dooley served as Senior Vice President, Corporate Development of
Viacom. From August 1993 to March 1994, he also served as President, Interactive
Television. In December 1990, Mr. Dooley was named Vice President, Finance of
Viacom, and he served as Viacom's Vice President and Treasurer from 1987 to
1994. Mr. Dooley joined Viacom International, Inc. in 1980 in the corporate
finance area and has held various positions in the corporate and divisional
finance areas.
Mr. Doyle was elected to the Board of Directors of the Company in April
1990. Since April 1992, Mr. Doyle has been the president of his own consulting
company, Doyle Consulting. From 1986 to April 1992, Mr. Doyle was a founding
partner of The Verity Group, a market research company.
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<PAGE>
From 1971 to 1986, Mr. Doyle served as President and Chairman of the Board of
Pioneer Electronic Corp. (USA). During that time he also served two terms as
Chairman of the Board of the Consumer Electronics Division and also was a member
of the Board of Governors of the Electronics Industry Association.
Mr. Goddard was elected to the Board of Directors of the Company in May
1994. Since January 1997, Mr. Goddard has been a self-employed consultant. Mr.
Goddard was a consultant for Viacom International, Inc. from August 1996 to
January 1997. From 1980 to 1996, Mr. Goddard served as President and Chief
Executive Officer of the cable division of Viacom International Inc. Mr. Goddard
has served as a director of TCI Satellite Entertainment, Inc. since December
1996.
Mr. Horowitz was elected to the Board of Directors of the Company in
November 1993. Mr. Horowitz is Executive Vice President-Advanced Development at
Citicorp, with global responsibility for incorporating electronic interactive
delivery into product lines and customer distribution systems. Prior to joining
Citicorp in January 1997, Mr. Horowitz was Senior Vice President-Technology at
Viacom Inc. and Chairman and Chief Executive Officer of Viacom Interactive Media
from 1989 to 1994. He was also a member of the Viacom Executive Committee. From
1974 to 1989, Mr. Horowitz held senior management positions with Home Box Office
(HBO), a subsidiary of Time Warner, Inc. Mr. Horowitz has served as a director
of Ariel Corporation since May 1995.
Mr. Meyer was elected to the Board of Directors of the Company in
February 1996. Since joining Thomson Consumer Electronics, Inc., a wholly-owned
subsidiary of THOMSON multimedia S.A., in 1988, Mr. Meyer has served as
Executive Vice President Marketing and Sales-Americas. Prior to his current
position, Mr. Meyer served as Senior Vice President, Product Management for
three years. Before that, he was Senior Vice President, TV Division-Americas.
Mr. Meyer also serves on the board of directors of THOMSON/Sun Interactive
Alliance.
Mr. Thibon was elected to the Board of Directors of the Company in
February 1996. Mr. Thibon has served as Vice President Corporate Business
Development for THOMSON multimedia S.A. since February 1997, after serving as
General Manager Strategic Alliances since March 1995. From 1987 to February
1995, Mr. Thibon served as Manager, General Manager and Deputy Director and then
Major Financial Accounts Director for France Telecom, a supplier in France of
telephone communications. Mr. Thibon also serves on the board of directors of
THOMSON-LCD S.A.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's executive officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Commission and the National Association of Securities Dealers, Inc. Executive
officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely in its review of the copies of such forms received by
it, or written representations from certain reporting persons, the Company
believes that all executive officers and directors of the Company complied with
all applicable filing requirements.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
<TABLE>
The following Summary Compensation Table sets forth certain information
regarding the compensation during the periods indicated of the Chief Executive
Officer of the Company and the next four most highly compensated executive
officers of the Company during the 1996 fiscal year (the "Named Executive
Officers"):
<CAPTION>
Long-Term
Compensation
Awards
------------
Other Securities All Other
Fiscal Annual Underlying Compen-
Name and Principal Position Year(1) Salary Bonus(2) Compensation Options(#) sation(3)
- --------------------------- ------- ------ -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Wangberg(4) 1996 $519,000 $911,400 $ -- -- $13,874
Chairman of the Board and 1995 437,500 300,000 545,118(5) 800,000 --
Chief Executive Officer Transition 1994 -- -- -- -- --
1994 -- -- -- -- --
Martin W. Henkel 1996 234,723 121,599 492,673(6) -- 7,238
Executive Vice President, 1995 243,648 100,000 246,337(6) 40,000 7,238
Chief Financial Officer Transition 1994 102,053 100,000 211,146(6) -- 3,480
and Director 1994 210,366 88,440 312,590(6) 15,000 6,960
Brian L. Klosterman(7) 1996 240,000 494,000 -- -- 12,000
President and Chief 1995 173,360 120,000 -- 150,000 6,960
Operating Officer and Transition 1994 79,336 38,162 -- -- 3,480
Director 1994 140,004 38,000 50,099(5) -- 6,960
Kenneth A. Milnes 1996 169,199 25,403 -- 20,000 --
Vice President, 1995 133,793 19,035 -- 40,000 --
Engineering Transition 1994 63,225 22,047 -- -- --
1994 115,008 -- -- -- --
Jonathan B. Orlick (8) 1996 160,244 63,457 77,579(5) 30,000 --
Vice President, 1995 -- -- -- -- --
Intellectual Transition 1994 -- -- -- -- --
Property and General 1994 -- -- -- -- --
Counsel -- -- -- -- --
<FN>
(1) "1996" refers to the fiscal year ended December 31, 1996. "1995" refers
to the fiscal year ended December 31, 1995. In September 1994, the
Board of Directors approved a change to the Company's operating fiscal
year from a fiscal year ending June 30 to a fiscal year ending December
31. In connection with this change, the Company filed a transition
report on Form 10 -K with the Commission covering the period from July
1, 1994 to December 31, 1994 (the "Transition Period"). "Transition
1994" refers to the Transition Period. "1994" refers to the fiscal year
ended June 30, 1994.
(2) Represents bonuses paid during the respective calendar years from
January 1 to December 31 to each of the Named Executive Officers.
(3) Represents car allowances paid during 1996, 1995, Transition 1994 and
1994 to each of the Named Executive Officers.
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<PAGE>
(4) Mr. Wangberg joined the Company in February 1995 and became the
Chairman of the Board of Directors and Chief Executive Officer in April
1996.
(5) Represents compensation to defray the costs of relocating to the
Company's geographic area.
(6) Amount represents additional compensation and reimbursement of income
tax liabilities related to the exercise of stock options originally
granted in November 1991.
(7) Mr. Klosterman became the Company's President and Chief Operating
Officer and a member of the Board of Directors in April 1996.
(8) Mr. Orlick joined the Company in January 1996 as Vice President,
Intellectual Property and became General Counsel in June 1996.
</FN>
</TABLE>
42
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
The following table provides information concerning each grant of
options to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1996 to the Named Executive Officers:
<CAPTION>
Potential Realizable
Value Minus Exercise
Individual Grants Price at Assumed Annual
------------------ Rates of Stock Price
Number of % of Total Exercise Appreciation for Option
Securities Options Granted Price Per Term(1)
Underlying Options to Employees in Share ($/sh) Expiration ------------------------
Name Granted(#) Fiscal Year (2)(3)(4) Date 5% 10%
---- ---------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Larry W. Wangberg -- -- -- --
Martin W. Henkel -- -- -- --
Brian L. Klosterman -- -- -- --
Kenneth A. Milnes 20,000 6.2% $6.625 08/01/06 $ 85,729 $226,183
Jonathan B. Orlick 30,000 9.3 7.00 02/01/06 135,872 358,479
<FN>
(1) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the ten year
option term. These numbers are calculated based on the requirements
promulgated by the Commission and do not reflect the Company's estimate of
future stock price growth.
(2) All options shown granted in fiscal 1996 become exercisable as to 1/48th
of the shares subject to the option exercisable each month provided that
the option may not be exercised for one year following the vesting
commencement date. Under the 1989 Stock Incentive Program, the Board of
Directors retains the discretion to modify the terms, including the price
of outstanding options.
(3) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by reference to the closing
sales price of the Common Stock on The Nasdaq National Market on the date
of grant.
(4) Exercise price may be paid in cash, promissory note, by delivery of
already-owned shares subject to certain conditions, or pursuant to a
cashless exercise procedure under which the optionee provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit
to the Company, out of the sale proceeds, an amount equal to the exercise
price plus all applicable withholding taxes.
</FN>
</TABLE>
43
<PAGE>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
The following table sets forth certain information regarding the
exercise of stock options by the Named Executive Officers in the fiscal year
December 31, 1996 and the value of stock options held as of December 31, 1996 by
such individuals.
<CAPTION>
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired December 31, 1996(#) December 31, 1996 ($)(1)
on Value -------------------- -----------------------
Exercise Realized
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- --- ------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Wangberg -- $ -- 366,666 433,334 $779,165 $920,835
Martin W. Henkel 13,333 43,332 22,395 32,605 63,644 171,356
Brian L. Klosterman -- -- 105,625 111,042 380,541 655,710
Kenneth A. Milnes 17,500 67,500 24,859 48,474 138,269 231,729
Jonathan B. Orlick -- -- -- 30,000 -- 71,250
<FN>
(1) Market value of the Company's Common Stock at the exercise date or
December 31, 1996, as the case may be, minus the exercise price.
</FN>
</TABLE>
Employment Contracts and Change-In-Control Arrangements
The Company has entered into employment agreements with Martin W.
Henkel, dated November 30, 1995, Brian L. Klosterman, dated December 21, 1995,
Kenneth A. Milnes, dated March 13, 1996, and Jonathan B. Orlick, dated June 1,
1996 (collectively the "Employees"). Pursuant to said employment agreements,
Messrs. Henkel, Klosterman, Milnes, and Orlick are paid monthly base salaries of
$20,266, $20,000, $11,250, and $15,000, respectively. The foregoing salaries may
be increased by the Board of Directors from time to time. The foregoing salaries
are also subject to annual cost of living increases, with the exception of Mr.
Orlick, whose monthly base salary is subject to adjustment on the basis of an
annual merit review and whose first merit increase shall be retroactive to June
1, 1996. Each of the Employees is eligible to participate in the Company's
employee benefit plans and executive compensation programs.
In addition, each of the Employees is entitled to periodic bonuses at
the discretion of the Board of Directors under the Company's Executive Bonus
Plan, with Mr. Klosterman guaranteed an annual bonus equal to a minimum of 50%
of his annual base salary for each full year of employment under his employment
agreement. Mr. Klosterman is also entitled to an auto allowance of $1,000 per
month during the term of his employment agreement.
In connection with his June 1, 1996 employment agreement, Mr. Orlick
received a one-time relocation assistance allowance of $25,000 in connection
with the close of escrow on his personal residence.
The terms of the existing employment agreements continue until the
earlier to occur of (i) December 1, 1998 for Mr. Henkel, December 20, 1998 for
Mr. Klosterman, March 12, 1998 for Mr. Milnes, and October 1, 1998 for Mr.
Orlick, or (ii) "Involuntary Termination" or "Constructive Termination" by the
Company or until voluntarily terminated by the Employee. "Involuntary
Termination" means
44
<PAGE>
termination by the Company, including upon death or disability of the Employee,
for any reason other than cause, and "Constructive Termination" means a material
reduction in salary or benefits, a material change in responsibilities, a
requirement to relocate beyond a specified distance, or subjection to
unreasonable or illegal working conditions.
Upon Involuntary Termination, Constructive Termination, or termination
of an Employee upon a "Change in Control" of the Company (as defined below), (i)
Messrs. Henkel and Klosterman are entitled to a lump-sum severance payment equal
to each Employee's respective remaining base salary and fees for the contract
period, but in no event less than 100% of each Employee's respective annual base
salary and fees, and up to one year of Company-paid group health and life
insurance coverage, (ii) Mr. Milnes is entitled to a lump-sum severance payment
equal to his remaining base salary for the contract period, but in no event less
than 100% of his annual base salary and fees, and up to one year of Company-paid
group health and life insurance coverage, and (iii) Mr. Orlick is entitled to a
lump-sum severance payment equal to his annual base salary then in effect and up
to one year of Company-paid group health and life insurance coverage. Upon
voluntary termination by Mr. Henkel, he is entitled to a lump-sum equivalent to
50% of the lump-sum referred to in the previous sentence for him and up to 16
months of Company-paid group health and life insurance coverage. In addition,
except with respect to Mr. Orlick, upon Involuntary Termination or a Change in
Control, the stock options outstanding prior to the execution of the employment
agreements and granted during the term of such employment agreements held by the
Employees shall become fully vested and immediately exercisable. "Change in
Control" is defined to mean: (i) the acquisition of securities of the Company
representing 40% or more of the total voting power of the Company's
then-outstanding securities except pursuant to a negotiated agreement with the
Company and the purchase of such securities from the Company, (ii) a change in
the composition of the Board of Directors displacing a majority of those
directors incumbent, elected or nominated for election as of the date of the
employment agreement, (iii) the approval by the shareholders of the Company of a
merger of the Company with any other corporation after which the shareholders
own less than 50% of the voting securities of the surviving corporation or (iv)
the approval by the shareholders of the Company of the liquidation or sale of
substantially all of the Company's assets.
Pursuant to their existing employment agreements, each of the Employees
has agreed that, during his employment and for a period of 12 months after
voluntary termination, the Employee will not own, control or manage or become
affiliated with or permit his name to be used in connection with any business or
enterprise that is or expects to become directly competitive with any business
conducted by the Company.
On February 2, 1995, the Company entered into an employment agreement
with Larry W. Wangberg, under which Mr. Wangberg serves as the Chief Executive
Officer of the Company and is paid a monthly base salary of $43,250. In
addition, Mr. Wangberg is entitled to receive an annual bonus of up to eighty
percent (80%) of his base salary, provided, however, that Mr. Wangberg shall
receive a minimum annual bonus of $200,000. In 1996, Mr. Wangberg received a
cash bonus of $500,000 pursuant to his employment agreement which provides for
the payment of such bonus at the time the Company raises at least $20,000,000 in
financing subsequent to said agreement. The bonus was payable as a result of the
Company raising approximately $30,000,000 subsequent to said agreement. The
foregoing base salary may be increased by the Board of Directors from time to
time and is subject to annual cost of living increases. Mr. Wangberg also is
eligible to participate in the Company's employee benefit plans and executive
compensation programs.
The Company granted Mr. Wangberg an option to purchase 500,000 shares
of the Company's Common Stock under the 1989 Stock Incentive Program at a price
per share of $7.25 equal to the fair
45
<PAGE>
market value of the Company's Common Stock. In addition, the Company also
granted Mr. Wangberg an option to purchase 300,000 shares of the Company's
Common Stock under the 1989 Stock Incentive Program at a price per share of
$7.25 equal to the fair market value of the Company's Common Stock, provided,
however, that such option shall become immediately exercisable when the Company
achieves certain performance milestones.
Mr. Wangberg's February 2, 1995 employment agreement continues until
the earlier of (i) January 31, 2001, or (ii) "Involuntary Termination" or
"Constructive Termination" by the Company or until voluntarily terminated by Mr.
Wangberg. "Involuntary Termination" is defined to mean termination by the
Company, including upon death or disability of Mr. Wangberg, for any reason
other than cause, and "Constructive Termination" is defined to mean a material
reduction in salary or benefits, a material change in responsibilities, a
requirement to relocate beyond a specified distance, or subjection to
unreasonable or illegal working conditions. Upon Involuntary Termination,
Constructive Termination, or termination of an Employee upon a "Change in
Control" of the Company (as defined below), Mr. Wangberg is entitled to (i) a
lump-sum severance payment equal to his remaining base salary and fees for the
contract period (in no event less than 200% of his annual base salary and fees),
and (ii) up to two years of Company-paid group health and life insurance
coverage. Upon voluntary termination, Mr. Wangberg is entitled to (i) a lump sum
equivalent to 100% of the lump sum referred to in the previous sentence, and
(ii) up to 12 months of Company-paid group health and life insurance coverage.
In addition, upon Involuntary Termination, the stock options outstanding prior
to the execution of the employment agreement and granted during the term of such
employment agreement held by Mr. Wangberg shall become fully vested and
immediately exercisable. "Change in Control" is defined to mean: (i) the
acquisition of securities of the Company representing 40% or more of the total
voting power of the Company's then-outstanding securities except pursuant to a
negotiated agreement with the Company and the purchase of such securities from
the Company, (ii) a change in the composition of the Board of Directors
displacing a majority of those directors incumbent, elected or nominated for
election as of the date of the employment agreement, (iii) the approval by the
shareholders of the Company of a merger of the Company with any other
corporation after which the shareholders own less than 50% of the voting
securities of the surviving corporation or (iv) the approval by the shareholders
of the Company of the liquidation or sale of substantially all of the Company's
assets.
Pursuant to the February 2, 1995 employment agreement, Mr. Wangberg has
agreed that, during his employment and for a period of 12 months after voluntary
termination, he will not own, control or manage or become affiliated with or
permit his name to be used in connection with any business or enterprise that is
or expects to become directly competitive with any business conducted by the
Company.
Effect of Gemstar Merger on Employment Agreements
Severance Provisions. Each existing employment agreement between the
Company and the executives contains provisions for lump sum severance payments
that will be triggered by the Merger. In the case of Messrs. Wangberg,
Klosterman and Henkel, upon consummation of
46
<PAGE>
the Merger, the Company will make a lump sum payment equal to the executive's
base salary, car allowance and guaranteed bonus for the remaining term of the
prior employment agreement, less applicable withholding. The lump sum payments
are expected to total approximately $3,385,164, approximately $678,090 and
approximately $636,437 for Messrs. Wangberg, Klosterman and Henkel,
respectively. In the case of Messrs. Milnes and Orlick, such lump sum cash
payment shall be equal to one year of each Employee's respective current base
salary, less applicable withholdings and are expected to total approximately
$190,000 and approximately $180,000, respectively, for Messrs. Milnes and
Orlick. In addition, the severance provisions of the employment agreements
provide that each Employee's stock options will accelerate in accordance with
the terms of such Employee's prior employment agreement. As of March 15, 1997,
the number of options subject to acceleration pursuant to the severance
provisions of each executive's existing employment agreement are 383,334,
99,792, 30,313, 47,917 and 21,875 for Messrs. Wangberg, Klosterman, Henkel,
Milnes and Orlick, respectively. Furthermore, if the benefits to which the
executive is entitled pursuant to the severance provisions or otherwise give
rise to an excise tax as a result of the application of Section 4999 of the
Code, the Company must pay the executive an amount sufficient to put the
executive in the same after-tax position that such executive would have been in
had such executive not been required to pay the excise tax.
In connection with the existing employment agreements of Messrs.
Wangberg and Klosterman and pursuant to two separate letter agreements entered
into at the request of the Company and dated as of December 23, 1996, by and
among the Company and Mr. Wangberg and Mr. Klosterman, Messrs. Wangberg and
Klosterman have agreed to accept from the Company in 1996 certain lump sum cash
payments (the "Accelerated Payments") to which they are entitled under their
respective prior employment agreements. Messrs. Wangberg and Klosterman received
Accelerated Payments of $100,000 and $350,000, respectively, and the amount of
such Accelerated Payments will be deducted from the lump sum severance payments
to which each of Messrs. Wangberg and Klosterman are entitled upon the closing
of the Merger. In the event the Merger is not consummated after such payments
have been made, each of Messrs. Wangberg and Klosterman, as the case may be,
have agreed to use reasonable efforts in seeking any available refund or
reduction in tax liability relating to the Accelerated Payments. In the event
that Mr. Wangberg or Mr. Klosterman, as the case may be, receives a refund or
realizes a reduction to his tax liability with respect to the Accelerated
Payments, Mr. Wangberg or Mr. Klosterman shall reimburse the Company in the
amount of such refund or reduction in tax liability. Whether or not the Merger
is consummated, in the event Mr. Wangberg or Mr. Klosterman, as the case may be,
becomes liable for any taxes as a result of the Accelerated Payments being paid
that would not have been payable had such payments been made immediately after
consummation of the Merger, or as a result of any payment made by Mr. Wangberg
or Mr. Klosterman, as the case may be, to the Company pursuant to the letter
agreement, the Company will indemnify Mr. Wangberg or Mr. Klosterman, as the
case may be, on an after-tax basis so as to make such executive whole with
respect to any tax liability.
On December 23, 1996, in connection with the Merger, the Company
entered into new employment agreements with each of Larry W. Wangberg, Martin W.
Henkel, Brian L. Klosterman, Kenneth A. Milnes, and Jonathan B. Orlick (the
"Executive Employment Agreements"). Each Executive Employment Agreement will
become effective only upon the consummation of the Merger (the "Effective Time")
and the Executive Employment Agreements provide for the employment of such
persons for a period (the "Employment Period") of one year for Mr. Milnes, two
years for Messrs. Wangberg and Orlick, three years for Mr. Klosterman and six
months for Mr. Henkel. The Executive Employment Agreements acknowledge the
Company's obligations to make lump sum severance payments pursuant to the terms
of each Executive's prior employment agreement upon the closing of the Merger.
Termination Provisions. Each of the Executive Employment Agreements
provides that the Employment Period shall terminate automatically upon the death
of the executive or for disability if, in the sole opinion of the Company 's
Board and subject to certain conditions, the Employee is prevented from properly
performing his duties by reason of any physical or mental incapacity. If the
Employee is terminated for disability, the Company shall be required to pay the
Employee's annual salary (or monthly salary, in the case of Mr. Henkel) up
through the last day of the month in which the Company's Board determines that
the Employee is disabled. In the event of the death of the Employee, the Company
shall pay to the executive's beneficiaries or estate the portion of the
Employee's annual salary (or monthly salary, in the case of Mr. Henkel) payable
by the Company through the end of the month in which death occurs. In addition,
the Company may terminate the Employee's employment with or without Cause (as
defined below). In the event that the termination is with Cause, the Company
shall have no liability to Employee. If termination is without Cause, the
Company shall pay a lump sum payment upon such termination of an amount equal to
the remaining annual salary through the Employment Period, and thereafter, all
obligations of the Company shall terminate; provided, however, in the cases of
Messrs. Klosterman, Milnes and Orlick, the Company shall pay Mr. Klosterman, Mr.
Orlick, or Mr. Milnes, as the case may be, an amount equal to the lesser of (x)
such Employee's annual salary and (y) the remaining annual salary through the
applicable Employment Period. In addition, the Klosterman Employment Agreement
provides that upon termination of Mr. Klosterman's employment, Mr. Klosterman
shall be entitled to receive a portion of the bonus to which he is entitled, on
the date it would otherwise be payable, proportional to the period which Mr.
Klosterman was employed compared to the
47
<PAGE>
period for which the bonus is paid. Under the Executive Employment Agreements,
termination shall be for "Cause" if: (i) the Employee has engaged in illegal or
other wrongful conduct substantially detrimental to the business or reputation
of the Company or any affiliated company, or is charged with or convicted of a
felony; (ii) the executive refuses or fails to act in accordance with any
reasonable direction or order of the Company's Board; provided that the Company
Board has given executive written notice of such refusal or failure and Employee
fails to comply with such direction or order within thirty days after the date
of such notice; or (iii) the Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
Noncompetition Provisions. Each of the Executive Employment Agreements
provides that during the Employment Period the Employee will not (i) accept any
other employment or (ii) engage in any other business activity that is
competitive with, or places him in a competing position to that of, the Company
or any affiliated company. In addition, subject to certain conditions, for a
period of one year after the termination of the Employment Period, the Employee
will not for himself or any third party, directly or indirectly, (i) divert or
attempt to divert from the Company or any affiliated company any business of any
kind in which it is engaged, including without limitation, the solicitation of
or interference with any of its suppliers or customers; (ii) employ, solicit for
employment, or recommend for employment and person employed by the Company,
during the period of such person's employment by the Company and for one year
thereafter; or (iii) engage in any business activity that is competitive with
the Company; provided that in no event shall the executive engage in such
competitive activities during the period which he continues to receive payments
pursuant to the termination provisions of the applicable Executive Employment
Agreement. For the purposes of the Executive Employment Agreements, "competitive
activities" is defined as business activities that are directly competitive with
any existing or presently planned business of the Company on the date of
termination, which activity constitutes or is anticipated to constitute more
than 15% of the revenues of the Company.
Wangberg Employment Agreement. Mr. Wangberg's December 23, 1996
employment agreement ("Wangberg Employment Agreement") provides that the Company
will employ Mr. Wangberg on a part time basis for the Employment Period
commencing at the Effective Time and ending the earlier of (i) two years
following the date of the Effective Time (the "Term Date") and (ii) the date of
termination otherwise in accordance with the terms of the Wangberg Employment
Agreement. The scope of Mr. Wangberg's employment will be determined by the
Company's Board and Mr. Wangberg has agreed to devote to the Company a total of
four normal work days per month throughout the period of the agreement. Mr.
Wangberg's employment will be automatically renewed for an additional one year
period on the Term Date and on each anniversary thereof unless either party
gives written notice to the other party that the employment is to be terminated.
Mr. Wangberg's annual salary under the Wangberg Employment Agreement shall be
$120,000 a year. In addition, Mr. Wangberg shall be eligible for benefits made
available generally to other employees of the company.
Klosterman Employment Agreement. Mr. Klosterman's December 23, 1996
employment agreement ("Klosterman Employment Agreement") provides that the
Company will employ Mr. Klosterman as President commencing at the Effective Time
and ending the earlier of (i) three years following the date of the Effective
Time (the "Term Date") and (ii) the date of termination otherwise in accordance
with the terms of the Klosterman Employment Agreement. Mr. Klosterman's
employment will be automatically renewed for an additional one year period on
the Term Date and on each anniversary thereof unless either party gives written
notice to the other party that the employment is to be terminated. Mr.
Klosterman's annual salary under the Klosterman Employment Agreement shall be
$240,000 a year. In addition Mr. Klosterman shall be eligible to receive, in the
discretion of the Company's Board, an annual performance bonus (or other special
bonuses), in such amounts as determined by the Company's
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Board in its sole and absolute discretion, but not less than 50% of Mr.
Klosterman's current base salary. Mr. Klosterman will also be eligible for
benefits made available generally to other employees of the Company. Upon the
Effective Time, the Company will grant to Mr. Klosterman a nonqualified stock
option under Gemstar's 1994 Stock Incentive Plan to purchase 100,000 shares of
Gemstar Ordinary Shares at a price per share equal to the fair market value of
Gemstar Ordinary Shares at the Effective Time. Such option shall become fully
exercisable upon a Change of Control, which shall be deemed to have occurred if
(i) there shall be consummated (x) any consolidation or merger of Gemstar in
which Gemstar is not the continuing or surviving corporation or pursuant to
which shares of Gemstar's Ordinary Shares would be converted into cash,
securities or other property, other than a merger of Gemstar in which the
holders of Gemstar's Ordinary Shares immediately prior to the merger have the
same proportionate ownership of common stock of the surviving corporation
immediately after the merger, (y) any reverse merger in which Gemstar is the
continuing or surviving corporation but in which securities possessing more than
51% if the total combined voting power of Gemstar's outstanding securities are
transferred to a person or persons different from those who hold such securities
immediately prior to the merger, or (z) any sale, lease, exchange or other
transfer (in one transaction or series of related transactions) or all, or
substantially all, of the assets of Gemstar or (ii) the members of Gemstar
approve a plan or proposal for the liquidation or dissolution of Gemstar.
Henkel Employment Agreement. Mr. Henkel's December 23, 1996 employment
agreement ("Henkel Employment Agreement") provides that the Company will employ
Mr. Henkel commencing at the Effective Time and ending the earlier of (i) six
months following the date of the Effective Time (the "Term Date") and (ii) the
date of termination otherwise in accordance with the terms of the Henkel
Employment Agreement. Mr. Henkel's employment will be automatically renewed for
an additional six-month period on the Term Date and on each anniversary thereof
unless either party gives notice to the other party that the employment is to be
terminated. The scope of Mr. Henkel's employment will be determined by the
Company's Board and Mr. Henkel has agreed to devote to the Company a total of
ten normal work days per month throughout the period of the agreement. During
the Employment Period and commencing immediately upon the Effective Time, Mr.
Henkel shall be entitled to a paid sabbatical of two months duration pursuant to
the terms of the Company's Sabbatical Program at full salary (based on Mr.
Henkel's salary then in effect on the Effective Date of the merger). Following
the sabbatical, Mr. Henkel shall be paid a monthly salary of $10,000. In
addition, Mr. Henkel shall be eligible for benefits made available generally to
other employees of the Company.
Milnes Employment Agreement. Mr. Milnes' December 23, 1996 employment
agreement ("Milnes Employment Agreement") provides that the Company will employ
Mr. Milnes commencing at the Effective Time and ending the earlier of (i) one
year following the date of the Effective Time (the "Term Date") and (ii) the
date of termination otherwise in accordance with the terms of the Milnes
Employment Agreement. The scope of Mr. Milnes' employment will be determined by
the Company's Board. Mr. Milnes' employment will be automatically renewed for an
additional one year period on the Term Date and on each anniversary thereof
unless either party gives notice to the other party that the employment is to be
terminated at least 90 days prior to the Term Date. Mr. Milnes' annual salary
under the Milnes Employment Agreement shall be $190,000 a year. In addition, Mr.
Milnes shall be eligible for benefits made available generally to other
employees of the Company. Upon the Effective Time, the Company shall grant to
the executive a nonqualified stock option under Gemstar's 1994 Stock Incentive
Plan to purchase 30,000 shares of Gemstar Ordinary Shares at a price per share
equal to the fair market value of the Gemstar Ordinary Shares at the Effective
Time. Mr. Milnes will also be eligible to receive, in the sole and absolute
discretion of the Company's Board, an annual bonus in such amount as determined
by the Company's Board.
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Orlick Employment Agreement. Mr. Orlick's December 23, 1996 employment
agreement ("Orlick Employment Agreement") provides that the Company will employ
Mr. Orlick commencing at the Effective Time and ending the earlier of (i) two
years following the date of the Effective Time (the "Term Date") and (ii) the
date of termination otherwise in accordance with the terms of the Orlick
Employment Agreement. The scope of Mr. Orlick's employment will be determined by
the Company's Board. Mr. Orlick's employment will be automatically renewed for
an additional one year period on the Term Date and on each anniversary thereof
unless either party gives notice to the other party that the employment is to be
terminated at least 90 days prior to the Term Date. Mr. Orlick's annual salary
under the Orlick Employment Agreement shall be $180,000 a year. In addition, Mr.
Orlick shall receive an automobile allowance of $750 per month and shall be
eligible for benefits made available generally to other employees of the
Company. Upon the Effective Time, the Company shall grant to the executive a
nonqualified stock option under Gemstar's 1994 Stock Incentive Plan to purchase
30,000 shares of Gemstar Ordinary Shares at a price per share equal to the fair
market value of the Gemstar Ordinary Shares at the Effective Time. Mr. Orlick
will also be eligible to receive, in the sole and absolute discretion of the
Company's Board, an annual bonus in such amount as determined by the Company's
Board.
Compensation of Directors
Each non-employee director of the Company receives a fee of $5,000 per
calendar year, $1,000 for each meeting attended, and $500 for each telephonic
meeting of the Company's Board of Directors. Additionally, each non-employee
director receives a fee of $500 for each committee meeting of the Company's
Board of Directors attended. Fees are only paid to those non-employee directors
who can accept such compensation on their own behalf rather than on behalf of
their respective corporations. During the last fiscal year, Messrs. John F.
Doyle and James E. Meyer received such compensation. Directors are also
reimbursed for certain expenses in connection with attendance at board and
committee meetings.
The Company's 1989 Stock Incentive Program provides for the
non-discretionary automatic grant of an option to purchase 10,000 shares of
Common Stock to each non-employee director of the Company on the date of each
Annual Meeting of Shareholders. Each new director who becomes a director within
six months after an Annual Meeting of Shareholders is automatically granted an
option to purchase 10,000 shares upon the date on which such person first
becomes a director. Options granted to directors have an exercise price equal to
the fair market value as of the date of grant and vest at a rate of 1/12th per
calendar month following the date of grant during the period the optionee
remains a director of the Company. On May 16, 1996, each of the non-employee
directors, Messrs. Jack C. Clifford, Ajit M. Dalvi, Donn M. Davis, Thomas E.
Dooley, John F. Doyle, John W. Goddard, Edward D. Horowitz, James E. Meyer and
Jacques Thibon was granted an option to purchase 10,000 shares of the Company's
Common Stock at an exercise price of $6.75 per share.
The Company has an agreement dated December 1, 1993 with Mr. Doyle to
provide marketing support, consultation and market research to the Company.
Under the terms of the agreement, Mr. Doyle is required to provide the Company
with not less than an average of 48 hours per month and reports to the Chief
Executive Officer of the Company on the progress of such consulting arrangement
on a monthly basis. Pursuant to the agreement, Mr. Doyle is paid a monthly
consulting fee of $7,490 for the period beginning December 1, 1993 and ending
December 1, 1998, subject to adjustments every twelfth month during such period
based on the consumer price index plus 2%. Pursuant to the agreement, Mr. Doyle
received consulting fees in the amount of $98,904 during 1996. In addition, the
Company reimburses Mr. Doyle for all pre-approved out-of-pocket expenses and
travel expenses incurred during
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the term of the agreement. The terms of the consulting agreement continue for
the period described above unless terminated earlier upon: (i) good faith
determination by the Company of the failure of Mr. Doyle to perform his services
under the agreement, (ii) death or disability of Mr. Doyle, and (iii) with 30
days' prior notice. As part of the consulting arrangement, Mr. Doyle has entered
into an agreement with the Company not to disclose to any third parties
information obtained by him concerning inventions, trademarks and confidential
information of the Company.
Pursuant to an employment agreement dated December 1, 1994, Mr. Michael
W. Faber was paid a monthly base salary of $32,910 until his date of retirement
from the Company's Board of Directors on April 18, 1996. As a result of his
voluntary termination after ten years of service to the Company and pursuant to
the agreement, Mr. Faber received a lump-sum cash payment of approximately
$571,123 in 1996 and up to 16 months of Company-paid group health and life
insurance coverage. Pursuant to the employment agreement, Mr. Faber agreed that
for a period of 12 months after his voluntary termination, he will not own,
control or manage or become affiliated with or permit his name to be used in
connection with any business or enterprise that is or expects to become directly
competitive with any business conducted by the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of directors Davis (Chairman),
Doyle (Vice Chairman) and Dooley. Mr. Wangberg, who is Chairman of the Board of
Directors and Chief Executive Officer of the Company, participates in the
discussions and decisions regarding salaries and incentive compensation for all
employees and consultants to the Company, except that Mr. Wangberg is excluded
from discussions regarding his own salary and incentive compensation.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of February 18, 1997, the number and
percentage of outstanding StarSight Common Stock owned beneficially by each
person known by the Company to own beneficially more than 5% of the outstanding
StarSight Common Stock by each director and by each Named Executive Officer of
the Company and by the executive officers and directors as a group.
Common Stock Approximate
Five Percent Shareholders, Directors Beneficially Percentage
and Certain Executive Officers Owned Owned (1)
------------------------------ ----- ---------
Viacom International Inc. (2) 5,684,158 22.2%
1515 Broadway
New York, NY 10036
THOMSON multimedia S.A.(3) 5,333,333 19.3
9 Place des Vosges
92050 Paris la Defense
Cedex, France
Gemstar International Group Limited (4) 5,276,034 17.1
125 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Cox Communications, Inc.(5) 2,166,647 8.5
1400 Lake Hearn Drive, N.E.
Atlanta, GA 30319
Massachusetts Financial Services Company(6) 1,382,000 5.4
500 Boyleston Street, 15th Floor
Boston, MA 02116
Tribune Company(7) 1,122,518 4.4
435 No. Michigan Avenue
Chicago, IL 60611
The Providence Journal Company(8) 791,897 3.1
75 Fountain Street
Providence, RI 02902
Thomas E. Dooley(9) 5,710,557 22.2
James E. Meyer(10) 5,342,499 19.3
Jacques Thibon(11) 5,342,499 19.3
Ajit M. Dalvi(12) 2,205,813 8.6
Donn M. Davis(13) 1,131,684 4.4
Larry W. Wangberg(14) 433,333 1.7
Martin W. Henkel(15) 214,048 *
John F. Doyle(16) 139,164 *
Brian L. Klosterman(17) 123,562 *
Jack C. Clifford(18) 39,166 *
John W. Goddard(19) 36,501 *
Kenneth A. Milnes(20) 29,916 *
Edward D. Horowitz(21) 10,467 *
Jonathan B. Orlick(22) 8,750 *
All directors and executive officers
as a group (14 persons)(23) 20,748,793 72.8
* Less than one percent
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(1) Applicable percentage of ownership is based on 25,612,585 shares of the
Company's Common Stock outstanding as of February 18, 1997, together
with applicable options or warrants for such shareholder. Beneficial
ownership is determined in accordance with the rules of the Commission
and includes voting and investment power with respect to shares. Shares
of Common Stock subject to options and warrants currently exercisable
or exercisable within 60 days after February 18, 1997 are deemed
outstanding for computing the percentage ownership of the person or
entity holding such options or warrants but are not deemed outstanding
for computing the percentage of any other person.
(2) Reflects ownership as reported on Schedule 13D/A dated February 7, 1997
filed with the Commission by Viacom International, Inc. ("Viacom").
Includes (i) 4,475,814 shares of the Company's Common Stock held by
Viacom, a wholly-owned subsidiary of Viacom, Inc., a company whose
controlling shareholder is National Amusements Inc. ("NAI"); (ii)
1,124,176 shares of the Company's Common Stock held by Virgin
Interactive Entertainment Inc., an affiliate of Viacom; and (iii)
97,498 shares of the Company's Common Stock issuable pursuant to
options exercisable within 60 days after February 18, 1997 held by
current or former employees of Viacom held for Viacom's benefit.
Excludes (i) 36,500 shares of the Company's Common Stock held by Sumner
M. Redstone, the controlling shareholder of NAI; and (ii) 3,334 shares
of the Company's Common Stock issuable pursuant to options exercisable
within 60 days after February 18, 1997 held by a former Viacom employee
solely for such employee's benefit, as discussed in note (19) below.
(3) Reflects ownership as reported by THOMSON multimedia S.A. on a Schedule
13D filed with the Commission on March 8, 1996. Includes 2,000,000
shares of the Company's Common Stock subject to currently exercisable
Warrants held by THOMSON. Excludes 18,332 shares issuable pursuant to
options to acquire the Company's Common Stock held by Messrs. Meyer and
Thibon exercisable within 60 day of February 18, 1997.
(4) Reflects ownership of an option to purchase 5,276,034 shares of the
Company Stock Option as reported on Schedule 13D dated January 2, 1997
filed with the Commission by Gemstar. Represents Gemstar's beneficial
ownership interest of the Company Stock Option which is exercisable
within 60 days of February 18, 1997 pursuant to the Company Stock
Option Agreement between the Company and Gemstar dated December 23,
1996. Gemstar may only exercise the Company Stock Option at any time
after the termination of the Merger Agreement under certain
circumstances.
(5) Reflects ownership as reported on (i) Schedule 13 D/A dated January 28,
1997 filed with the Commission by Cox Communications, Inc. ("CCI"),
(ii) Schedule 13D/A dated January 28, 1997 filed with the Commission by
Barbara Cox Anthony, and (iii) Schedule 13D/A dated January 28, 1997
filed with the Commission by Anne Cox Chambers. CCI, Cox Communications
Holdings, Inc., Cox Holdings, Inc., and Cox Enterprises, Inc.
(collectively the "Cox Corporations") are controlled by Anne Cox
Chambers and Barbara Cox Anthony. The Cox Corporations and Mses.
Chambers and Anthony may be deemed to have the power to vote and
dispose of the 2,166,647
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shares of the Company's Common Stock held by CCI. Excludes 39,166
shares of the Company's Common Stock issuable pursuant to options to
acquire the Company's Common Stock held by Ajit M. Dalvi, an executive
officer of CCI, exercisable within 60 days of February 18, 1997.
(6) Reflects ownership as reported on Schedule 13G dated February 11, 1997
filed with the Commission by Massachusetts Financial Services Company
("MFSC"). Such Schedule 13G indicates that MFSC has sole despositive
power and sole voting power with respect to 1,382,000.
(7) Reflects ownership as reported on Schedule 13D dated February 21, 1996
filed with the Commission by Tribune Company ("Tribune"). Such Schedule
13D indicates that Tribune has sole despositive power and sole voting
power with respect to 1,122,518 of such shares. Excludes 9,166 shares
issuable pursuant to options to acquire the Company's Common Stock held
by Mr. Davis exercisable within 60 days of February 18, 1997.
(8) Effective February 19, 1997, The Providence Journal Company was
purchased by A.M. Belo Corporation ("A.H. Belo"). The Providence
Journal Company will remain a wholly-owned subsidiary of A.H. Belo.
Excludes 39,166 shares of the Company's Common Stock issuable pursuant
to stock options held by Jack C. Clifford, a former executive officer
of The Providence Journal Company, exercisable within 60 days after
February 18, 1997.
(9) Includes 5,684,158 shares of the Company's Common Stock held and
beneficially owned by Viacom or over which Viacom has voting power to
which Mr. Dooley disclaims beneficial ownership and 19,166 shares
subject to stock options held by Mr. Dooley for the benefit of Viacom
exercisable within 60 days after February 18, 1997.
(10) Includes 5,333,333 shares of the Company's Common Stock held and
beneficially owned by THOMSON to which Mr. Meyer disclaims beneficial
ownership. Includes 9,166 shares of StarSight Common Stock issuable
pursuant to stock options held by Mr. Meyer exercisable within 60 days
after February 18, 1997.
(11) Includes 5,333,333 shares of the Company's Common Stock held and
beneficially owned by THOMSON to which Mr. Thibon disclaims beneficial
ownership. Includes 9,166 shares of the Company's Common Stock issuable
pursuant to stock options held by Mr. Thibon exercisable within 60 days
after February 18, 1997.
(12) Includes 2,166,647 shares of the Company's Common Stock held and
beneficially owned by CCI to which Mr. Dalvi disclaims beneficial
ownership. Represents 39,166 shares of the Company's Common Stock
issuable pursuant to stock options held by Mr. Dalvi exercisable within
60 days after February 18, 1997.
(13) Includes 1,122,518 shares of the Company's Common Stock held and
beneficially owned by Tribune Company to which Mr. Davis disclaims
beneficial ownership. Represents 9,166 shares of the Company's Common
Stock issuable pursuant to stock options held by Mr. Davis exercisable
within 60 days after February 18, 1997.
(14) Includes 433,333 shares of the Company's Common Stock issuable pursuant
to stock options held by Mr. Wangberg exercisable within 60 days after
February 18, 1997.
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(15) Includes 187,069 shares of the Company's Common Stock held by the
Henkel Family Trust TRUA December 24, 1992 over which Mr. Henkel has
voting and investment power. Also includes 26,979 shares of StarSight
Common Stock issuable pursuant to stock options held by Mr. Henkel
exercisable within 60 days after February 18, 1997.
(16) Includes 83,166 shares of the Company's Common Stock issuable pursuant
to stock options held by Mr. Doyle exercisable within 60 days after
February 18, 1997.
(17) Includes 122,292 shares of the Company's Common Stock issuable pursuant
to stock options held by Mr. Klosterman exercisable within 60 days
after February 18, 1997.
(18) Excludes 791,897 shares of the Company's Common Stock held and
beneficially owned by Providence Journal, to which Mr. Clifford
disclaims beneficial ownership. As of February 28, 1997, Mr. Clifford
resigned his position with The Providence Journal Company. Represents
39,166 shares of the Company's Common Stock issuable pursuant to stock
options held by Mr. Clifford exercisable within 60 days after February
18, 1997.
(19) Includes 4,559,982 shares of the Company's Common Stock held and
beneficially owned by Viacom or over which Viacom has voting power to
which Mr. Goddard disclaims beneficial ownership and 25,833 shares
subject to stock options held by Mr. Goddard for the benefit of Viacom.
Includes 3,334 shares of the Company's Common Stock issuable pursuant
to Stock Options held by Mr. Goddard exercisable within 60 days after
February 18, 1997.
(20) Includes 21,666 shares of the Company's Common Stock issuable pursuant
to stock options held by Mr. Milnes exercisable within 60 days after
February 18, 1997.
(21) Excludes 4,559,982 shares of the Company's Common Stock held and
beneficially owned by Viacom or over which Viacom has voting power to
which Mr. Horowitz disclaims beneficial ownership and 52,499 shares
subject to stock options held by Mr. Horowitz for the benefit of Viacom
exercisable within 60 days after February 18, 1997.
(22) Includes 8,750 shares of the Company's Common Stock issuable pursuant
to stock options held by Mr. Orlick exercisable within 60 days after
February 18, 1997.
(23) Includes 851,603 shares of the Company's Common Stock issuable pursuant
to options granted to executive officers and directors of StarSight
exercisable within 60 days after February 18, 1997.
Changes in Control
On December 23, 1996, the Company and Gemstar agreed to merge pursuant
to and subject to the terms and conditions of an Agreement and Plan of Merger
between the Company, Gemstar, and G/S Acquisition Subsidiary ("Sub") dated as of
December 23, 1996 (the "Merger Agreement"). Upon the closing of the proposed
merger, Sub will merge with and into the Company, the outstanding common stock
of Sub will become the outstanding common stock of the Company, and the Company
will survive as a wholly owned subsidiary of Gemstar (the "Merger").
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The Merger
In connection with the Merger, (i) each share of the Company's Common
Stock issued and outstanding as of the time the Merger becomes effective, which
will occur upon the filing of a merger agreement and any other required
documentation with the California Secretary of State (the "Effective Time"),
will be converted into 0.6062 share (the "Exchange Ratio") of Gemstar Ordinary
Shares; (ii) each stock option to purchase shares of the Company's Common Stock
(the "Stock Options") outstanding immediately prior to the Effective Time under
the Company's 1989 Stock Incentive Program (the "Stock Option Plan") which has
not been exercised in accordance with its terms, will be assumed by Gemstar; and
(iii) each stock purchase warrant issued by the Company to purchase shares of
the Company's Common Stock will in accordance with its terms, be adjusted to
become exercisable for, or exchangeable for a new warrant on substantially the
same terms.
In connection with the Merger, the Company and Gemstar will each hold a
special meeting of the holders of each entity's shares. At the Gemstar special
meeting, the holders of Gemstar Ordinary Shares will be asked to approve the
issuance of Ordinary Shares to the holders of the Company's Common Stock in
connection with the Merger, and at the StarSight special meeting the holders of
StarSight Common Stock will be asked to approve and adopt the Merger Agreement.
Related Agreements
Employment Agreements. The Company has entered into employment
agreements, each dated December 23, 1996, with Larry W. Wangberg, Brian L.
Klosterman, Martin W. Henkel, Kenneth A. Milnes and Jonathan Orlick, and the
following other employees of the Company: William Scharninghausen, Robert
Russman, Daniel Donnelly and Michael Hopkins. Pursuant to said employment
agreements, Messrs. Wangberg, Klosterman, Scharninghausen, Milnes, Orlick,
Russman, Donnelly and Hopkins will be paid annual base salaries of $120,000,
$240,000, $123,833, $190,000, $180,000, $150,960, $145,000 and $123,000,
respectively. Mr. Henkel will be paid $60,000, representing a $10,000 per month
base salary for six months. All such employment agreements become effective at
the Effective Time of the Merger and provide for the employment of such persons
for a period ("Employment Period") of one year for Messrs. Scharninghausen,
Milnes, Russman, Hopkins and Donnelly, two years for Messrs. Wangberg and
Orlick, three years for Mr. Klosterman and six months for Mr. Henkel, unless, in
each case, the employment agreement is otherwise terminated in accordance with
its terms. For additional information regarding the employment agreements
entered into with the Named Executive Officers, see "Item 11, EXECUTIVE
COMPENSATION -- Effect of Gemstar Merger on Employment Agreements."
StarSight Significant Shareholder Agreement. In connection with the
Merger Agreement, certain significant shareholders of the Company (THOMSON
multimedia S.A., Viacom International Inc. (formerly PVI Transmission, Inc.),
Tribune Company, Virgin Interactive, Inc. (formerly Spelling Entertainment,
Inc.), Cox Communications, Inc., and The Providence Journal Company
(collectively, the "StarSight Significant Shareholders")) entered into the
Company Significant Shareholder Agreement, dated as of December 23, 1996 (the
"Company Significant Shareholder Agreement"), with the Company and Gemstar
pursuant to which the StarSight Significant Shareholders agreed to vote or cause
to be voted all shares of capital stock of the Company owned of record,
beneficially owned, held in any capacity by, or under control of, any such
StarSight Significant Shareholder in favor of the Merger Agreement and the
Merger and other transactions provided for or contemplated by the Merger
Agreement and against any inconsistent proposals or transactions. As of the date
of the StarSight Significant Shareholder Agreement, the StarSight Significant
Shareholders own or have an interest in approximately 13,014,060 shares of the
Company's Common Stock, representing approximately 51.0% of the outstanding
Common Stock of the Company. In addition, the Company Significant Shareholder
Agreement provides that during the period from the date of the Merger Agreement
and continuing to the earlier of its termination or the Effective Time, the
StarSight Significant Shareholders shall not, and shall not agree to, transfer,
pledge or otherwise dispose of any of such shares or interests therein without
the express written consent of Gemstar. The Company Significant Shareholder
Agreement terminates on June 30, 1997 unless the Merger Agreement is terminated
earlier or extended, in which case, the Company Significant Shareholder
Agreement will terminate on the same date as the Merger Agreement.
Gemstar Significant Shareholder Agreement. In connection with the
Merger Agreement, certain significant shareholders of Gemstar (collectively, the
"Gemstar Significant Shareholders") entered into the Parent Significant
Shareholder Agreement, dated as of December 23, 1996 (the "Parent Significant
Shareholder Agreement"), with the Company and Gemstar pursuant to which the
Gemstar Significant Shareholders agreed to vote or cause to be voted all shares
of Gemstar Ordinary Shares owned of record, beneficially owned, held in any
capacity by, or under control of, any such Gemstar Significant
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Shareholder in favor of the Merger Agreement and the Merger and other
transactions provided for or contemplated by the Merger Agreement and against
any inconsistent proposals or transactions. As of the date of the Parent
Significant Shareholder Agreement, the Gemstar Significant Shareholders own or
have an interest in approximately 16,761,722 shares of Gemstar Ordinary Shares,
representing approximately 53.6% of the outstanding Gemstar Ordinary Shares. In
addition, the Parent Significant Shareholder Agreement includes similar
limitations and obligations of the parties to those described above in
connection with the Company Significant Shareholder Agreement.
Company Option Agreement. Concurrently with the execution of the Merger
Agreement, the Company and Gemstar entered into a Company Option Agreement,
dated as of December 23, 1996 (the "Company Option Agreement"), pursuant to
which the Company granted Gemstar an irrevocable option to purchase up to
5,276,034 shares of the Company's Common Stock at a purchase price of $10.46 per
share (the "Company Stock Option"). The Company Stock Option is exercisable, in
whole or in part, at any time and from time to time following the occurrence of
a Company Purchase Event (as defined below) and prior to termination of the
Company Option Agreement. A "Company Purchase Event" means any termination of
the Merger Agreement pursuant to Section 7.1(h), (j) or (l) thereof. The Company
Stock Option will terminate and be of no further force and effect upon the
earliest to occur of (i) the consummation of the transactions contemplated by
the Merger Agreement, (ii) the later to occur of (a) June 23, 1998, (b) the
closing date of any Company Takeover Proposal (as such term is defined in the
Merger Agreement) plus 30 days, or (iii) the payment by the Company and the
receipt by Gemstar of the Company Termination Fee of $15,000,000. Gemstar will
receive certain demand and piggyback registration rights in connection with the
exercise of the Company Stock Option which rights are effective for up to three
years thereafter. In the alternative, should a Company Purchase Event occur,
Gemstar or Sub may elect to have the shares acquired in connection with the
Company Stock Option repurchased by the Company
Parent Option Agreement. Concurrently with the execution of the Merger
Agreement, the Company and Gemstar entered into a Parent Option Agreement, dated
as of December 23, 1996 (the "Parent Option Agreement," together with the
Company Option Agreement, the "Stock Option Agreements"), pursuant to which
Gemstar granted the Company an irrevocable option to purchase up to 6,341,824
shares of Gemstar Ordinary Shares at a purchase price of $17.25 per share (the
"Parent Stock Option"). The Parent Stock Option is exercisable, in whole or in
part, at any time and from time to time following the occurrence of a Purchase
Event (as defined below) and prior to termination of the Parent Option
Agreement. A "Purchase Event" means any termination of the Merger Agreement
pursuant to Section 7.1(i), (k) or (m) thereof. The Parent Stock Option will
terminate and be of no further force and effect upon the earliest to occur of
(i) the consummation of the transactions contemplated by the Merger Agreement,
(ii) the later to occur of (a) June 23, 1998, (b) the closing date of any Parent
Takeover Proposal (as such term is defined in the Merger Agreement) plus 30
days, or (iii) the payment by Gemstar and the receipt by the Company of the
Parent Termination Fee of $15,000,000. The Company will receive certain demand
and piggyback registration rights in connection with the exercise of the Parent
Stock Option which are effective for up to three years thereafter. In the
alternative, should a Purchase Event occur, the Company may elect to have the
shares acquired in connection with the Parent Stock Option repurchased by
Gemstar.
Representations, Warranties and Covenants
Under the Merger Agreement, Gemstar and the Company made a number of
representations regarding their respective capital structures, operations,
financial condition and other matters. Each party agreed as to itself and its
subsidiaries that, until consummation of the Merger or the earlier
57
<PAGE>
termination of the Merger Agreement, it will, among other things, maintain its
business, conduct its operations in the ordinary course, provide the other with
reasonable access to its financial , operating and other information, and use
all reasonable efforts to consummate the Merger.
Conditions to the Merger
In addition to the requirements that the Company's shareholders approve
the Merger and Gemstar's shareholders approve the issuance of Ordinary Shares in
connection with the Merger, the obligations of Gemstar and the Company to
consummate the Merger are subject to the satisfaction of a number of other
conditions, including (i) the approval for listing on The Nasdaq National Market
of the shares of Gemstar Ordinary Shares issuable to the Company's shareholders
and option and warrant holders pursuant to the Merger Agreement; (ii) the
absence of any litigation or proceedings brought by a governmental entity which
seeks to enjoin or prohibit the consummation of the Merger; (iii) the
declaration by the Commission that the Registration Statement on Form F-4 for
the Ordinary Shares is effective; (iv) the absence of any stop orders or
proceedings initiated or threatened by the Commission for that purpose with
respect to the Registration Statement on Form F-4; (v) the expiration of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"); and (vi) the receipt of all authorizations,
permits, consents, waivers, orders or approvals that may be required by
regulatory authorities.
Each party's obligations under the Merger Agreement will also be
conditioned upon the accuracy in every material respect of the representations
and warranties made by the other party, and upon the other party's performance
or compliance in all material respects with all agreements and covenants
required by the Merger Agreement. Each party's obligations are further
conditioned upon (i) each of Gemstar and the Company receiving an opinion letter
from their respective counsel to the effect that the Merger will be treated for
federal income tax purposes as a reorganization qualifying under the provisions
of Section 368(a) of the Code; (ii) each of Gemstar and the Company receiving an
opinion letter from their respective accounting firms, in form and substance
reasonably acceptable to Gemstar and the Company, regarding the appropriateness
of "pooling of interests" accounting treatment for the Merger by Gemstar for
purposes of its consolidated financial statements under generally accepted
accounting principles and applicable Commission rules and regulations; (iii) the
absence of certain changes in condition of Gemstar or the Company as the case
may be; and (iv) the receipt by Gemstar or the Company, as the case may be, of
consents and/or approvals from third parties required in connection with the
Merger.
Regulatory Approvals and Filings
Under the HSR Act, and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger cannot be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specific waiting period requirements have been satisfied.
In connection with the issuance of the Gemstar Ordinary shares to the
Company's shareholders, Gemstar will file a Registration Statement on Form F-4
with the Commission pursuant to the Securities Act and provide a Joint Proxy
Statement/Prospectus to the holders of its shares pursuant to Section 14 of the
Exchange Act and the rules promulgated thereunder. In connection with the
StarSight Special Meeting, the Company will file the Joint Proxy/Statement
Prospectus with the Commission and provide the Joint Proxy Statement/Prospectus
to its shareholders pursuant to Section 14 of the Exchange Act and
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<PAGE>
the rules promulgated thereunder. The Merger cannot be consummated until such
time as the Commission has declared effective the Registration Statement on Form
F-4 filed by Gemstar.
Termination
The Merger Agreement may be terminated by the mutual written agreement
of the parties. The Merger Agreement may also be terminated by either party if
(i) any governmental entity enjoins or prohibits consummation of the Merger;
(ii) the Merger has not occurred by June 30, 1997, provided that if the Merger
shall not have been consummated due to the waiting period under the HSR Act not
having expired, or due to an action having been instituted by the Antitrust
Division or FTC challenging or seeking to enjoin the consummation of the Merger,
then such date shall be extended to August 31, 1997; (iii) any requisite
shareholder approval is not obtained; (iv) the other party breaches any
representation, warranty, covenant or other agreement set forth in the Merger
Agreement; (v) prior to the consummation of the Merger, the Company accepts or
recommends to its shareholders a Company Superior Proposal, as that term is
defined in Section 4.2(b) of the Merger Agreement; or (vi) prior to the
consummation of the Merger, Gemstar accepts or recommends to its shareholders a
Parent Superior Proposal, as that term is defined in Section 4.3(b) of the
Merger Agreement. The Merger Agreement may be terminated by Gemstar if the
Company's Board fails to recommend, withdraws or modifies adversely its
recommendation of the Merger or the Company fails to comply with its obligations
under Section 5.1 of the Merger Agreement following a Company Takeover Proposal,
as that term is defined in Section 4.2(a) of the Merger Agreement. The Merger
Agreement may be terminated by the Company if the Gemstar Board fails to
recommend or withdraws or modifies adversely its recommendation of the Merger or
Gemstar fails to comply with its obligations under Section 5.1 of the Merger
Agreement following a Parent Takeover Proposal, as that term is defined in
Section 4.3(a) of the Merger Agreement.
Amendment
The Merger Agreement may be amended prior to the Effective Time by the
parties at any time before or after approval by the Company's shareholders,
except that, after such approval, no amendment may be made that by law requires
the further approval of the shareholders of the Company or Gemstar. The Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of Gemstar and the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THOMSON beneficially owned 5,333,333 shares of StarSight Common Stock,
representing approximately 19.3% of the outstanding shares of StarSight Common
Stock, and Messrs. Meyer and Thibon, Directors of the Company, are the Executive
Vice President, Marketing and Sales-Americas of Thomson Consumer Electronics,
Inc., a wholly-owned subsidiary of THOMSON, and Vice President, Corporate
Business Development for THOMSON, respectively.
As of December 31, 1996, Viacom owned 5,684,158 shares of StarSight
Common Stock, representing approximately 22.2% of the outstanding shares of
StarSight Common Stock, and Messrs. Goddard, Horowitz and Dooley, Directors of
the Company, are the former President and Chief Executive Officer of the cable
division of Viacom, Executive Vice President-Advanced Development of Citicorp,
formerly Senior Vice President-Technology at Viacom Inc., and the Deputy
Chairman and Executive Vice President-Finance, Corporate Development and
Communications of Viacom Inc., respectively.
59
<PAGE>
As of December 31, 1996, The Providence Journal Company beneficially
owned 791,897 shares of StarSight Common Stock, representing approximately 3.1%
of the outstanding shares of StarSight Common Stock, and until February 28,
1997, Mr. Clifford, Director of the Company, was the Executive Vice President,
Broadcasting and Telecommunications of The Providence Journal Company. Effective
February 19, 1997, The Providence Journal Company was purchased by A.H. Belo
Corporation.
As of December 31, 1996, Tribune Company beneficially owned 1,122,518
shares of the StarSight Common Stock, representing approximately 4.4% of the
outstanding shares of StarSight Common Stock, and Mr. Davis, Director of the
Company, is the President of Tribune Ventures.
As of December 31, 1996, CCI beneficially owned 2,166,647 shares of
StarSight Common Stock, representing approximately 8.5% of the outstanding
shares of StarSight Common Stock, and Mr. Dalvi, Director of the Company, is the
Senior Vice President of Marketing and Programming for CCI.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following financial statements are filed as part of this
Report:
Page
----
Index to Financial Statements F-1
Independent Auditors' Report F-2
Balance Sheets, December 31, 1996 and 1995 F-3
Statements of Operations for the twelve months
ended December 31, 1996 and 1995,
six months ended December 31, 1994,
and twelve months ended June 30, 1994 F-4
Statements of Shareholders' Equity for the
twelve months ended December 31, 1996 and
1995, six months ended December 31, 1994,
and twelve months ended June 30, 1994 F-5
Statements of Cash Flows for the
twelve months ended December 31, 1996 and 1995, six
months ended December 31, 1994, and twelve
months ended June 30, 1994 F-7
Notes to Financial Statements F-8
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable or the required information is shown in the Financial Statements
or Notes thereto.
(a)(3) Exhibits
2(13) Agreement and Plan of Merger dated as of December 23,
1996 by and among Registrant, Gemstar International
Group Limited and G/S Acquisition Subsidiary.
3.1(1) Restated Articles of Incorporation of Registrant.
3.2(2) Bylaws of Registrant, as amended.
4.1(13) Company Option Agreement dated as of December 23,
1996 by and between Registrant and Gemstar
International Group Limited.
4.2(13) Company Significant Shareholder Agreement dated as of
December 23, 1996 between Registrant and Gemstar
International Group Limited, THOMSON multimedia S.A.,
PVI Transmission Inc., Tribune Company, Spelling
Entertainment, Inc., Cox Communications, Inc. and The
Providence Journal Company.
4.3(14) Parent Option Agreement dated as of December 23, 1996
by and between Registrant and Gemstar International
Group Limited.
4.4(14) Parent Significant Shareholder Agreement dated as of
December 23, 1996 between Gemstar International Group
Limited, the Registrant, Dynamic Core Holdings
Limited, Creative Assets Limited and Henry Yuen.
61
<PAGE>
10.1(3,12) 1989 Stock Incentive Program, as amended, and forms
of agreements thereunder.
10.2(2) Employee Stock Purchase Plan and forms of agreements
thereunder.
10.3(2) Lease Agreement between Registrant and Shapell
Industries of Northern California dated as of January
8, 1992.
10.4(2) Form of Indemnification Agreements between Registrant
and its officers and directors.
10.5(2) Corporate Partnership Agreement dated as of September
12, 1991, as amended, between Registrant and Viacom
International Inc.
10.6**(2) Agreement dated as of January 31, 1991, between
Registrant and Tribune Media Services, Inc., as
amended.
10.7**(2) Memorandum of Understanding dated May 28, 1993
between Registrant and Mitsubishi Electric
Corporation.
10.8**(2) Manufacturing Agreement dated as of June 1, 1991
between Registrant and Zenith Electronics
Corporation.
10.9**(2) Network Service and Joint Development Agreement dated
as of October 11, 1989, as amended, between
Registrant and National Datacast, Inc.
10.10**(2) License Agreement dated as of March 5, 1993 between
Registrant and TV/COM International.
10.11**(2) Terms of Affiliation Agreement dated as of January
24, 1993 between Registrant and KBLCOM Incorporated.
10.12**(2) License and Technical Assistance Agreement dated as
of March 1, 1991 between Registrant and Video Control
Technology, Inc.
10.13**(2) License and Technical Assistance Agreement dated as
of October 1, 1992 between Registrant and
Scientific-Atlanta, Inc.
10.14**(2) License and Technical Assistance Agreement dated as
of October 1, 1992 between Registrant and General
Instrument Corp.
10.15**(2) License and Technical Assistance Agreement dated as
of December 1, 1992 between Registrant and GoldStar
Co., Ltd.
10.16**(2) Subscriber Billing Service Agreement dated as of
December 23, 1992 between Registrant and First Data
Resources, Inc.
10.17**(2) HTVRO Distribution Agreement dated as of April 30,
1993 between Registrant and Showtime Satellite
Networks, Inc.
10.18**(2) Letter Agreement dated as of May 27, 1993 between
Registrant and Lifetime Television.
10.19**(2) Agreement dated as of October 30, 1992 between
Registrant and TV Data Technologies, Inc.
10.20(2) Terms of Warrant Issuance Agreement between
Registrant and Providence Journal Company.
10.21(2) Terms of Warrant Issuance Agreement dated as of May
18, 1993 between Registrant and Times Mirror Cable
Television Inc.
10.22(2) Manufacturing Agreement dated as of May 28, 1993
between Registrant and PCI Limited.
10.23(2) Assignment Agreement dated as of May 9, 1989 between
Registrant and Patrick Young.
10.24(8) Employment Agreement between Registrant and Michael
W. Faber dated as of December 1, 1994.
10.25(8) Employment Agreement between Registrant and John H.
Roop dated as of December 1, 1993.
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<PAGE>
10.26(2) Employment and Consulting Agreement between
Registrant and Patrick Young dated as of August 1,
1992.
10.27(2) Warrants issued by Registrant to Tribune Company,
dated January 22, 1992.
10.28(2) Warrants issued by Registrant to KBL Ventures, Inc.
dated February 3, 1993.
10.29(2) Warrants issued by Registrant to Providence Journal
Company dated May 7, 1993.
10.30(2) Warrants issued by Registrant to Times Mirror Cable
Television dated May 18, 1993.
10.31(6) Consulting Agreement between Registrant and Willard
Block dated December 1, 1993.
10.32(6) Consulting Agreement between Registrant and John F.
Doyle dated December 1, 1993.
10.33(4) License and Technical Assistance Agreement dated as
of November 26, 1993 between Registrant and Samsung
Electronics Co. Ltd.
10.34**(2) Network Service Agreement dated as of April 30, 1993
between Registrant and Viacom International Inc.
10.35(2) Terms of Warrant Issuance Agreement dated as of June
18, 1993 between Registrant and Cox Communications,
Inc.
10.36**(2) Terms of Affiliation Agreement dated as of June 18,
1993 between Registrant and Cox Communications, Inc.
10.37(2) Warrants issued by Registrant to Cox Communications,
Inc. dated June 18, 1993.
10.38(8) Employment Agreement between the Registrant and John
B. Burns III dated as of December 1, 1993.
10.39(8) Employment Agreement between Registrant and Martin W.
Henkel dated as of December 1, 1994.
10.40**(4) License and Technical Assistance Agreement dated as
of October 28, 1993 between Registrant and Uniden
American Corporation.
10.41**(4) License and Technical Assistance Agreement dated as
of November 5, 1993 between Registrant and Philips
Consumer Electronics Company.
10.42**(5) License and Technical Assistance Agreement dated as
of January 31, 1994 between Registrant and Mitsubishi
Electric Corporation.
10.43**(6) License and Technical Assistance Agreement dated as
of May 12, 1994 between Registrant and THOMSON
Consumer Electronics.
10.44**(7) License and Technical Assistance Agreement dated as
of August 12, 1994 between Registrant and Sony
Corporation.
10.45**(7) License and Technical Assistance Agreement dated as
of September 23, 1994 between Registrant and
Matsushita Electric Corporation of America.
10.46(7) Strategic Agreement dated October 28, 1994 between
Registrant and Bell Atlantic Video Services Company.
10.47**(8) License and Technical Assistance Agreement dated as
of December 7, 1994 between Registrant and Daewoo
Electronics Company, Ltd.
10.48**(8) License and Technical Assistance Agreement dated as
of February 13, 1995 between Registrant and Sharp
Corporation.
10.49**(8) License and Technical Assistance Agreement dated as
of February 26, 1995 between Registrant and GoldStar
Co., Limited.
10.50(8) Network Service Agreement between Registrant and
Trinity Broadcasting Network dated August 16, 1994.
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<PAGE>
10.51(8) License and Technical Assistance Agreement between
Registrant and NextWave Communications Corporation
dated March 15, 1995.
10.52(9) Employment Agreement between Registrant and Larry W.
Wangberg dated February 2, 1995.
10.53(9) Employment Agreement between Registrant and John R.
Roop dated December 1, 1994.
10.54**(9) Service Agreement between Registrant and Viacom Cable
dated November 10, 1994.
10.55**(9) Agreement between Registrant and Philips Consumer
Electronics Company dated October 27, 1994.
10.56**(10) Agreement between Registrant and Toshiba America
Consumer Products Inc. dated May 23, 1995.
10.57**(11) Strategic Cooperation Agreement dated February 21,
1996, between StarSight Telecast, Inc. and THOMSON
multimedia S.A.
10.58(11) Securities Purchase Agreement dated as of February
19, 1996 between THOMSON multimedia S.A. and
StarSight Telecast, Inc.
10.59(11) StarSight Telecast, Inc. Common Stock Purchase
Warrant to Purchase 2,000,000 Plus a Variable Amount
of Shares of Common Stock, granted to THOMSON
multimedia S.A.
10.60(11) Shareholders Agreement dated February 19, 1996 among
THOMSON multimedia S.A., StarSight Telecast, Inc.,
and PVI Transmission, Inc.
10.61(11) Right of First Refusal Agreement dated February 19,
1996 between StarSight Telecast, Inc. and THOMSON
multimedia S.A.
10.62(11) Amendment No. Two To Corporate Partnership Agreement,
dated November 20, 1995 among StarSight Telecast,
Inc., Michael W. Faber, Patrick Young, Milbank Wilson
Capital Partners, and PVI Transmission Inc. (as
successor to Viacom International, Inc.)
10.63(11) Amendment No. Three to Corporate Partnership
Agreement, dated February 19, 1996 among PVI
Transmission Inc. (as successor to Viacom
International, Inc.), StarSight Telecast, Inc., Scott
Wilson, Jeremiah Milbank, Michael W Faber, and
Patrick Young.
10.64** Agreement dated as of December 20, 1996 between
Registrant and Microsoft Corporation.
10.65 Letter Agreement, dated December 23, 1996, between
Registrant and Larry W. Wangberg.
10.66 Letter Agreement, dated December 23, 1996, between
Registrant and Brian L. Klosterman.
10.67 Employment Agreement between Registrant and Larry
W. Wangberg dated as of December 23, 1996.
10.68 Employment Agreement between Registrant and Brian
L. Klosterman dated as of December 23, 1996.
10.69 Employment Agreement between Registrant and Martin
W. Henkel dated as of December 23, 1996.
10.70 Employment Agreement between Registrant and Kenneth
A. Milnes dated as of December 23, 1996.
10.71 Employment Agreement between Registrant and
Jonathan Orlick dated as of December 23, 1996.
11.1 Computation of net loss per share.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
- --------------------
** Confidential treatment has been granted or requested with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1
(File No. 33-64138) as declared effective by the Securities and
Exchange Commission July 29, 1993.
(3) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1993.
64
<PAGE>
(4) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1993.
(5) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1994.
(6) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K "of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
(8) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Transition
Report on Form 10-K for the transition period from July 1, 1994 to
December 31, 1994.
(9) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1995.
(10) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995.
(11) Incorporated by reference to Item 14 "Exhibits, Financial Statements
Schedules and Reports on Form 8-K" for the fiscal year ended
December 31, 1995.
(12) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 333-04075) as declared effective by the
Commission on May 20, 1996.
(13) Incorporated by reference to Item 7 "Material to be Filed as
Exhibit" of Schedule 13D as filed with the Commission on January 2,
1997 by Gemstar International Group Limited (Commission File No.
0-26878).
(14) Incorporated by reference to Item 7 "Material to be Filed as
Exhibit" of the Company's Schedule 13D filed with the Commission on
January 2, 1997.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the last quarter of the fiscal year ended December 31, 1996.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
-----------------------------------
Chairman of the Board and
Chief Executive Officer
Date: March 11, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry W. Wangberg and Martin W. Henkel,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- ------------------------- ---------------------------------- --------------
/s/ Larry W. Wangberg Chairman of the Board of Directors March 11, 1997
- ------------------------ and Chief Executive Officer
Larry W. Wangberg (Principal Executive Officer)
/s/ Brian L. Klosterman President and Chief Operating March 11, 1997
- ------------------------ Officer
Brian L. Klosterman
/s/ Martin W. Henkel Executive Vice President, Chief March 11, 1997
- ------------------------ Financial Officer and Director
Martin W. Henkel
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<PAGE>
/s/ Donn M. Davis March 11, 1997
- ------------------------ Director
Donn M. Davis
/s/ James E. Meyer March 11, 1997
- ------------------------ Director
James E. Meyer
/s/ Jack C. Clifford March 11, 1997
- ------------------------ Director
Jack C. Clifford
/s/ Ajit M. Dalvi March 11, 1997
- ------------------------ Director
Ajit M. Dalvi
/s/ John F. Doyle March 11, 1997
- ------------------------ Director
John F. Doyle
/s/ John W. Goddard March 11, 1997
- ------------------------ Director
John W. Goddard
/s/ Edward D. Horowitz March 11, 1997
- ------------------------ Director
Edward D. Horowitz
/s/ Thomas E. Dooley March 11, 1997
- ------------------------ Director
Thomas E. Dooley
/s/ Jacques Thibon March 11, 1997
- ------------------------ Director
Jacques Thibon
67
<PAGE>
INDEX TO EXHIBITS
Exhibits Sequentially
Numbered Page
2(13) Agreement and Plan of Merger dated as of December 23,
1996 by and among Registrant, Gemstar International
Group Limited and G/S Acquisition Subsidiary.
3.1(1) Restated Articles of Incorporation of Registrant.
3.2(2) Bylaws of Registrant, as amended.
4.1(13) Company Option Agreement dated as of December 23,
1996 by and between Registrant and Gemstar
International Group Limited.
4.2(13) Company Significant Shareholder Agreement dated as of
December 23, 1996 between Registrant and Gemstar
International Group Limited, THOMSON multimedia S.A.,
PVI Transmission Inc., Tribune Company, Spelling
Entertainment, Inc., Cox Communications, Inc. and The
Providence Journal Company.
4.3(14) Parent Option Agreement dated as of December 23, 1996
by and between Registrant and Gemstar International
Group Limited
4.4(14) Parent Significant Shareholder Agreement dated as of
December 23, 1996 between Gemstar International Group
Limited, the Registrant, Dynamic Core Holdings
Limited, Creative Assets Limited and Henry Yuen
10.1(3,12) 1989 Stock Incentive Program, as amended, and forms
of agreements thereunder.
10.2(2) Employee Stock Purchase Plan and forms of agreements
thereunder.
10.3(2) Lease Agreement between Registrant and Shapell
Industries of Northern California dated as of January
8, 1992.
10.4(2) Form of Indemnification Agreements between Registrant
and its officers and directors.
10.5(2) Corporate Partnership Agreement dated as of September
12, 1991, as amended, between Registrant and Viacom
International Inc.
10.6**(2) Agreement dated as of January 31, 1991, between
Registrant and Tribune Media Services, Inc., as
amended.
10.7**(2) Memorandum of Understanding dated May 28, 1993
between Registrant and Mitsubishi Electric
Corporation.
10.8**(2) Manufacturing Agreement dated as of June 1, 1991
between Registrant and Zenith Electronics
Corporation.
10.9**(2) Network Service and Joint Development Agreement dated
as of October 11, 1989, as amended, between
Registrant and National Datacast, Inc.
10.10**(2) License Agreement dated as of March 5, 1993 between
Registrant and TV/COM International.
<PAGE>
10.11**(2) Terms of Affiliation Agreement dated as of January
24, 1993 between Registrant and KBLCOM Incorporated.
10.12**(2) License and Technical Assistance Agreement dated as
of March 1, 1991 between Registrant and Video Control
Technology, Inc.
10.13**(2) License and Technical Assistance Agreement dated as
of October 1, 1992 between Registrant and
Scientific-Atlanta, Inc.
10.14**(2) License and Technical Assistance Agreement dated as
of October 1, 1992 between Registrant and General
Instrument Corp.
10.15**(2) License and Technical Assistance Agreement dated as
of December 1, 1992 between Registrant and GoldStar
Co., Ltd.
10.16**(2) Subscriber Billing Service Agreement dated as of
December 23, 1992 between Registrant and First Data
Resources, Inc.
10.17**(2) HTVRO Distribution Agreement dated as of April 30,
1993 between Registrant and Showtime Satellite
Networks, Inc.
10.18**(2) Letter Agreement dated as of May 27, 1993 between
Registrant and Lifetime Television.
10.19**(2) Agreement dated as of October 30, 1992 between
Registrant and TV Data Technologies, Inc.
10.20(2) Terms of Warrant Issuance Agreement between
Registrant and Providence Journal Company.
10.21(2) Terms of Warrant Issuance Agreement dated as of May
18, 1993 between Registrant and Times Mirror Cable
Television Inc.
10.22(2) Manufacturing Agreement dated as of May 28, 1993
between Registrant and PCI Limited.
10.23(2) Assignment Agreement dated as of May 9, 1989 between
Registrant and Patrick Young.
10.24(8) Employment Agreement between Registrant and Michael
W. Faber dated as of December 1, 1994.
10.25(8) Employment Agreement between Registrant and John H.
Roop dated as of December 1, 1993.
10.26(2) Employment and Consulting Agreement between
Registrant and Patrick Young dated as of August 1,
1992.
10.27(2) Warrants issued by Registrant to Tribune Company,
dated January 22, 1992.
10.28(2) Warrants issued by Registrant to KBL Ventures, Inc.
dated February 3, 1993.
10.29(2) Warrants issued by Registrant to Providence Journal
Company dated May 7, 1993.
10.30(2) Warrants issued by Registrant to Times Mirror Cable
Television dated May 18, 1993.
10.31(6) Consulting Agreement between Registrant and Willard
Block dated December 1, 1993.
<PAGE>
10.32(6) Consulting Agreement between Registrant and John F.
Doyle dated December 1, 1993.
10.33(4) License and Technical Assistance Agreement dated as
of November 26, 1993 between Registrant and Samsung
Electronics Co. Ltd.
10.34**(2) Network Service Agreement dated as of April 30, 1993
between Registrant and Viacom International Inc.
10.35(2) Terms of Warrant Issuance Agreement dated as of June
18, 1993 between Registrant and Cox Communications,
Inc.
10.36**(2) Terms of Affiliation Agreement dated as of June 18,
1993 between Registrant and Cox Communications, Inc.
10.37(2) Warrants issued by Registrant to Cox Communications,
Inc. dated June 18, 1993.
10.38(8) Employment Agreement between the Registrant and John
B. Burns III dated as of December 1, 1993.
10.39(8) Employment Agreement between Registrant and Martin W.
Henkel dated as of December 1, 1994.
10.40**(4) License and Technical Assistance Agreement dated as
of October 28, 1993 between Registrant and Uniden
American Corporation.
10.41**(4) License and Technical Assistance Agreement dated as
of November 5, 1993 between Registrant and Philips
Consumer Electronics Company.
10.42**(5) License and Technical Assistance Agreement dated as
of January 31, 1994 between Registrant and Mitsubishi
Electric Corporation.
10.43**(6) License and Technical Assistance Agreement dated as
of May 12, 1994 between Registrant and THOMSON
Consumer Electronics.
10.44**(7) License and Technical Assistance Agreement dated as
of August 12, 1994 between Registrant and Sony
Corporation.
10.45**(7) License and Technical Assistance Agreement dated as
of September 23, 1994 between Registrant and
Matsushita Electric Corporation of America.
10.46(7) Strategic Agreement dated October 28, 1994 between
Registrant and Bell Atlantic Video Services Company.
10.47**(8) License and Technical Assistance Agreement dated as
of December 7, 1994 between Registrant and Daewoo
Electronics Company, Ltd.
10.48**(8) License and Technical Assistance Agreement dated as
of February 13, 1995 between Registrant and Sharp
Corporation.
10.49**(8) License and Technical Assistance Agreement dated as
of February 26, 1995 between Registrant and GoldStar
Co., Limited.
10.50(8) Network Service Agreement between Registrant and
Trinity Broadcasting Network dated August 16, 1994.
<PAGE>
10.51(8) License and Technical Assistance Agreement between
Registrant and NextWave Communications Corporation
dated March 15, 1995.
10.52(9) Employment Agreement between Registrant and Larry W.
Wangberg dated February 2, 1995.
10.53(9) Employment Agreement between Registrant and John R.
Roop dated December 1, 1994.
10.54**(9) Service Agreement between Registrant and Viacom Cable
dated November 10, 1994
10.55**(9) Agreement between Registrant and Philips Consumer
Electronics Company dated October 27, 1994.
10.56**(10) Agreement between Registrant and Toshiba America
Consumer Products Inc. dated May 23, 1995.
10.57**(11) Strategic Cooperation Agreement dated February 21,
1996 between StarSight Telecast, Inc. and THOMSON
multimedia S.A.
10.58(11) Securities Purchase Agreement dated as of February
19, 1996 between THOMSON multimedia S.A. and
StarSight Telecast, Inc.
10.59(11) StarSight Telecast, Inc. Common Stock Purchase
Warrant to Purchase 2,000,000 Plus a Variable Amount
of Shares of Common Stock, granted to THOMSON
multimedia S.A.
10.60(11) Shareholders Agreement dated February 19, 1996 among
THOMSON multimedia S.A., StarSight Telecast, Inc.,
and PVI Transmission, Inc.
10.61(11) Right of First Refusal Agreement dated February 19,
1996 between StarSight Telecast, Inc. and THOMSON
multimedia S.A.
10.62(11) Amendment No. Two To Corporate Partnership Agreement,
dated November 20, 1995 among StarSight Telecast,
Inc., Michael W. Faber, Patrick Young, Milbank Wilson
Capital Partners, and PVI Transmission Inc. (as
successor to Viacom International, Inc.).
10.63(11) Amendment No. Three to Corporate Partnership
Agreement, dated February 19, 1996 among PVI
Transmission Inc. (as successor to Viacom
International, Inc.), StarSight Telecast, Inc., Scott
Wilson, Jeremiah Milbank, Michael W. Faber, and
Patrick Young.
10.64** Agreement dated as of December 20, 1996 between
Registrant and Microsoft Corporation
10.65 Letter Agreement, dated December 23, 1996, between
Registrant and Larry W. Wangberg.
10.66 Letter Agreement, dated December 23, 1996, between
Registrant and Brian L. Klosterman.
10.67 Employment Agreement between Registrant and Larry
W. Wangberg dated as of December 23, 1996.
10.68 Employment Agreement between Registrant and Brian
L. Klosterman dated as of December 23, 1996.
10.69 Employment Agreement between Registrant and Martin
W. Henkel dated as of December 23, 1996.
10.70 Employment Agreement between Registrant and Kenneth
A. Milnes dated as of December 23, 1996.
10.71 Employment Agreement between Registrant and
Jonathan Orlick dated as of December 23, 1996.
11.1 Computation of net loss per share.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
- ------------------
** Confidential treatment has been granted or requested with respect to
certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993.
(2) Incorporated by reference to the Registration Statement on Form S-1
(File No. 33-64138) as declared effective by the Securities and
Exchange Commission July 29, 1993.
<PAGE>
(3) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1993.
(4) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1993.
(5) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1994.
(6) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994.
(7) Incorporated by reference to Item 6 "Exhibits, and Reports on Form
8-K "of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1994.
(8) Incorporated by reference to Item 14 "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" of the Company's Transition
Report on Form 10-K for the transition period from July 1, 1994 to
December 31, 1994.
(9) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1995.
(10) Incorporated by reference to Item 6 "Exhibits and Reports on Form
8-K" of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995.
(11) Incorporated by reference to Item 14 "Exhibits, Financial Statements
Schedules and Reports on Form 8-K" for the fiscal year ended
December 31, 1995.
(12) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 333-04075) as declared effective by the
Commission on May 20, 1996.
(13) Incorporated by reference to Item 7 "Material to be Filed as
Exhibit" of Schedule 13D as filed with the Commission on January 2,
1997 by Gemstar International Group Limited (Commission File No.
0-26878).
(14) Incorporated by reference to Item 7 "Material to be Filed as
Exhibit" of the Company's Schedule 13D filed with the Commission on
January 2, 1997.
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
INDEX TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Balance Sheets, December 31, 1996 and 1995 F-3
Statements of Operations for the Twelve Months Ended December 31, 1996 and 1995,
Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994 F-4
Statements of Shareholders' Equity for the Twelve Months Ended December 31, 1996 and 1995,
Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994 F-5
Statements of Cash Flows for the Twelve Months Ended December 31, 1996 and 1995,
Six Months Ended December 31, 1994 and Twelve Months Ended June 30, 1994 F-7
Notes to Financial Statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
StarSight Telecast, Inc.:
We have audited the accompanying balance sheets of StarSight Telecast, Inc. (the
"Company") as of December 31, 1996 and 1995, and the related statements of
operations, shareholders' equity and cash flows for the twelve months ended
December 31, 1996 and 1995, six months ended December 31, 1994, and twelve
months ended June 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1996 and
1995, and the results of its operations and its cash flows for the twelve months
ended December 31, 1996 and 1995, the six months ended December 31, 1994, and
the twelve months ended June 30, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 6 to the financial statements, effective July 1, 1994 the
Company changed its method of accounting for legal costs incurred in connection
with patent infringement litigation.
DELOITTE & TOUCHE LLP
San Francisco, California
March 7, 1997
F-2
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
BALANCE SHEETS, DECEMBER 31, 1996 and 1995
(in thousands, except share data)
- ------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
1996 1995
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $25,708 $8,787
Short-term investments available for sale 1,989
Accounts receivable 3,047 2,192
Inventories 441
Other 352 410
------------ -------------
Total current assets 31,096 11,830
FURNITURE, FIXTURES AND EQUIPMENT, Net 1,074 1,637
PATENTS AND LICENSES, net of accumulated
amortization of $853 and $595 2,861 2,866
------------ -------------
TOTAL ASSETS $35,031 $16,333
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,530 $1,570
Accrued liabilities 2,719 3,068
Deferred revenue 11,170 2,992
License fee payable 74 286
------------ -------------
Total current liabilities 15,493 7,916
------------ -------------
LONG-TERM DEFERRED REVENUE 9,700
------------
LONG-TERM LICENSE FEE PAYABLE 74
-------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 12)
SHAREHOLDERS' EQUITY:
Common Stock, no par value: authorized 50,000,000 shares; issued
and outstanding, 25,556,304 and 21,902,018 shares, respectively 125,972 99,400
Unearned compensation (399) (371)
Accumulated deficit (115,735) (90,686)
------------ -------------
Total shareholders' equity 9,838 8,343
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,031 $16,333
============ =============
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, SIX MONTHS ENDED DECEMBER 31, 1994 AND
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Twelve Months Twelve Months Six Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1996 1995 1994 1994
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
License $6,853 $749
Subscription and other 1,845 1,164 $70
----------- ----------- -----------
Total revenues 8,698 1,913 70
----------- ----------- -----------
COST OF GOODS SOLD 1,544 676
INVENTORY RESERVES AND WRITE-OFFS 801 4,931 1,450
----------- ----------- -----------
GROSS PROFIT (LOSS) 6,353 (3,694) (1,380)
----------- ----------- -----------
COSTS AND EXPENSES:
General and administrative 10,311 9,848 8,302 $8,228
Litigation costs 4,776 2,880 1,644
Engineering and development 3,420 3,539 2,128 6,843
Marketing 7,480 6,823 4,325 4,478
Network services and other expenses 6,127 5,570 3,292 2,682
----------- ----------- ----------- -----------
Total costs and expenses 32,114 28,660 19,691 22,231
----------- ----------- ----------- -----------
OPERATING LOSS (25,761) (32,354) (21,071) (22,231)
----------- ----------- ----------- -----------
INTEREST EXPENSE (14) (33) (23) (19)
INTEREST INCOME 726 607 833 1,695
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (25,049) (31,780) (20,261) (20,555)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (1,172)
----------- ----------- ----------- -----------
NET LOSS $(25,049) $(31,780) $(21,433) $(20,555)
=========== =========== =========== ===========
LOSS PER COMMON SHARE:
LOSS BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $(1.01) $(1.50) $(0.97) $(1.08)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (0.06)
----------- ----------- ----------- -----------
NET LOSS $(1.01) $(1.50) $(1.03) $(1.08)
=========== =========== =========== ===========
NUMBER OF SHARES USED FOR
CALCULATION OF NET LOSS
PER COMMON SHARE 24,783,159 21,163,768 20,799,445 19,082,759
=========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, SIX MONTHS ENDED DECEMBER 31, 1994 AND
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------- -------------------
Unearned Accumulated
Shares Amount Shares Amount Compensation Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 8,158,820 $41,073 7,805,674 $3,099 $(1,888) $(16,918) $25,366
Issuance of common stock for cash -
Initial Public Offering - Net ($15.00 per share) 3,105,000 42,334 42,334
Conversion of convertible preferred stock
into common stock (8,158,820) (41,073) 8,158,820 41,073
Exercise of warrant for cash ($5.625 per share) 833,333 4,688 4,688
Amortization of unearned compensation 273 273
Exercise of stock options for cash 574,578 479 479
Issuance of common stock for cash 15,219 183 183
Net loss (20,555) (20,555)
----------- -------- ----------- --------- -------- --------- --------
BALANCE, JUNE 30, 1994 20,492,624 91,856 (1,615) (37,473) 52,768
Exercise of warrant for cash ($7.50 per share) 229,624 1,722 1,722
Exercise of stock options for cash 266,288 377 377
Issuance of common stock for cash 17,250 114 114
Amortization of unearned compensation 631 631
Net loss (21,433) (21,433)
----------- -------- ----------- --------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 -- $ -- 21,005,786 $94,069 $(984) $(58,906) $34,179
(Continued)
F-5
<PAGE>
STARSIGHT TELECAST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, SIX MONTHS ENDED DECEMBER 31, 1994 AND
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible
Preferred Stock Common Stock
-------------------- ---------------------
Unearned Accumulated
Shares Amount Shares Amount Compensation Deficit Total
BALANCE, DECEMBER 31, 1994 -- $ -- 21,005,786 $94,069 $(984) $(58,906) $34,179
Issuance of common stock for cash ($7.50 per share) 666,668 5,000 5,000
Exercise of stock options for cash 218,929 243 243
Issuance of common stock for cash 20,635 88 88
Amortization of unearned compensation 613 613
Net loss (31,780) (31,780)
------ -------- ------------- --------- ------ --------- --------
BALANCE, DECEMBER 31, 1995 21,912,018 99,400 (371) (90,686) 8,343
Issuance of common stock and warrants for cash - net 3,333,333 24,625 24,625
Exercise of stock options for cash 309,336 694 694
Issuance of common stock for cash 11,617 61 61
Compensatory repricing of stock option grant 1,027 (1,027)
Compensatory stock option grants 165 (165)
Amortization of unearned compensation 1,164 1,164
Net loss (25,049) (25,049)
------ -------- ------------- --------- ------ --------- --------
BALANCE, DECEMBER 31, 1996 -- $ -- 25,566,304 $125,972 $(399) $(115,735) $9,838
====== ======== ============= ========= ====== ========= ========
<FN>
(Concluded)
See notes to financial statements.
</FN>
</TABLE>
F-6
<PAGE>
<TABLE>
STARSIGHT TELECAST, INC.
STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995, SIX MONTHS ENDED DECEMBER 31, 1994 AND
TWELVE MONTHS ENDED JUNE 30, 1994 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Twelve Months Twelve Months Six Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1996 1995 1994 1994
----------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,049) $(31,780) $(21,433) $(20,555)
Adjustments to reconcile net loss to net
cash used in operating activities:
Cumulative effect of accounting change 1,172
Amortization of unearned compensation 1,164 613 631 273
Depreciation and amortization 1,246 1,823 936 1,016
Inventory valuation reserve 801 3,649 1,450
Changes in assets and liabilities:
Accounts payable and accrued liabilities (389) (1,164) 2,872 537
Deferred revenue 17,878 2,796
Accounts receivable, inventories and other assets (1,157) (3,545) (2,720) (988)
--------- --------- --------- ---------
Net cash used in operating activities (5,506) (27,608) (17,092) (19,717)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of furniture, fixtures and equipment (425) (585) (849) (2,528)
Purchases of long-term investments (10,024)
Maturities of long-term investments 5,020
Sales of long-term investments held to maturity 5,004
Purchases of short-term investments (15,701) (11,868) (19,712)
Maturities of short-term investments 13,712 16,940 8,811 5,829
Additions to patents and licenses (253) (142) (34) (3,854)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (2,667) 21,217 1,080 (30,289)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock, net 24,625 5,000 42,334
Proceeds from exercise of warrants and options
for common stock 755 331 2,213 5,350
Proceeds from notes payable 822
Repayment of note payable (286) (294) (147) (103)
--------- --------- --------- ---------
Net cash provided by financing activities 25,094 5,037 2,066 48,403
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH 16,921 (1,354) (13,946) (1,603)
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
Beginning of period 8,787 10,141 24,087 25,690
--------- --------- --------- ---------
End of period $25,708 $8,787 $10,141 $24,087
========= ========= ========= =========
OTHER CASH FLOW INFORMATION -
Interest paid $14 $33 $23 $19
========= ========= ========= =========
NONCASH INVESTING AND FINANCING
ACTIVITIES -
Conversion of convertible preferred stock into
common stock $41,703
=========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-7
<PAGE>
STARSIGHT TELECAST, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
General - StarSight Telecast, Inc. (the "Company") was incorporated on May
12, 1986 under the laws of the State of California. The Company markets a
patented on-screen interactive television program guide and VCR control
service under the StarSight brand name into three distinct distribution
channels: consumer electronics, service providers, such as cable or telco,
and licensing the Company's intellectual property for
non-StarSight-capable products, which provide guide features based on
StarSight's proprietary technology and patented inventions.
Change in Fiscal Year - In September 1994, the Company changed its fiscal
year from one ending on June 30 to one ending on December 31 and,
accordingly, the Company adopted a December 31 or calendar year-end
beginning on January 1, 1995. Accordingly, the accompanying statements of
operations, shareholders' equity and cash flows include the transition
fiscal period for the six months from July 1, 1994 to December 31, 1994.
Revenue Recognition - License revenues are recognized as earned based upon
sales or installations of licensed products or services. License revenues
to two customers represented 31% and 30%, respectively, of total revenues
for the twelve months ended December 31, 1996. Also see Note 4.
Subscription revenues are recognized as earned over the period of service.
Activation fees are recognized in the period in which a subscription is
activated. Revenues from sales of stand alone StarSight receivers are
recognized when the related subscription is activated. Deferred revenue
results from cash advances (primarily from license revenues) and
collections and billed receivables for which revenue has not been
recognized.
Cash and Cash Equivalents - The Company considers cash investments with a
maturity of three months or less at the time of purchase to be cash
equivalents.
Investments - The Company holds investments in U.S. Treasury backed
securities with maximum maturities of less than three years. Under
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments and Debt and Equity Securities through September
6, 1995, the Company's short-term and long-term investments were
classified as held to maturity and reported at amortized cost. Effective
September 7, 1995 the Company reclassified its short-term and long-term
investments as available for sale; such investments are reported at market
value with the net unrealized gain or loss included in shareholders'
equity.
Fair Value of Financial Instruments - The Company believes the carrying
amount of its financial instruments, which consists primarily of cash and
investments, receivables and payables, approximates fair value due to the
short-term maturity of these instruments.
Inventories consist primarily of stand alone StarSight receivers and raw
materials and are stated at the lower of cost or market. Cost is
determined principally by the first-in, first-out method. Market is based
on net realizable value for raw materials, work-in-process and finished
products inventories.
F-8
<PAGE>
Furniture, Fixtures and Equipment - The Company records furniture,
fixtures and equipment at cost. Depreciation is computed on the
straight-line method over estimated useful lives ranging from two to five
years.
Income Taxes - The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, which requires the use of the asset and
liability method.
Unearned Compensation - Unearned compensation related to the Company's
stock option plan is calculated based on the difference between the market
value of the common stock at the date the stock option was granted or
repriced (see Note 17) and the option exercise price. Generally, employee
stock options vest ratably over 48 months from the date of grant.
Accordingly, amortization of unearned compensation resulted in charges to
operations of $1,164,000, $613,000, $631,000 and $273,000 for the twelve
months ended December 31, 1996 and 1995, the six months ended December 31,
1994 and the twelve months ended June 30, 1994, respectively.
Net Loss Per Share - The net loss per share for all periods presented 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.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
New Accounting Standards - The Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation in 1996. SFAS No. 123 establishes accounting
and disclosure requirements using a fair value based method of accounting
for stock based employee compensation plans. As allowed under the
provisions of SFAS No. 123, the Company has chosen to continue the
intrinsic value based method of option valuation ("APB 25") and provide
pro forma disclosures of net loss and net loss per share as if the
accounting provisions of SFAS No. 123 had been adopted.
The Black-Scholes model used by the Company to calculate option values
pursuant to SFAS No. 123, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also incorporate highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect
the calculated values. Under the Black-Scholes pricing model, stocks with
high volatility provide option holders with a greater economic "upside"
potential and, accordingly, result in a higher option valuation. Thus
management believes that the Black-Scholes model does not necessarily
provide a reliable single measure of the fair value of the Company's
option awards.
The Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of in 1996. SFAS
No. 121 establishes recognition and measurement criteria for impairment
losses whenever events or changes in circumstances indicate that the
carrying value of assets may not be recoverable. The adoption of SFAS No.
121 did not have an effect on the Company's financial statements.
F-9
<PAGE>
Reclassifications - Certain reclassifications have been made to prior
period amounts to conform with the 1996 presentation.
2. PROPOSED MERGER WITH GEMSTAR
On December 23, 1996, the Company and Gemstar International Group Limited
("Gemstar") agreed to merge pursuant to and subject to the terms and
conditions of the Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement, the Company's shareholders will receive
0.6062 ordinary shares of Gemstar for each share of StarSight common
stock. Consummation of the proposed merger is subject to, among other
things, approval by both companies' shareholders and certain government
regulatory approvals, as well as the satisfaction or waiver of certain
other customary conditions.
3. RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
MANAGEMENT PLANS FOR 1997
Revenues for the twelve months ended December 31, 1996 were $8,698,000. 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. Net loss for the twelve months ended December 31, 1996 and
1995, six months ended December 31, 1994 and the twelve months ended June
30, 1994 was $25,049,000, $31,780,000, $21,433,000 and $20,555,000,
respectively, and net cash used in operating activities for the twelve
months ended December 31, 1996 and 1995, the six months ended December 31,
1994 and the twelve months ended June 30, 1994 was $5,506,000,
$27,608,000, $17,092,000 and $19,717,000, respectively. At December 31,
1996, the Company had an accumulated deficit of $115,735,000.
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 flows from operating activities in
the foreseeable future. The Company is dependent on licensing and
subscription revenues of StarSight products and services in order to
minimize negative cash flow from operations. Because of its limited
commercial operating history, 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, obtain adequate financing to fulfill its marketing plan and
successfully market its products and services to potential subscribers and
license its intellectual property for non-StarSight-capable products.
In March 1996, pursuant to a series of strategic and financial agreements
with THOMSON (see Note 22), the Company sold 3,333,333 shares of the
Company's Common Stock to THOMSON for $25,000,000 ($7.50 per share). The
net proceeds to the Company, after deducting placement fees, were
$24,625,000. Such placement fees of $375,000 were paid to a shareholder
pursuant to an investment advisor agreement with the shareholder.
In December 1996, the Company received a $20,000,000 lump sum royalty
payment under a licensing agreement with Microsoft (see Note 4). At
December 31, 1996, the Company had cash and cash equivalents and
short-term investments available for sale of $27,697,000. In January 1997,
the Company received $7,715,000 as partial payment under an arbitration
settlement (see Note 5).
F-10
<PAGE>
The Company believes that its existing cash and cash equivalents and
short-term investments available for sale will be sufficient to sustain
the Company's current level of operations and meet its financial
obligations through the end of 1997.
4. MICROSOFT LICENSING AGREEMENT
On December 20, 1996, the Company entered into a licensing agreement with
Microsoft Corporation ("Microsoft") to license certain of its technologies
with Microsoft. Under the agreement, Microsoft paid the Company a
non-refundable "lump sum" royalty payment of $20,000,000 (the "Royalty
Payment") for a non-exclusive, worldwide license for the Company's
intellectual property related to electronic program guides, which
technology will be used by Microsoft for future software products and
services on the PC platform. Additionally, Microsoft provided the Company
with a royalty free license under certain of its intellectual property
related to electronic program guides. Microsoft also agreed to pay the
Company certain additional per unit royalties related to additional
features of StarSight licensed product and a percentage of advertising
revenues derived from Microsoft licensed products. The Company agreed to
pay Microsoft a percentage of subscription revenues derived from StarSight
licensed products. The Company will recognize revenue related to the
Royalty Payment ratably during the initial two year period of the
agreement based on the projected installed units of Microsoft licensed
product. Accordingly, $300,000 was recognized as license revenues in 1996
and $19,700,000 was classified as deferred revenues (current and
long-term) at December 31, 1996.
5. SCIENTIFIC-ATLANTA ARBITRATION SETTLEMENT
On December 11, 1996, the U.S. District Court for the Northern District of
California confirmed an American Arbitration Association ("AAA")
arbitration panel award of $15,000,000, plus attorney fees and arbitration
costs, against Scientific-Atlanta for unlawful use of certain Company
intellectual property, breach of contract, breach of the implied covenant
of good faith and fair dealing and unfair trade practices. In addition,
the court confirmed the AAA panel's injunction prohibiting
Scientific-Atlanta for a period of three years from shipping to third
parties any consumer product incorporating an interactive program guide,
except for orders already committed to in writing as of July 23, 1996, the
date of the AAA panel ruling. In January 1997, the Company received a
partial settlement of $7,485,000, plus $230,000 in accrued interest, all
of which will be recognized as 1997 revenues. Remaining amounts due will
be recognized as revenues when such cash or other consideration is
received.
6. ACCOUNTING CHANGE
Effective July 1, 1994, the Company changed its method of accounting to
expense legal costs incurred in connection with patent infringement
litigation. Previously all such legal costs were capitalized and amortized
over the remaining useful lives of the related patents. The Company
believes that this change in accounting method is preferable because it
conforms to the predominant industry practice. The cumulative effect at
July 1, 1994 of adopting this accounting change was an increase in the
Company's net loss by $1,172,000 ($0.06 per share). The effect of this
accounting change for the six months ended December 31, 1994, in addition
to the cumulative effect noted above, was an increase in the Company's net
loss of $1,644,000 ($0.08 per share). See Note 7.
F-11
<PAGE>
7. PATENTS AND LICENSES AND PATENT INFRINGEMENT LITIGATION
Patents and Licenses
The Company holds several U.S. and foreign patents, encompassing processes
as well as systems of electronically delivering television program
schedule information to a storage device for the control of television
tuners, recording devices and the use of on-screen menus for program
guides and control of cable decoding devices by recording devices. The
Company has filed a series of other patent applications covering
additional product features, various interfaces, and new products which
are directed toward the area of electronic program guide and recording
device products. The costs incurred in connection with securing these
patents are capitalized and amortized over their estimated useful lives of
13 to 17 years.
In February 1994, the Company paid $2,500,000 in cash consideration for an
amendment to a licensing assignment agreement. The original assignment
agreement assigned to the Company all right, title and interest in two
patents, the TV Schedule patent and the VCR Scheduling patent, in exchange
for certain royalty payments. The amendment eliminated these royalty
payments in exchange for the cash consideration. The $2,500,000 was
capitalized as patents and licenses and is being amortized over the
average remaining useful lives of the two applicable patents.
In March 1994, the Company entered into an exclusive patent license
agreement with another company for five previously issued patents and
several related pending patents (the "PMC Patents"), one which has since
been granted. In consideration for the license agreement, the Company paid
a license fee consisting of a one-time payment of $500,000 and monthly
installments of $25,000 over a three-year period thereafter. The Company
expensed the total license fee of $1,322,000 in the twelve months ended
June 30, 1994 as additional development will be required to achieve
product feasibility.
Patent Infringement Litigation
The Company is a defendant in several lawsuits alleging infringement of
certain patent rights by the Company, as described below.
Gemstar Litigation
The Company and Gemstar are currently in litigation with each other over
their respective intellectual property rights as described more fully
below. The Company and Gemstar, however, have agreed to cease ("stay") all
activity with respect to the pending litigation between them until the
earlier of the consummation of the Merger or termination of the Merger
Agreement.
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
F-12
<PAGE>
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 was dismissed with prejudice.
In addition, the case has been phased to permit resolution of validity and
infringement issues prior to resolving all other disputed issues. The
court conducted trial in August 1996 regarding Levine's alleged
unequitable conduct. A decision has not been rendered in view of the
aforementioned stay.
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. A trial date has not yet been set and discovery has been stayed
pursuant to the Merger Agreement.
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. On May
5, 1995, SuperGuide amended its complaint to add a count asserting that
the Company's `121 patent is invalid and/or unenforceable and is not
infringed upon by SuperGuide. The Company filed a motion to dismiss
SuperGuide's causes of action with respect to the `121 patent for lack of
subject matter jurisdiction (based on no case or controversy); on August
8, 1995, the Company's motion was granted. This lawsuit also has been
consolidated with the above mentioned cases for discovery and pre-trial
purposes. A trial date has not yet been set and discovery has been stayed
pursuant to the aforementioned Merger Agreement.
United Video Litigation
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 ten 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 of 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 set the trial date for the next
phase for May 5, 1997. The Company will present witnesses during this next
phase relating to the validity, enforceability and infringement of the
`121 patent.
F-13
<PAGE>
Scientific-Atlanta Arbitration and Litigation
In 1995, the Company brought an arbitration action against
Scientific-Atlanta concerning Scientific-Atlanta's alleged delay in the
deployment of StarSight-capable set-top boxes and its development of a
competing electronic program guide allegedly using the Company's
technology in violation of its licensing agreement with the Company. In
apparent response to the arbitration action, Scientific-Atlanta filed a
lawsuit in the United States District Court for the Northern District of
Georgia (the "Atlanta suit") in February 1996 against the Company and
Philips alleging that the Company's stand alone StarSight receiver
infringed on three U.S. patents owned by Scientific-Atlanta. The Company
filed a demand on April 30, 1996 for arbitration on the issue of whether
the Company is licensed to use Scientific-Atlanta's patents. The
arbitrators have been selected, but there has been no discovery and no
hearing date has been set. The judge in the Atlanta suit has stayed
proceedings pending the outcome of the April 30, 1996 arbitration. On July
23, 1996, the American Arbitration Association ("AAA") awarded the Company
$15,000,000 in monetary damages plus attorney 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.
On December 11, 1996, the U.S. District Court for the Northern District of
California confirmed the AAA arbitration panel award of $15,000,000, plus
attorney fees and arbitration costs. In addition, the court confirmed the
AAA panel's injunction prohibiting Scientific-Atlanta for a period of
three years from shipping to third parties any consumer product
incorporating an interactive program guide, except for orders already
committed to in writing as of July 23, 1996, the date of the AAA panel
ruling. On December 24, 1996, Scientific-Atlanta appealed $10,000,000 of
the award to the U.S. District Court of Appeals for the Ninth Circuit. The
matter is currently pending and no briefs have been filed.
In January 1997, the Company received a payment of $7,715,000 for a
portion of the award, consisting of $5,000,000 in damages, $2,485,000 for
attorney fees and arbitration costs and $230,000 in accrued interest.
The Company intends to respond and vigorously defend the allegations
against it and to actively pursue its claims against each party. Through
December 31, 1996, the Company expensed $10,472,000 in legal and other
costs in connection with the litigation described above, of which
$4,776,000 and $2,880,000 was incurred for the twelve months ended
December 31, 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 suits. 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.
The Company 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.
F-14
<PAGE>
8. INVESTMENTS
Short-term investments available for sale of $1,989,000 at December 31,
1996 consist of debt instruments issued by a Federal Agency. The fair
value of these instruments approximated amortized cost at December 31,
1996.
In September 1995, the Company sold its long-term investments held to
maturity to provide cash for operating requirements.
9. INVENTORIES
Inventories are summarized as follows (in thousands):
December 31, December 31,
1996 1995
Raw materials $ 801 $ 441
Finished products 680 5,099
------- -------
Total 1,481 5,540
Less lower of cost-or-market valuation allowance (1,481) (5,099)
------- -------
Inventory, net $ -- $ 441
======= =======
Inventory reserves and write-offs were $801,000, $4,931,000 and $1,450,000
for the twelve months ended December 31, 1996 and 1995 and the six months
ended December 31, 1994, respectively.
The Company had entered into an agreement with a third party manufacturer
(the "Manufacturer") for the manufacture of as many as 100,000 stand alone
StarSight receivers ("Receivers") on a subcontract basis. In connection
with this agreement, the Company provided the Manufacturer certain raw
materials to complete the manufacture of the Receivers. At December 31,
1994, the Company had recorded an inventory valuation allowance of
$1,450,000 related to this agreement covering approximately 25,000
Receivers which the Company had committed to purchase. Such inventory
valuation allowance represented the Company's estimate of the excess of
cost over net realizable value on work-in-process and finished products
inventories to reflect the anticipated sales price of the Company's stand
alone StarSight receiver at the time.
During the first quarter of 1995, the Company committed to purchase
another 10,000 Receivers and recorded an additional inventory valuation
allowance of $930,000. In September 1995 the Company canceled its
commitment to purchase the remaining 65,000 Receivers from the
Manufacturer. Such cancellation did not result in any additional cost or
liability to the Company. However, in September 1995, as a result of the
completion of this agreement with the Manufacturer and a significant
reduction in the anticipated sales price of the Receivers, the Company
recorded an additional lower of cost or market inventory valuation
allowance of $2,340,000. In addition, the Company expensed $960,000 of
excess work-in-process inventories originally acquired for use in the
manufacture of the remaining 65,000 receivers. In the fourth quarter of
1995, the Company recorded an additional lower
F-15
<PAGE>
of cost or market inventory valuation allowance of $701,000. As a result,
the total 1995 inventory reserve and write-off was $4,931,000.
During the fourth quarter of 1996, as a result of delays in the
manufacture of StarSight-capable consumer electronics products, the
Company recorded an additional lower of cost or market inventory allowance
of $801,000.
10. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following (in thousands):
December 31, December 31,
1996 1995
Computer equipment and software $ 2,229 $ 1,994
Furniture and fixtures 644 629
Machines and equipment 2,852 2,677
------- -------
Total 5,725 5,300
Less accumulated depreciation (4,651) (3,663)
------- -------
Furniture, fixtures and equipment, net $ 1,074 $ 1,637
======= =======
11. THOMSON LICENSING AGREEMENT
During the fourth quarter of 1995, the Company entered into a licensing
agreement with Thomson Consumer Electronics for use of the Company's
intellectual property in certain Digital Satellite System ("DSS")
equipment manufactured by Thomson Consumer Electronics. In connection with
this agreement, the Company received a prepayment of $2,000,000 for
license fees in October 1995 which was recorded as deferred revenue.
Revenues are recognized when actual shipments of DSS equipment with the
Company's intellectual property occur. The Company recorded approximately
$2,612,000 in license revenues under this agreement for the twelve months
ended December 31, 1996. No revenues were recorded under this agreement
for the twelve months ended December 31, 1995.
F-16
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into a long-term joint development and network
service agreement for the transmission of television program schedule data
which originally expired on June 30, 1996. During 1996, the expiration
date was extended to December 31, 2001. Under this agreement, the Company
is committed to pay a monthly fee based on the number of designated market
areas. If services are provided nationwide and subscriptions exceed a
certain level, these fees may increase to a maximum of $7,000,000 per year
prior to adjustments for inflation.
Future minimum payments under this agreement as of December 31, 1996 are
as follows:
Years ended December 31 (in thousands):
1997 $1,240
1998 1,240
1999 1,240
2000 1,240
2001 1,240
------
Total $6,200
======
Fees under this agreement were $1,124,000, $1,170,722, $1,245,000 and
$1,008,000 for the twelve months ended December 31, 1996 and 1995, the six
months ended December 31, 1994 and the twelve months ended June 30, 1994,
respectively.
The Company has entered into a data delivery agreement for television
programming schedule data and computer services. Fees under this agreement
begin with the achievement of an agreed-upon subscriber base and are
limited to a maximum of $1,600,000 per year through April 25, 2000. Fees
under this agreement were $705,000, $654,000, $415,000 and $413,000 for
the twelve months ended December 31, 1996 and 1995, the six months ended
December 31, 1994 and the twelve months ended June 30, 1994, respectively.
The Company has entered into a product development and manufacturing
agreement for televisions that utilize the Company's television program
subscription services. Under this agreement, the Company will reimburse
certain design and engineering costs incurred by the manufacturer and will
also pay certain incremental manufacturing costs and royalties based upon
units produced. For the six months ended December 31, 1994 and the twelve
months ended June 30, 1994, the Company incurred expenses of $3,117,000
and $997,000, respectively, under this agreement. Subsequent to December
31, 1994, the Company fulfilled its obligations to reimburse the
manufacturer resulting in no further payments by the Company. The Company
has entered into another similar agreement with the same manufacturer. For
the twelve months ended December 31, 1996, the Company expensed
approximately $807,000 under this agreement.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
F-17
<PAGE>
purposes, and (b) operating loss and tax credit carryforwards. The
deferred tax balances consisted of the following (in thousands):
December 31, December 31,
1996 1995
Deferred tax assets:
Federal and state net operating loss carryforwards $ 30,000 $ 29,257
Patent litigation costs 4,000 2,629
Inventory reserves 600 1,765
Excess book over tax depreciation and amortization 400 341
Unearned licensing revenue 7,900 --
Other 1,500 1,512
-------- --------
Total 44,400 35,504
Valuation allowance (44,400) (35,504)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company
has established a valuation allowance of $44,400,000 and $35,504,000 as of
December 31, 1996 and 1995, respectively, due to the uncertainty of
realizing future tax benefits from its net operating loss carryforwards
and other deferred tax assets.
As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $81,000,000, and net
operating loss carryforwards for state tax purposes of approximately
$38,000,000, which expire at various dates through 2011. The difference
between the net operating loss carryforwards for federal income tax
purposes and for California income tax purposes results primarily from the
capitalization of research and development costs and the 50% limitation on
the California loss carryforwards.
Internal Revenue Code Section 382 places a limitation (the "Section 382
Limitation") on the amount of taxable income which can be offset by net
operating loss ("NOL") carryforwards after a change in control (generally
greater than 50% change in ownership) of a loss corporation. California
has similar rules. Generally, after a control change, a loss corporation
cannot deduct NOL carryforwards in excess of the Section 382 Limitation.
As a result of recent equity investments, the Company has not yet
determined the amount, if any, of limitations of NOL carryforwards as of
December 31, 1996. Future ownership changes could limit the Company's use
of its remaining NOL carryforwards.
14. ISSUANCE OF COMMON STOCK IN 1996 AND 1995
On March 8, 1996, the Company sold 3,333,333 shares of its Common Stock to
THOMSON at a price of $7.50 per share for $24,625,000, net of placement
fees associated with the transaction of $375,000. See Note 22.
On November 20, 1995, the Company completed a private placement with
certain existing shareholders for 666,668 shares of the Company's common
stock at a price of $7.50 per share or total net proceeds of $5,000,000.
There were no underwriting commissions or placement fees associated with
the transaction.
F-18
<PAGE>
15. INITIAL PUBLIC OFFERING OF COMMON STOCK IN 1993
In July 1993, the Company completed an underwritten initial public
offering ("IPO") of 3,105,000 shares of Common Stock, at an initial price
to the public of $15.00 per share The net proceeds to the Company, after
deducting underwriting commissions and discounts and other offering costs,
was $42,334,000. At the time of the IPO, all of the Convertible Preferred
Stock was automatically converted into Common Stock on a one for one
basis. The Series A, B, C, D, E, F, G. H, and I Convertible Preferred
Stock was convertible at any time into the same number of fully paid and
nonassessable shares of Common Stock.
16. STOCK WARRANTS
As a result of the IPO, the Series C, D, E, F, G, H and I Warrants became
exercisable for shares of Common Stock. In September 1993, a Warrant
Holder exercised its Warrant to purchase 833,333 shares of the Company's
Common Stock for $4,687,498 ($5.63 per share). In September 1994, a
Warrant Holder exercised its Warrant to purchase 229,624 shares of the
Company's Common Stock for $1,722,180 ($7.50 per share).
On September 18, 1991, in connection with the sale of Series C Convertible
Preferred Stock, the Company granted the holder, in the event the Company
or any shareholder of the Company engages or proposes to engage in a
transaction that would result in a new shareholder of the Company holding
greater than 25% of the Company's outstanding capital stock, on an
as-defined fully diluted basis ("25% Shareholder"), the right to purchase,
at the fair market value of the Common Stock as determined by the average
of the closing prices for a share of Common Stock of the Company on the
ten consecutive trading days preceding the date of exercise, additional
shares of Common Stock to enable it to maintain up to a 1.4:1 ratio
between its percentage ownership of the Company, on an as-defined fully
diluted basis, and that of the new 25% Shareholder, provided that the
holder may not, pursuant to this right, increase its percentage ownership
to greater than 51% of the Company's outstanding capital stock on an
as-defined fully diluted basis (the "Top Up Right"). In connection with
the THOMSON investment of $25,000,000 (see Note 22), the holder agreed
that THOMSON could acquire greater than 25% of the Company's outstanding
capital stock without initiating the holder's Top Up Right. In connection
with the proposed merger with Gemstar, the holder agreed to certain
modifications of its Top Up Right, solely as such right applies to the
option granted by the Company to Gemstar in connection with the proposed
merger.
In connection with a strategic and affiliation agreement with Bell
Atlantic Video Services Company ("BVS") dated October 28, 1994, the
Company granted BVS two Warrants to purchase an aggregate of 1,000,000
shares of the Company's common stock. One warrant to purchase 500,000
shares can be exercised at predetermined prices increasing from $15 to $35
over the four-year warrant term. The remaining warrant to purchase 500,000
shares can be exercised at 85% of market price at the time of exercise.
In connection with a series of strategic and financial agreements with
THOMSON dated March 8, 1996, the Company granted THOMSON a warrant to
purchase 2,000,000 shares of the Company's Common Stock as follows: up to
1,000,000 shares at $7.50 per share on or prior to February 1, 1998 and up
to the balance of the shares at $10.00 per share on or prior to February
1, 1999. The total number of shares purchasable by THOMSON under the
warrant is limited to 19.6% of the Company's issued and outstanding Common
Stock.
F-19
<PAGE>
17. STOCK OPTIONS
In November 1994, the Company amended the 1989 Stock Incentive Program to
increase the number of shares reserved for stock options from 2,666,667
shares to 3,866,667 shares. In May 1995, the Company amended the 1989
Stock Incentive Program to increase the number of shares reserved for
stock options from 3,866,667 shares to 4,766,667 shares. The 1989 Stock
Incentive Program provides for two forms of option agreements:
o The incentive stock option plan is intended to qualify as an
"incentive stock option" plan as defined in Section 422(A) of the
Internal Revenue Code of 1986 and provides for the granting of
options to purchase shares of the Company's Common Stock to key
officers and employees.
o The nonstatutory stock plan is not intended to be a qualified option
plan and provides for the granting of options to purchase shares of
the Company's Common Stock to employees and consultants.
Stock options become exercisable pursuant to individual written agreements
between the Company and participants in the plans. Generally, the exercise
price is the estimated fair market value at the date of the grant.
Generally, employee stock options vest ratably over 48 months from the
date of grant. Unexercised options expire five to ten years from the date
of the grant.
F-20
<PAGE>
<TABLE>
A summary of the options outstanding in the Company's stock option plans
follows:
<CAPTION>
Weighted
Average
Exercise
Share Price
-------------------------------------------------------- ------------
Incentive Nonstatutory Total
<S> <C> <C> <C> <C>
Balance at July 1, 1993 1,284,335 502,732 1,787,067 $ 2.78
Granted 364,668 200,000 564,668 $18.83
Exercised (459,827) (129,334) (589,161) $ 1.31
Canceled (4,860) (5,833) (10,693) $19.64
--------- ---------- ----------
Balance at June 30, 1994 1,184,316 567,565 1,751,881 $ 8.35
Granted 232,533 200,000 432,533 $11.91
Exercised (192,038) (73,000) (265,038) $ 2.02
Canceled (195,231) (47,499) (242,730) $18.71
--------- ---------- ----------
Balance at December 31, 1994 1,029,580 647,066 1,676,646 $ 9.10
Granted 1,169,783 90,000 1,259,783 $ 5.67
Exercised (177,929) (41,000) (218,929) $ 3.05
Canceled (216,805) (116,733) (333,538) $11.85
--------- ---------- ----------
Balance at December 31, 1995 1,804,629 579,333 2,383,962 $ 6.66
Granted 613,797 197,500 811,297 $ 6.84
Exercised (200,669) (108,667) (309,336) $ 2.61
Canceled (441,242) (100,000) (541,242) $10.55
--------- ---------- ----------
Balance at December 31, 1996 1,776,515 568,166 2,344,681 $ 6.85
========= ========== ==========
</TABLE>
In January 1996, the Company repriced the exercise price of approximately
300,000 options (originally granted from $15.00 to $3.75) to $3.50. As a
result, the Company incurred $752,000 in compensation expense in 1996 (see
Note 1) and expects to incur an additional $214,000 and $107,000 in
compensation expense in 1997 and 1998, respectively.
At December 31, 1996, there were 993,872 shares available for the granting
of additional options. There were 1,277,632, 1,061,392, 981,139 and
965,875 shares exercisable at December 31, 1996, 1995, 1994 and June 30,
1994, respectively, at a weighted average price of $7.30, $7.45, $7.95 and
$5.09, respectively.
F-21
<PAGE>
<TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<CAPTION>
Outstanding Exercisable
---------------------------------------------------- ------------------------------
Number Weighted Weighted Number of Weighted
Range of Outstanding at Average Average Exercisable at Average
Exercise December 31, Remaining Life Exercise December 31, Exercise
Prices 1996 (in years) Price 1996 Price
- ----------------- ----------------- -------------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
$2.75-$5.00 713,935 1.7 $3.43 443,212 $3.43
$5.01-$10.00 1,383,663 2.5 $7.02 599,525 $7.02
$10.01-$15.00 182,083 0 $12.29 173,333 $12.29
$15.01-$22.25 65,000 0 $22.25 61,562 $22.25
---------- ---------
2,344,681 1,277,632
========== =========
</TABLE>
18. SFAS NO. 123 PRO FORMA DISCLOSURES
The Company applies APB 25 in accounting for its stock options. Had
compensation cost been determined consistent with SFAS No. 123, the
Company's net loss and net loss per share would have been changed to the
pro forma amounts indicated below:
Year Ended December 31,
1996 1995
---------- -----------
Net loss (in thousands)
As reported $ (25,049) $ (31,780)
Pro forma (26,561) (32,730)
Primary net loss per share
As reported $ (1.01) $ (1.50)
Pro forma (1.07) (1.55)
The weighted-average grant date fair value of options granted during the
year was $4.52 in 1996 ($4.44 for options granted at market price and
$4.95 for options granted at less than market price) and $4.36 in 1995.
The weighted average exercise price of options granted in 1996 was $6.84
for options granted at market price and $3.50 for options granted at less
than market price.
F-22
<PAGE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Year Ended December 31,
1996 1995
--------- ----------
Dividend Yield 0% 0%
Volatility 95% 95%
Risk free interest 5.7% 6.9%
Expected terms (years) 2.5 4
The expected term assumption in 1996 is lower than the vesting period due
to the effect of repricing existing options (see Note 17). This repricing
of existing options has been included in the Black-Scholes option pricing
model. The incremental fair value of the options between the fair value
after and before the repricing has been included in the 1996 pro forma
calculations above.
The impact of outstanding unvested stock options granted prior to 1995 has
been excluded from the pro forma calculations. Accordingly, the 1996 and
1995 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock
options.
19. EMPLOYEE STOCK PURCHASE PLAN
In May 1993 the Company's Employee Stock Purchase Plan (the "Purchase
Plan") was adopted by the Board of Directors and approved by the Company's
shareholders. The Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code of 1986, as amended. The Purchase Plan allows
eligible employees to purchase Common Stock at not less than 85% of fair
market value through payroll deductions not to exceed 15% of an employee's
compensation and not to exceed $25,000 of stock in any calendar year. A
total of 100,000 shares of Common Stock are reserved for issuance under
the Purchase Plan. During the twelve months ended December 31, 1996 and
1995, the six months ended December 31, 1994 and the twelve months ended
June 30, 1994, employees of the Company purchased 11,617 shares of Common
Stock for $61,000, 20,635 shares of Common Stock for $88,000, 17,250
shares of Common Stock for $114,000 and 15,219 shares of Common Stock for
$183,000, respectively, under the Purchase Plan.
20. 401(k) PLAN
The Company maintains a salary deferral 401(k) plan (the "Plan") covering
all employees who have met certain eligibility requirements. Employees may
elect to contribute up to 20% of their eligible compensation to the Plan,
not to exceed the dollar limit set by law. Under the Plan, the Company
may, at its discretion, make matching contributions to the Plan. The
Company has not made any contributions to the Plan through December 31,
1996.
F-23
<PAGE>
21. LEASES
The Company leases office space under operating leases which are subject
to certain rent escalations and include renewal provisions at the option
of the Company.
Future minimum payments under operating leases as of December 31, 1996
were as follows:
Years ended December 31 (in thousands):
1997 $812
1998 815
1999 824
2000 608
2001 526
Thereafter 658
------
Total $4,243
======
Rental expense was $754,000, $644,000, $330,000 and $486,000 for the
twelve months ended December 31, 1996 and 1995, the six months ended
December 31, 1994 and the twelve months ended June 30, 1994, respectively.
22. MARCH 1996 AGREEMENTS WITH THOMSON
On March 8, 1996, the Company and THOMSON finalized agreements to form a
long-term strategic relationship to aggressively incorporate and promote
StarSight technology and related services in selected THOMSON product
lines. The key terms and conditions of these agreements follow:
o The Company sold 3,333,333 shares of its Common Stock to THOMSON at
$7.50 per share or $25,000,000 in total.
o The Company granted THOMSON a warrant to purchase 2,000,000 shares
of the Company's Common Stock as follows: up to 1,000,000 shares at
$7.50 per share on or prior to February 1, 1998 and up to the
balance of the shares at $10.00 per share on or prior to February 1,
1999. The total number of shares purchasable by THOMSON under the
warrant is limited to 19.6% of the Company's issued and outstanding
Common Stock.
o THOMSON will put StarSight capability into a significant portion of
THOMSON's suitable consumer electronic products over the life of the
ten year agreement.
o The Company will pay THOMSON a per subscriber fee for new
subscribers using a THOMSON StarSight-capable product. Fees under
this agreement are limited to certain annual maximums through the
year 2000.
o The Company will pay THOMSON a percentage of all subscription fees
derived from THOMSON StarSight-capable products. Fees under this
agreement begin after the achievement of an agreed-upon minimum of
THOMSON StarSight-capable products manufactured or procured by
THOMSON. In addition, the Company will pay THOMSON a percentage of
all revenues related to consumer electronics products whether or not
the subscriber is using a THOMSON StarSight-capable product. Such
fees under this agreement begin after the achievement of an
agreed-upon
F-24
<PAGE>
minimum of THOMSON StarSight-capable products manufactured or
procured by THOMSON. This agreement expires in 2010.
o The Company and THOMSON each agree to contribute significant
specific dollar advertising commitments in each year 1997 and 1998
for advertising and promotion of THOMSON StarSight-capable products.
The Company believes that as a result of significant changing conditions
in the marketplace, including increased competition, certain aspects of
these strategic business agreements with THOMSON, such as THOMSON's volume
commitments and the Company's technology transfer commitments, will be
renegotiated in the near term as soon as market conditions have been
clarified.
******
F-25
DEFINITIVE AGREEMENT
THIS AGREEMENT is made as of October 1, 1996 ("Effective Date"), by and
between STARSIGHT TELECAST, INC. ("StarSight"), a corporation organized and
existing under the laws of the State of California, USA, having its main office
and place of business at 39650 Liberty Street, 3rd Floor, Fremont, California,
94538, USA, and Microsoft Corporation ("Microsoft"), a corporation organized and
existing under the laws of the State of Washington, USA, having its main office
and place of business at One Microsoft Way, Redmond, Washington 98052-6399, USA,
who agree as follows:
SECTION 1
RECITALS
StarSight is engaged in the manufacture, research and development of
data processing products and methods including the provision of schedule and
programming information to end users and television broadcast facilities having
systems compatible for receiving such information.
Microsoft develops, manufactures, licenses, sells and supports a wide
range of software and hardware products, including data processing products, for
personal computers ("PCs"), sub-PCs, computerized appliances, workstations and
servers.
StarSight and Microsoft have intellectual property rights including
certain patents and patent applications, and have the right to grant licenses to
the other under such intellectual property rights. The parties expect to
continue research and development which will be protected by future intellectual
property rights. Each of the parties wishes to be granted licenses under such
intellectual property rights of the other party.
The parties wish to cooperate with respect to their respective
development of data processing products and provision of schedule and
programming information to end users and television broadcast facilities.
Further, the parties wish to share certain revenues and conduct various
marketing activities in connection with such products and services.
SECTION 2
DEFINITIONS
When the following terms are used in capitalized form herein, they
shall have the following meanings:
"Advertising Links" means a hypertext link or other mechanism through
which advertising is made available to or accessible by user selection. One
example of an "Advertising Link" would be an icon which could be selected by a
user which activates or causes the display or storage of an advertising message.
<PAGE>
"Advertising Revenue(s)" means all Microsoft revenues generated from
advertising sold for display in any EPG display of any Microsoft EPG Product, as
well as any fees paid by an advertiser to Microsoft for display of an
Advertising Link or for user selection of an Advertising Link in any EPG display
of any Microsoft EPG Product.
"Data Loader" means a mechanism for receiving and storing data in a
manner which allows it to be displayed in an EPG.
"Deliverables" shall mean either the Microsoft Deliverables or the
StarSight Deliverables as the context may require.
"Delivering Party" shall mean Microsoft in the case of the Microsoft
Deliverables and StarSight in the case of the StarSight Deliverables.
"Digital Set Top Box" means any digital device (other than a
Traditional Product, a personal computer or other multi-purpose device, as well
as, components designed therefor), the principal design and function of which is
the reception, decoding and conditional access of MPEG (or equivalent) digital
broadcast signals, irrespective of the broadcast method (e.g., cable,
satellite), of programming services such as television.
"Direct Broadcast Satellite Product" or "DBS Product" means an
integrated receiver/decoder product compatible with a direct broadcast satellite
system such as, for example, the DirecTV 101(degree) West direct broadcast
satellite network. A DBS Product may be, for example, without limitation a
television, a VCR or personal computer having an integrated direct broadcast
satellite network receiving function.
[REDACTED***] means [REDACTED***] or its successor in interest to its
[REDACTED***].
"Electronic Program Guide" or "EPG" means any electronic guide which
displays or gives selective access to any information.
"Licensed Patents" means, as to each party to this Agreement, the
claims covering EPG-related inventions in any and all patents and applications
throughout the world including utility models, design patents, divisionals,
reissues, continuations, re-examinations and extensions thereof, issued or
issuing on applications entitled to an effective filing date before
[REDACTED***], under which patents or applications therefor such party or any of
its Subsidiaries now has or [REDACTED***] of or within the scope granted herein.
The term "Licensed Patents" shall not apply with respect to any claim of any
patent in which either party first obtains rights before, on, or after the
Effective Date if a grant of a license or the exercise of rights thereunder
would result [REDACTED***], or result in the loss of any rights in such patent,
by the granting party, except for [REDACTED***] to Subsidiaries of such granting
party, and [REDACTED***] to third parties for inventions made by said third
parties while employed by such granting party to this Agreement.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-2-
<PAGE>
"Microsoft Deliverables" shall mean deliverables identified on Appendix
A, attached hereto and incorporated by reference and as may be amended from time
to time in writing by the mutual agreement of the parties to this Agreement.
"Microsoft EPG Product" means a Microsoft Licensed Product that
includes or incorporates an EPG designed to receive and display local broadcast
TV listings.
"Microsoft Licensed Product(s)" means any and all products, services
and infrastructure of Microsoft or any of its Subsidiaries which products,
services and infrastructure, but for this Agreement would directly or indirectly
infringe one or more of the valid and enforceable claims of the StarSight
Licensed Patents. The term "Microsoft Licensed Products," however, shall not
include Traditional Products.
"Net Advertising Revenues" means Advertising Revenues less only
allowances for uncollectable amounts and bad debts, determined in accordance
with generally accepted accounting principles as consistently applied by
Microsoft.
"Net Subscription Revenues" means Subscription Revenues less only
allowances for uncollectible amounts and bad debts, determined in accordance
with generally accepted accounting principles as consistently applied by
StarSight.
"Receiving Party" shall mean StarSight in the case of the Microsoft
Deliverables and Microsoft in the case of the StarSight Deliverables.
"Service Provider" means any company or entity which operates a
broadcast system, irrespective of the broadcast method (e.g., cable, satellite),
for providing programming services such as television.
[REDACTED***] means, with respect to any Digital Set Top Box, one that
is directly or indirectly provided by a [REDACTED***] to an end user via lease,
subscription or otherwise whereby title to the Digital Set Top Box does not pass
to the end user (i.e., the Digital Set Top Box remains an asset listed on the
financial books of the [REDACTED***] or other entity which provides the Digital
Set Top Box to the end user).
"StarSight Authorization Codes" means codes which StarSight uses to
electronically send activation, deactivation or other commands or data to
individually addressable StarSight products.
"StarSight Competitor" means an entity that actively designs and/or
sells or otherwise markets Electronic Program Guide hardware, services and/or
software which, when such products and services, taken individually or
collectively, directly compete in the marketplace with similar StarSight
products and services designed, sold, or otherwise marketed by StarSight, or are
licensed under and/or covered by any StarSight patent, copyright, or trade
secret.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-3-
<PAGE>
"StarSight Data Loader" means a Data Loader that receives and stores
StarSight data, pursuant to a StarSight subscription.
"StarSight Deliverables" shall mean deliverables identified on Appendix
B, attached hereto and incorporated by reference.
"StarSight Licensed Product(s)" means any and all EPG products and
services of StarSight or any of its Subsidiaries the primary function of which
is to receive and display information from a StarSight data service and a
substantial portion of which functionality is to receive and display television
programming information which products and services, but for this Agreement
would directly or indirectly infringe one or more of the valid and enforceable
claims of the Microsoft Licensed Patents. For example, personal computer
operating systems, Internet/Intranet browser programs, general purpose
word-processing programs, and spreadsheet programs would not be included in the
term "StarSight Licensed Products."
"StarSight Protocol(s)" means data structures, protocols, and similar
information established by StarSight to enable StarSight products to receive,
decode and utilize information broadcast through the StarSight system.
"StarSight Trademarks" means the "StarSight and the "StarSight and
Design" trademarks, whether alone or in combination, as illustrated in Appendix
C, attached hereto and incorporated by reference; provided however, that the
appearance and/or style of the trademarks may vary from time to time as
specified by StarSight in its sole discretion.
"Subscription Revenues" means StarSight revenues generated from (or as
a result of) paid subscribers to the StarSight EPG subscription service for
local broadcast TV listings derived directly from users' use of Microsoft EPG
Products. The term "Subscription Revenues" does not include subscription
revenues received by StarSight derived from any non-Microsoft EPG product
irrespective of whether such non-Microsoft EPG Product runs on a third party
platform or on a Microsoft operating system platform (such as "Windows(R) 95" or
its successor products and platforms).
"Subsidiary" means a corporation, company, or other entity: (i) more
than 50% of whose outstanding shares or securities (representing the right to
vote for the election of directors or other such managing authority) are, now or
hereafter, owned or controlled, directly or indirectly by a party hereto, but
such corporation, company, or other entity shall be considered to be a
Subsidiary only so long as such ownership or control exists; or (ii) which does
not have outstanding shares-or securities, as may be the case with a
partnership, joint venture, or unincorporated association, but more than
[REDACTED***] of whose ownership interest representing the right to make
decisions for such corporation, company, or other entity is, now or hereafter,
owned or controlled, directly or indirectly by a party hereto, but such
corporation, company, or other entity shall be considered to be a Subsidiary
only so long as such ownership or control exists.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-4-
<PAGE>
"Trade Secret(s)" means information shared by one party with the other
relating to past, present and future research, development and business
activities, which information is treated as secret and confidential, and which
information derives independent, actual or potential value from not being
generally known to other persons by proper means.
"Traditional Products" means devices of the type and capability
generally available in the consumer market as of [REDACTED***], in the following
product categories: television sets, VCRs, TVCRs, and television set top decoder
boxes irrespective of whether such products are connected via cable, satellite,
telephony, MMDS, etc. and irrespective of whether such products are
[REDACTED***] or distributed by some other means.
"Transfer(s)" or "Transferred" means (i) deliver(ed) to others
(including for export) other than by sale, regardless of the basis of
compensation, if any, (e.g., by consignment or by gift) and/or (ii) sell (sold)
in combination with other products.
"Version" means a particular model or version of a Microsoft Licensed
Product.
"Version Number" means any combination of numbers, letters, and/or
words used to identify a particular Version of a Microsoft Licensed Product.
SECTION 3
PATENT AND TRADE SECRET CROSS-LICENSE
3.1 Subject to the obligations herein, including without limitation the
consideration and payments pursuant to Sections 5 and 6, StarSight hereby grants
to Microsoft a worldwide, non-exclusive, non-assignable license under
StarSight's Licensed Patents and, subject without limitation to Section 10.1 and
10.2, Trade Secrets to make, have made, use, lease, sell, offer to sell,
otherwise market and import Microsoft Licensed Products.
3.2 Subject to the obligations herein, including without limitation the
consideration and payment pursuant to Sections 5 and 6, Microsoft hereby grants
to StarSight a worldwide, non-exclusive, non-assignable license under
Microsoft's Licensed Patents and, subject without limitation to Section 10.1 and
10.2, Trade Secrets to make, have made, use, lease, sell, offer to sell,
otherwise market and import StarSight Licensed Products.
3.3 Subject to Section 11, the patent licenses granted under this
Section 3 shall not include the right to grant sub-licenses. The right to "have
made" shall not be considered a prohibited sub-license.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-5-
<PAGE>
SECTION 4
DEVELOPMENT AND SCHEDULES
4.1 Microsoft shall deliver the Microsoft Deliverables to StarSight in
accordance with schedules referenced in Section 4.5. If the schedule is not
specified for a particular Microsoft Deliverable, then such Microsoft
Deliverable will be distributed throughout the term of this Agreement as jointly
determined by the parties.
4.2 Microsoft grants to StarSight the license rights described in
Appendix A with respect to the Microsoft Deliverables. The relevant license
grants will apply to all Versions (pre-release and final) and components thereof
distributed by Microsoft. To the extent any of the license rights set forth in
Appendix A are inconsistent with the license rights set forth in this Agreement,
then the license rights set forth in this Agreement shall apply.
4.3 StarSight shall deliver the StarSight Deliverables to Microsoft in
accordance with schedules referenced in Section 4.5. If the schedule is not
specified for a particular StarSight Deliverable, then such StarSight
Deliverable will be distributed throughout the term of this Agreement as jointly
determined by the parties.
4.4 StarSight grants to Microsoft the license rights described in
Appendix B with respect to the StarSight Deliverables. The relevant license
grants will apply to all Versions (pre-release and final) and components thereof
distributed by StarSight. To the extent any of the license rights set forth in
Appendix B are inconsistent with the license rights set forth in this Agreement,
then the license rights set forth in this Agreement shall apply.
4.5 The current schedule for the delivery of the Deliverables is set
forth on Appendices A and B and may, from time to time be updated upon agreement
of the parties. The schedule and all updates thereto will take into account the
availability of the Deliverables and timing of development activities and test
deployments. The parties agree to use reasonable efforts to implement the
development activities and test deployments in accordance with the agreed upon
schedule.
4.6 In the event hardware is included in the Deliverables, then the
following additional terms and conditions shall apply to such hardware. The
Delivering Party shall retain title to hardware it delivers at all times. The
Receiving Party shall insure and take normal precautions to care for the
hardware it receives. The Delivering Party agrees that for the duration of this
Agreement it will maintain the hardware it delivers in good working order at its
expense. The Delivering Party shall determine in its sole discretion the methods
(e.g., repair, replacement) by which it will maintain the hardware it delivers
in good working order. The Receiving Party agrees to provide reasonable
assistance and access to the hardware ft receives to the Delivering Party for
this purpose.
4.7 The Receiving Party may not reverse engineer, and in the case of
the software, decompile, or disassemble the Deliverables it receives.
-6-
<PAGE>
4.8 Microsoft agrees that it shall not intentionally design its
software and/or hardware to block out or prevent the reception of StarSight's
data/service, provided that StarSight shall use reasonable efforts to make its
data and security mechanisms compatible with such software and/or hardware.
Microsoft agrees that it shall take prompt steps to correct any inadvertent
blocking designs upon written notice from StarSight or upon Microsoft's own
discovery of such a problem.
4.9 The parties acknowledge that changes to the Deliverables will
probably need to be made as development on their respective products progresses
toward commercial release or as new types of products are developed.
Accordingly, the parties agree to review Appendices A and B from time to time
and make amendments to this Agreement to reflect such changes.
SECTION 5
MARKETING AND DATA LOADERS
5.1 INCLUSION OF STARSIGHT DATA LOADER
5.1.1 Microsoft, as partial consideration for the licenses and rights
granted to it herein, agrees that all Microsoft EPG Products shall conform to
each of the following:
(a) Microsoft shall deliver the applicable StarSight Data
Loader with all Microsoft EPG Products irrespective
of whether the StarSight Service is available to
permit the display of local broadcast TV listings
data pursuant to a StarSight subscription (whether
that service is free or otherwise). It is expressly
understood between the parties that a service
providing only satellite or other national TV
broadcast listings (i.e., not including local
broadcast TV listings data) shall not be considered a
service that provides local broadcast TV listings
data.
(b) Microsoft shall not deliver as part of the Microsoft
EPG Product any other Data Loader for a service that
provides local broadcast TV listings.
5.1.2 Notwithstanding the provisions of [REDACTED***].
5.1.3 Notwithstanding the provisions of Section 5.1.1(b), in the event
the StarSight local broadcast TV listings data service is not available in a
geographic region at the time a Version of a Microsoft EPG Product is introduced
in such region, then Section 5.1.1(b) shall not apply to such
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-7-
<PAGE>
Version. The Microsoft EPG Product, however, shall still include a StarSight
Data Loader, except as provided below, so that if and when the StarSight data
service becomes available in such region ft may be used with the Microsoft EPG
Product. Microsoft, prior to the introduction of a new Version, is not required
to include the StarSight Data Loader in circumstances where it is unlikely the
StarSight data service will. be available in a particular geographic area based
upon written confirmation to that effect by StarSight and when, by the nature of
the hardware on which the Microsoft EPG Product is loaded, storage limitations
exist. In the event StarSight fails to respond to Microsoft's request for
"written confirmation" within twenty (20) days of Microsoft's written request,
Microsoft may proceed absent written confirmation from StarSight. Microsoft will
also promptly introduce a new Version of the Microsoft EPG Product which
complies with the requirements of Sections 5.1.1(a) and (b), by removing the
other Data Loader in such new Version, when the StarSight data service becomes
available in such region.
5.2 MARKETING REQUIREMENTS
5.2.1 Microsoft, as partial consideration for the licenses and rights
granted to it herein, agrees that all Microsoft EPG Products shall conform to
each of the following:
(a) At least with the same frequency it displays the
Microsoft logo, if and when displayed, Microsoft
shall prominently display the StarSight logo in all
Microsoft EPG Products (including, to the extent
applicable, Windows 95 and/or successor products):
(i) during the EPG set up routine;
(ii) on the EPG display;
(iii) with reference to the offer of the trial period
described in Section 5.6; and
(iv) to StarSight Service subscribers (1) when
StarSight information is displayed and (2) when
other EPG advertising and service related
screens (if any) are displayed.
(b) The StarSight logo will be the only logo for a local
broadcast TV listings service shown on the EPG
display of any Microsoft EPG Product which actively
uses the StarSight Data Loader.
(c) Microsoft shall give credit to StarSight in an "about
box" or equivalent screen, in all Microsoft EPG
Products including those products identified in
Sections 5.1.2 and 5.1.3. An example of such language
is:
"StarSight Logo" Features of this product are
licensed from
StarSight Telecast, Inc.
-8-
<PAGE>
(d) Microsoft shall prominently display the StarSight
logo on the front of any hardware product made by or
for Microsoft that includes a Microsoft EPG Product
and on the face of any accompanying Microsoft remote
control device.
(e) Microsoft shall make commercially reasonable use of
the StarSight Trademarks (both the word and design
marks) in connection with the marketing or
advertising of the EPG functionality of a Microsoft
EPG Product, provided the StarSight EPG service is
available for use in connection with such Microsoft
EPG Product in the applicable geographic area.
Microsoft shall not incorporate into any Microsoft
EPG Product the logo or trademark of any competing
(i.e., non-StarSight) EPG service for local broadcast
TV listings subject to the provisions of Sections
5.1.2, 5.2.2 and/or 7.2. Microsoft's use of the
StarSight Trademarks (both the word and design marks)
shall cover the following materials and advertising:
(i) manuals and user documentation (whether
printed or in electronic form);
(ii) product specification sheets;
(iii) point-of-purchase materials;
(iv) sales training materials;
(v) TV/radio advertising;
(vi) in-box materials;
(vii) consumer magazine advertising;
(viii) trade journals and related advertising; and
(ix) packaging.
However, the foregoing shall not require Microsoft to
mention StarSight or display the StarSight logo on
every occasion listed in this Section 5.2.1(e) where
EPG functionality is described or discussed, so long
as this Section 5.2.1(e) is substantially met.
(f) Microsoft shall provide the functionality in
Microsoft EPG Product software to display an offering
message to the consumer in the EPG set up routine or
other appropriate place to encourage the consumer to
subscribe to the StarSight service and to display a
message to alert the customer to renew the StarSight
service when renewal is due; provided that such
functionality shall not be a generalized messaging
function to enable communication with users.
5.2.2 Notwithstanding the provisions of Section 5.2.1(a), 5.2.1(b) and
5.2.1(e), in the event the initial execution of the EPG set-up routine of a
Microsoft EPG Product is not able to connect to a data transmission/delivery
mechanism for StarSight's local broadcast TV listings data in any given
geographic region because such mechanism is not available, or if the user
declines to sign up for the StarSight service (whether that service is free or
otherwise), then the set-up routine may [REDACTED***] on the EPG display; but
only on the condition that the Microsoft EPG Product shall allow the user, at
[REDACTED***] for the StarSight service at a
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portions have been filed separately with the Commission.
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later date, whether that occurs as a result of the availability of the
service in that geographic area or otherwise, in which case the [REDACTED***]
shall appear in the EPG display if and as required pursuant to Sections 5.2.1(a)
and (b). In all cases, however, the provisions of Section 5.2.1(c) shall apply.
For the purposes of this Section 5.2.2, a "data transmission/delivery mechanism"
shall generally mean without limitation any broadcast data transport provided to
the consumer as part of a normal cable, telephony, airwave or satellite service.
In the event the StarSight data service is not available on a "data
transmission/delivery mechanism" which mechanism is generally competitive in
terms of cost, availability and service to the "data transmission/delivery
mechanism" for other EPG-related services available to consumers in the
particular geographic region, then the StarSight mechanism shall not be
considered a "data transmission/delivery mechanism" for the purposes of this
Section, but only so long as the StarSight "data transmission/delivery
mechanism" is not generally competitive.
5.3 LICENSE FOR STARSIGHT TRADEMARKS
5.3.1 StarSight grants to Microsoft and Microsoft accepts a worldwide,
nonexclusive, royalty-free license to use the StarSight Trademarks solely in
connection with the marketing and promotion of StarSight as set forth in Section
5. Microsoft shall use the StarSight Trademarks (word and design marks) only in
the form set forth on Appendix C unless otherwise approved in writing by
StarSight and shall include the designation(TM) or (R), as instructed by
StarSight. Microsoft agrees to use its best efforts to comply with all
applicable laws and regulations pertaining to the proper use and designation of
StarSight Trademarks in each country in which Microsoft uses the StarSight
Trademarks. Microsoft shall not have the fight to use the StarSight Trademarks
as a business name, or fictitious business name.
5.3.2 QUALITY CONTROL:
(a) The nature and quality of Microsoft Licensed Product
marketed in connection with the StarSight Trademarks
and the StarSight logo, and all marketing and
promotional material using the StarSight Trademarks
and the StarSight logo, shall be a high quality
consistent with the high quality of StarSight's goods
and shall conform to the requirements of this
Agreement and otherwise be consistent with the
reputation and goodwill symbolized by the StarSight
Trademarks and the StarSight logo.
(b) StarSight shall have the right to monitor the quality
of the Microsoft Licensed Products and advertising
and promotional materials using the StarSight
Trademarks and the StarSight logo to ensure that the
Microsoft Licensed Products and advertising and
promotional materials conform to the requirements of
this Agreement. In the event StarSight believes any
Microsoft Licensed Products, advertising or
promotional materials do not, conform to such
standards, upon StarSight's request Microsoft shall
provide exemplars of the relevant Microsoft Licensed
Products, advertising and promotional materials for
review by StarSight.
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treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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5.3.3 Microsoft acknowledges that it is often difficult, particularly
in foreign countries, to obtain clear, registered title to StarSight Trademarks.
Accordingly, Microsoft agrees that the rights granted herein exist only to the
extent that StarSight owns such rights, and no warranty, express or implied, is
made with respect thereto or with respect to the trademark rights of any third
parties that may conflict with the rights granted herein.
5.3.4 Microsoft agrees that any use of the StarSight Trademarks or the
StarSight logo, including but not limited to use as a trade name, service mark
or trade style shall inure to the benefit of StarSight, and that such use by
Microsoft shall not give to Microsoft any right, title or interest in the
StarSight Trademarks or the StarSight logo.
5.3.5 Microsoft agrees that it will not, during the term of this
Agreement or at any time thereafter, make application for, or aid or abet others
to seek trademark registrations or recordings of, trade names or company names
in any state of the United States, in the United States Patent and Trademark
Office, or in other United States governmental agencies, or in any foreign
country of any mark or design which includes StarSight Trademarks, or variations
thereof, or imitations thereof, alone or in combination, except with the prior
written permission of StarSight.
5.3.6 Microsoft agrees not to take any action challenging or opposing,
or to raise or cause to be raised, either during the term of this Agreement or
after its termination, on any grounds whatsoever, any questions concerning, or
objections to, the validity of the StarSight Trademarks or StarSight's rights
therein.
5.3.7 Microsoft agrees to provide reasonable assistance to StarSight,
at StarSight's cost, in obtaining registrations for the StarSight Trademarks by
providing, without limitation, information and samples of trademark usage
regarding the StarSight Trademarks; provided, however, the failure to obtain
such registrations shall not affect the validity of this Agreement.
5.3.8 Microsoft acknowledges that this Agreement does not convey any
ownership interest in the StarSight Trademarks to Microsoft.
5.4 [REDACTED***]
5.4.1 Subject to the parties reaching agreement on the terms of
Microsoft's acquisition [REDACTED***] bandwidth through StarSight (as provided
in Section 5.4.2), Microsoft agrees to provide StarSight, at no charge, access
to and use of a minimum of [REDACTED***] data capability of Microsoft's
allocated bandwidth or equivalent bandwidth on the [REDACTED***] within the
continental US. The approval by [REDACTED***] of such allocation of bandwidth to
StarSight shall be subject to the terms and conditions of the agreement between
Microsoft and [REDACTED***]. Microsoft agrees to use its commercially
reasonable, good faith efforts to obtain such approval from [REDACTED***] and to
assist StarSight in its efforts to work with [REDACTED***] to resolve any
hardware-related issues and/or other technical issues relating to the use of the
[REDACTED***] bandwidth (For example, distribution and/or retrofitting of
set-top boxes to handle the [REDACTED***] data channel decryption function).
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treatment filed with the Securities and Exchange Commission. Omitted
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5.4.2 StarSight agrees to work with Microsoft if requested, on a
commercially reasonable basis to provide Microsoft access to at least
[REDACTED***] within StarSight's existing data delivery systems or network to
facilitate the delivery of Microsoft advertising or other information. StarSight
would maintain the network in conjunction with its existing service, and invoice
Microsoft in an amount to be agreed upon which is intended to cover StarSight's
costs and expenses to maintain the network and obtain [REDACTED***] bandwidth.
The use of [REDACTED***] bandwidth shall be subject to the terms and conditions
of StarSight's agreement(s) with the applicable third party data delivery
systems or network provider(s).
5.4.3 The parties also agree to work with each other on a commercially
reasonable basis to assist in obtaining any rights or access to data delivery
systems worldwide which are necessary or desirable to support the parties'
respective subscription and/or advertising businesses related to products
licensed hereunder. The parties acknowledge, however, that despite such efforts
they may not be able to obtain access to the necessary or desirable amount of
bandwidth on any given data delivery system.
5.5 ADVERTISING AND SUBSCRIPTION
5.5.1 StarSight agrees that all advertising data/inventory for
Microsoft EPG Products shall be exclusively obtained and sold by Microsoft
and/or its designates.
5.5.2 Microsoft agrees to make available to StarSight a limited amount
of advertising inventory in any EPG display of Microsoft EPG Products,
equivalent to [REDACTED***] of the total advertising inventory, free of charge,
solely for advertising StarSight's own products and services. The advertising
inventory made available to StarSight pursuant to this Section 5.5.2 shall be
evenly distributed between prime and non-prime times. Further, when viewed by a
viewer, such advertising inventory shall be of no less prominence, on average,
than the advertising inventory of other Microsoft customers who pay for such
inventory in cash.
5.6 StarSight agrees to provide a minimum of [REDACTED***] free service
("Trial Period") to each new end user customer of a Microsoft EPG Product only
in those instances when the StarSight Data Loader is used by the customer. Upon
the expiration of the Trial Period, the consumer will be offered the opportunity
to subscribe to the StarSight service at a rate no higher than the then current
published standard StarSight consumer rate card. In the event the consumer does
not subscribe, then the StarSight data subscription service to such subscriber
may be terminated, in StarSight's discretion. StarSight may from time to time,
at its sole option, offer end user customers of Microsoft EPG Products
additional periods of free and/or discounted service.
5.7 StarSight will administer, at its sole expense, the end user
subscription process, including bill collections, credit checks, subscription
authorizations and de-authorizations, with customers who subscribe to
StarSight's service through a Microsoft EPG Product. Microsoft will administer,
at its sole expense, technical support insofar as it relates to Microsoft
Licensed Products.
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5.8 Microsoft agrees to communicate and/or meet with StarSight on a
regular and timely basis to discuss Microsoft's intent and/or plans to introduce
Microsoft EPG Products into any geographic region where the StarSight service is
not then available. Microsoft further agrees to use commercially reasonable
efforts to assist StarSight so that it may meet Microsoft's launch plans in any
given geographic region. This assistance includes but is not necessarily limited
to Microsoft assisting StarSight to make the necessary local contacts for the
purposes of initiating StarSight service in such geographic region. Microsoft
shall work with StarSight, in conjunction with original equipment manufacturers
and the owners of data transmission capacity, to increase and facilitate
StarSight's ability to have a viable data transmission/delivery mechanism for
local broadcast TV listings data in any given geographic region where StarSight
does not then have its service available. StarSight shall, however, be solely
responsible for negotiating and acquiring the necessary bandwidth and
establishing the required infrastructure to support their data service.
5.9 [REDACTED***] DIGITAL SET TOP BOXES
5.9.1 In addition to the requirements set forth in this Agreement, the
license set forth in Section 3 for Microsoft EPG Products installed on or
incorporated in [REDACTED***] Digital Set Top Boxes is expressly conditioned
upon the occurrence of one of the following:
(i) Microsoft elects, at its sole option, to
[REDACTED***] described in Section [REDACTED***] for
each [REDACTED***] on which a Microsoft EPG Product
licensed by Microsoft is installed or incorporated
into; or
(ii) The [REDACTED***] which distributes a [REDACTED***]
Digital Set Top Box shall have entered into an
agreement with StarSight that provides a license from
StarSight covering the Microsoft EPG Product.
For situations described in Section 5.9.1 (i), in the event the [REDACTED***]
Microsoft EPG Product [REDACTED***], then Microsoft may, [REDACTED***] the
licensee a Microsoft EPG Product which [REDACTED***] described in Sections
[REDACTED***] and [REDACTED***]. Microsoft shall, however, still include the
StarSight Data Loader as required by Section 5. 1.1(a) with all Microsoft EPG
Products.
SECTION 6
PAYMENTS, ACCRUALS, RECORDS AND REPORTS
6.1 PAYMENTS.
6.1.1 Microsoft shall pay StarSight at execution hereof the
non-refundable "lump sum" royalty payment of Twenty Million US Dollars
(US$20,000,000) for the license set forth in Section 3.1.
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6.1.2 Microsoft shall pay StarSight [REDACTED***] (i) for each unit of
Microsoft EPG Product distributed with one or more Data Loaders in addition to
the StarSight Data Loader pursuant to Section 5.1.2, or (ii) for each unit of
Microsoft EPG Product licensed by Microsoft and installed on or incorporated
into a [REDACTED***] Digital Set Top Box pursuant to Section [REDACTED***]. For
the purposes of this Section 6.1.2, upgrades, updates and new versions to or for
a particular unit of Microsoft EPG Product for which a [REDACTED***] royalty has
already been paid shall not constitute a new unit of Microsoft EPG Product so
long as the original [REDACTED***] Digital Set Top Box or other applicable
hardware has not been taken out of service, replaced with new hardware or a new
[REDACTED***] Digital Set Top Box. This royalty amount is over and above all
other payments specified in this Agreement.
6.1.3 Microsoft agrees to pay StarSight [REDACTED***] of the total Net
Advertising Revenues.
6.1.4 StarSight agrees to pay Microsoft [REDACTED***] of the total Net
Subscription Revenues.
6.1.5 All payments due under Sections 6.1.2, 6.1.3 and 6.1.4 shall be
accounted for on a calendar year quarterly basis and paid within forty-five (45)
days after each quarter. Notwithstanding the foregoing, at Microsoft's option,
it may elect to pay amounts due under Section 6.1.2 in quarterly installment
payments over a period of three (3) years from the date the original payment is
due. A reasonable rate of interest to be agreed by the parties shall accrue on
such installment payments.
6.2 ACCRUALS, RECORDS AND REPORTS
6.2.1 Royalties and payments due under Sections 6.1.2, 6.1.3 and 6.1.4
shall accrue as follows:
(a) Royalties shall accrue when any unit of Microsoft EPG
Product with respect to which royalty payments are
required by Section 6.1.2 is sold or licensed (as
evidenced by bill or invoice) and payment therefor is
received by Microsoft. Royalties shall not accrue at
the time of sale or Transfer for sales or Transfers
between Microsoft and its Subsidiary for resale or
for further Transfer. Royalties shall not accrue for
"not for resale" or "NFR" units distributed by
Microsoft.
(b) Payments required by Section 6.1.3 shall accrue when
Advertising Revenues as to which such payment is due
have been billed by Microsoft and payment therefor is
received by Microsoft. Payments required by Section
6.1.3 shall accrue for "not for resale" or "NFR"
units distributed by Microsoft.
(c) Payments required by Section 6.1.4 shall accrue on
Net Subscription Revenues when the underlying
subscription fee has been billed and payment therefor
is ' received by
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StarSight. Payments required by Section 6.1.4 shall
accrue for "not for resale" or "NFR" units
distributed by Microsoft.
6.2.2 The royalty payment set forth in Section 6.1.1 reflects, on a
ratable quarterly basis, a projected installed base of at least [REDACTED***]
units of Microsoft Licensed Product during the initial [REDACTED***] period from
the Effective Date and is being paid in a lump sum as a matter of convenience to
the parties, in part to avoid expenses and other costs associated with
accounting for the actual number of units of Microsoft Licensed Products sold or
Transferred during the payment period. Likewise, the payments set forth in
Sections 6.1.2 and 6.1.3, are attributable to Microsoft EPG Product sold or
Transferred over the entire term of the Agreement including the period beyond
the initial [REDACTED***] term of the Agreement.
6.2.3 All royalties and other sums of money due hereunder shall be paid
in United States dollars. All royalties and other sums of money for an
accounting period computed on invoiced amounts in currencies other than United
States dollars shall be converted directly into United States dollars without
intermediate conversions to another currency at the intercompany exchange rates
established from time to time and consistently applied by the paying party for
internal transactions and accounting purposes.
6.2.4 Each Microsoft royalty report shall include the following
information:
(a) as to royalties due under Section 6.1.2:
(i) identification by Version Number, Service
Provider(as applicable), quantity and
description of each Microsoft EPG Product upon
which a royalty has accrued pursuant to Section
6.2.1 (a);
(ii) identification of the amount of royalties due
for each such product, including all
information required to show how such amount
has been calculated and the aggregate of all
royalties due; and
(iii) identification of the amount of royalties as to
which credit is taken under Section 7.4.1, if
any.
(b) as to Net Advertising Revenue payments due under
Section 6.1.3:
(i) the total amount of Advertising Revenues;
(ii) the amount of each cost permitted to be
deducted from such total in order to determine
Net Advertising Revenue;
(iii) identification of the amount of Net Advertising
Revenues payment due including all other
information, in addition to that of Section
6.2.4(b)(ii), to show how such amount has been
calculated; and (iv) identification of the
amount of royalties as to which credit is taken
under Section 7.4.1, if any.
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treatment filed with the Securities and Exchange Commission. Omitted
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6.2.5 Each StarSight royalty report shall include the following
information:
(a) as to payments due on Net Subscription Revenues under
Section 6.1.4:
(i) the total amount of Subscription Revenues;
(ii) the amount of each cost permitted to be
deducted from such total in order to determine
Net Subscription Revenues; and
(iii) identification of the amount of Net
Subscription Revenues payment due including all
other information, in addition to that of
Section 6.2.5(a)(ii), to show how such amount
has been calculated.
6.2.6 In the event that any of the subsections of Sections 6.2.4 or
6.2.5 (as applicable) do not apply, the reporting party shall so state as to
each Section. In the event no royalties are due, the reporting party's royalty
report shall so state as to each such subsection.
6.2.7 Each royalty report shall be certified by an officer of the
reporting party or by a designee of such officer to be correct to the best of
such party's knowledge and information.
6.2.8 Each royalty report shall be in a format substantially similar to
the appropriate form(s) provided in Appendix D for Microsoft and Appendix E for
StarSight, attached hereto and incorporated by reference.
6.2.9 An accounting period shall end on the last day of each March,
June, September, and December during the term of this Agreement. The first
accounting period under this Agreement shall be for a period commencing October
1, 1996 and ending December 31, 1996. Within forty-five (45) calendar days after
the end of each such period, the paying party shall furnish to the other party a
written royalty report containing the information specified in Section 6.2.4 or
Section 6.2.5 (as applicable) and shall pay to such party all unpaid amounts,
whether royalty or other payments, accrued hereunder in favor of such other
party to the end of each such period. The paying party shall bear and pay all
taxes which are required by its national government, including any political
subdivision thereof, as the result of the existence or operation of this
Agreement, except any necessary, appropriate, and required income tax imposed
upon royalties or other payments, by the national government of such party. The
paying party may deduct or withhold such income tax from said royalties or other
payments provided it furnishes the other party with a tax certificate, or other
document evidencing payment of such income tax.
6.2.10 Each party shall keep separate records in sufficient detail to
permit the determination of royalties and other payments payable hereunder. Such
records shall be maintained for at least [REDACTED***]. At the request of one
party, the other party will permit an independent auditor and technical
consultant selected by the requesting party or any other person or persons
acceptable to both parties, to examine during ordinary business hours once each
calendar year such records and other documents as may be necessary to verify or
determine royalties and other payments paid or payable under this Agreement.
Such auditor, technical consultant or other person(s) shall be instructed to
report to the requesting party only the amount of royalties and other payments
due and
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treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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payable. If no request for examination of such records for any particular
accounting period has been made by one party within [REDACTED***] after the end
of said period, the right to examine such records for said period shall
terminate.
6.2.11 The fees and expenses of the requesting party's representative
performing any examination of records under Section 6.2.10 shall be borne by the
requesting party. However, if an error resulting in the underpayment of either
royalties or other payments of more than [REDACTED***] of the total thereof
respectively due is discovered for any year examined, then the total fees and
expenses of these representatives shall be borne by the other party. Such other
party in any case shall pay the requesting party the amount of any under payment
of royalties or other payments uncovered as a result of any such examination of
records. Section 6.2.12 specifically applies to any such underpayment.
6.2.12 The paying party shall be liable for interest at a rate of
[REDACTED***] per month compounded monthly on any overdue royalty or other
payment set forth in Section 6.1, commencing on the date such royalty or other
payment becomes due. If such interest rate exceeds the maximum legal rate in the
jurisdiction where a claim therefor is being asserted, the interest rate shall
be reduced to such maximum legal rate.
SECTION 7
LIMITED INDEMNITY
7.1 Microsoft and StarSight agree, however unlikely, that ft is still
nonetheless possible that patent licenses may be requested or required from
[REDACTED***] and/or their affiliates (hereinafter collectively referred to as
"Claimant") for EPG related features of Microsoft Licensed Products. Hence,
StarSight agrees to [REDACTED***] the broadest possible covenants and licenses
from Claimant [REDACTED***] that include the capability of accessing the
StarSight data service.
7.2 The parties recognize that [REDACTED***] that it may not be able to
do so, or that such covenants and licenses [REDACTED***]. In such cases it may
be desirable for [REDACTED***] to retain additional flexibility [REDACTED***]
such licenses with perhaps more favorable terms than would be otherwise possible
but for certain requirements of this Agreement. Therefore, if all the following
conditions are met:
a. Within [REDACTED***] days of the Effective Date,
Microsoft receives a [REDACTED***] patent
infringement from a Claimant asserting, or after
[REDACTED***] days of the Effective Date, Microsoft
determines through discussions with a Claimant or
otherwise, that a [REDACTED***] one or more of
Claimant's EPG related patents which are based upon
any patent which has issued, or application which has
been filed, [REDACTED***]; and
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b. Microsoft gives StarSight at least [REDACTED***] days
notice of such a [REDACTED***] along with a copy of
Claimant's [REDACTED***] (if any), or if an
[REDACTED***], then with complete details of the
patent and other relevant information, subject to
preserving attorney/client privilege, so that
StarSight and Microsoft may evaluate whether or not
such [REDACTED***] by virtue of a pre-existing
agreement between StarSight and Claimant; and
c. If the [REDACTED***] is not in StarSight's and
Microsoft's reasonable opinion [REDACTED***] and
Microsoft is required to pay or deems it necessary
[REDACTED***] in excess of [REDACTED***] in the
aggregate for [REDACTED***]; then
Microsoft, irrespective of the requirements set forth in this
Agreement, [REDACTED***] of the particular Claimant in [REDACTED***] on an equal
(or lesser) basis with the [REDACTED***] if Microsoft deems it necessary in
order to acquire the [REDACTED***]. [REDACTED***].
7.3 Microsoft shall be entitled to [REDACTED***] of the royalties
described in Section 7.2 (irrespective of the royalty amount), up to a maximum
offset amount not to exceed [REDACTED***], for amounts actually paid by
Microsoft to Claimant only against amounts otherwise payable by Microsoft to
StarSight pursuant to Section 6.1.3.
StarSight's maximum indemnification liability under this
Section 7.3 is [REDACTED***].
7.4 Limited Indemnity [REDACTED***]
7.4.1 (a) StarSight has entered into a written [REDACTED***]
agreement with [REDACTED***] pursuant to which
StarSight is the [REDACTED***].
(b) In the event [REDACTED***] asserts its [REDACTED***]
[REDACTED***] [REDACTED***] which are the subject of
the [REDACTED***] which meet the requirements of
Sections 5.1.1 and 5.2.1 of this Agreement, then
StarSight will intervene to the appropriate level,
including litigation if necessary, in order to
ascertain StarSight's [REDACTED***] rights under
[REDACTED***] Agreement. The level of such
intervention will be determined solely by StarSight.
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(c) If, as a result of the foregoing intervention, it is
determined that StarSight does not have the
[REDACTED***] to such [REDACTED***] or the
[REDACTED***] of additional royalties to license such
[REDACTED***] to Microsoft; StarSight will indemnify
Microsoft for any amounts Microsoft directly pays to
[REDACTED***], including, subject to Section 7.4.2,
associated legal fees and costs, if any, as a result
of [REDACTED***] asserting such [REDACTED***] against
such [REDACTED***] up to [REDACTED***] of indemnity
paid, as follows:
(i) StarSight will indemnify Microsoft for the
first [REDACTED***] thereof, as it is paid by
Microsoft to [REDACTED***], in cash payments;
and
(ii) StarSight will indemnify Microsoft for up to an
additional [REDACTED***] at a rate of
[REDACTED***] per dollar paid by Microsoft to
[REDACTED***]. Any indemnification payments
required pursuant to this Section 7.4.1 (b)
shall be payable to Microsoft only as a credit
against payments to be made by Microsoft to
StarSight for such [REDACTED***] under Sections
6.1.2 or 6.1.3 of this Agreement.
StarSight's maximum indemnification liability under this Section 7.4.1
is [REDACTED***]. Legal fees incurred by StarSight as a result of its
indemnification of Microsoft hereunder shall not count against this maximum
indemnification liability.
7.4.2 (a) StarSight shall, at its expense and upon Microsoft's
reasonable request, defend [REDACTED***] action
brought by [REDACTED***] as a result of its assertion
as set forth in Section 7.4.1(b), which is brought in
a court of competent jurisdiction, against Microsoft
and/or Microsoft's Subsidiaries, affiliates,
directors, officers, employees, agents and
independent contractors, to the extent it is in
connection with [REDACTED***]; and
(b) On the condition that Microsoft shall: (1) provide
StarSight prompt notice in writing of any such action
or claim and permit StarSight to intervene, answer
and defend such action or claim; and (2) provide
StarSight reasonable information, assistance and
authority to help StarSight in such intervention or
defense; and
(c) StarSight will not be responsible for any costs,
damages or fees, if a settlement of any claim or
action under Section 7.4 is made by Microsoft without
StarSight's written permission, which permission will
not be unreasonably withheld. Microsoft shall have
the right, at its expense, to employ separate counsel
and participate in the defense of any action or
claim; and
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(d) StarSight may not settle any claim or action under
this Section 7.4 on Microsoft's behalf without first
obtaining Microsoft's written permission, which
permission will not be unreasonably withheld. In the
event Microsoft and StarSight agree to settle a claim
or action, each party agrees not to publicize the
settlement without first obtaining the other party's
written permission, which permission will not be
unreasonably withheld.
7.5 Maximum Indemnification Obligation
7.5.1 Notwithstanding any other provision in this Agreement to the
contrary, StarSight's maximum indemnification liability for whatever reason
under this Agreement is [REDACTED***]. Legal fees incurred by StarSight as a
result of its indemnification of Microsoft hereunder shall not count against
this maximum indemnification liability.
7.6 STARSIGHT TRADEMARK INDEMNIFICATION
7.6.1 StarSight shall, at its expense and Microsoft's request, defend
any claim or action brought against Microsoft, and Microsoft's Subsidiaries,
affiliates, directors, officers, employees, agents and independent contractors,
to the extent it is based upon a claim that the StarSight Trademarks infringe or
violate any trademark or other proprietary or unfair competition right of a
third party, and StarSight will indemnify and hold Microsoft harmless from and
against any costs, damages and fees reasonably incurred by Microsoft, including
but not limited to fees of attorneys and. other professionals, that are
attributable to such claim. Microsoft shall: (i) provide StarSight prompt notice
in writing of any such claim or action and permit StarSight to answer and defend
such claim or action; and (ii) provide StarSight information, assistance and
authority to help StarSight to defend such claim or action. StarSight will not
be responsible for any costs, damages or fees, if a settlement is made by
Microsoft without StarSight's written permission, which permission will not be
unreasonably withheld. Microsoft shall have the right, at its expense, to employ
separate counsel and participate in the defense of any claim or action.
StarSight shall reimburse Microsoft upon demand for any payments made or loss
suffered by it at any time after the Effective Date, based upon the judgment of
any court of competent jurisdiction or pursuant to a bona fide compromise or
settlement of claims, demands, or actions, in respect to any damages related to
any claim or action under this Section 7.6. StarSight may not settle any claim
or action under this Section 7.6 on Microsoft's behalf without first obtaining
Microsoft's written permission, which permission will not be unreasonably
withheld. In the event Microsoft and StarSight agree to settle a claim or
action, each party agrees not to publicize the settlement without first
obtaining the other party's written permission, which permission will not be
unreasonably withheld.
7.6.2 Notwithstanding Section 7.6.1, should the use of any StarSight
Trademark as contemplated by this Agreement be enjoined or be threatened to be
enjoined, StarSight shall notify Microsoft and immediately, at StarSight's
expense: (i) procure for Microsoft the right to continue use the StarSight
Trademark, as applicable, as licensed in this Agreement; or (ii) replace or
modify the StarSight Trademark with a mark that is non-infringing. In the
alternative, and at StarSight's election, StarSight may notify Microsoft that
Sections 5.2 and 5.3 shall not apply to the infringing or
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-20-
<PAGE>
potentially infringing StarSight Trademark until such time as StarSight notifies
Microsoft that such mark is neither infringing nor potentially infringing. In
the event, after a reasonable period of time, StarSight is unsuccessful in its
attempts to procure the necessary rights or replace or modify the StarSight
Trademark as indicated above, Microsoft may take reasonable steps to remove or
modify the StarSight Trademark, with StarSight's approval not to be unreasonably
withheld, to prevent the injunction from being entered.
SECTION 8
WARRANTIES
8.1 NEITHER PARTY MAKES ANY REPRESENTATION, EXPRESS OR IMPLIED, AS TO
THE PRODUCTS LICENSED HEREUNDER, THIS AGREEMENT OR OTHERWISE, AND HEREBY
DISCLAIMS ANY FURTHER WARRANTY, INCLUDING ANY WARRANTY OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, INTELLECTUAL PROPERTY VALIDITY, INTELLECTUAL
PROPERTY NON-INFRINGEMENT OR OTHER STATUTORY WARRANTY, EXCEPT AS EXPRESSLY SET
FORTH HEREIN.
8.2 NEITHER PARTY HERETO SHALL BE LIABLE TO THE OTHER PARTY, ITS
CUSTOMERS, OR ANY OTHER ENTITY CLAIMING THROUGH OR UNDER SUCH OTHER PARTY FOR
ANY LOSS OF PROFITS OR INCOME, LOSS OF DATA OR OTHER TANGIBLE BUSINESS LOSS OR
OTHER CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HERETO
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT.
8.3 StarSight warrants title to U.S. Patents 4,706,121; 5,151,789;
5,353,121; 5,479,266; 5,479,268; and 5,550,576.
SECTION 9
TERM AND TERMINATION
9.1 This Agreement shall come into effect as of the Effective Date and,
unless terminated sooner in accordance with this Section 9, shall remain in
effect [REDACTED***].
9.2 Either party may terminate this Agreement or any license granted by
it hereunder upon written notice to the other party in the event that the other
party breaches a material obligation or warranty hereunder, and fails to cure
such breach within sixty (60) days after written notice by the non-breaching
party. A breach of Section 5.1, 5.2, 5.3, 5.5 and 7.4, failure to make a payment
under Section 6 and breach of any confidentiality obligation under Section 1 0
including the NDA set forth in Section 10.1 shall be among the acts considered
to be a breach of a material obligation.
9.3 The provision of Sections 6.1.2 through 6.1.5, 6.2, 7.4, 8 and 10
and any other provision which by its nature is intended to survive termination,
shall survive any termination or expiration of this Agreement. Termination of
this Agreement or any license granted herein shall not
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-21-
<PAGE>
affect Microsoft Licensed Products or StarSight Licensed Products distributed
prior to the date of such termination.
9.4 During the term of this Agreement, and provided the parties are in
material compliance with the terms hereof, the parties shall in good faith
negotiate, and grant to each other on terms agreeable to both parties, any other
additional licenses under Microsoft intellectual property rights and StarSight
intellectual property rights as may be required and/or requested by either party
to continue the business contemplated by this Agreement.
SECTION 10
CONFIDENTIALITY
10.1 The terms and conditions of this Agreement and information
provided and or exchanged pursuant to this Agreement shall be deemed
"Confidential Information" and subject to the terms and conditions of the
Non-Disclosure Agreement dated April 1, 1996 (the "NDA"), as amended, between
Microsoft and StarSight, except that (1) the five (5) year period of Section
2(a) thereof shall be amended to be coextensive with the term of this Agreement,
and (2) the second sentence of Section 4(g) thereof shall be deleted and Section
12.8 hereof shall be substituted therefor. Any conflict between the terms of the
NDA and the terms of this Agreement shall be resolved in favor of the terms of
this Agreement.
10.2 Microsoft acknowledges that the StarSight Authorization Codes and
StarSight Protocols are highly confidential and that unauthorized use or
disclosure of such information could significantly damage the business of
StarSight. In the event Microsoft obtains rightful possession or knowledge of
StarSight Authorization Codes pursuant to this Agreement then, in addition to
its other obligations under this Section 10, Microsoft agrees that no more than
one (1) master copy and one (1) backup copy of StarSight Authorization Codes and
StarSight Protocols shall be made or maintained ("Authorized Copies"). Such
Authorized Copies will be maintained in a locked room or container when not in
use and will be accessible only by a limited number of employees who require
access to the StarSight Authorization Codes or StarSight Protocols for
incorporation into the Microsoft Licensed Products. Microsoft agrees to maintain
a written record of individual employees that actually accessed the StarSight
Product Authorization Codes or StarSight Protocols, and shall provide such
information to StarSight upon request.
10.3 The parties agree to jointly announce the signing of this
Agreement once it is fully executed. Neither party shall make any public
announcement about or otherwise disclose to any third party the terms or content
of this Agreement or the parties' discussions regarding the subject matter of
this Agreement-without the written consent of the other party, which consent
shall not be unreasonably withheld or delayed. Either party may make at any time
announcements which are advised to be made by the Parties' respective outside
counsel or that are required by applicable law, regulatory bodies, stock
exchange or stock association rules, so long as the party so required to make
the announcement, promptly after learning of such requirement, notifies the
other party of such requirement and discusses with the other party in good faith
the exact wording of any such
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announcement. Each party, as applicable, agrees to request "confidential
treatment" from the appropriate regulatory authority if this Agreement must be
included as part of any public filing.
SECTION 11
SUB-LICENSES
11.1 All licenses granted herein include the right of the licensee to
grant sub-licenses of or within the scope of such licenses to a party's
Subsidiaries. Each Subsidiary so sub-licensed shall be bound by the terms and
conditions of this Agreement (other than the payment or royalties as provided in
Section 6, which shall remain the obligation of Microsoft and StarSight,
respectively) as if it were named herein in the place of such licensee. The
licensee represents to the licensor that it has the power to bind each such
Subsidiary to the terms and conditions of this Agreement and agrees to, and
shall take whatever action is necessary to, so legally bind its Subsidiaries, or
in the alternative, the licensee hereby guarantees the performance of the
obligations of its Subsidiaries hereunder. The licensee shall pay and account to
the licensor for all payments due hereunder in respect of the exercise by any
Subsidiary of the licensee of the sub-license granted to it hereunder. Any
sub-license granted to a Subsidiary shall terminate on the date such Subsidiary
ceases to be a Subsidiary.
SECTION 12
MISCELLANEOUS
12.1 Waiver. A party's failure at any time to require the other party's
performance of any obligation under this Agreement shall not affect such party's
right to require subsequent performance of that obligation. Any waiver of any
breach of any provision of this Agreement shall not be construed as a waiver of
any continuing or succeeding breach of such provision, waiver or modification of
the provision itself, or any modification of any right under this Agreement.
12.2 Assignment. Neither party may assign or otherwise transfer this
Agreement, or any of its rights, licenses or obligations hereunder, to any third
party without the prior written consent of the other and any such attempted
assignment or transfer shall be void, except in the case of the sale of all or
substantially all of the assigning party's assets relating to the licensed
products (in which case this Agreement shall be fully binding on the licensee's
successor in interest).
12.3 Express Licenses Only. The rights and licenses granted in this
Agreement are limited to those expressly recited. No rights, licenses or other
grants are made by implication, estoppel, exhaustion, operation of law or
otherwise.
12.4 Patent Marking. Microsoft shall, except as may otherwise be agreed
to in writing (such as to account for additional StarSight Licensed Patents
which issue), provide the following notice or a reasonable variation to be
agreed to in advance by the parties in writing on all Microsoft EPG Product and
with any accompanying instruction material package:
"StarSight Licensed: The manufacture and sale of EPG features
of this product was licensed from StarSight Telecast, Inc.,
which license
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<PAGE>
includes rights under U.S. Patent Nos.: 4,706,121; 5,151,789;
5,353,121; 5,479,266; and 5,479,268."
For each unit of Microsoft EPG Product which is or includes hardware, the above
notice or the reasonable variation of such notice as mutually agreed to in
writing must be affixed to the hardware and be visible. For each unit of
Microsoft EPG Product which is embodied in software this notice may appear in an
"about-box" or may be embedded as a character (Ascii) string which appears in
the executable software code when it is viewed or printed. Microsoft's failure
to comply with the foregoing requirements shall not constitute a breach of this
Agreement; provided, upon learning of such failure, Microsoft promptly corrects
it.
12.5 Each party as "Granting Party" grants to the other party the right
to obtain upon request and to the extent and subject to the terms and conditions
under which the Granting Party has the right to do so at the time of such
request, a license of or within the scope granted herein with respect to any
patent which would otherwise qualify as a Licensed Patent of the Granting Party,
but for payment to third parties as set forth in the definition of Licensed
Patents. Such license shall be granted under a separate agreement at a royalty
rate or other payment payable by the Granting Party to a third party for
granting of such license or the exercise of rights thereunder.
12.6 Payments, Notices and Other Communications.
12.6.1 All notices and other communications required or permitted under
this Agreement shall be in writing and shall be given in one of the following
ways:
(i) by overnight courier;
(ii) by registered or certified mail; or
(iii) by facsimile followed by registered or certified mail.
Such notices shall be delivered to the parties at the following
addresses (or at such other address as a party may specify by written notice to
the other);
If to StarSight:
StarSight Telecast, Inc.
39650 Liberty Street, 3rd Floor
Fremont, CA 94538
United States of America
Facsimile: (510) 353-3907
Attention: Jonathan Orlick
Vice President Intellectual Property,
General Counsel
-24-
<PAGE>
If to Microsoft:
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
United States of America
Facsimile: (206) 936-7329
Attention: Thomas F. Gershaw
Senior Product Manager
Consumer Platforms Division
With a copy to:
Law and Corporate Affairs (same address)
Either party may change its address by a notice given to the other
party in the manner set forth above. Notices and communications shall be deemed
to have been given upon receipt when delivered personally or by overnight
courier, or ten (10) days after posting if sent by registered or certified mail;
or upon receipt by facsimile, provided the original copy is received by
registered or certified mail within ten (10) days after facsimile transmission.
12.6.2 Royalty reports, as described in Section 6.2, shall be sent by
overnight delivery, or faxed and then mailed within five (5) days as set forth
below.
If to StarSight:
StarSight Telecast Inc.
Attention: Chief Accounting Officer
39650 Liberty Street, 3rd Floor
Fremont, California 94538
United States of America
Facsimile Number: (510) 657-5022
If to Microsoft
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Attn: Special Agreements/ Dept. 551
Fax number (206) 936-5401
12.6.3 All payments by Microsoft as set forth in Section 6.1 shall be
paid via automated clearing house payment, check sent by overnight delivery or
bank wire transfer to:
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<PAGE>
Attention: [REDACTED***]
ABA Routing Number: [REDACTED***]
12.6.4 All payments by StarSight as set forth in Section 6.1 shall be
paid via automated clearing house payment, check sent by overnight delivery or
bank wire transfer to:
Attention: [REDACTED***]
ABA Routing Number: [REDACTED***]
12.7 Partial Invalidity. If any provision of this Agreement shall be
found or held to be invalid or unenforceable in any jurisdiction in which this
Agreement is being performed or enforced, the remainder of this Agreement shall
be valid and enforceable, and the parties shall use their best efforts to
negotiate a substitute valid and enforceable provision that most nearly effect
the parties' intent in entering into this Agreement.
12.8 Governing Law. The validity, construction, and performance of this
Agreement shall be governed by and interpreted in accordance with the laws of
the State of California, USA, without regard to conflicts of laws provision.
12.9 Section Headings. The heading to sections and this Agreement are
to facilitate reference only and do not form a part of this Agreement, and shall
not in any way affect the interpretation thereof.
12.10 Entire Agreement. The terms and conditions herein contained
constitute the entire agreement between the parties regarding the subject matter
hereof, and supersede all previous agreements and understandings, whether oral
or written, between the parties hereto with respect to the subject matter
hereof. No modification, alteration, addition or change in the terms hereof
shall be binding on either party hereto unless reduced to writing and duly
executed by the parties in the same manner as the execution of this Agreement.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the dates set forth below.
MICROSOFT: STARSIGHT:
MICROSOFT CORPORATION STARSIGHT TELECAST, INC.
By: /s/ Craig J. Mundie By: /s/ Larry Wangberg
-------------------------------------- ---------------------------
Craig J. Mundie Larry Wangberg
Senior Vice President Chief Executive Officer
Consumer Platforms Division
Date: December 20, 1996 Date: December 20, 1996
------------------------------------ -----------------------
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<PAGE>
APPENDIX A
MICROSOFT DELIVERABLES AND SCHEDULE
1. Deliverables Defined
Microsoft shall deliver to StarSight at least one copy of each
Microsoft EPG Product and associated development tool (e.g., software developer
kit ("SDK") and driver developer kit ("DDK"))("EPG Development Tools") as such
products and tools become available, as determined by Microsoft. Microsoft shall
deliver the Microsoft EPG Products and EPG Development Tools in pre-release and
final Versions.
2. Schedule for Delivery
To be agreed upon by the parties.
3. License Grant
The license grants for each Microsoft EPG Product and EPG Development
Tool shall be the standard Microsoft license grants for such products and tools.
At a minimum, however, the StarSight shall be entitled to and is hereby granted
at least the following license rights with respect to each Microsoft EPG Product
and EPG Development Tool:
3.1 Microsoft EPG Products. Microsoft grants StarSight the
following limited, non- exclusive rights:
StarSight may use the Microsoft EPG Products to design, develop, and
test StarSight products and services and associated development tools and
infrastructure products for use with Microsoft EPG Products, EPG Development
Tools and infrastructure products.
3.2 EPG Development Tools. Microsoft grants StarSight the
following limited, non- exclusive rights:
a. Software Product. StarSight may install and use the EPG
Development Tools to design, develop, and test software application products for
use with Microsoft EPG Products ("Application").
b. Sample Code. StarSight may modify the sample source code
located in the EPG Development Tools "samples" directories ("Sample Code") to
design, develop, and test StarSight's Application. StarSight may also reproduce
and distribute the Sample Code in object code form along with any modifications
it makes to the Sample Code, provided that StarSight complies with the
Distribution Requirements described below. For purposes of this section,
"modifications" shall mean enhancements to the functionality of the Sample Code.
A-1
<PAGE>
c. Redistributable Code. Portions of the EPG Development Tools
are designated as "Redistributable Code."
d. Distribution Requirements. StarSight may copy and
redistribute the Sample Code and/or Redistributable Code (collectively
"Redistributable Components") as described above, provided that (i) StarSight
distributes the Redistributable Components only in conjunction with, and as a
part of its Application; (ii) StarSight's Application adds significant and
primary functionality to the Redistributable Components; (iii) the
Redistributable Components only operate in conjunction with Microsoft EPG
Products; (iv) StarSight does not permit further redistribution of the
Redistributable Components by its end-user customers; (v) StarSight does not use
Microsoft's name, logo, or trademarks to market its Application; (vi) StarSight
includes a valid copyright notice on its Application; and (vii) StarSight agrees
to indemnify, hold harmless, and defend Microsoft from and against any claims or
lawsuits, including attorneys' fees, that arise or result from the use or
distribution of its Application, except to the extent such claims or lawsuits
arise as a consequence of the Microsoft Deliverables.
e. Pre-Release Code. In the event, the EPG Development Tools
contain pre-release code, then StarSight is hereby advised that is not at the
level of performance and compatibility of the final, generally available,
product offering. These portions of the EPG Development Tools may not operate
correctly and may be substantially modified prior to first commercial shipment.
Microsoft is not obligated to make this or any later version of the EPG
Development Tools commercially available. Microsoft grants StarSight the right
to distribute test versions of its Application created using the pre-release
code provided StarSight complies with the Distribution Requirements described in
Section 3.2(d) of this Appendix A and the following additional provisions: (i)
StarSight must mark the test version of its Application "BETA" and (ii)
StarSight is solely responsible for updating its customers with versions of its
Application that operate satisfactorily with the final commercial release of the
pre-release code.
4. Support
In addition to such direct support from Microsoft technical personnel
as Microsoft deems necessary, support for StarSight's use of the Microsoft
Deliverables shall be in accordance with Microsoft's standard support offerings.
A-2
<PAGE>
APPENDIX B
STARSIGHT DELIVERABLES AND SCHEDULE
1. Deliverables Defined
StarSightshall deliver to Microsoft technical information, trade
secrets and specifications regarding [REDACTED***], decryption of the StarSight
data stream, StarSight data formats and other technologies, all as StarSight
deems necessary, to facilitate the compatibility of Microsoft EPG Products with
StarSight's data and transmission network and to assist Microsoft in the
development of the StarSight Data Loader and a data security mechanism
(collectively "StarSight Deliverables").
2. Schedule for Delivery
To be agreed upon by the parties.
3. License Grant
StarSight grants Microsoft the following limited, non-exclusive rights:
Microsoft may use the StarSight Deliverables to design, develop, and test
Microsoft EPG Products and associated development tools and infrastructure
products for use with StarSight products and services.
4. Support
In addition to such direct support from StarSight technical personnel
as StarSight deems necessary, support for Microsoft's use of the StarSight
Deliverables shall be in accordance with StarSight's standard support offerings.
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
B-1
<PAGE>
<TABLE>
APPENDIX C
STARSIGHT TRADEMARKS
<CAPTION>
TRADEMARK INT'L CLASS COUNTRY APPLICATION/
REGISTRATION NO.
<S> <C> <C> <C>
STARSIGHT Class 9 United States Registration No. 1,968,793
STARSIGHT Class 38 United States Registration No. 1,883,116
STAR DESIGN Class 9 United States Registration No. 1,973,971
STAR DESIGN Class 38 United States Registration No. 1,915,871
STARSIGHT (AND
STAR DESIGN) Class 9 United States Registration No. 1,968,794
STARSIGHT (AND
STAR DESIGN) Class 38 United States Registration No. 1,921,168
STARSIGHT Canada [REDACTED***]
STARSIGHT Classes 9 and 38 France Registration No. 94/540158
STARSIGHT Classes 9 and 38 Germany [REDACTED***]
STARSIGHT (AND
STAR DESIGN) Classes 9 and 38 Germany [REDACTED***]
STARSIGHT Class 9 Japan [REDACTED***]
STARSIGHT Class 38 Japan [REDACTED***]
STARSIGHT Class 9 Mexico Registration No. 496518
STARSIGHT Class 38 Mexico Registration No. 496517
STARSIGHT Classes 9 and 38 United Kingdom [REDACTED***]
</TABLE>
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
C-1
<PAGE>
<TABLE>
<CAPTION>
APPENDIX D
MICROSOFT ROYALTY REPORTING FORM
For Quarter Ending ___________________
<S> <C> <C> <C> <C> <C>
6.1.2
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
QTY SOLD OR ROYALTY RATE
(6.2.1(a)) INVOICED [REDACTED***] ROYALTY DUE
VERSION NUMBER DESCRIPTION OF MICROSOFT (A) (B) (A x B)
EPG PRODUCT and Identification
of Service Provider (as applicable)
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
- --------------------- ----------------------------------------- ------------------- ---------------------- ---------------------
SUBTOTAL DUE $
--------------------
6.1.3
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
ADVERTISING
REVENUES NET ADVERTISING REVENUES
RECEIVED* TOTAL ALLOWANCES* RECEIVED (A - B) ROYALTY DUE
(A) (B) (C) [REDACTED***]
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
- --------------------- ---------------------------------------- ---------------------------------------- ------------------------
TOTAL ROYALTY DUE FOR QUARTER ENDING $
------------------------
*Attach itemization including description and amount.
- --------------------------------------------------------------------------------------------------------------- -----------------
TOTAL ROYALTY DUE (6.1.2 + 6.1.3) FOR QUARTER ENDING $
- --------------------------------------------------------------------------------------------------------------- -----------------
I certify that this report is a true and accurate representation of the amounts due and owing StarSight to the best
of my knowledge and information.
By:________________________________________ Printed Name:________________________________ Date:_____________________
</TABLE>
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
D-1
<PAGE>
<TABLE>
APPENDIX E
STARSIGHT ROYALTY REPORTING FORM
For Quarter Ending ________________
<CAPTION>
6.1.4
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
<S> <C> <C> <C>
SUBSCRIPTION REVENUES NET SUBSCRIPTION REVENUES
RECEIVED* TOTAL ALLOWANCES* RECEIVED (A - B) ROYALTY DUE
(A) (B) (C) [REDACTED***]
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
- ----------------------- ------------------------ ---------------------------------------- -------------------------------------
TOTAL ROYALTY DUE FOR QUARTER ENDING $
-------------------------------------
*Attach itemization including description and amount.
I certify that this report is a true and accurate representation of the amounts
due and owing Microsoft to the best of my knowledge and information.
By:________________________________________ Printed Name:________________________________ Date:_____________________
</TABLE>
- --------------------------------------------
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
E-1
Exhibit 10.65
December 23, 1996
Ladies and Gentlemen:
This letter agreement (the "Agreement") is being entered into in
connection with the execution of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of December 23, 1996, among GemStar International Group
Limited ("GemStar"), G/S Acquisition Subsidiary ("Sub") and StarSight Telecast,
Inc. (the "Company"), pursuant to which, among other things, Sub will merge with
and into the Company (the "Merger"), subject to the terms and conditions set
forth in the Merger Agreement. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Merger Agreement.
The purpose of this Agreement is to confirm our mutual understandings
and agreements with regard to the Employment Agreement between the Company and
Larry W. Wangberg (the "Executive"), effective as of February 2, 1995 (the
"Employment Agreement"), as it relates to the Executive. The Company has
requested that, for the benefit of its shareholders (which will become
shareholders of GemStar after consummation of the Merger), the Executive enter
into this Agreement.
The Company agrees to pay on the Payment Date, and the Executive agrees
to accept payment of $100,000 (the "Total Accelerated Payments"). Such payments
shall be treated for tax withholding and reporting purposes as taxable
compensation to the Executive as of the Payment Date.
The Executive agrees, on his behalf and on behalf of his heirs,
assigns, executors, administrators and legal representatives, that upon the
Executive's receipt of such payments, the total amounts payable (or that will
become payable) under the Employment Agreement will be reduced by the Total
Accelerated Payments. The Company and the Executive agree that the receipt by
the Executive of the Total Accelerated Payment shall be without prejudice to any
other provision of the Employment Agreement, including, without limitation,
rights to payments due to the Executive (other than the Total Accelerated
Payments), the acceleration of Executive's options pursuant to Section 2 (e) of
the Employment Agreement and rights to continued employee benefits pursuant to
Section 2(d) of the Employment Agreement, and that nothing in this Agreement
shall have any effect whatsoever on the rights of the Executive to receive from
the Company reimbursement with respect to taxes as set forth in Section 5(c) of
the Employment Agreement.
<PAGE>
December 23, 1996
Page 2
In the event that after payment of the Total Accelerated Payments the
Merger is not consummated pursuant to the Merger Agreement and the Merger
Agreement is terminated (for any reason), then:
(1) the Company shall notify the Executive of:
(a) the termination of the Merger Agreement,
(b) the amount of the Total Accelerated Payments that was
withheld by the Company to pay taxes (the "Withheld
Amount"), and
(c) the amount of the Total Accelerated Payments that was
actually paid to the Executive, net of the Withheld
Amount (the "Received Amount");
(2) the Executive shall, within five business days of receipt of such
notice, notify the Company of any taxes (other than the Withheld Amount) that
have been paid by the Executive with respect to the Total Accelerated Payments
or that the Executive reasonably expects to pay with respect to the Total
Accelerated Payments (the "Excess Tax Amount");
(3) the Executive shall, within five business days after receipt of the
Company's notice, reimburse the Company for the excess of the Received Amount
over the Excess Tax Amount; and
(4) the Company and the Executive shall use reasonable efforts in
seeking any available refund or reduction in tax liability with respect to the
Withheld Amount or the Excess Tax Amount, as the case may be; in the event that
the Executive receives a refund from any taxing authority or realizes a
reduction to the Executive's tax liability with respect to the Withheld Amount
or the Excess Tax Amount, the Executive shall promptly reimburse the Company in
the amount of the refund or reduction in tax liability, as applicable, net of
any taxes imposed thereon, and in any event not to exceed the aggregate amount
paid by the Company to the Executive hereunder.
Whether or not the Merger is consummated, in the event that the
Executive becomes liable for any taxes (including, without limitation, any
interest or penalties imposed with respect to such taxes or acceleration of the
timing of the Executive's payment of any such liability) as a result of the
Total Accelerated Payments being paid hereunder that would not have been payable
had such payments been made immediately after the consummation of the Merger, or
as a result of any payment made by the Executive to the Company pursuant to this
Agreement (in any such case, an "Executive Tax Liability"), the Company shall
indemnify the Executive on an after-tax basis so as to make the Executive whole
with respect to any such Executive Tax Liability.
<PAGE>
December 23, 1996
Page 3
In addition, whether or not the Merger is consummated, the Company
shall indemnify the Executive for reasonable expenses (including, without
limitation, reasonable attorneys', accountants' and expert witness fees)
incurred in connection with any action, suit, claim, liability or proceeding (a
"Claim") arising by reason of this Agreement, including, without limitation, any
audit or other proceeding relating to the defense of an Executive Tax Liability,
and any and all Claims of the Company or third parties (including without
limitation any Claims against which the Company would not be permitted to
indemnify the Executive). The Company shall make any payments required pursuant
to this Agreement (other than the Withheld Amount and the Excess Tax Amount,
which shall be made as set forth above) within five days after it receives
written notice that any expense, judgment, fine, settlement or other amount,
including, without limitation, a Tax Liability or related expense, actually has
been incurred.
Except as expressly set forth herein, this Agreement shall not be
deemed to affect or modify any provision of the Employment Agreement.
This Agreement may not be amended or terminated without the prior
written consent of the Company and the Executive.
This Agreement may be executed in any number of counterparts which
together shall constitute but one agreement.
This Agreement may not be assigned by any party hereto and shall be
binding on and inure to the benefit of their respective successors and, in the
case of the Executive, heirs and other legal representatives.
<PAGE>
December 23, 1996
Page 4
The Company and the Executive have caused this Agreement to be duly
executed as of the date first above written.
STARSIGHT TELECAST, INC.
By: /s/ Martin W. Henkel
________________________________________
Name: Martin W. Henkel
Title: Executive Vice President and Chief
Financial Officer
/s/ Larry W. Wangberg
_____________________________________________
Larry W. Wangberg
December 23, 1996
Page 1
Exhibit 10.66
December 23, 1996
Ladies and Gentlemen:
This letter agreement (the "Agreement") is being entered into in
connection with the execution of an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of December 23, 1996, among GemStar International Group
Limited ("GemStar"), G/S Acquisition Subsidiary ("Sub") and StarSight Telecast,
Inc. (the "Company"), pursuant to which, among other things, Sub will merge with
and into the Company (the "Merger"), subject to the terms and conditions set
forth in the Merger Agreement. Capitalized terms which are used but not defined
herein shall have the meanings ascribed to such terms in the Merger Agreement.
The purpose of this Agreement is to confirm our mutual understandings
and agreements with regard to the Employment Agreement between the Company and
Brian L. Klosterman (the "Executive"), dated as of December 21, 1995 (the
"Employment Agreement"), as it relates to the Executive. The Company has
requested that, for the benefit of its shareholders (which will become
shareholders of GemStar after consummation of the Merger), the Executive enter
into this Agreement.
The Company agrees to pay on the Payment Date, and the Executive agrees
to accept payment of $350,000 (the "Total Accelerated Payments"). Such payments
shall be treated for tax withholding and reporting purposes as taxable
compensation to the Executive as of the Payment Date.
The Executive agrees, on his behalf and on behalf of his heirs,
assigns, executors, administrators and legal representatives, that upon the
Executive's receipt of such payments, the total amounts payable (or that will
become payable) under the Employment Agreement will be reduced by the Total
Accelerated Payments. The Company and the Executive agree that the receipt by
the Executive of the Total Accelerated Payment shall be without prejudice to any
other provision of the Employment Agreement, including, without limitation,
rights to payments due to the Executive (other than the Total Accelerated
Payments), the acceleration of Executive's options pursuant to Section 2 (e) of
the Employment Agreement and rights to continued employee benefits pursuant to
Section 2(d) of the Employment Agreement, and that nothing in this Agreement
shall have any effect whatsoever on the rights of the Executive to receive from
the Company reimbursement with respect to taxes as set forth in Section 5(b) of
the Employment Agreement.
<PAGE>
December 23, 1996
Page 2
In the event that after payment of the Total Accelerated Payments the
Merger is not consummated pursuant to the Merger Agreement and the Merger
Agreement is terminated (for any reason), then:
(1) the Company shall notify the Executive of:
(a) the termination of the Merger Agreement,
(b) the amount of the Total Accelerated Payments that was
withheld by the Company to pay taxes (the "Withheld
Amount"), and
(c) the amount of the Total Accelerated Payments that was
actually paid to the Executive, net of the Withheld
Amount (the "Received Amount");
(2) the Executive shall, within five business days of receipt of such
notice, notify the Company of any taxes (other than the Withheld Amount) that
have been paid by the Executive with respect to the Total Accelerated Payments
or that the Executive reasonably expects to pay with respect to the Total
Accelerated Payments (the "Excess Tax Amount");
(3) the Executive shall, within five business days after receipt of the
Company's notice, reimburse the Company for the excess of the Received Amount
over the Excess Tax Amount; and
(4) the Company and the Executive shall use reasonable efforts in
seeking any available refund or reduction in tax liability with respect to the
Withheld Amount or the Excess Tax Amount, as the case may be; in the event that
the Executive receives a refund from any taxing authority or realizes a
reduction to the Executive's tax liability with respect to the Withheld Amount
or the Excess Tax Amount, the Executive shall promptly reimburse the Company in
the amount of the refund or reduction in tax liability, as applicable, net of
any taxes imposed thereon, and in any event not to exceed the aggregate amount
paid by the Company to the Executive hereunder.
Whether or not the Merger is consummated, in the event that the
Executive becomes liable for any taxes (including, without limitation, any
interest or penalties imposed with respect to such taxes or acceleration of the
timing of the Executive's payment of any such liability) as a result of the
Total Accelerated Payments being paid hereunder that would not have been payable
had such payments been made immediately after the consummation of the Merger, or
as a result of any payment made by the Executive to the Company pursuant to this
Agreement (in any such case, an "Executive Tax Liability"), the Company shall
indemnify the Executive on an after-tax basis so as to make the Executive whole
with respect to any such Executive Tax Liability.
In addition, whether or not the Merger is consummated, the Company
shall indemnify the Executive for reasonable expenses (including, without
limitation, reasonable attorneys', accountants' and expert witness fees)
incurred in connection with any action, suit, claim, liability or proceeding (a
<PAGE>
December 23, 1996
Page 3
"Claim") arising by reason of this Agreement, including, without limitation, any
audit or other proceeding relating to the defense of an Executive Tax Liability,
and any and all Claims of the Company or third parties (including without
limitation any Claims against which the Company would not be permitted to
indemnify the Executive). The Company shall make any payments required pursuant
to this Agreement (other than the Withheld Amount and the Excess Tax Amount,
which shall be made as set forth above) within five days after it receives
written notice that any expense, judgment, fine, settlement or other amount,
including, without limitation, a Tax Liability or related expense, actually has
been incurred.
Except as expressly set forth herein, this Agreement shall not be
deemed to affect or modify any provision of the Employment Agreement.
This Agreement may not be amended or terminated without the prior
written consent of the Company and the Executive.
This Agreement may be executed in any number of counterparts which
together shall constitute but one agreement.
This Agreement may not be assigned by any party hereto and shall be
binding on and inure to the benefit of their respective successors and, in the
case of the Executive, heirs and other legal representatives.
<PAGE>
December 23, 1996
Page 4
The Company and the Executive have caused this Agreement to be duly
executed as of the date first above written.
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
_____________________________
Name: Larry W. Wangberg
Title: Chief Executive Officer
/s/ Brian L. Klosterman
___________________________________
Brian L. Klosterman
Exhibit 10.67
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
December 23, 1996 by and between StarSight Telecast, Inc., a California
corporation ("Company") and Larry W. Wangberg ("Employee").
WITNESSETH:
WHEREAS, Company, Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar") and a wholly owned subsidiary of Gemstar ("Sub")
are entering into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger");
WHEREAS, following the Merger, Company desires to obtain the benefit of
continued service of Employee on a part-time basis, on its own behalf and on
behalf of all existing and future "Affiliated Companies" (defined as any
corporation or other business entity or entities that directly or indirectly
controls, is controlled by, or is under common control with the Company), and
Employee desires to render services to Company and its Affiliated Companies;
WHEREAS, this Agreement shall become effective, without any further
action of either party, at such time, and only at such time, as a merger
agreement regarding the Merger is duly filed with the California Secretary of
State as provided by the Merger Agreement (the "Effective Time");
WHEREAS, if the Merger Agreement is terminated in accordance with its
terms, this Agreement shall also terminate and become null and void; and
WHEREAS, Company and Employee desire to set forth in this Agreement the
terms and conditions of Employee's employment with Company following the
Effective Time.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. The Company hereby employs Employee on
a part-time basis to render services to the Company in the position
<PAGE>
and with the duties and responsibilities described in Section 2 for the period
(the "Period of Employment") commencing, without any further action by either
party, at the Effective Time and ending on the earlier of (i) two years
following the date of the Effective Time (the "Term Date") and (ii) the date the
Period of Employment is terminated in accordance with Section 4.
(b) Renewal. Subject to Section 4, the Employee's employment
will be automatically renewed for an additional one (1) year period (without any
action by either party) on the Term Date and on each anniversary thereof, unless
either party gives to the other written notice ninety (90) days in advance of
the beginning of any one year renewal period that the Period of Employment is to
be terminated. Either party's right to terminate the Period of Employment under
this Section 1(b), instead of renewing the Agreement, shall be with or without
cause.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with the
Company in such position as may be reasonably required by the Board of Directors
of the Company (the "Board"). Employee agrees to devote to the Company, as
requested by the Company from time to time, four normal work days per month.
(b) Other Activities. Employee, during the Period of
Employment, will not (i) accept any other employment, or (ii) engage in any
other business activity (whether or not pursued for pecuniary advantage) that is
competitive with, or that places him in a competing position to that of, the
Company or any Affiliated Company.
Employee and the Company agree that the terms of Employee's
employment under this Agreement constitute a "constructive termination" of
Employee under Section 4(b)(ii) of the employment agreement by and between
Employee and the Company effective on February 2, 1995 (the "Prior Employment
Agreement"), and, as such, entitle Employee to certain benefits, including but
not limited to, severance payments under Section 5(a) of the Prior Employment
Agreement, acceleration of Employee's options pursuant to Section 2(e) of the
Prior Employment Agreement and a "gross-up" pursuant to Section 5(c) of the
Prior Employment Agreement for any excise tax applicable to such severance
payments under Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"). Under Section 5(a) of the Prior Employment Agreement, Employee
will receive a lump sum cash payment on the Effective Time equal to his base
salary, car allowance and guaranteed bonus for the remainder of the contract
period. For example, assuming an Effective Time of March 15, 1997, such lump sum
payment would be $3,385,164.
2
<PAGE>
3. Compensation, Benefits, Etc.
(a) Compensation. In consideration of the services to be
rendered hereunder, including, without limitation, services to any Affiliated
Company, Employee shall be paid an annual salary of One Hundred Twenty Thousand
Dollars ($120,000) (the "Annual Salary"), payable in installments at the times
and pursuant to the procedures regularly established, and as they may be
amended, by the Company during the term of this Agreement.
(b) Benefits. As Employee becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits made available generally to
employees of the Company. The amount and extent of benefits to which Employee is
entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(c) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate. Nothing
in this section shall affect any entitlement of Employee's heirs to the benefits
under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive days in any twelve-month period, then, to
the extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.
3
<PAGE>
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon notice to Employee. Termination shall be for "Cause" if: (i) Employee has
engaged in illegal or other wrongful conduct substantially detrimental to the
business or reputation of the Company or any Affiliated Company, or is charged
with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board; provided, that
the Board has given Employee written notice of such refusal or failure and
Employee fails to comply with such direction or order within 30 days after the
date of such notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
(d) By Company Without Cause. The Company may terminate the
Period of Employment without Cause at any time upon 30 days' advance written
notice to Employee. Upon such termination, and subject to Employee's compliance
with the provisions of Sections 5 and 6 hereof, the Company shall pay Employee a
lump sum payment upon such termination of an amount equal to the remaining
amounts payable by the Company pursuant to Section 3(a) through the Term Date,
and thereafter all obligations of the Company hereunder shall terminate.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that all
personal property, including, without limitation, all books, manuals, records,
reports, notes, contracts, lists, blueprints and other documents, or materials,
or copies thereof, Proprietary Information (as defined below), furnished to or
prepared by Employee in the course of or incident to his employment, including,
without limitation, records and any other materials pertaining to Invention
Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company provided that, if at the time of the
termination of the Period of Employment, Employee is a member of the Board,
Employee shall not be deemed to have resigned as a member of the Board as a
result of such termination.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 5, 6 and 7 shall survive
termination of the Period of Employment and the expiration of this Agreement.
4
<PAGE>
5. Excise Taxes. Neither Employee nor the Company expect any benefits
payable to Employee under this Agreement, the Prior Employment Agreement or
otherwise payable as a result of the Merger to be subject to the excise tax
under Section 4999 of the Code (the "Excise Tax"). Nevertheless, if the Company,
as of the date of this Agreement, pays to Employee $100,000 ("Total Accelerated
Payments"), and if the Internal Revenue Service determines that any payment made
to the Employee pursuant to the Prior Employment Agreement shall be subject to
the Excise Tax, the Company shall pay to the Employee the amount of the Excise
Tax payable and additional state or federal income taxes due as a result of the
payment to Employee of such Excise Tax. Employee shall use reasonable efforts in
seeking any available refund or reduction in tax liability with respect to the
Excise Tax and additional state or federal taxes due with respect to it. In the
event that Employee receives a refund from any taxing authority or realizes a
reduction to the Employee's tax liability with respect to the Excise Tax and
additional state or federal taxes due with respect to it, as the case may be,
the Employee shall promptly reimburse the Company in the amount of the refund or
reduction in tax liability, as applicable, net of any taxes imposed thereon.
6. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and
any idea in whatever form, tangible or intangible, pertaining in any manner to
the business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.
5
<PAGE>
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
5(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 5(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated Company) any business of any kind in which it is engaged,
including, without limitation, the solicitation of or interference with any of
its suppliers or customers, (ii) employ, solicit for employment, or recommend
for employment any person employed by the Company, or any Affiliated Company,
during the period of such person's employment and for a period of one year
thereafter, or (iii) engage in any business activity that is competitive with
the Company, unless Employee can prove that action taken in contravention of
this Section 5(c)(iii) was done without the use of any Proprietary Information;
provided, that in no event shall Employee engage in such competitive activities
during the period which Employee continues to receive payments pursuant to
Section 4 above. For purposes of this Section 5(c), "competitive activities"
shall be business activities that are directly competitive with an existing or
presently planned business of the Company on the date of termination, which
activity constitutes or is anticipated to constitute more than 15% of revenues
of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit
any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code ss. 3426), or otherwise available under law.
7. Employee Inventions and Ideas.
(a) Defined; Statutory Notice. The term "Invention Ideas"
means any and all ideas, processes, trademarks, service marks, inventions,
technology, computer programs, original works of authorship, designs, formulas,
discoveries, patents, copyrights, and all improvements, rights, and claims
related to the foregoing that are conceived, developed, or reduced to practice
by the Employee alone or with others except to the extent that California Labor
Code Section 2870 lawfully prohibits the assignment of rights in such ideas,
processes, inventions, etc. Section 2870(a) provides:
Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply
6
<PAGE>
to an invention that the employee developed entirely on his or her own time
without using the employer's equipment, supplies, facilities, or trade secret
information except for those inventions that either:
(i) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee
for the employer.
Employee hereby acknowledges that he understands the foregoing
limitations created by Section 2870.
(b) Disclosure. Employee agrees to maintain adequate and
current written records on the development of all Invention Ideas and to
disclose promptly to the Company all Invention Ideas and relevant records, which
records will remain the sole property of the Company. Employee further agrees
that all information and records pertaining to any idea, process, trademark,
service mark, invention, technology, computer program, original work of
authorship, design, formula, discovery, patent, or copyright that Employee does
not believe to be an Invention Idea, but is conceived, developed, or reduced to
practice by Employee (alone or with others) during his Period of Employment or
during the one year period following termination of employment, shall be
promptly disclosed to the Company (such disclosure to be received in
confidence). The Company shall examine such information to determine if in fact
the idea, process, or invention, etc., is an Invention Idea subject to this
Agreement.
(c) Assignment. Employee agrees to assign to the Company,
without further consideration, his entire right, title, and interest (throughout
the United States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole property of
the Company, whether or not patentable. In the event any Invention Idea shall be
deemed by the Company to be patentable or otherwise registerable, Employee shall
assist the Company (at its expense) in obtaining letters patent, copyright,
trademark, or other applicable intellectual property registrations thereon and
shall execute all documents and do all other things (including testifying at the
Company's expense) necessary or proper to obtain letters patent, copyright,
trademark, or other applicable intellectual property registrations thereon and
to vest the Company, or any Affiliated Company specified by the Board, with full
title thereto. Should the Company be unable to secure Employee's signature on
any
7
<PAGE>
document necessary to apply for, prosecute, obtain, or enforce any patent,
copyright, or other right or protection relating to any Invention Idea, whether
due to the Employee's mental or physical incapacity or any other cause, Employee
hereby irrevocably designates and appoints Company and each of its duly
authorized officers and agents as the Employee's agent and attorney in fact, to
act for and in the Employee's behalf and stead and to execute and file any such
document, and to do all other lawfully permitted acts to further the
prosecution, issuance, and enforcement of patents, copyrights, or the rights or
protections with the same force and effect as if executed and delivered by
Employee. Employee hereby agrees to maintain, update, improve and modify the
Invention Ideas, for so long as he is living, regardless of whether the Period
of Employment has terminated.
(d) Exclusions. Employee acknowledges that there are no ideas,
processes, trademarks, service marks, technology, computer programs, original
works of authorship, designs, formulas, inventions, discoveries, patents,
copyrights, or improvements to the foregoing that he desires to exclude from the
operation of this Agreement, except for the inventions and ideas of Employee and
his associates outside of the Company (i) which were or are developed entirely
by Employee and each such associate entirely outside of his or her activities
for the Company, (ii) which do not relate at the time of conception or reduction
to practice to the Company's business, or actually or demonstrably anticipated
research development, and (iii) which do not result from any work performed by
Employee for the Company. To the best of the Employee's knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, trademarks, service marks, inventions, technology,
computer programs, original works of authorship, designs, formulas, discoveries,
patents, or copyrights that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of
establishing when any idea, process, invention, etc., is first conceived or
developed by Employee, or whether it results from access to Proprietary
Information or the Company's equipment, facilities, and data, Employee agrees
that any idea, process, trademark, service mark, technology, computer program,
original work of authorship, design, formula, invention, discovery, patent,
copyright, or any improvement, rights, or claims related to the foregoing shall
be presumed to be an Invention Idea if it is conceived, developed, used, sold,
exploited, or reduced to practice by Employee or with the aid of Employee within
one (1) year after termination of the Period of Employment. Employee can rebut
the above presumption if he proves that the invention, idea, process, etc., (i)
was first conceived and/or developed prior to the date of
8
<PAGE>
this Agreement, (ii) was first conceived or developed after termination of the
Period of Employment, (iii) was conceived or developed entirely on Employee's
own time without using the Company's equipment, supplies, facilities, or
Proprietary Information, and (iv) did not result from any work performed by
Employee for the Company. Nothing in this Agreement is intended to expand the
scope of protection provided Employee by Sections 2870 through 2872 of the
California Labor Code.
In connection with the transactions contemplated by the Merger, the
Company and Employee acknowledge and agree to execute concurrently herewith a
letter agreement in the form attached hereto as Exhibit 1 relating to Employee's
Employment Agreement with the Company dated as of December 21, 1995.
8. Assignment: Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the Company with, or its merger into, any other
corporation, or the sale by the Company of all or substantially all of its
properties or assets, or the assignment by the Company of this Agreement and the
performance of its obligations hereunder to any successor in interest or any
Affiliated Company. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective heirs,
legal representatives, successors and permitted assigns, and shall not benefit
any person or entity other than those enumerated above.
In the event of a consolidation or merger of the Company with or into
another corporation, or the sale of all, or substantially all, of the Company's
assets to another corporation, such corporation as may survive said transaction
shall assume this Agreement and become obligated to perform all the terms and
conditions hereof, and Employee's obligations hereunder shall continue in favor
of such surviving corporation.
9. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
StarSight Telecast, Inc.
9
<PAGE>
39650 Liberty Street
Fremont, California 94538
Attention: _______________
with a copy to:
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Attention: Larry Goldberg
or to Employee at:
_______________________________________
_______________________________________
_______________________________________
_______________________________________
Notice of change of address shall be effective only if made in accordance with
this section.
10. Entire Agreement. Except as expressly provided herein with respect
to certain rights of Employee under the Prior Employment Agreement, the terms of
this Agreement are intended by the parties to be the final and exclusive
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence of any prior or contemporaneous
agreement any and all of which are superceded as of the Effective Time. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
11. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this Agreement that such other party was or is
obligated to comply with or perform, provided, however, that such waiver shall
not operate as a waiver of, or estoppel with respect to, any other or subsequent
failure. No failure to exercise and no delay in exercising any right, remedy or
power hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy or power hereunder preclude any other or
further exercise thereof or the exercise of any other right, remedy or power
provided herein or by law or in equity.
10
<PAGE>
12. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
13. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
14. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ Larry W. Wangberg
____________________________________________
Larry W. Wangberg
EMPLOYEE
STARSIGHT TELECAST, INC.
By: /s/ Martin W. Henkel
_______________________________________
Its: Executive Vice President and Chief
Financial Officer
_______________________________________
11
Exhibit 10.68
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
December 23, 1996 by and between StarSight Telecast, Inc., a California
corporation ("Company") and Brian Klosterman ("Employee").
WITNESSETH:
WHEREAS, Company, Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar") and a wholly owned subsidiary of Gemstar ("Sub")
are entering into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger");
WHEREAS, following the Merger, Company desires to obtain the benefit of
continued service of Employee, on its own behalf and on behalf of all existing
and future "Affiliated Companies" (defined as any corporation or other business
entity or entities that directly or indirectly controls, is controlled by, or is
under common control with the Company), and Employee desires to render services
to Company and its Affiliated Companies;
WHEREAS, this Agreement shall become effective, without any further
action of either party, at such time, and only at such time, as a merger
agreement regarding the Merger is duly filed with the California Secretary of
State as provided by the Merger Agreement (the "Effective Time");
WHEREAS, if the Merger Agreement is terminated in accordance with its
terms, this Agreement shall also terminate and become null and void; and
WHEREAS, Company and Employee desire to set forth in this Agreement the
terms and conditions of Employee's employment with Company following the
Effective Time.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Period of Employment.
<PAGE>
(a) Basic Term. The Company hereby employs Employee to render
services to the Company in the position and with the duties and responsibilities
described in Section 2 for the period (the "Period of Employment") commencing,
without any further action by either party, at the Effective Time and ending on
the earlier of (i) three years following the date of the Effective Time (the
"Term Date") and (ii) the date the Period of Employment is terminated in
accordance with Section 4.
(b) Renewal. Subject to Section 4, the Employee's employment
will be automatically renewed for an additional one (1) year period (without any
action by either party) on the Term Date and on each anniversary thereof, unless
either party gives to the other written notice ninety (90) days in advance of
the beginning of any one year renewal period that the Period of Employment is to
be terminated. Either party's right to terminate the Period of Employment under
this Section 1(b), instead of renewing the Agreement, shall be with or without
cause.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with the
Company as President and shall perform such responsibilities and duties as may
be reasonably required by the Board of Directors of the Company (the "Board").
Employee and the Company agree that the terms of
Employee's employment under this Agreement constitute a "constructive
termination" of Employee under Section 4(b)(ii) of the employment agreement by
and between Employee and the Company as of December 21, 1995 (the "Prior
Employment Agreement"), and, as such, entitle Employee to severance payments
under Section 5(a) of the Prior Employment Agreement, acceleration of Employee's
options pursuant to Section 2(e) of the Prior Employment Agreement and a
"gross-up" pursuant to Section 5(b) of the Prior Employment Agreement for any
excise tax applicable to such severance payments under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"). Under Section 5(a) of
the Prior Employment Agreement, Employee will receive a lump sum cash payment on
the Effective Time equal to his base salary, car allowance and guaranteed bonus
for the remainder of the contract period. For example, assuming an Effective
Time of March 15, 1997, such lump sum payment would be $678,090.
(b) Other Activities. Employee, during the Period of
Employment, will not (i) accept any other employment, or (ii) engage in any
other business activity (whether or not pursued for pecuniary advantage) that is
competitive with, or
2
<PAGE>
that places him in a competing position to that of, the Company or any
Affiliated Company.
3. Compensation, Benefits, Etc.
(a) Compensation. In consideration of the services to be
rendered hereunder, including, without limitation, services to any Affiliated
Company, Employee shall be paid an annual salary of Two Hundred Forty Thousand
Dollars ($240,000) (the "Annual Salary"), payable in installments at the times
and pursuant to the procedures regularly established, and as they may be
amended, by the Company during the term of this Agreement.
(b) Bonus. Employee shall also be eligible to receive, in the
discretion of the Board, an annual performance bonus (or other special bonuses),
in such amounts as determined by the Board, in its sole and absolute discretion,
but not less than 50% of current base salary. Upon termination of Employee's
employment, Employee shall be entitled to receive a portion of the bonus, on the
date it would otherwise be payable, proportional to the period which Employee
was employed compared to the period for which the bonus is paid.
(c) Stock Options. Upon the Effective Time, the Company shall
grant to the Employee a nonqualified stock option (the "Option") under Gemstar's
1994 Stock Incentive Plan to purchase 100,000 shares of Gemstar Ordinary Shares,
par value $.01 per share (the "Ordinary Shares"), at a price per share equal to
the fair market value of the Ordinary Shares on the day of the Effective Time
(the "Exercise Price"). Effective upon a "Change of Control" of the Company (as
defined below) the Option shall become fully exercisable. For purposes of this
Section 3(c), a Change of Control of the Company shall be deemed to have
occurred if (i) there shall be consummated (x) any consolidation or merger of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's Common Stock would be converted
into cash, securities or other property, other than a merger of the Company in
which the holders of the Company's Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, (y) any reverse merger in which the
Company is the continuing or surviving corporation but in which securities
possessing more than 51% of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from
those who hold such securities immediately prior to the merger, or (z) any sale,
lease, exchange or other transfer (in one transaction or series of related
transactions) of all, or substantially all, of the assets of the
3
<PAGE>
Company, or (ii) the stockholders of the Company approve a plan or proposal for
the liquidation or dissolution of the Company. The Option shall be evidenced by
a standard stock option agreement utilized by Gemstar for the grant of other
stock options under such plan and shall contain vesting and other terms which
are consistent with the grants of stock options made to other similarly situated
employees of the Company.
(d) Benefits. As Employee becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits made available generally to
employees of the Company. The amount and extent of benefits to which Employee is
entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(e) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
(f) Automobile Allowance. As additional compensation for
Employee's services to the Company, the Company shall pay Employee a monthly
automobile allowance of $1,000 during the Period of Employment.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate. Nothing
in this section shall affect any entitlement of Employee's heirs to the benefits
under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive days in any twelve-month period, then, to
the extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall
4
<PAGE>
terminate. Nothing in this section shall affect Employee's rights under any
disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon notice to Employee. Termination shall be for "Cause" if: (i) Employee has
engaged in illegal or other wrongful conduct substantially detrimental to the
business or reputation of the Company or any Affiliated Company, or is charged
with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board; provided, that
the Board has given Employee written notice of such refusal or failure and
Employee fails to comply with such direction or order within 30 days after the
date of such notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
(d) By Company Without Cause. The Company may terminate the
Period of Employment without Cause at any time upon 30 days' advance written
notice to Employee. Upon such termination, and subject to Employee's compliance
with the provisions of Sections 5 and 6 hereof, the Company shall pay Employee a
lump sum payment upon such termination of an amount equal to the lesser of (i)
Employee's Annual Salary, and (ii) the remaining amounts payable by the Company
pursuant to Section 3(a) through the Term Date, and thereafter all obligations
of the Company hereunder shall terminate.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that
all personal property, including, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints and other documents, or
materials, or copies thereof, Proprietary Information (as defined below),
furnished to or prepared by Employee in the course of or incident to his
employment, including, without limitation, records and any other materials
pertaining to Invention Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company provided that, if at the time of the
termination of the Period of Employment, Employee is a member of the Board,
Employee shall not be deemed to have resigned as a member of the Board as a
result of such termination.
5
<PAGE>
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 5, 6 and 7 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Excise Taxes. Neither Employee nor the Company expect any benefits
payable to Employee under this Agreement, the Prior Employment Agreement or
otherwise payable as a result of the Merger to be subject to the excise tax
under Section 4999 of the Code (the "Excise Tax"). Nevertheless, if the Company,
as of the date of this Agreement, pays to Employee $350,000 ("Total Accelerated
Payment"), and if the Internal Revenue Service determines that any payment made
to the Employee pursuant to the Prior Employment Agreement shall be subject to
the Excise Tax, the Company shall pay to the Employee the amount of the Excise
Tax payable and additional state or federal income taxes due as a result of the
payment to Employee of such Excise Tax. Employee shall use reasonable efforts in
seeking any available refund or reduction in tax liability with respect to the
Excise Tax and additional state or federal income taxes due with respect to it.
In the event that Employee receives a refund from any taxing authority or
realizes a reduction to the Employee's tax liability with respect to the Excise
Tax and additional state or federal income taxes due with respect to it, as the
case may be, the Employee shall promptly reimburse the Company in the amount of
the refund or reduction in tax liability, as applicable, net of any taxes
imposed thereon.
6. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and
any idea in whatever form, tangible or intangible, pertaining in any manner to
the business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
6
<PAGE>
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
5(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 5(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated Company) any business of any kind in which it is engaged,
including, without limitation, the solicitation of or interference with any of
its suppliers or customers, (ii) employ, solicit for employment, or recommend
for employment any person employed by the Company, or any Affiliated Company,
during the period of such person's employment and for a period of one year
thereafter, or (iii) engage in any business activity that is competitive with
the Company, unless Employee can prove that action taken in contravention of
this Section 5(c)(iii) was done without the use of any Proprietary Information;
provided, that in no event shall Employee engage in such competitive activities
during the period which Employee continues to receive payments pursuant to
Section 4 above. For purposes of this Section 5(c), "competitive activities"
shall be business activities that are directly competitive with an existing or
presently planned business of the Company on the date of termination, which
activity constitutes or is anticipated to constitute more than 15% of revenues
of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit
any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code ss. 3426), or otherwise available under law.
7. Employee Inventions and Ideas.
(a) Defined; Statutory Notice. The term "Invention Ideas"
means any and all ideas, processes, trademarks, service marks, inventions,
technology, computer programs, original works of authorship, designs, formulas,
discoveries, patents, copyrights, and all improvements, rights, and claims
related to the foregoing that are conceived, developed, or reduced to practice
by the Employee alone or with others except to the
7
<PAGE>
extent that California Labor Code Section 2870 lawfully prohibits the assignment
of rights in such ideas, processes, inventions, etc. Section 2870(a) provides:
Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee
for the employer.
Employee hereby acknowledges that he understands the foregoing
limitations created by Section 2870.
(b) Disclosure. Employee agrees to maintain adequate and
current written records on the development of all Invention Ideas and to
disclose promptly to the Company all Invention Ideas and relevant records, which
records will remain the sole property of the Company. Employee further agrees
that all information and records pertaining to any idea, process, trademark,
service mark, invention, technology, computer program, original work of
authorship, design, formula, discovery, patent, or copyright that Employee does
not believe to be an Invention Idea, but is conceived, developed, or reduced to
practice by Employee (alone or with others) during his Period of Employment or
during the one year period following termination of employment, shall be
promptly disclosed to the Company (such disclosure to be received in
confidence). The Company shall examine such information to determine if in fact
the idea, process, or invention, etc., is an Invention Idea subject to this
Agreement.
(c) Assignment. Employee agrees to assign to the Company,
without further consideration, his entire right, title, and interest (throughout
the United States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole property of
the Company, whether or not patentable. In the event any Invention Idea shall be
deemed by the Company to be patentable or otherwise registerable, Employee shall
assist the Company (at its expense) in obtaining letters patent, copyright,
trademark, or other
8
<PAGE>
applicable intellectual property registrations thereon and shall execute all
documents and do all other things (including testifying at the Company's
expense) necessary or proper to obtain letters patent, copyright, trademark, or
other applicable intellectual property registrations thereon and to vest the
Company, or any Affiliated Company specified by the Board, with full title
thereto. Should the Company be unable to secure Employee's signature on any
document necessary to apply for, prosecute, obtain, or enforce any patent,
copyright, or other right or protection relating to any Invention Idea, whether
due to the Employee's mental or physical incapacity or any other cause, Employee
hereby irrevocably designates and appoints Company and each of its duly
authorized officers and agents as the Employee's agent and attorney in fact, to
act for and in the Employee's behalf and stead and to execute and file any such
document, and to do all other lawfully permitted acts to further the
prosecution, issuance, and enforcement of patents, copyrights, or the rights or
protections with the same force and effect as if executed and delivered by
Employee. Employee hereby agrees to maintain, update, improve and modify the
Invention Ideas, for so long as he is living, regardless of whether the Period
of Employment has terminated.
(d) Exclusions. Employee acknowledges that there are no ideas,
processes, trademarks, service marks, technology, computer programs, original
works of authorship, designs, formulas, inventions, discoveries, patents,
copyrights, or improvements to the foregoing that he desires to exclude from the
operation of this Agreement, except for the inventions and ideas of Employee and
his associates outside of the Company (i) which were or are developed entirely
by Employee and each such associate entirely outside of his or her activities
for the Company, (ii) which do not relate at the time of conception or reduction
to practice to the Company's business, or actually or demonstrably anticipated
research development, and (iii) which do not result from any work performed by
Employee for the Company. To the best of the Employee's knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, trademarks, service marks, inventions, technology,
computer programs, original works of authorship, designs, formulas, discoveries,
patents, or copyrights that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of
establishing when any idea, process, invention, etc., is first conceived or
developed by Employee, or whether it results from access to Proprietary
Information or the Company's equipment, facilities, and data, Employee agrees
that any idea, process, trademark, service mark, technology, computer program,
9
<PAGE>
original work of authorship, design, formula, invention, discovery, patent,
copyright, or any improvement, rights, or claims related to the foregoing shall
be presumed to be an Invention Idea if it is conceived, developed, used, sold,
exploited, or reduced to practice by Employee or with the aid of Employee within
one (1) year after termination of the Period of Employment. Employee can rebut
the above presumption if he proves that the invention, idea, process, etc., (i)
was first conceived and/or developed prior to the date of this Agreement, (ii)
was first conceived or developed after termination of the Period of Employment,
(iii) was conceived or developed entirely on Employee's own time without using
the Company's equipment, supplies, facilities, or Proprietary Information, and
(iv) did not result from any work performed by Employee for the Company. Nothing
in this Agreement is intended to expand the scope of protection provided
Employee by Sections 2870 through 2872 of the California Labor Code.
In connection with the transactions contemplated by the Merger, the
Company and Executive acknowledge and agree to execute concurrently herewith a
letter agreement in the form attached hereto as Exhibit 1 relating to
Executive's Employment Agreement with the Company dated as of December 21, 1995.
8. Assignment: Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the Company with, or its merger into, any other
corporation, or the sale by the Company of all or substantially all of its
properties or assets, or the assignment by the Company of this Agreement and the
performance of its obligations hereunder to any successor in interest or any
Affiliated Company. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective heirs,
legal representatives, successors and permitted assigns, and shall not benefit
any person or entity other than those enumerated above.
In the event of a consolidation or merger of the Company with or into
another corporation, or the sale of all, or substantially all, of the Company's
assets to another corporation, such corporation as may survive said transaction
shall assume this Agreement and become obligated to perform all
10
<PAGE>
the terms and conditions hereof, and Employee's obligations hereunder shall
continue in favor of such surviving corporation.
9. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Attention: _______________
with a copy to:
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Attention: Larry Goldberg
or to Employee at:
_______________________________________
_______________________________________
_______________________________________
_______________________________________
Notice of change of address shall be effective only if made in accordance with
this section.
10. Entire Agreement. Except as expressly provided herein with respect
to certain rights of Employee under the Prior Employment Agreement, the terms of
this Agreement are intended by the parties to be the final and exclusive
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence of any prior or contemporaneous
agreement any and all of which are superceded as of the Effective Time. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
11. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive
11
<PAGE>
compliance by the other party with any provision of this Agreement that such
other party was or is obligated to comply with or perform, provided, however,
that such waiver shall not operate as a waiver of, or estoppel with respect to,
any other or subsequent failure. No failure to exercise and no delay in
exercising any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy or power
hereunder preclude any other or further exercise thereof or the exercise of any
other right, remedy or power provided herein or by law or in equity.
12. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
13. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
14. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ Brian Klosterman
____________________________________________
Brian Klosterman
EMPLOYEE
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
_______________________________________
Its: Chief Executive Officer
_______________________________________
12
Exhibit 10.69
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
December 23, 1996 by and between StarSight Telecast, Inc., a California
corporation ("Company") and Martin W. Henkel ("Employee").
WITNESSETH:
WHEREAS, Company, Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar") and a wholly owned subsidiary of Gemstar ("Sub")
are entering into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger");
WHEREAS, following the Merger, Company desires to obtain the benefit of
continued service of Employee on a part-time basis, on its own behalf and on
behalf of all existing and future "Affiliated Companies" (defined as any
corporation or other business entity or entities that directly or indirectly
controls, is controlled by, or is under common control with the Company), and
Employee desires to render services to Company and its Affiliated Companies;
WHEREAS, this Agreement shall become effective, without any further
action of either party, at such time, and only at such time, as a merger
agreement regarding the Merger is duly filed with the California Secretary of
State as provided by the Merger Agreement (the "Effective Time");
WHEREAS, if the Merger Agreement is terminated in accordance with its
terms, this Agreement shall also terminate and become null and void; and
WHEREAS, Company and Employee desire to set forth in this Agreement the
terms and conditions of Employee's employment with Company following the
Effective Time.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Period of Employment.
<PAGE>
(a) Basic Term. The Company hereby employs Employee on a
part-time basis to render services to the Company in the position and with the
duties and responsibilities described in Section 2 for the period (the "Period
of Employment") commencing, without any further action by either party, at the
Effective Time and ending on the earlier of (i) six months following the date of
the Effective Time (the "Term Date") and (ii) the date the Period of Employment
is terminated in accordance with Section 4.
(b) Renewal. Subject to Section 4, the Employee's employment
will be automatically renewed for an additional six month period (without any
action by either party) on the Term Date and on each anniversary thereof, unless
either party gives to the other written notice sixty (60) days in advance of the
beginning of any six month renewal period that the Period of Employment is to be
terminated. Either party's right to terminate the Period of Employment under
this Section 1(b), instead of renewing the Agreement, shall be with or without
cause.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with the
Company in such positions as may be reasonably required by the Board of
Directors of the Company (the "Board"). Employee agrees to devote to the
Company, as requested by the Company from time to time, ten normal work days per
month.
(b) Other Activities. Employee, during the Period of
Employment, will not (i) accept any other employment, or (ii) engage in any
other business activity (whether or not pursued for pecuniary advantage) that is
competitive with, or that places him in a competing position to that of, the
Company or any Affiliated Company.
Employee and the Company agree that the terms of Employee's
employment under this Agreement constitute a "constructive termination" of
Employee under Section 4(b)(ii) of the employment agreement by and between
Employee and the Company effective on December 2, 1995 (the "Prior Employment
Agreement"), and, as such, entitle Employee to certain benefits, including but
not limited to, severance payments under Section 5(a) of the Prior Employment
Agreement, acceleration of Employee's options pursuant to Section 2(e) of the
Prior Employment Agreement and a "gross-up" pursuant to Section 5(b) of the
Prior Employment Agreement for any excise tax applicable to such severance
payments under Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"). Under Section 5(a) of the Prior Employment Agreement, Employee
will receive a lump sum cash payment on the Effective Time equal to his base
salary, car allowance and guaranteed bonus for the remainder
2
<PAGE>
of the contract period. For example, assuming an Effective Time of March 15,
1997, such lump sum payment would be $636,437.
3. Compensation, Benefits, Etc.
(a) Sabbatical; Compensation. During the Period of Employment
and commencing immediately upon the Effective Time, Employee shall be entitled
to a paid sabbatical of two months' duration pursuant to the terms of the
Company's Sabbatical Program at full salary (based on Employee's salary then in
effect on the effective date of the Merger). At the end of the sabbatical period
and continuing until the end of the Period of Employment, and in consideration
of the services to be rendered hereunder, including, without limitation,
services to any Affiliated Company, Employee shall be paid a monthly salary of
Ten Thousand Dollars ($10,000) (the "Monthly Salary"), payable in installments
at the times and pursuant to the procedures regularly established, and as they
may be amended, by the Company during the term of this Agreement.
(b) Benefits. As Employee becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits made available generally to
executives of the Company. The amount and extent of benefits to which Employee
is entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(c) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate. Nothing
in this section shall affect any entitlement of Employee's heirs to the benefits
under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive
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days in any twelve-month period, then, to the extent permitted by law, the
Period of Employment shall terminate on and the compensation to which Employee
is entitled pursuant to Section 3(a) shall be paid up through the last day of
the month in which the Board determines Employee to be disabled hereunder, and
thereafter the Company's obligations hereunder shall terminate. Nothing in this
section shall affect Employee's rights under any disability plan in which he is
a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon notice to Employee. Termination shall be for "Cause" if: (i) Employee has
engaged in illegal or other wrongful conduct substantially detrimental to the
business or reputation of the Company or any Affiliated Company, or is charged
with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board; provided, that
the Board has given Employee written notice of such refusal or failure and
Employee fails to comply with such direction or order within 30 days after the
date of such notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
(d) By Company Without Cause. The Company may terminate the
Period of Employment without Cause at any time upon 30 days' advance written
notice to Employee. Upon such termination, and subject to Employee's compliance
with the provisions of Sections 5 and 6 hereof, the Company shall pay Employee a
lump sum payment upon such termination of an amount equal to the remaining
amounts payable by the Company pursuant to Section 3(a) through the Term Date,
and thereafter all obligations of the Company hereunder shall terminate.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that
all personal property, including, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints and other documents, or
materials, or copies thereof, Proprietary Information (as defined below),
furnished to or prepared by Employee in the course of or incident to his
employment, including, without limitation, records and any other materials
pertaining to Invention Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company provided that, if at the time of the
termination of the Period of Employment, Employee is a member of the Board,
Employee shall not be deemed to
4
<PAGE>
have resigned as a member of the Board as a result of such termination.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 5, 6 and 7 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and
any idea in whatever form, tangible or intangible, pertaining in any manner to
the business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this Agreement, and (ii) after termination of the Period
of Employment as specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
5(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 5(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated Company) any business of any kind in which it is engaged,
including, without limitation, the solicitation of or interference with any of
its suppliers or customers, (ii) employ, solicit for employment, or recommend
for employment any person employed by the Company, or any Affiliated Company,
during the period of such person's employment and for a
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<PAGE>
period of one year thereafter, or (iii) engage in any business activity that is
competitive with the Company, unless Employee can prove that action taken in
contravention of this Section 5(c)(iii) was done without the use of any
Proprietary Information; provided, that in no event shall Employee engage in
such competitive activities during the period which Employee continues to
receive payments pursuant to Section 4 above. For purposes of this Section 5(c),
"competitive activities" shall be business activities that are directly
competitive with an existing or presently planned business of the Company on the
date of termination, which activity constitutes or is anticipated to constitute
more than 15% of revenues of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit
any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code ss. 3426), or otherwise available under law.
6. Employee Inventions and Ideas.
(a) Defined; Statutory Notice. The term "Invention Ideas"
means any and all ideas, processes, trademarks, service marks, inventions,
technology, computer programs, original works of authorship, designs, formulas,
discoveries, patents, copyrights, and all improvements, rights, and claims
related to the foregoing that are conceived, developed, or reduced to practice
by the Employee alone or with others except to the extent that California Labor
Code Section 2870 lawfully prohibits the assignment of rights in such ideas,
processes, inventions, etc. Section 2870(a) provides:
Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee
for the employer.
Employee hereby acknowledges that he understands the foregoing
limitations created by Section 2870.
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(b) Disclosure. Employee agrees to maintain adequate and
current written records on the development of all Invention Ideas and to
disclose promptly to the Company all Invention Ideas and relevant records, which
records will remain the sole property of the Company. Employee further agrees
that all information and records pertaining to any idea, process, trademark,
service mark, invention, technology, computer program, original work of
authorship, design, formula, discovery, patent, or copyright that Employee does
not believe to be an Invention Idea, but is conceived, developed, or reduced to
practice by Employee (alone or with others) during his Period of Employment or
during the one year period following termination of employment, shall be
promptly disclosed to the Company (such disclosure to be received in
confidence). The Company shall examine such information to determine if in fact
the idea, process, or invention, etc., is an Invention Idea subject to this
Agreement.
(c) Assignment. Employee agrees to assign to the Company,
without further consideration, his entire right, title, and interest (throughout
the United States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole property of
the Company, whether or not patentable. In the event any Invention Idea shall be
deemed by the Company to be patentable or otherwise registerable, Employee shall
assist the Company (at its expense) in obtaining letters patent, copyright,
trademark, or other applicable intellectual property registrations thereon and
shall execute all documents and do all other things (including testifying at the
Company's expense) necessary or proper to obtain letters patent, copyright,
trademark, or other applicable intellectual property registrations thereon and
to vest the Company, or any Affiliated Company specified by the Board, with full
title thereto. Should the Company be unable to secure Employee's signature on
any document necessary to apply for, prosecute, obtain, or enforce any patent,
copyright, or other right or protection relating to any Invention Idea, whether
due to the Employee's mental or physical incapacity or any other cause, Employee
hereby irrevocably designates and appoints Company and each of its duly
authorized officers and agents as the Employee's agent and attorney in fact, to
act for and in the Employee's behalf and stead and to execute and file any such
document, and to do all other lawfully permitted acts to further the
prosecution, issuance, and enforcement of patents, copyrights, or the rights or
protections with the same force and effect as if executed and delivered by
Employee. Employee hereby agrees to maintain, update, improve and modify the
Invention Ideas, for so long as he is living, regardless of whether the Period
of Employment has terminated.
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<PAGE>
(d) Exclusions. Employee acknowledges that there are no ideas,
processes, trademarks, service marks, technology, computer programs, original
works of authorship, designs, formulas, inventions, discoveries, patents,
copyrights, or improvements to the foregoing that he desires to exclude from the
operation of this Agreement, except for the inventions and ideas of Employee and
his associates outside of the Company (i) which were or are developed entirely
by Employee and each such associate entirely outside of his or her activities
for the Company, (ii) which do not relate at the time of conception or reduction
to practice to the Company's business, or actually or demonstrably anticipated
research development, and (iii) which do not result from any work performed by
Employee for the Company. To the best of the Employee's knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, trademarks, service marks, inventions, technology,
computer programs, original works of authorship, designs, formulas, discoveries,
patents, or copyrights that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of
establishing when any idea, process, invention, etc., is first conceived or
developed by Employee, or whether it results from access to Proprietary
Information or the Company's equipment, facilities, and data, Employee agrees
that any idea, process, trademark, service mark, technology, computer program,
original work of authorship, design, formula, invention, discovery, patent,
copyright, or any improvement, rights, or claims related to the foregoing shall
be presumed to be an Invention Idea if it is conceived, developed, used, sold,
exploited, or reduced to practice by Employee or with the aid of Employee within
one (1) year after termination of the Period of Employment. Employee can rebut
the above presumption if he proves that the invention, idea, process, etc., (i)
was first conceived and/or developed prior to the date of this Agreement, (ii)
was first conceived or developed after termination of the Period of Employment,
(iii) was conceived or developed entirely on Employee's own time without using
the Company's equipment, supplies, facilities, or Proprietary Information, and
(iv) did not result from any work performed by Employee for the Company. Nothing
in this Agreement is intended to expand the scope of protection provided
Employee by Sections 2870 through 2872 of the California Labor Code.
7. Assignment: Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to
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<PAGE>
encumbrance or the claims of creditors. Any purported assignment, transfer or
delegation shall be null and void. Nothing in this Agreement shall prevent the
consolidation of the Company with, or its merger into, any other corporation, or
the sale by the Company of all or substantially all of its properties or assets,
or the assignment by the Company of this Agreement and the performance of its
obligations hereunder to any successor in interest or any Affiliated Company.
Subject to the foregoing, this Agreement shall be binding upon and shall inure
to the benefit of the parties and their respective heirs, legal representatives,
successors and permitted assigns, and shall not benefit any person or entity
other than those enumerated above.
In the event of a consolidation or merger of the Company with or into
another corporation, or the sale of all, or substantially all, of the Company's
assets to another corporation, such corporation as may survive said transaction
shall assume this Agreement and become obligated to perform all the terms and
conditions hereof, and Employee's obligations hereunder shall continue in favor
of such surviving corporation.
8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Attention: Martin Henkel
with a copy to:
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Attention: Larry Goldberg
or to Employee at:
Martin Henkel
141 Maricopa Drive
Los Gatos, CA 95032
9
<PAGE>
Notice of change of address shall be effective only if made in accordance with
this section.
9. Entire Agreement. Except as expressly provided herein with respect
to certain rights of Employee under the Prior Employment Agreement, the terms of
this Agreement are intended by the parties to be the final and exclusive
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence of any prior or contemporaneous
agreement any and all of which are superceded as of the Effective Time. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this Agreement that such other party was or is
obligated to comply with or perform, provided, however, that such waiver shall
not operate as a waiver of, or estoppel with respect to, any other or subsequent
failure. No failure to exercise and no delay in exercising any right, remedy or
power hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy or power hereunder preclude any other or
further exercise thereof or the exercise of any other right, remedy or power
provided herein or by law or in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the
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<PAGE>
Company shall be entitled to injunctive relief against Employee in the event of
any breach or threatened breach of any such provisions by Employee, in addition
to any other relief (including damages) available to the Company under this
Agreement or under law.
The parties have duly executed this Agreement as of the date first
written above.
/s/ Martin W. Henkel
____________________________________________
Martin W. Henkel
Employee
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
_______________________________________
Its: Chief Executive Officer
_______________________________________
11
Exhibit 10.70
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
December 23, 1996 by and between StarSight Telecast, Inc., a California
corporation ("Company") and Kenneth A. Milnes ("Employee").
WITNESSETH:
WHEREAS, Company, Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar") and a wholly owned subsidiary of Gemstar ("Sub")
are entering into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger");
WHEREAS, following the Merger, Company desires to obtain the benefit of
continued service of Employee, on its own behalf and on behalf of all existing
and future "Affiliated Companies" (defined as any corporation or other business
entity or entities that directly or indirectly controls, is controlled by, or is
under common control with the Company), and Employee desires to render services
to Company and its Affiliated Companies;
WHEREAS, this Agreement shall become effective, without any further
action of either party, at such time, and only at such time, as a merger
agreement regarding the Merger is duly filed with the California Secretary of
State as provided by the Merger Agreement (the "Effective Time");
WHEREAS, if the Merger Agreement is terminated in accordance with its
terms, this Agreement shall also terminate and become null and void; and
WHEREAS, Company and Employee desire to set forth in this Agreement the
terms and conditions of Employee's employment with Company following the
Effective Time.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. The Company hereby employs Employee to render
services to the Company in the position and with the
<PAGE>
duties and responsibilities described in Section 2 for the period (the "Period
of Employment") commencing, without any further action by either party, at the
Effective Time and ending on the earlier of (i) one year following the date of
the Effective Time (the "Term Date") and (ii) the date the Period of Employment
is terminated in accordance with Section 4.
(b) Renewal. Subject to Section 4, the Employee's employment
will be automatically renewed for an additional one (1) year period (without any
action by either party) on the Term Date and on each anniversary thereof, unless
either party gives to the other written notice ninety (90) days in advance of
the beginning of any one year renewal period that the Period of Employment is to
be terminated. Either party's right to terminate the Period of Employment under
this Section 1(b), instead of renewing the Agreement, shall be with or without
cause.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with the
Company as a Vice President or in such positions as may be reasonably required
by the Board of Directors of the Company (the "Board").
Employee and the Company agree that the terms of Employee's
employment under this Agreement constitute a "constructive termination" of
Employee under Section 4(b)(ii) of the employment agreement by and between
Employee and the Company effective on March 13, 1996 (the "Prior Employment
Agreement"), and, as such, entitle Employee to, severance payments under Section
5(a) of the Prior Employment Agreement, acceleration of Employee's options
pursuant to Section 2(e) of the Prior Employment Agreement and a "gross-up"
pursuant to Section 5(b) of the Prior Employment Agreement for any excise tax
applicable to such severance payments under Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code"). Under Section 5(a) of the Prior
Employment Agreement, Employee will receive a lump sum cash payment on the
Effective Time equal to one year of Employee's current base salary less
applicable withholdings. For example, assuming an Effective Time of March 15,
1997, such lump sum payment would be $198,170.
(b) Other Activities. Employee, during the Period of
Employment, will not (i) accept any other employment, or (ii) engage in any
other business activity (whether or not pursued for pecuniary advantage) that is
competitive with, or that places him in a competing position to that of, the
Company or any Affiliated Company.
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3. Compensation, Benefits, Etc.
(a) Compensation. In consideration of the services to be
rendered hereunder, including, without limitation, services to any Affiliated
Company, Employee shall be paid an annual salary of One Hundred Ninety Thousand
Dollars ($190,000) (the "Annual Salary"), payable in installments at the times
and pursuant to the procedures regularly established, and as they may be
amended, by the Company during the term of this Agreement.
(b) Stock Options. Upon the Effective Time, the Company shall
grant to the Executive a nonqualified stock option under Gemstar's 1994 Stock
Incentive Plan to purchase 30,000 shares of Gemstar Ordinary Shares, par value
$.01 per share (the "Ordinary Shares"), at a price per share equal to the fair
market value of the Ordinary Shares on the day of the Effective Time (the
"Exercise Price"). Such option shall be evidenced by a standard stock option
agreement utilized by Gemstar for the grant of other stock options under such
plan and shall contain vesting and other terms which are consistent with the
grants of stock options made to other executives of the Company.
(c) Benefits. As Employee becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits made available generally to
executives of the Company. The amount and extent of benefits to which Employee
is entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(d) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
(e) Bonus. Employee shall be eligible to receive, in the sole
and absolute discretion of the Board, an annual bonus, in such amount as
determined by the Board in its sole and absolute discretion.
(f) Health Insurance. The Company shall reimburse Employee, up
to $500 per month, for the out-of-pocket costs incurred by Employee with respect
to his health insurance premiums.
4. Termination of Employment.
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(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate. Nothing
in this section shall affect any entitlement of Employee's heirs to the benefits
under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive days in any twelve-month period, then, to
the extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon notice to Employee. Termination shall be for "Cause" if: (i) Employee has
engaged in illegal or other wrongful conduct substantially detrimental to the
business or reputation of the Company or any Affiliated Company, or is charged
with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board; provided, that
the Board has given Employee written notice of such refusal or failure and
Employee fails to comply with such direction or order within 30 days after the
date of such notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
(d) By Company Without Cause. The Company may terminate the
Period of Employment without Cause at any time upon 30 days' advance written
notice to Employee. Upon such termination, and subject to Employee's compliance
with the provisions of Sections 5 and 6 hereof, the Company shall pay Employee a
lump sum payment upon such termination of an amount equal to the lesser of (i)
Employee's Annual Salary, and (ii) the remaining amounts payable by the Company
pursuant to Section 3(a) through the Term Date, and thereafter all obligations
of the Company hereunder shall terminate.
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(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that
all personal property, including, without limitation, all books, manuals,
records, reports, notes, contracts, lists, blueprints and other documents, or
materials, or copies thereof, Proprietary Information (as defined below),
furnished to or prepared by Employee in the course of or incident to his
employment, including, without limitation, records and any other materials
pertaining to Invention Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company provided that, if at the time of the
termination of the Period of Employment, Employee is a member of the Board,
Employee shall not be deemed to have resigned as a member of the Board as a
result of such termination.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 5, 6 and 7 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and
any idea in whatever form, tangible or intangible, pertaining in any manner to
the business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust for the sole benefit of
the Company and not to, directly or indirectly, disclose, use, copy, publish,
summarize or remove from the Company's premises any Proprietary Information (or
remove from the premises any other property of the Company), except (i) during
the Period of Employment to the extent necessary to carry out Employee's
responsibilities under this
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Agreement, and (ii) after termination of the Period of Employment as
specifically authorized in writing by the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
5(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 5(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated Company) any business of any kind in which it is engaged,
including, without limitation, the solicitation of or interference with any of
its suppliers or customers, (ii) employ, solicit for employment, or recommend
for employment any person employed by the Company, or any Affiliated Company,
during the period of such person's employment and for a period of one year
thereafter, or (iii) engage in any business activity that is competitive with
the Company, unless Employee can prove that action taken in contravention of
this Section 5(c)(iii) was done without the use of any Proprietary Information;
provided, that in no event shall Employee engage in such competitive activities
during the period which Employee continues to receive payments pursuant to
Section 4 above. For purposes of this Section 5(c), "competitive activities"
shall be business activities that are directly competitive with an existing or
presently planned business of the Company on the date of termination, which
activity constitutes or is anticipated to constitute more than 15% of revenues
of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit
any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code ss. 3426), or otherwise available under law.
6. Employee Inventions and Ideas.
(a) Defined; Statutory Notice. The term "Invention Ideas"
means any and all ideas, processes, trademarks, service marks, inventions,
technology, computer programs, original works of authorship, designs, formulas,
discoveries, patents, copyrights, and all improvements, rights, and claims
related to the foregoing that are conceived, developed, or reduced to practice
by the Employee alone or with others except to the extent that California Labor
Code Section 2870 lawfully prohibits the assignment of rights in such ideas,
processes, inventions, etc. Section 2870(a) provides:
6
<PAGE>
Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee
for the employer.
Employee hereby acknowledges that he understands the foregoing
limitations created by Section 2870.
(b) Disclosure. Employee agrees to maintain adequate and
current written records on the development of all Invention Ideas and to
disclose promptly to the Company all Invention Ideas and relevant records, which
records will remain the sole property of the Company. Employee further agrees
that all information and records pertaining to any idea, process, trademark,
service mark, invention, technology, computer program, original work of
authorship, design, formula, discovery, patent, or copyright that Employee does
not believe to be an Invention Idea, but is conceived, developed, or reduced to
practice by Employee (alone or with others) during his Period of Employment or
during the one year period following termination of employment, shall be
promptly disclosed to the Company (such disclosure to be received in
confidence). The Company shall examine such information to determine if in fact
the idea, process, or invention, etc., is an Invention Idea subject to this
Agreement.
(c) Assignment. Employee agrees to assign to the Company,
without further consideration, his entire right, title, and interest (throughout
the United States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole property of
the Company, whether or not patentable. In the event any Invention Idea shall be
deemed by the Company to be patentable or otherwise registerable, Employee shall
assist the Company (at its expense) in obtaining letters patent, copyright,
trademark, or other applicable intellectual property registrations thereon and
shall execute all documents and do all other things (including testifying at the
Company's expense) necessary or proper to obtain letters patent, copyright,
trademark, or other applicable
7
<PAGE>
intellectual property registrations thereon and to vest the Company, or any
Affiliated Company specified by the Board, with full title thereto. Should the
Company be unable to secure Employee's signature on any document necessary to
apply for, prosecute, obtain, or enforce any patent, copyright, or other right
or protection relating to any Invention Idea, whether due to the Employee's
mental or physical incapacity or any other cause, Employee hereby irrevocably
designates and appoints Company and each of its duly authorized officers and
agents as the Employee's agent and attorney in fact, to act for and in the
Employee's behalf and stead and to execute and file any such document, and to do
all other lawfully permitted acts to further the prosecution, issuance, and
enforcement of patents, copyrights, or the rights or protections with the same
force and effect as if executed and delivered by Employee. Employee hereby
agrees to maintain, update, improve and modify the Invention Ideas, for so long
as he is living, regardless of whether the Period of Employment has terminated.
(d) Exclusions. Employee acknowledges that there are no ideas,
processes, trademarks, service marks, technology, computer programs, original
works of authorship, designs, formulas, inventions, discoveries, patents,
copyrights, or improvements to the foregoing that he desires to exclude from the
operation of this Agreement, except for the inventions and ideas of Employee and
his associates outside of the Company (i) which were or are developed entirely
by Employee and each such associate entirely outside of his or her activities
for the Company, (ii) which do not relate at the time of conception or reduction
to practice to the Company's business, or actually or demonstrably anticipated
research development, and (iii) which do not result from any work performed by
Employee for the Company. To the best of the Employee's knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, trademarks, service marks, inventions, technology,
computer programs, original works of authorship, designs, formulas, discoveries,
patents, or copyrights that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of
establishing when any idea, process, invention, etc., is first conceived or
developed by Employee, or whether it results from access to Proprietary
Information or the Company's equipment, facilities, and data, Employee agrees
that any idea, process, trademark, service mark, technology, computer program,
original work of authorship, design, formula, invention, discovery, patent,
copyright, or any improvement, rights, or claims related to the foregoing shall
be presumed to be an Invention Idea if it is conceived, developed, used, sold,
8
<PAGE>
exploited, or reduced to practice by Employee or with the aid of Employee within
one (1) year after termination of the Period of Employment. Employee can rebut
the above presumption if he proves that the invention, idea, process, etc., (i)
was first conceived and/or developed prior to the date of this Agreement, (ii)
was first conceived or developed after termination of the Period of Employment,
(iii) was conceived or developed entirely on Employee's own time without using
the Company's equipment, supplies, facilities, or Proprietary Information, and
(iv) did not result from any work performed by Employee for the Company. Nothing
in this Agreement is intended to expand the scope of protection provided
Employee by Sections 2870 through 2872 of the California Labor Code.
7. Assignment: Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the Company with, or its merger into, any other
corporation, or the sale by the Company of all or substantially all of its
properties or assets, or the assignment by the Company of this Agreement and the
performance of its obligations hereunder to any successor in interest or any
Affiliated Company. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective heirs,
legal representatives, successors and permitted assigns, and shall not benefit
any person or entity other than those enumerated above.
In the event of a consolidation or merger of the Company with or into
another corporation, or the sale of all, or substantially all, of the Company's
assets to another corporation, such corporation as may survive said transaction
shall assume this Agreement and become obligated to perform all the terms and
conditions hereof, and Employee's obligations hereunder shall continue in favor
of such surviving corporation.
9
<PAGE>
8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Attention: ___________________
with a copy to:
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Attention: Larry Goldberg
or to Employee at:
______________________________________
______________________________________
______________________________________
______________________________________
Notice of change of address shall be effective only if done in accordance with
this section.
9. Entire Agreement. Except as expressly provided herein with respect
to certain rights of Employee under the Prior Employment Agreement, the terms of
this Agreement are intended by the parties to be the final and exclusive
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence of any prior or contemporaneous
agreement any and all of which are superceded as of the Effective Time. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this
10
<PAGE>
Agreement that such other party was or is obligated to comply with or perform,
provided, however, that such waiver shall not operate as a waiver of, or
estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy or power provided herein or by law or
in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
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<PAGE>
The parties have duly executed this Agreement as of the date first
written above.
/s/ Kenneth A. Milnes
____________________________________________
Kenneth A. Milnes
Employee
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
_______________________________________
Its: Chief Executive Officer
_______________________________________
12
Exhibit 10.71
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
December 23, 1996 by and between StarSight Telecast, Inc., a California
corporation ("Company") and Jon Orlick ("Employee").
WITNESSETH:
WHEREAS, Company, Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar") and a wholly owned subsidiary of Gemstar ("Sub")
are entering into an Agreement and Plan of Merger of even date herewith (the
"Merger Agreement"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger");
WHEREAS, following the Merger, Company desires to obtain the benefit of
continued service of Employee, on its own behalf and on behalf of all existing
and future "Affiliated Companies" (defined as any corporation or other business
entity or entities that directly or indirectly controls, is controlled by, or is
under common control with the Company), and Employee desires to render services
to Company and its Affiliated Companies;
WHEREAS, this Agreement shall become effective, without any further
action of either party, at such time, and only at such time, as a merger
agreement regarding the Merger is duly filed with the California Secretary of
State as provided by the Merger Agreement (the "Effective Time");
WHEREAS, if the Merger Agreement is terminated in accordance with its
terms, this Agreement shall also terminate and become null and void; and
WHEREAS, Company and Employee desire to set forth in this Agreement the
terms and conditions of Employee's employment with Company following the
Effective Time.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree as follows:
1. Period of Employment.
(a) Basic Term. The Company hereby employs Employee to render
services to the Company in the position and with the duties and responsibilities
described in Section 2 for the period
<PAGE>
(the "Period of Employment") commencing, without any further action by either
party, at the Effective Time and ending on the earlier of (i) two years
following the date of the Effective Time (the "Term Date") and (ii) the date the
Period of Employment is terminated in accordance with Section 4.
(b) Renewal. Subject to Section 4, the Employee's employment
will be automatically renewed for an additional one (1) year period (without any
action by either party) on the Term Date and on each anniversary thereof, unless
either party gives to the other written notice ninety (90) days in advance of
the beginning of any one year renewal period that the Period of Employment is to
be terminated. Either party's right to terminate the Period of Employment under
this Section 1(b), instead of renewing the Agreement, shall be with or without
cause.
2. Position, Duties and Responsibilities.
(a) Position. Employee hereby accepts employment with the
Company as a Vice President or in such other position(s) as may be reasonably
required by the Board of Directors of the Company (the "Board").
Employee and the Company agree that the terms of Employee's
employment under this Agreement constitute a "constructive termination" of
Employee under Section 4(b)(ii) of the employment agreement by and between
Employee and the Company effective on June 1, 1996 (the "Prior Employment
Agreement"), and, as such, entitle Employee to, severance payments under Section
5(a) of the Prior Employment Agreement and a "gross-up" pursuant to Section 5(b)
of the Prior Employment Agreement for any excise tax applicable to such
severance payments under Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"). Under Section 5(a) of the Prior Employment Agreement,
Employee will receive a lump sum cash payment on the Effective Time equal to one
year of Employee's current base salary less applicable witihholdings. For
example, assuming an Effective Time of March 15, 1997, such lump sum payment
would be $180,000.
(b) Other Activities. Employee, during the Period of
Employment, will not (i) accept any other employment, or (ii) engage in any
other business activity (whether or not pursued for pecuniary advantage) that is
competitive with, or that places him in a competing position to that of, the
Company or any Affiliated Company.
3. Compensation, Benefits, Etc.
2
<PAGE>
(a) Compensation. In consideration of the services to be
rendered hereunder, including, without limitation, services to any Affiliated
Company, Employee shall be paid an annual salary of One Hundred Eighty Thousand
Dollars ($180,000) (the "Annual Salary"), payable in installments at the times
and pursuant to the procedures regularly established, and as they may be
amended, by the Company during the term of this Agreement.
(b) Stock Options. Upon the Effective Time, the Company shall
grant to the Executive a nonqualified stock option under Gemstar's 1994 Stock
Incentive Plan to purchase 30,000 shares of Gemstar Ordinary Shares, par value
$.01 per share (the "Ordinary Shares"), at a price per share equal to the fair
market value of the Ordinary Shares on the day of the Effective Time (the
"Exercise Price"). Such option shall be evidenced by a standard stock option
agreement utilized by Gemstar for the grant of other stock options under such
plan and shall contain vesting and other terms which are consistent with the
grants of stock options made to other executives of the Company.
(c) Benefits. As Employee becomes eligible therefor, the
Company shall provide Employee with the right to participate in and to receive
benefits from all present and future life, accident, disability, medical,
pension and savings plans and all similar benefits made available generally to
executives of the Company. The amount and extent of benefits to which Employee
is entitled shall be governed by the specific benefit plan, as it may be amended
from time to time.
(d) Expenses. The Company shall reimburse Employee for
reasonable travel and other business expenses incurred by Employee in the
performance of his duties hereunder in accordance with the Company's general
policies, as they may be amended from time to time during the term of this
Agreement.
(e) Bonus. Employee shall also be eligible to receive, in the
sole and absolute discretion of the Board, an annual bonus, in such amounts as
determined by the Board in its sole and absolute discretion.
(f) Automobile Allowance. As additional compensation for
Employee's services to the Company, the Company shall pay Employee a monthly
automobile allowance of $750 during the Period of Employment.
(g) Vacation. Employee shall be entitled to two weeks paid
vacation during the first year of this Agreement. Thereafter, Employee shall be
entitled to three weeks paid vacation.
3
<PAGE>
(h) Relocation. In the event Employee's employment with the
Company requires him to relocate, the parties to this Agreement will mutually
agree, in good faith, on an appropriate relocation reimbursement amount.
4. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Employee. The Company shall pay to Employee's
beneficiaries or estate, as appropriate, the compensation to which he is
entitled pursuant to Section 3(a) through the end of the month in which death
occurs. Thereafter, the Company's obligations hereunder shall terminate. Nothing
in this section shall affect any entitlement of Employee's heirs to the benefits
under any life insurance plan.
(b) By Disability. If, in the sole opinion of the Board,
Employee shall be prevented from properly performing his duties hereunder by
reason of any physical or mental incapacity for a period of more than 150 days
in the aggregate or 120 consecutive days in any twelve-month period, then, to
the extent permitted by law, the Period of Employment shall terminate on and the
compensation to which Employee is entitled pursuant to Section 3(a) shall be
paid up through the last day of the month in which the Board determines Employee
to be disabled hereunder, and thereafter the Company's obligations hereunder
shall terminate. Nothing in this section shall affect Employee's rights under
any disability plan in which he is a participant.
(c) By Company For Cause. The Company may terminate, without
liability, the Period of Employment for Cause (as defined below) at any time
upon notice to Employee. Termination shall be for "Cause" if: (i) Employee has
engaged in illegal or other wrongful conduct substantially detrimental to the
business or reputation of the Company or any Affiliated Company, or is charged
with or convicted of a felony; (ii) Employee refuses or fails to act in
accordance with any reasonable direction or order of the Board; provided, that
the Board has given Employee written notice of such refusal or failure and
Employee fails to comply with such direction or order within 30 days after the
date of such notice; or (iii) Employee has engaged in any fraud, embezzlement,
misappropriation or similar conduct against the Company.
(d) By Company Without Cause. The Company may terminate the
Period of Employment without Cause at any time upon 30 days' advance written
notice to Employee. Upon such termination, and subject to Employee's compliance
with the provisions of Sections 5 and 6 hereof, the Company shall pay
4
<PAGE>
Employee a lump sum payment upon such termination of an amount equal to the
lesser of (i) Employee's Annual Salary, and (ii) the remaining amounts payable
by the Company pursuant to Section 3(a) through the Term Date, and thereafter
all obligations of the Company hereunder shall terminate.
(e) Termination Obligations.
(i) Employee hereby acknowledges and agrees that all
personal property, including, without limitation, all books, manuals, records,
reports, notes, contracts, lists, blueprints and other documents, or materials,
or copies thereof, Proprietary Information (as defined below), furnished to or
prepared by Employee in the course of or incident to his employment, including,
without limitation, records and any other materials pertaining to Invention
Ideas (as defined below), belong to the Company.
(ii) Upon termination of the Period of Employment,
Employee shall be deemed to have resigned from all offices then held with the
Company or any Affiliated Company provided that, if at the time of the
termination of the Period of Employment, Employee is a member of the Board,
Employee shall not be deemed to have resigned as a member of the Board as a
result of such termination.
(iii) The representations and warranties contained
herein and Employee's obligations under Sections 5, 6 and 7 shall survive
termination of the Period of Employment and the expiration of this Agreement.
5. Proprietary Information.
(a) Defined. "Proprietary Information" is all information and
any idea in whatever form, tangible or intangible, pertaining in any manner to
the business of the Company or any Affiliated Company, or to its clients,
consultants or business associates, unless: (i) the information is or becomes
publicly known through lawful means; (ii) the information was rightfully in
Employee's possession or part of his general knowledge prior to his employment
by the Company; or (iii) the information is disclosed to Employee without
confidential or proprietary restriction by a third party who rightfully
possesses the information (without confidential or proprietary restriction) and
did not learn of it, directly or indirectly, from the Company.
(b) General Restrictions on Use. Employee agrees to hold all
Proprietary Information in strict confidence and trust
5
<PAGE>
for the sole benefit of the Company and not to, directly or indirectly,
disclose, use, copy, publish, summarize or remove from the Company's premises
any Proprietary Information (or remove from the premises any other property of
the Company), except (i) during the Period of Employment to the extent necessary
to carry out Employee's responsibilities under this Agreement, and (ii) after
termination of the Period of Employment as specifically authorized in writing by
the Board.
(c) Interference with Business; Competitive Activities.
Employee acknowledges that pursuit of the activities prohibited by this Section
5(c) would necessarily involve the use or disclosure of Proprietary Information
in breach of Section 5(b), but that proof of such breach would be extremely
difficult. To prevent such disclosure, use and breach and in consideration of
employment under this Agreement, Employee agrees for a period of one year after
termination of the Period of Employment, he shall not for himself or any third
party, directly or indirectly, (i) divert or attempt to divert from the Company
(or any Affiliated Company) any business of any kind in which it is engaged,
including, without limitation, the solicitation of or interference with any of
its suppliers or customers, (ii) employ, solicit for employment, or recommend
for employment any person employed by the Company, or any Affiliated Company,
during the period of such person's employment and for a period of one year
thereafter, or (iii) engage in any business activity that is competitive with
the Company, unless Employee can prove that action taken in contravention of
this Section 5(c)(iii) was done without the use of any Proprietary Information;
provided, that in no event shall Employee engage in such competitive activities
during the period which Employee continues to receive payments pursuant to
Section 4 above. For purposes of this Section 5(c), "competitive activities"
shall be business activities that are directly competitive with an existing or
presently planned business of the Company on the date of termination, which
activity constitutes or is anticipated to constitute more than 15% of revenues
of the Company.
(d) Remedies. Nothing in this Section 6 is intended to limit
any remedy of the Company under the California Uniform Trade Secrets Act
(California Civil Code ss. 3426), or otherwise available under law.
6. Employee Inventions and Ideas.
(a) Defined; Statutory Notice. The term "Invention Ideas"
means any and all ideas, processes, trademarks, service marks, inventions,
technology, computer programs, original works of authorship, designs, formulas,
discoveries, patents,
6
<PAGE>
copyrights, and all improvements, rights, and claims related to the foregoing
that are conceived, developed, or reduced to practice by the Employee alone or
with others except to the extent that California Labor Code Section 2870
lawfully prohibits the assignment of rights in such ideas, processes,
inventions, etc. Section 2870(a) provides:
Any provision in an employment agreement which provides that
an employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(i) Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer.
(ii) Result from any work performed by the employee
for the employer.
Employee hereby acknowledges that he understands the foregoing
limitations created by Section 2870.
(b) Disclosure. Employee agrees to maintain adequate and
current written records on the development of all Invention Ideas and to
disclose promptly to the Company all Invention Ideas and relevant records, which
records will remain the sole property of the Company. Employee further agrees
that all information and records pertaining to any idea, process, trademark,
service mark, invention, technology, computer program, original work of
authorship, design, formula, discovery, patent, or copyright that Employee does
not believe to be an Invention Idea, but is conceived, developed, or reduced to
practice by Employee (alone or with others) during his Period of Employment or
during the one year period following termination of employment, shall be
promptly disclosed to the Company (such disclosure to be received in
confidence). The Company shall examine such information to determine if in fact
the idea, process, or invention, etc., is an Invention Idea subject to this
Agreement.
(c) Assignment. Employee agrees to assign to the Company,
without further consideration, his entire right, title, and interest (throughout
the United States and in all foreign countries), free and clear of all liens and
encumbrances, in and to each Invention Idea, which shall be the sole property of
the Company, whether or not patentable. In the event any Invention
7
<PAGE>
Idea shall be deemed by the Company to be patentable or otherwise registerable,
Employee shall assist the Company (at its expense) in obtaining letters patent,
copyright, trademark, or other applicable intellectual property registrations
thereon and shall execute all documents and do all other things (including
testifying at the Company's expense) necessary or proper to obtain letters
patent, copyright, trademark, or other applicable intellectual property
registrations thereon and to vest the Company, or any Affiliated Company
specified by the Board, with full title thereto. Should the Company be unable to
secure Employee's signature on any document necessary to apply for, prosecute,
obtain, or enforce any patent, copyright, or other right or protection relating
to any Invention Idea, whether due to the Employee's mental or physical
incapacity or any other cause, Employee hereby irrevocably designates and
appoints Company and each of its duly authorized officers and agents as the
Employee's agent and attorney in fact, to act for and in the Employee's behalf
and stead and to execute and file any such document, and to do all other
lawfully permitted acts to further the prosecution, issuance, and enforcement of
patents, copyrights, or the rights or protections with the same force and effect
as if executed and delivered by Employee. Employee hereby agrees to maintain,
update, improve and modify the Invention Ideas, for so long as he is living,
regardless of whether the Period of Employment has terminated.
(d) Exclusions. Employee acknowledges that there are no ideas,
processes, trademarks, service marks, technology, computer programs, original
works of authorship, designs, formulas, inventions, discoveries, patents,
copyrights, or improvements to the foregoing that he desires to exclude from the
operation of this Agreement, except for the inventions and ideas of Employee and
his associates outside of the Company (i) which were or are developed entirely
by Employee and each such associate entirely outside of his or her activities
for the Company, (ii) which do not relate at the time of conception or reduction
to practice to the Company's business, or actually or demonstrably anticipated
research development, and (iii) which do not result from any work performed by
Employee for the Company. To the best of the Employee's knowledge, there is no
existing contract in conflict with this Agreement or any other contract to
assign ideas, processes, trademarks, service marks, inventions, technology,
computer programs, original works of authorship, designs, formulas, discoveries,
patents, or copyrights that is now in existence between Employee and any other
person or entity.
(e) Post-Termination Period. Because of the difficulty of
establishing when any idea, process, invention, etc., is first conceived or
developed by Employee, or whether it
8
<PAGE>
results from access to Proprietary Information or the Company's equipment,
facilities, and data, Employee agrees that any idea, process, trademark, service
mark, technology, computer program, original work of authorship, design,
formula, invention, discovery, patent, copyright, or any improvement, rights, or
claims related to the foregoing shall be presumed to be an Invention Idea if it
is conceived, developed, used, sold, exploited, or reduced to practice by
Employee or with the aid of Employee within one (1) year after termination of
the Period of Employment. Employee can rebut the above presumption if he proves
that the invention, idea, process, etc., (i) was first conceived and/or
developed prior to the date of this Agreement, (ii) was first conceived or
developed after termination of the Period of Employment, (iii) was conceived or
developed entirely on Employee's own time without using the Company's equipment,
supplies, facilities, or Proprietary Information, and (iv) did not result from
any work performed by Employee for the Company. Nothing in this Agreement is
intended to expand the scope of protection provided Employee by Sections 2870
through 2872 of the California Labor Code.
7. Assignment: Successors and Assigns.
Employee agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Employee's rights
be subject to encumbrance or the claims of creditors. Any purported assignment,
transfer or delegation shall be null and void. Nothing in this Agreement shall
prevent the consolidation of the Company with, or its merger into, any other
corporation, or the sale by the Company of all or substantially all of its
properties or assets, or the assignment by the Company of this Agreement and the
performance of its obligations hereunder to any successor in interest or any
Affiliated Company. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective heirs,
legal representatives, successors and permitted assigns, and shall not benefit
any person or entity other than those enumerated above.
In the event of a consolidation or merger of the Company with or into
another corporation, or the sale of all, or substantially all, of the Company's
assets to another corporation, such corporation as may survive said transaction
shall assume this Agreement and become obligated to perform all the terms and
conditions hereof, and Employee's obligations hereunder shall continue in favor
of such surviving corporation.
9
<PAGE>
8. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand or mailed, postage prepaid, by certified or registered
mail, return receipt requested, and addressed to the Company at:
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Attention: ___________________
with a copy to:
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Attention: Larry Goldberg
or to Employee at:
______________________________________
______________________________________
______________________________________
______________________________________
Notice of change of address shall be effective only if done in accordance with
this section.
9. Entire Agreement. Except as expressly provided herein with respect
to certain rights of Employee under the Prior Employment Agreement, the terms of
this Agreement are intended by the parties to be the final and exclusive
expression of their agreement with respect to the employment of Employee by the
Company and may not be contradicted by evidence of any prior or contemporaneous
agreement any and all of which are superceded as of the Effective Time. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding
involving this Agreement.
10. Amendments; Waivers. This Agreement may not be modified, amended or
terminated except by an instrument in writing, signed by Employee and by a duly
authorized representative of the Company other than Employee. By an instrument
in writing similarly executed, either party may waive compliance by the other
party with any provision of this
10
<PAGE>
Agreement that such other party was or is obligated to comply with or perform,
provided, however, that such waiver shall not operate as a waiver of, or
estoppel with respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy or power hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy or power hereunder preclude any other or further exercise thereof
or the exercise of any other right, remedy or power provided herein or by law or
in equity.
11. Severability; Enforcement. If any provision of this Agreement, or
the application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
12. Governing Law. The validity, interpretation, enforceability and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of California.
13. Injunctive Relief. The parties agree that in the event of any
breach or threatened breach of any of the covenants in Section 6, the damage or
imminent damage to the value and the goodwill of the Company's business will be
irreparable and extremely difficult to estimate, making any remedy at law or in
damages inadequate. Accordingly, the parties agree that the Company shall be
entitled to injunctive relief against Employee in the event of any breach or
threatened breach of any such provisions by Employee, in addition to any other
relief (including damages) available to the Company under this Agreement or
under law.
11
<PAGE>
The parties have duly executed this Agreement as of the date first
written above.
/s/ Jonathan Orlick
______________________________________
Jonathan Orlick
Employee
STARSIGHT TELECAST, INC.
By: /s/ Larry W. Wangberg
_________________________________
Its: Chief Executive Officer
_________________________________
12
<TABLE>
Exhibit 11.1
STARSIGHT TELECAST, INC.
Computation of Net Loss Per Share (in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Twelve Months Twelve Months Six Months Twelve Months
Ended Ended Ended Ended
December 31, December 31, December 31, June 30,
1996 1995 1994 1994
-------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Loss before cumulative effect
of accounting change $ (25,049) $ (31,780) $ (20,261) $ (20,555)
Cumulative effect of accounting
change (1,172)
-------------- ---------- ---------- --------------
Net loss $ (25,049) $ (31,780) $ (21,433) $ (20,555)
============== ========== ========== ==============
Primary shares outstanding:
Common shares 24,783,159 21,163,768 20,799,445 19,082,759
============== ========== ========== ==============
Loss per common share:
Loss before cumulative effect
of accounting change $ (1.01) $ (1.50) $ (0.97) $ (1.08)
Cumulative effect of accounting
change (0.06)
-------------- ---------- ---------- --------------
Primary net loss per share $ (1.01) $ (1.50) $ (1.03) $ (1.08)
============== ========== ========== ==============
Fully diluted shares outstanding:
Common shares and common
share equivalents 25,940,040 21,426,537 21,629,022 20,809,770
============== ========== ========== ==============
Loss per common share:
Loss before cumulative effect
of accounting change $ (0.97) $ (1.48) $ (0.94) $ (0.99)
Cumulative effect of accounting
change (0.05)
-------------- ---------- ---------- --------------
Fully diluted net loss per share (1) $ (0.97) $ (1.48) $ (0.99) $ (0.99)
============== ========== ========== ==============
<FN>
(1) Fully Diluted Net Loss Per Common Share has been presented in accordance
with Regulation S-K Item 601(b)(11) even though the amount of fully
diluted loss per share is not required to be presented in the statement of
operations under the provisons of APB Opinion No. 15 because of the
anti-dilutive effects of including common stock equivalents.
</FN>
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
33-68758 and 33-87660 of StarSight Telecast, Inc. on Forms S-8 of our report
dated March 7, 1997, (which report expresses an unqualified opinion on such
financial statements and includes an explanatory paragraph relating to a change
in accounting for legal costs incurred in connection with patent infringement
litigation effective July 1, 1994), appearing in this Annual Report on Form 10-K
of StarSight Telecast, Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
San Francisco, California
March 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 25,708
<SECURITIES> 1,989
<RECEIVABLES> 3,047
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,096
<PP&E> 5,725
<DEPRECIATION> 4,651
<TOTAL-ASSETS> 35,031
<CURRENT-LIABILITIES> 15,493
<BONDS> 0
<COMMON> 125,972
0
0
<OTHER-SE> (116,134)
<TOTAL-LIABILITY-AND-EQUITY> 35,031
<SALES> 8,698
<TOTAL-REVENUES> 8,698
<CGS> 1,544
<TOTAL-COSTS> 32,114
<OTHER-EXPENSES> 801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (25,049)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,049)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
