<PAGE>
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
FILED PURSUANT TO RULE 14A-6(E)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
<TABLE>
<S> <C>
[_ Preliminary]Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
(AS PERMITTED BY RULE 14A-6(E)(2))
</TABLE>
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
STARSIGHT TELECAST, INC.
-----------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STARSIGHT TELECAST, INC.
-----------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1)Title of each class of securities to which transaction applies:
STARSIGHT TELECAST, INC. COMMON STOCK, NO PAR VALUE
---------------------------------------------------------------------------
(2)Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
(3)
--------------------------------------------------------------------------
(4)Proposed maximum aggregate value of transaction:
---------------------------------------
(5)Total fee paid:
----------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1)Amount Previously Paid: __________________________________________________
(2)Form, Schedule or Registration Statement No.: ____________________________
(3)Filing Party: ____________________________________________________________
(4)Date Filed: ______________________________________________________________
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
135 NORTH LOS ROBLES AVENUE, SUITE 800
PASADENA, CALIFORNIA 91101
April 18, 1997
Dear Member:
The Annual Meeting (the "Gemstar Annual Meeting") of the Members
(hereinafter, "Shareholders") of Gemstar International Group Limited, a
British Virgin Islands corporation ("Gemstar"), will be held at 7:00 a.m.,
California time, on May 1, 1997 at 2-29-18 Nishi-Ikebukuro, Toshima-ku, Tokyo
171, Japan.
At the Gemstar Annual Meeting, you will be asked to consider and vote upon a
proposal to approve the issuance of Gemstar Ordinary Shares, par value $.01
per share ("Gemstar Ordinary Shares"), as contemplated by the Agreement and
Plan of Merger, dated as of December 23, 1996 (the "Merger Agreement"), by and
among Gemstar, StarSight Telecast, Inc., a California corporation
("StarSight"), and G/S Acquisition Subsidiary, a newly-formed, wholly-owned
California subsidiary of Gemstar ("Sub"). The Merger Agreement provides for a
merger pursuant to which Sub will be merged with and into StarSight (the
"Merger"), whereby, among other things, StarSight will survive the Merger and
become a wholly-owned subsidiary of Gemstar.
In connection with the Merger, (i) each share of StarSight common stock, no
par value ("StarSight 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 shares (the
"Exchange Ratio") of Gemstar Ordinary Shares; no fractional shares of Gemstar
Ordinary Shares will be issued in the Merger and, in lieu thereof, a cash
payment will be made (see the section of the accompanying Joint Proxy
Statement/Prospectus entitled "THE PLAN OF MERGER--Exchange of Certificate"
which describes how the value of such fractional shares will be determined);
(ii) each stock option to purchase shares of StarSight Common Stock (the
"Stock Options") outstanding immediately prior to the Effective Time under the
StarSight's 1989 Stock Incentive Program (the "Stock Option Plan") which has
not been exercised in accordance with its terms, will be assumed by Gemstar
such that each Stock Option will be deemed to constitute an option to acquire,
on substantially the same terms and conditions as were applicable under such
Stock Option, the number, rounded down to the nearest whole integer, of full
shares of Gemstar Ordinary Shares the holder of such Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
Stock Option in full, including as to unvested shares, immediately prior to
the Effective Time, at a price per share equal to (y) the exercise price per
share for the shares of StarSight Common Stock otherwise purchasable pursuant
to such Stock Option divided by (z) the Exchange Ratio, with such exercise
price per share rounded up to the nearest whole cent; and (iii) each stock
purchase warrant issued by StarSight to purchase shares of StarSight Common
Stock (collectively, the "Warrants"), will in accordance with its terms, be
adjusted (an "Adjusted Warrant") to become exercisable for, or exchangeable
for a new warrant (on substantially the same terms) that would be exercisable
for, the number of shares of Gemstar Ordinary Shares equal to the Warrant
Conversion Number (as defined below). The exercise price of any Adjusted
Warrant (the "Adjusted Exercise Price") will be an amount equal to the
exercise price of the Warrant related to such Adjusted Warrant as of the date
of the Merger Agreement divided by the Exchange Ratio. The "Warrant Conversion
Number" for any Adjusted Warrant will be equal to the number of shares
purchasable pursuant to the Warrant related to such Adjusted Warrant as of the
date of the Merger Agreement multiplied by the Exchange Ratio.
Gemstar's Board of Directors has received an opinion of Hambrecht & Quist,
Gemstar's financial advisor, that, as of the date of and based upon and
subject to certain matters stated in such opinion, the Exchange Ratio was
fair, from a financial point of view, to Gemstar and its Shareholders. In the
event that the issuance of the Gemstar Ordinary Shares as contemplated by the
Merger Agreement is approved by the affirmative vote of the holders of a
majority of the shares of Gemstar Ordinary Shares voted at the Gemstar Annual
Meeting and the Merger is subsequently challenged, Gemstar may argue that an
individual Shareholder who voted in favor of
<PAGE>
approving the issuance of the Gemstar Ordinary Shares is estopped from
challenging the issuance of Gemstar Ordinary Shares in the Merger under
applicable law.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to approve and adopt a proposal to increase the number of
Gemstar Ordinary Shares available for issuance under Gemstar's 1994 Stock
Incentive Plan, as amended (the "Stock Incentive Plan"), by 3,500,000 Gemstar
Ordinary Shares and to authorize Gemstar's Board of Directors to amend the
Stock Incentive Plan accordingly (the "Stock Incentive Plan Proposal").
Approval and adoption of the Stock Incentive Plan Proposal is being requested,
in part, in order to provide for sufficient shares to accommodate the
assumption of the Stock Options in accordance with the terms of the Merger
Agreement, if the issuance of Gemstar Ordinary Shares as contemplated by the
Merger Agreement is approved. If the issuance of Gemstar Ordinary Shares is
approved by the Shareholders, but the Stock Incentive Plan Proposal is not,
approval of the issuance of Gemstar Ordinary Shares will be deemed to
constitute approval of the assumption by Gemstar of the outstanding Stock
Options under the Stock Option Plan as of the Effective Time of the Merger.
This assumption would be on a basis reflecting a conversion of the Stock
Options in the Merger into options to purchase Gemstar Ordinary Shares, with
appropriate adjustments to the numbers of shares and the exercise price of the
Stock Options as provided in the Merger Agreement. The Stock Options, in these
circumstances, would not be issued under the Stock Incentive Plan. Further, if
the Stock Incentive Plan Proposal is not approved by the Shareholders but the
issuance of Gemstar Ordinary Shares is approved, certain options that are to
be granted under the Stock Incentive Plan to certain StarSight executives upon
the Effective Time of the Merger will be granted outside of the Stock
Incentive Plan. Accordingly, a vote approving the issuance of Gemstar Ordinary
Shares as contemplated by the Merger Agreement is effectively a vote ratifying
the grant of such options that are to be granted to certain StarSight
executives upon the Effective Time of the Merger. If the Stock Incentive Plan
Proposal is approved and the issuance of Gemstar Ordinary Shares in connection
with the Merger is approved, such options to be granted to certain StarSight
executives will be granted under the Stock Incentive Plan and the approval of
the Stock Incentive Plan is such case has the effect of ratifying the grants
of the options.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to elect Dr. George F. Carrier and Teruyuki Toyama
(collectively, the "Director Nominees") to another term as Class II directors.
Dr. George F. Carrier was appointed a director of Gemstar in August 1994. Mr.
Teruyuki Toyama has been the President and Chief Executive Officer of Overseas
Carrier Services Co., Ltd. since 1993 and was appointed a director of Gemstar
in August 1994. If elected, each will serve as a director until the 2000
Annual Meeting, subject to the provisions of Gemstar's Amended and Restated
Articles of Association.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
further be asked to ratify the appointment of KPMG Peat Marwick LLP as
Gemstar's independent auditors for the year ended March 31, 1998.
The rules of The Nasdaq National Market require that the Gemstar
Shareholders approve the issuance of the Gemstar Ordinary Shares pursuant to
the Merger Agreement by the affirmative vote of the holders of a majority of
the shares of Gemstar Ordinary Shares voted at the Gemstar Annual Meeting, in
person or by proxy. No dissenters' rights are available to the Gemstar
Shareholders in connection with the Merger. Approval of the Stock Incentive
Plan Proposal, the election of Dr. George F. Carrier and Teruyuki Toyama as
directors of Gemstar, and ratification of the appointment of KPMG Peat Marwick
LLP as Gemstar's independent auditors also will require the affirmative vote
of a majority of the Gemstar Ordinary Shares which are present or represented
at the Gemstar Annual Meeting and entitled to vote thereon and are actually
voted. Abstentions and broker non-votes will have no effect on the results,
although they will be counted for purposes of determining the presence of a
quorum for the conduct of business at the Gemstar Annual Meeting.
StarSight's shareholders will consider and vote upon a proposal to approve
and adopt the Merger Agreement and the Merger at a separate meeting to be held
on May 1, 1997. If the requisite shareholder approval of Gemstar and StarSight
is received, the Merger is expected to be consummated on or before May 2,
1997.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS APPROVED
UNANIMOUSLY THE MERGER AGREEMENT AND THE TRANSACTIONS PROVIDED FOR THEREIN,
INCLUDING THE MERGER, AND THE STOCK INCENTIVE PLAN
2
<PAGE>
PROPOSAL, AND HAS CONCLUDED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF
GEMSTAR AND ITS SHAREHOLDERS. YOUR BOARD OF DIRECTORS HAS RECOMMENDED
UNANIMOUSLY THAT THE SHAREHOLDERS OF GEMSTAR APPROVE THE ISSUANCE OF GEMSTAR
ORDINARY SHARES IN CONNECTION WITH THE MERGER AGREEMENT AND THE TRANSACTIONS
PROVIDED FOR THEREIN, INCLUDING THE MERGER, AND THE STOCK INCENTIVE PLAN
PROPOSAL. YOUR BOARD OF DIRECTORS FURTHER RECOMMENDS A VOTE FOR THE ELECTION
OF THE DIRECTOR NOMINEES AND A VOTE FOR RATIFICATION OF THE APPOINTMENT OF
KPMG PEAT MARWICK LLP AS GEMSTAR'S INDEPENDENT AUDITORS FOR THE YEAR ENDING
MARCH 31, 1998.
In the material accompanying this letter, you will find a Notice of the
Annual Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by Shareholders at the Gemstar Annual Meeting and a
proxy. The Joint Proxy Statement/Prospectus more fully describes the terms of
the Merger Agreement, the Merger and the Stock Incentive Plan Proposal and
includes information about Gemstar and StarSight. The Merger Agreement is
attached as Appendix A to the Joint Proxy Statement/Prospectus.
All Shareholders are cordially invited to attend the Gemstar Annual Meeting
in person. However, whether or not you plan to attend the Gemstar Annual
Meeting, please complete, sign, date and return your proxy in the enclosed
envelope. If you attend the Gemstar Annual Meeting, you may vote in person if
you wish, even though you have previously returned your proxy. It is important
that your shares be represented and be voted at the Gemstar Annual Meeting.
Sincerely,
/s/ Henry C. Yuen
HENRY C. YUEN
President and Chief Executive Officer
3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
135 NORTH LOS ROBLES AVENUE, SUITE 800
PASADENA, CALIFORNIA 91101
----------------
NOTICE OF THE ANNUAL MEETING OF MEMBERS
----------------
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Gemstar Annual
Meeting") of the Members (hereinafter, "Shareholders") of Gemstar
International Group Limited, a British Virgin Islands corporation ("Gemstar"),
will be held at 7:00 a.m., California time, on May 1, 1997 at 2-29-18 Nishi-
Ikebukuro, Toshima-ku, Tokyo 171, Japan for the following purposes:
1. To approve the issuance of Gemstar ordinary shares, par value $.01 per
share ("Gemstar Ordinary Shares") pursuant to the Agreement and Plan of
Merger, dated as of December 23, 1996, by and among Gemstar, StarSight
Telecast, Inc., a California corporation ("StarSight") and G/S Acquisition
Subsidiary, a newly-formed, wholly-owned California subsidiary of Gemstar
("Sub"), pursuant to which Sub will be merged with and into StarSight,
whereby, among other things, StarSight will survive the merger and become a
wholly-owned subsidiary of Gemstar (referred herein as the "Merger").
In connection with the Merger, (i) each share of StarSight common stock, no
par value ("StarSight 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 shares (the
"Exchange Ratio") of Gemstar Ordinary Shares; no fractional shares of Gemstar
Ordinary Shares will be issued in the Merger and, in lieu thereof, a cash
payment will be made (see the section of the accompanying Joint Proxy
Statement/Prospectus entitled "THE PLAN OF MERGER--Exchange of Certificate"
which describes how the value of such fractional shares will be determined);
(ii) each stock option to purchase shares of StarSight Common Stock (the
"Stock Options") outstanding immediately prior to the Effective Time under the
StarSight's 1989 Stock Incentive Program (the "Stock Option Plan") which has
not been exercised in accordance with its terms, will be assumed by Gemstar
such that each Stock Option will be deemed to constitute an option to acquire,
on substantially the same terms and conditions as were applicable under such
Stock Option, the number, rounded down to the nearest whole integer, of full
shares of Gemstar Ordinary Shares the holder of such Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
Stock Option in full, including as to unvested shares, immediately prior to
the Effective Time, at a price per share equal to (y) the exercise price per
share for the shares of StarSight Common Stock otherwise purchasable pursuant
to such Stock Option divided by (z) the Exchange Ratio, with such exercise
price per share rounded up to the nearest whole cent; and (iii) each stock
purchase warrant issued by StarSight to purchase shares of StarSight Common
Stock (collectively, the "Warrants"), will in accordance with its terms, be
adjusted (an "Adjusted Warrant") to become exercisable for, or exchangeable
for a new warrant (on substantially the same terms) that would be exercisable
for, the number of shares of Gemstar Ordinary Shares equal to the Warrant
Conversion Number (as defined below). The exercise price of any Adjusted
Warrant (the "Adjusted Exercise Price") will be an amount equal to the
exercise price of the Warrant related to such Adjusted Warrant as of the date
of the Merger Agreement divided by the Exchange Ratio. The "Warrant Conversion
Number" for any Adjusted Warrant will be equal to the number of shares
purchasable pursuant to the Warrant related to such Adjusted Warrant as of the
date of the Merger Agreement multiplied by the Exchange Ratio.
2. To consider and vote upon a proposal to increase the number of Gemstar
Ordinary Shares available for issuance under Gemstar's 1994 Stock Incentive
Plan, as amended (the "Stock Incentive Plan"), by 3,500,000 Gemstar Ordinary
Shares and to authorize Gemstar's Board of Directors to amend the Stock
Incentive Plan accordingly (the "Stock Incentive Plan Proposal").
3. To elect Dr. George F. Carrier and Teruyuki Toyama to another term as
Class II directors of Gemstar.
<PAGE>
4. To ratify the appointment of KPMG Peat Marwick LLP to serve as Gemstar's
independent auditors for the year ended March 31, 1998.
5. To transact such other business as may properly come before the Gemstar
Annual Meeting, including any motion to adjourn to a later date to permit
further solicitation of proxies, if necessary.
The foregoing items of business are more fully described in the Joint Proxy
Statement/Prospectus accompanying this Notice.
Only Shareholders of record of Gemstar Ordinary Shares at the close of
business on March 17, 1997 are entitled to notice of, and will be entitled to
vote at, the Gemstar Annual Meeting or any adjournment thereof. The rules of
The Nasdaq National Market require that the Gemstar Shareholders approve the
issuance of the Gemstar Ordinary Shares pursuant to the Merger Agreement by
the affirmative vote of the holders of a majority of the shares of Gemstar
Ordinary Shares voted at the Gemstar Annual Meeting, in person or by proxy.
Approval of the Stock Incentive Plan Proposal, the election of Dr. George F.
Carrier and Teruyuki Toyama as directors of Gemstar and ratification of the
appointment of KPMG Peat Marwick LLP as Gemstar's independent auditors also
will require the affirmative vote of a majority of the votes of the Gemstar
Ordinary Shares which are present or represented at the Gemstar Annual Meeting
and entitled to vote thereon and are actually voted. Abstentions and broker
non-votes will have no effect on the results, although they will be counted
for purposes of determining the presence of a quorum for the conduct of
business at the Gemstar Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Larry Goldberg
LARRY GOLDBERG
Secretary
Pasadena, California
April 18, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE GEMSTAR ANNUAL MEETING YOU
ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY
IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
GEMSTAR ANNUAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY
TIME BEFORE IT IS VOTED.
2
<PAGE>
STARSIGHT TELECAST, INC.
39650 LIBERTY STREET
FREMONT, CALIFORNIA 94538
April 18, 1997
Dear Shareholder:
A Special Meeting of the Shareholders (the "StarSight Special Meeting") of
StarSight Telecast, Inc., a California corporation ("StarSight"), will be held
at 7:00 a.m., California time, on May 1, 1997, at 3300 Kearney Street,
Fremont, California 94538.
At the StarSight Special Meeting, you will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated
as of December 23, 1996 (the "Merger Agreement"), by and among StarSight,
Gemstar International Group Limited, a British Virgin Islands corporation
("Gemstar"), and G/S Acquisition Subsidiary, a newly-formed, wholly-owned
California subsidiary of Gemstar ("Sub"), and the transactions contemplated
thereunder, including a merger (the "Merger") pursuant to which Sub will be
merged with and into StarSight (the "Merger"), whereby, among other things,
StarSight will survive the Merger and become a wholly-owned subsidiary of
Gemstar.
In connection with the Merger, (i) each share of StarSight common stock, no
par value ("Starsight 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 shares (the
"Exchange Ratio") of Gemstar ordinary shares, par value $.01 per share
("Gemstar Ordinary Shares"); no fractional shares of Gemstar Ordinary Shares
will be issued in the Merger and, in lieu thereof, a cash payment will be made
(see the section of the accompanying Joint Proxy Statement/Prospectus entitled
"THE PLAN OF MERGER--Exchange of Certificates" which describes how the value
of such fractional shares will be determined); (ii) each stock option to
purchase shares of StarSight Common Stock (the "Stock Options") outstanding
immediately prior to the Effective Time under StarSight's 1989 Stock Incentive
Program (the "Stock Option Plan") which has not been exercised in accordance
with its terms, will be assumed by Gemstar such that each Stock Option will be
deemed to constitute an option to acquire, on substantially the same terms and
conditions as were applicable under such Stock Option, the number, rounded
down to the nearest whole integer, of full shares of Gemstar Ordinary Shares
the holder of such Stock Option would have been entitled to receive pursuant
to the Merger had such holder exercised such Stock Option in full, including
as to unvested shares, immediately prior to the Effective Time, at a price per
share equal to (y) the exercise price per share for the shares of StarSight
Common Stock otherwise purchasable pursuant to such Stock Option divided by
(z) the Exchange Ratio, with such exercise price per share rounded up to the
nearest whole cent; and (iii) each stock purchase warrant issued by StarSight
to purchase shares of StarSight Common Stock (collectively, the "Warrants"),
will in accordance with its terms, be adjusted (an "Adjusted Warrant") to
become exercisable for, or exchangeable for a new warrant (on substantially
the same terms) that would be exercisable for, the number of shares of Gemstar
Ordinary Shares equal to the Warrant Conversion Number (as defined below). The
exercise price of any Adjusted Warrant (the "Adjusted Exercise Price") will be
an amount equal to the exercise price of the Warrant related to such Adjusted
Warrant as of the date of the Merger Agreement divided by the Exchange Ratio.
The "Warrant Conversion Number" for any Adjusted Warrant will be equal to the
number of shares purchasable pursuant to the Warrant related to such Adjusted
Warrant as of the date of the Merger Agreement multiplied by the Exchange
Ratio.
<PAGE>
The StarSight shareholders must vote to approve the Merger Agreement. If the
holders of at least 5% of the outstanding shares of StarSight Common Stock
have exercised dissenters' rights in connection with the Merger under Sections
1300--1312 of the California General Corporation Law, any holder of StarSight
Common Stock may exercise dissenters' rights by voting against the Merger and
following the procedures set forth in
Section 1300. See the section of the accompanying Joint Proxy
Statement/Prospectus entitled "DESCRIPTION OF STARSIGHT CAPITAL STOCK--
Dissenters' Rights." Gemstar's members will, among other things, consider and
vote upon a proposal to approve the issuance of Gemstar Ordinary Shares in
connection with the Merger at a separate meeting to be held on May 1, 1997. No
dissenters' or appraisal rights are available to the Gemstar members in
connection with the Merger. If the requisite approval of Gemstar's members and
StarSight's shareholders is received, the Merger is expected to be consummated
on or before May 2, 1997.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS PROVIDED FOR THEREIN, INCLUDING THE MERGER, AND
HAS CONCLUDED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF STARSIGHT AND
ITS SHAREHOLDERS. YOUR BOARD OF DIRECTORS HAS RECOMMENDED THAT THE
SHAREHOLDERS OF STARSIGHT APPROVE AND ADOPT THE MERGER AGREEMENT, AND THE
TRANSACTIONS PROVIDED FOR THEREIN, INCLUDING THE MERGER.
StarSight's Board of Directors has received an opinion of Smith Barney Inc.,
StarSight's financial advisor, that, as of the date of and based upon and
subject to certain matters stated in such opinion, the Exchange Ratio was
fair, from a financial point of view, to the holders of StarSight Common
Stock. In the event that the Merger Agreement and the transactions provided
for therein, including the Merger, are approved and adopted by the affirmative
vote of the holders of a majority of issued and outstanding shares of
StarSight Common Stock and the Merger is subsequently challenged, StarSight
may argue that an individual shareholder who voted in favor of approving and
adopting the Merger Agreement and the transactions provided for therein,
including the Merger, is estopped from challenging the Merger under applicable
state law.
In connection with the Merger, three of StarSight's employee directors,
Larry W. Wangberg, Brian L. Klosterman and Martin W. Henkel, have entered into
new employment agreements with StarSight which will become effective only upon
consummation of the Merger. Each such employee has an existing employment
agreement with StarSight that provides for StarSight to make lump sum
severance payments to such individuals in the approximate aggregate amount of
$4.7 million at the Effective Time of the Merger. In connection with the
severance payments to be made in connection with the Merger (the "Accelerated
Payments"), StarSight paid to Messrs. Wangberg and Klosterman, $100,000 and
$350,000, respectively, in 1996. The Accelerated Payments will be deducted
from the lump sum payment made upon the closing of the Merger, or if the
Merger is not consummated, Messrs. Wangberg and Klosterman will seek any
available refund or reduction in tax liability and will reimburse StarSight
the amounts related to the Accelerated Payments received as a tax refiled or
reduction in tax liability. Six other StarSight employees, including the Chief
Accounting Officer, have also entered into new employment agreements with
StarSight that become effective only upon consummation of the Merger. Each
such employee has an existing employment agreement with StarSight that
provides for StarSight to make lump sum severance payments to such individuals
in the aggregate of approximately $900,000 at the Effective Time. In addition,
unvested options to purchase shares of StarSight Common Stock held by the
three employee directors and the other StarSight employees noted above will
vest and become immediately exercisable at the Effective Time. As a result of
the foregoing and certain other interests described in the accompanying Joint
Proxy Statement/Prospectus, the three employee directors and other StarSight
employees noted above may have interests that are not identical to those of
other shareholders. See the section of the Joint Proxy Statement/Prospectus
entitled "THE PLAN OF MERGER--Interests of Certain Persons in the Merger."
2
<PAGE>
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by shareholders at the StarSight Special Meeting and a
proxy. The Joint Proxy Statement/Prospectus more fully describes the terms of
the Merger Agreement and the Merger and includes information about Gemstar and
StarSight. The Merger Agreement is attached as Appendix A to the Joint Proxy
Statement/Prospectus.
All shareholders are cordially invited to attend the StarSight Special
Meeting in person. However, whether or not you plan to attend the StarSight
Special Meeting, please complete, sign, date and return your proxy in the
enclosed envelope. If you attend the StarSight Special Meeting, you may vote
in person if you wish, even though you have previously returned your proxy. It
is important that your shares be represented and be voted at the StarSight
Special Meeting.
Sincerely,
/s/ Larry W. Wangberg
LARRY W. WANGBERG
Chairman of the Board of Directors and
Chief Executive Officer
3
<PAGE>
STARSIGHT TELECAST, INC.
39650 LIBERTY STREET
FREMONT, CALIFORNIA 94538
----------------
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"StarSight Special Meeting") of StarSight Telecast, Inc., a California
corporation ("StarSight"), will be held at 7:00 a.m., California time, on May
1, 1997 at 3300 Kearney Street, Fremont, California 94538, for the following
purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of December 23, 1996, by and among
StarSight, Gemstar International Group Limited, a British Virgin Islands
corporation ("Gemstar"), and G/S Acquisition Subsidiary, a newly-formed,
wholly-owned California subsidiary of Gemstar ("Sub"), pursuant to which
Sub will be merged with and into StarSight, whereby, among other things,
StarSight will survive the merger and become a wholly-owned subsidiary of
Gemstar (referred to herein as the "Merger").
In connection with the Merger, (i) each share of StarSight common stock,
no par value ("StarSight 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
shares (the "Exchange Ratio") of Gemstar ordinary shares, par value $.01
per share ("Gemstar Ordinary Shares"); no fractional shares of Gemstar
Ordinary Shares will be issued in the Merger and, in lieu thereof, a cash
payment will be made (see the section of the accompanying Joint Proxy
Statement/Prospectus entitled "THE PLAN OF MERGER--Exchange of
Certificates" which describes how the value of such fractional shares will
be determined); (ii) each stock option to purchase shares of StarSight
Common Stock (the "Stock Options") outstanding immediately prior to the
Effective Time under the StarSight's 1989 Stock Incentive Program (the
"Stock Option Plan") which has not been exercised in accordance with its
terms, will be assumed by Gemstar such that each Stock Option will be
deemed to constitute an option to acquire, on substantially the same terms
and conditions as were applicable under such Stock Option, the number,
rounded down to the nearest whole integer, of full shares of Gemstar
Ordinary Shares the holder of such Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such Stock Option
in full, including as to unvested shares, immediately prior to the
Effective Time, at a price per share equal to (y) the exercise price per
share for the shares of StarSight Common Stock otherwise purchasable
pursuant to such Stock Option divided by (z) the Exchange Ratio, with such
exercise price per share rounded up to the nearest whole cent; and (iii)
each stock purchase warrant issued by StarSight to purchase shares of
StarSight Common Stock (collectively, the "Warrants"), will in accordance
with its terms, be adjusted (an "Adjusted Warrant") to become exercisable
for, or exchangeable for a new warrant (on substantially the same terms)
that would be exercisable for, the number of shares of Gemstar Ordinary
Shares equal to the Warrant Conversion Number (as defined below). The
exercise price of any Adjusted Warrant (the "Adjusted Exercise Price") will
be an amount equal to the exercise price of the Warrant related to such
Adjusted Warrant as of the date of the Merger Agreement divided by the
Exchange Ratio. The "Warrant Conversion Number" for any Adjusted Warrant
will be equal to the number of shares of StarSight Common Stock purchasable
pursuant to the Warrant related to such Adjusted Warrant as of the date of
the Merger Agreement multiplied by the Exchange Ratio.
2. To transact such other business as may properly come before the
StarSight Special Meeting, including any motion to adjourn to a later date
to permit further solicitation of proxies, if necessary.
The foregoing items of business are more fully described in the Joint Proxy
Statement/Prospectus accompanying this Notice.
<PAGE>
Only shareholders of record of StarSight Common Stock at the close of
business on March 17, 1997 are entitled to notice of, and will be entitled to
vote at, the StarSight Special Meeting or any adjournment thereof. Approval of
the Merger Agreement and the Merger will require the affirmative vote of the
holders of a majority of issued and outstanding shares of StarSight Common
Stock.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Martin W. Henkel
MARTIN W. HENKEL
Executive Vice President, Chief
Financial
Officer and Secretary
Fremont, California
April 18, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE STARSIGHT SPECIAL MEETING
YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT
PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO
ATTEND THE STARSIGHT SPECIAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY
YOU AT ANY TIME BEFORE IT IS VOTED.
2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
JOINT PROXY STATEMENT/PROSPECTUS
STARSIGHT TELECAST, INC.
JOINT PROXY STATEMENT
------------
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Gemstar International Group Limited,
a British Virgin Islands corporation ("Gemstar"), of proxies from holders of
its ordinary shares, par value $.01 per share ("Gemstar Ordinary Shares") for
use at its annual meeting of members to be held May 1, 1997 (together with any
adjournment or postponement thereof, the "Gemstar Annual Meeting") and in
connection with the solicitation by the Board of Directors of StarSight
Telecast, Inc., a California corporation ("StarSight"), of proxies from holders
of its common stock, no par value ("StarSight Common Stock") for use at its
special meeting of shareholders to be held May 1, 1997 (together with any
adjournment or postponement thereof, the "StarSight Special Meeting").
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will be
asked to approve the issuance of Gemstar Ordinary Shares as contemplated by the
Agreement and Plan of Merger, dated as of December 23, 1996 (the "Merger
Agreement") by and among StarSight, Gemstar and G/S Acquisition Subsidiary, a
newly-formed, wholly-owned California subsidiary of Gemstar ("Sub"), pursuant
to which Sub will be merged with and into StarSight whereby, among other
things, StarSight will survive the merger and become a wholly-owned subsidiary
of Gemstar (referred to herein as the "Merger"). The holders of Gemstar
Ordinary Shares must vote on the issuance of Gemstar Ordinary Shares in
connection with the Merger pursuant to the rules of The Nasdaq National Market.
At the StarSight Special Meeting (together with the Gemstar Annual Meeting, the
"Meetings"), the holders of StarSight Common Stock will be asked to adopt and
approve the Merger Agreement and the transactions contemplated thereby,
including the Merger. A copy of the Merger Agreement is attached as Appendix A
to this Joint Proxy Statement/Prospectus.
In connection with the Merger, (i) each share of StarSight 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 shares (the "Exchange Ratio") of Gemstar Ordinary
Shares; no fractional shares of Gemstar Ordinary Shares will be issued and, in
lieu thereof, a cash payment will be made (see "THE PLAN OF MERGER--Exchange of
Certificates" which describes how the value of such fractional shares will be
determined); (ii) each stock option to purchase shares of StarSight Common
Stock (the "Stock Options") outstanding immediately prior to the Effective Time
under StarSight's 1989 Stock Incentive Program (the "Stock Option Plan") which
has not been exercised in accordance with its terms, will be assumed by Gemstar
such that each Stock Option will be deemed to constitute an option to acquire,
on substantially the same terms and conditions as were applicable under such
Stock Option, the number, rounded down to the nearest whole integer, of full
shares of Gemstar Ordinary Shares the holder of such Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
Stock Option in full, including as to unvested shares, immediately prior to the
Effective Time, at a price per share equal to (y) the exercise price per share
for the shares of StarSight
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT
PROXY STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE
ACCURACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS APRIL 15, 1997.
<PAGE>
Common Stock otherwise purchasable pursuant to such Stock Option divided by
(z) the Exchange Ratio, with such exercise price per share rounded up to the
nearest whole cent; and (iii) each stock purchase warrant issued by StarSight
to purchase shares of StarSight Common Stock (collectively, the "Warrants"),
will in accordance with its terms, be adjusted (an "Adjusted Warrant") to
become exercisable for, or exchangeable for a new warrant (on substantially
the same terms) that would be exercisable for, the number of shares of Gemstar
Ordinary Shares equal to the Warrant Conversion Number (as defined below). The
exercise price of any Adjusted Warrant (the "Adjusted Exercise Price") will be
an amount equal to the exercise price of the Warrant related to such Adjusted
Warrant as of the date of the Merger Agreement divided by the Exchange Ratio.
The "Warrant Conversion Number" for any Adjusted Warrant will be equal to the
number of shares purchasable pursuant to the Warrant related to such Adjusted
Warrant as of the date of the Merger Agreement multiplied by the Exchange
Ratio.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to approve and adopt a proposal to increase the number of
Gemstar Ordinary Shares available for issuance under Gemstar's 1994 Stock
Incentive Plan, as amended (the "Stock Incentive Plan"), by 3,500,000 Gemstar
Ordinary Shares and to authorize Gemstar's Board of Directors to amend the
Stock Incentive Plan accordingly (the "Stock Incentive Plan Proposal").
Approval and adoption of the Stock Incentive Plan Proposal is being requested,
in part, in order to provide for sufficient shares to accommodate the
assumption of the Stock Options in accordance with the terms of the Merger
Agreement, if the issuance of Gemstar Ordinary Shares as contemplated by the
Merger Agreement is approved. If the issuance of Gemstar Ordinary Shares is
approved by the Shareholders, but the Stock Incentive Plan Proposal is not,
approval of the issuance of Gemstar Ordinary Shares will be deemed to
constitute approval of the assumption by Gemstar of the outstanding Stock
Options under the Stock Option Plan as of the Effective Time of the Merger.
This assumption would be on a basis reflecting a conversion of the Stock
Options in the Merger into options to purchase Gemstar Ordinary Shares, with
appropriate adjustments to the numbers of shares and the exercise price of the
Stock Options as provided in the Merger Agreement. The Stock Options, in these
circumstances, would not be issued under the Stock Incentive Plan. Further, if
the Stock Incentive Plan Proposal is not approved by the Shareholders but the
issuance of Gemstar Ordinary Shares is approved, certain options that are to
be granted under the Stock Incentive Plan to certain StarSight executives upon
the Effective Time of the Merger will be granted outside of the Stock
Incentive Plan. Accordingly, a vote approving the issuance of Gemstar Ordinary
Shares as contemplated by the Merger Agreement is effectively a vote ratifying
the grant of such options that are to be granted to certain StarSight
executives upon the Effective Time of the Merger. If the Stock Incentive Plan
Proposal is approved and the issuance of Gemstar Ordinary Shares in connection
with the Merger is approved, such options to be granted to certain StarSight
executives will be granted under the Stock Incentive Plan and the approval of
the Stock Incentive Plan in such case has the effect of ratifying the grants
of the options.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to elect Dr. George F. Carrier and Teruyuki Toyama
(collectively, the "Director Nominees") to another term as Class II directors.
Dr. George F. Carrier was appointed a director of Gemstar in August, 1994. Mr.
Teruyuki Toyama has been the President and Chief Executive Officer of Overseas
Carrier Services Co., Ltd. since 1993 and was appointed a director of Gemstar
in August, 1994. If elected, each will serve as a director until the 2000
Annual Meeting, subject to the provisions of Gemstar's Amended and Restated
Articles of Association.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
further be asked to ratify the appointment of KPMG Peat Marwick LLP as
Gemstar's independent auditors for the year ended March 31, 1998.
Only shareholders of record of StarSight Common Stock at the close of
business on March 17, 1997 are entitled to notice of, and will be entitled to
vote at, the StarSight Special Meeting. Approval and adoption of the Merger
Agreement and the Merger will require the affirmative vote of the holders of a
majority of the issued and outstanding shares of the StarSight Common Stock.
Only members of record of Gemstar Ordinary Shares at the close of business
on March 17, 1997 are entitled to notice of, and will be entitled to vote at,
the Gemstar Annual Meeting. The rules of The Nasdaq National Market require
that the Gemstar Shareholders approve the issuance of the Gemstar Ordinary
Shares pursuant to
2
<PAGE>
the Merger Agreement by the affirmative vote of the holders of a majority of
the shares of Gemstar Ordinary Shares voted at the Gemstar Annual Meeting in
person or by proxy. Approval of the Stock Incentive Plan Proposal, the
election of Dr. George F. Carrier and Teruyuki Toyama as directors of Gemstar
and ratification of the appointment of KPMG Peat Marwick LLP as Gemstar's
independent auditors also will require the affirmative vote of a simple
majority of the Gemstar Ordinary Shares which are present or represented at
the Gemstar Annual Meeting and entitled to vote thereon and are actually
voted. Abstentions and broker non-votes will have no effect on the result,
although they will be counted for purposes of determining the presence of a
quorum for the conduct of business at the Gemstar Annual Meeting.
Concurrently with the execution of the Merger Agreement, StarSight granted
Gemstar an irrevocable option to purchase up to 5,276,034 shares of StarSight
Common Shares at a purchase price of $10.46 per share and Gemstar granted
StarSight 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 options become
exercisable following the occurrence of certain purchase events which include
any termination of the Merger Agreement because (i) either of Gemstar or
StarSight accepts or recommends to its respective shareholders a takeover
proposal that is likely to be consummated and is financially superior to the
Merger, (ii) either Gemstar's or StarSight's board of directors fails to
recommend or withdraws or modifies adversely its recommendation of the Merger,
or (iii) following certain third-party takeover proposals, any shareholder
approval required for the consummation of the Merger is not obtained. See
"SUMMARY--Company Option Agreement" and "--Parent Option Agreement." Upon any
such termination of the Merger Agreement, or upon the failure of certain
significant shareholders of either Gemstar or StarSight to vote in favor of
the Merger and, in connection with such vote, the Merger is not approved by
the shareholders of either Gemstar or Starsight, in lieu of exercising the
above-described options, either Gemstar or StarSight may elect to receive a
termination fee in the amount of $15 million. See "THE PLAN OF MERGER--Merger
Expenses, Fees and Other Costs."
The outstanding shares of Gemstar Ordinary Shares are listed on The Nasdaq
National Market under the symbol "GMSTF," and it is a condition to the
obligations of Gemstar and StarSight to close the Merger that the shares of
Gemstar Ordinary Shares to be issued in the Merger be approved for listing on
The Nasdaq National Market, upon official notice of issuance. The last
reported sale price of Gemstar Ordinary Shares on The Nasdaq National Market
on April 11, 1997 was $14.00 per share. Based on such last reported sale
price, the Exchange Ratio would result in a per share purchase price for the
StarSight Common Stock of approximately $8.49. Because the Exchange Ratio is
fixed, a change in the market price of Gemstar Ordinary Shares before the
Merger will affect the dollar market value of the Gemstar Ordinary Shares to
be received by the shareholders of StarSight in the Merger.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Gemstar under the Securities Act, for the public offering of up to 15,550,000
Gemstar Ordinary Shares issuable in connection with the Merger. This Joint
Proxy Statement/Prospectus does not cover resales of such shares, and no
person is authorized to use this Joint Proxy Statement/Prospectus in
connection with any such resale. All information concerning Gemstar contained
in this Joint Proxy Statement/Prospectus has been furnished by Gemstar and all
information concerning StarSight has been furnished by StarSight. This Joint
Proxy Statement/Prospectus is first being mailed to members of Gemstar and
shareholders of StarSight on or about April 18, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 37 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE SECURITIES OFFERED HEREBY.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................... 8
ADDITIONAL INFORMATION REGARDING GEMSTAR AND STARSIGHT..................... 9
ENFORCEABILITY OF CIVIL LIABILITIES........................................ 10
SUMMARY.................................................................... 11
Introduction............................................................. 11
The Companies............................................................ 11
Gemstar's Reasons for the Merger......................................... 12
Recommendation of Gemstar's Board of Directors........................... 12
Opinion of Gemstar's Financial Advisors.................................. 13
The Gemstar Annual Meeting............................................... 13
StarSight's Reasons for the Merger....................................... 13
Recommendation of StarSight's Board of Directors......................... 14
Opinion of StarSight's Financial Advisors................................ 15
The StarSight Special Meeting............................................ 15
The Merger............................................................... 16
Representations and Covenants of StarSight............................... 23
Representations and Covenants of Gemstar................................. 24
Conditions to the Merger................................................. 25
Regulatory Approvals..................................................... 26
Termination or Amendment................................................. 26
Certain Federal Income Tax Consequences.................................. 28
Accounting Treatment..................................................... 28
Merger Expenses and Other Costs.......................................... 28
Dissenters' Rights....................................................... 29
Proposal to Approve an Amendment to Gemstar's Stock Incentive Plan....... 29
Election of Gemstar's Class II Directors................................. 30
Ratification of Gemstar's Independent Auditors........................... 30
SELECTED HISTORICAL FINANCIAL DATA......................................... 31
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA.............. 34
COMPARATIVE PER SHARE DATA................................................. 36
RISK FACTORS............................................................... 37
Integration of the Businesses............................................ 37
Risks Associated with Fixed Exchange Ratio............................... 37
Substantial Expenses Resulting from the Merger........................... 38
History of Losses; Uncertainty of Future Profitability................... 38
Fluctuations in Operating Results........................................ 38
Seasonality and Variability of Results................................... 38
Dependence on Single Product Category.................................... 39
New Products; Rapid Technological Change................................. 40
Reliance on Third Parties--Gemstar....................................... 40
Reliance on Third Parties--StarSight..................................... 41
Competition.............................................................. 42
Dependence on Key Employees.............................................. 43
Passive Foreign Investment Company....................................... 44
Patent and Proprietary Information; Litigation........................... 44
Risks Associated With International Operations........................... 45
</TABLE>
4
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Rights of Shareholders under British Virgin Islands Law May Be Less
Protected than those of Shareholders of a Corporation Incorporated in a
U.S. Jurisdiction...................................................... 45
Holding Company Structure; Restrictions on Subsidiary Dividends......... 46
Control by Management................................................... 46
Restatement of Earnings Due to Pooling of Interest Accounting Treatment;
Dilution............................................................... 46
Volatility.............................................................. 46
MARKET PRICE AND DIVIDENDS................................................ 47
COMPARATIVE PER SHARE DATA................................................ 48
THE PLAN OF MERGER........................................................ 49
General................................................................. 49
Effective Time of the Merger............................................ 49
Conversion of StarSight Common Stock.................................... 49
Treatment of StarSight Stock Options.................................... 50
Treatment of StarSight Warrants......................................... 50
Exchange of Certificates................................................ 50
Background of the Merger................................................ 52
Reasons for the Merger; Board Recommendations........................... 58
Opinions of Financial Advisors.......................................... 63
Related Agreements...................................................... 72
Representations and Covenants of StarSight.............................. 76
Representations and Covenants of Gemstar................................ 77
Conditions to the Merger................................................ 78
Regulatory Approvals.................................................... 79
Termination or Amendment................................................ 79
Certain Federal Income Tax Matters...................................... 81
Accounting Treatment.................................................... 83
Affiliates' Restrictions on Sales of Gemstar Ordinary Shares............ 83
Merger Expenses, Fees and Other Costs................................... 84
Interests of Certain Persons in the Merger.............................. 84
THE STARSIGHT SPECIAL MEETING............................................. 88
General................................................................. 88
Record Date and Outstanding Shares...................................... 89
Voting of Proxies....................................................... 89
Vote Required........................................................... 89
Abstentions; Broker Non-Votes........................................... 90
Solicitation of Proxies and Expenses.................................... 90
THE GEMSTAR ANNUAL MEETING................................................ 91
General................................................................. 91
Record Date and Outstanding Shares...................................... 91
Vote Required........................................................... 91
Solicitation of Proxies and Expenses.................................... 92
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 93
DESCRIPTION OF STARSIGHT CAPITAL STOCK.................................... 98
General................................................................. 98
StarSight Common Stock.................................................. 98
Preferred Stock......................................................... 98
Registration Rights..................................................... 98
Dissenters' Rights...................................................... 99
</TABLE>
5
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
STARSIGHT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 102
DESCRIPTION OF GEMSTAR CAPITAL STOCK....................................... 105
Ordinary Shares.......................................................... 105
Preference Shares........................................................ 105
Dividends................................................................ 105
Voting Rights............................................................ 105
Directors................................................................ 105
Fiduciary Duties and Indemnification..................................... 106
Quorum................................................................... 106
Resolutions.............................................................. 106
GEMSTAR SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 107
COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND STARSIGHT.............. 109
Shareholder Power to Call Shareholder Meeting............................ 109
Dissolution.............................................................. 109
Size of Board of Directors............................................... 109
Classified Board of Directors............................................ 110
Removal of Directors..................................................... 110
Actions by Written Consent of Shareholders............................... 110
Voting Requirements...................................................... 110
Rights of Dissenting Shareholders........................................ 111
Inspection of Shareholder List........................................... 111
Dividends................................................................ 112
Bylaws................................................................... 112
Transactions Involving Officers or Directors............................. 112
Filling Vacancies on the Board of Directors.............................. 113
Limitation of Liability Of Directors..................................... 113
Business Combinations/Reorganizations.................................... 114
Shareholder Derivative Suits............................................. 114
COMPARISON OF U.S. AND BRITISH VIRGIN ISLANDS CORPORATE LAWS............... 114
PROPOSAL TO APPROVE AN AMENDMENT TO GEMSTAR'S STOCK INCENTIVE PLAN......... 116
Summary of the Stock Incentive Plan...................................... 117
ELECTION OF GEMSTAR CLASS II DIRECTORS..................................... 123
Information Regarding the Gemstar Board.................................. 123
Information Regarding Gemstar's Compensation of Directors and Officers... 123
RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS............................. 124
BRITISH VIRGIN ISLANDS TAXATION............................................ 124
EXCHANGE CONTROLS.......................................................... 124
LEGAL MATTERS.............................................................. 124
EXPERTS.................................................................... 124
FORWARD LOOKING STATEMENTS................................................. 125
</TABLE>
6
<PAGE>
APPENDICES
<TABLE>
<S> <C>
APPENDIX A AGREEMENT AND PLAN OF MERGER
APPENDIX B OPINION OF HAMBRECHT & QUIST
APPENDIX C OPINION OF SMITH BARNEY INC.
APPENDIX D STARSIGHT SIGNIFICANT SHAREHOLDER AGREEMENT
APPENDIX E GEMSTAR SIGNIFICANT SHAREHOLDER AGREEMENT
APPENDIX F COMPANY OPTION AGREEMENT
APPENDIX G PARENT OPTION AGREEMENT
APPENDIX H CALIFORNIA GENERAL CORPORATION LAW--CHAPTER 13 DISSENTERS' RIGHTS
APPENDIX I GEMSTAR'S ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED MARCH
31, 1996 FILED ON JUNE 10, 1996
APPENDIX J GEMSTAR'S REPORT ON FORM 6-K REGARDING ITS FINANCIAL RESULTS FOR THE
QUARTER ENDED JUNE 30, 1996 FILED ON OCTOBER 30, 1996
APPENDIX K GEMSTAR'S REPORT ON FORM 6-K REGARDING ITS FINANCIAL RESULTS FOR THE
QUARTER ENDED SEPTEMBER 30, 1996 FILED ON JANUARY 16, 1997
APPENDIX L GEMSTAR'S REPORT ON FORM 6-K, FILED ON JANUARY 16, 1997, CONTAINING
FIVE PRESS RELEASES CONCERNING RECENT BUSINESS DEVELOPMENTS
APPENDIX M GEMSTAR'S REPORT ON FORM 6-K, FILED ON MARCH 11, 1997, REGARDING ITS
FINANCIAL RESULTS FOR THE QUARTER ENDED DECEMBER 31, 1996,
CERTAIN SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE-YEAR PERIOD ENDED MARCH 31, 1996 AND VIDEOGUIDE'S FINANCIAL
STATEMENTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
APPENDIX N GEMSTAR'S FORM S-8 REGISTRATION STATEMENT WITH RESPECT TO GEMSTAR'S
1994 STOCK INCENTIVE PLAN, AS AMENDED
APPENDIX O GEMSTAR'S FORM 8-A FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT
OF 1934, DATED SEPTEMBER 28, 1995
APPENDIX P STARSIGHT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
APPENDIX Q STARSIGHT'S REGISTRATION STATEMENT ON FORM 8-A AS DECLARED EFFECTIVE
BY THE COMMISSION ON JULY 23, 1993 PURSUANT TO SECTIONS 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
7
<PAGE>
NO PERSON HAS BEEN AUTHORIZED BY GEMSTAR OR STARSIGHT TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GEMSTAR OR
STARSIGHT. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS
JOINT PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Gemstar and StarSight are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports and other information with the Securities
and Exchange Commission (the "Commission"). If the Merger is approved by the
respective shareholders of Gemstar and StarSight and subsequently consummated,
Gemstar will no longer be deemed a "foreign private issuer," as defined in the
Exchange Act, and as a result will no longer be exempted by rule from the
proxy and other requirements of Section 14 of the Exchange Act and from the
short-swing profit provisions of Section 16 of the Exchange Act. Further,
Gemstar will be required to file with the Commission annual, quarterly and
current reports on Forms 10-K, 10-Q and 8-K, respectively. The Registration
Statement (as defined below), the exhibits and schedules forming a part
thereof and the reports and other information filed by Gemstar and StarSight
with the Commission in accordance with the Exchange Act may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will
also be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, certain of the
documents filed by Gemstar and StarSight with the Commission are available
through the Commission's Electronic Data Gathering and Retrieval System
("EDGAR") at http:\\//www.sec.gov.
Under the rules and regulations of the Commission, the solicitation of
proxies from shareholders of StarSight to approve and adopt the Merger
Agreement and the Merger constitutes an offering of Gemstar Ordinary Shares to
be issued in connection with the Merger. Accordingly, Gemstar has filed with
the Commission, a Registration Statement on Form F-4 under the Securities Act
of 1933, as amended (the "Securities Act") with respect to such offering (the
"Registration Statement"). This Joint Proxy Statement/Prospectus constitutes
the prospectus of Gemstar that is filed as part of the Registration Statement.
Other parts of the Registration Statement are omitted from this Joint Proxy
Statement/Prospectus in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including the exhibits to
the Registration Statement and other material that is not included herein, may
be inspected without charge at the regional offices of the Commission referred
to above, or obtained at prescribed rates from the Public Reference Section of
the Commission at the addresses set forth above. The omitted portions of the
Joint Proxy Statement/Prospectus may be obtained through EDGAR at
http:\\//www.sec.gov.
Statements made in this Joint Proxy Statement/Prospectus concerning the
contents of any contract or other document are not necessarily complete. With
respect to each contract or other document filed as an exhibit to the
Registration Statement, reference is hereby made to that exhibit for a more
complete description of the matter involved and each such statement is hereby
qualified in its entirety by such reference.
ALL INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS RELATING
TO GEMSTAR AND ITS AFFILIATES HAS BEEN SUPPLIED BY GEMSTAR, AND ALL
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS RELATING TO
STARSIGHT AND ITS AFFILIATES HAS BEEN SUPPLIED BY STARSIGHT.
8
<PAGE>
ADDITIONAL INFORMATION REGARDING GEMSTAR AND STARSIGHT
Additional information with respect to Gemstar is contained in Appendices I-
O attached hereto. For a description of Gemstar's business, see "Item 1--
Description of Business" of Gemstar's Report on Form 20-F for the Fiscal Year
Ended March 31, 1996 filed on June 10, 1996, attached hereto as Appendix I
("Gemstar's Form 20-F"). For a description of Gemstar's property, see "Item
2--Description of Property" of Gemstar's Form 20-F. For a description of
Gemstar's legal proceedings, see "Item 3--Legal Proceedings" of Gemstar's Form
20-F. For information with respect to exchange controls and other limitations
affecting Gemstar security holders, see "Item 6--Exchange Controls and Other
Limitations Affecting Security Holders" of Gemstar's Form 20-F. For
information with respect to certain anticipated U.S. federal income tax
consequences and British Virgin Islands tax consequences of an investment in
the Gemstar Ordinary Shares, see "Item 7--Taxation" of Gemstar's Form 20-F.
For additional information with respect to Gemstar's selected financial data,
see "Item 8--Selected Financial Data" of Gemstar's Form 20-F. For information
with respect to Gemstar's financial statements, financial schedules and other
financial information, see Gemstar's financial statements and the notes
thereto contained in Items 17, 18 and 19 of Gemstar's Form 20-F, the condensed
consolidated financial statements and the notes thereto contained in Gemstar's
Report on Form 6-K regarding its financial results for the quarter ended June
30, 1996 filed on October 30, 1996, attached hereto as Appendix J, the
condensed consolidated financial statements and the notes thereto contained in
Gemstar's Report on Form 6-K regarding its financial results for the quarter
ended September 30, 1996 filed on January 16, 1997 attached hereto as Appendix
K and the consolidated financial statements and the notes thereto, certain
supplemental consolidated financial statements for the three-year period ended
March 31, 1996 and VideoGuide, Inc.'s financial statements for the three-year
period ended December 31, 1995 contained in Gemstar's Report on Form 6-K,
filed on March 11, 1997, attached hereto as Appendix M. For Gemstar's
management's discussion and analysis of financial condition and results of
operations, see "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Gemstar's Form 20-F .
Additional information with respect to StarSight is contained in Appendices
P and Q attached hereto. For a description of StarSight's business, see "Item
1--Business" of StarSight's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996, attached hereto as Appendix P ("StarSight's Form 10-
K"). For a description of StarSight's property, see "Item 2--Properties" of
StarSight's Form 10-K. For a description of StarSight's legal proceedings, see
"Item 3--Legal Proceedings" of StarSight's Form 10-K. For information with
respect to StarSight's financial statements, financial schedules and other
financial information, see "Item 8--Financial Statements and Supplementary
Data" of StarSight's Form 10-K. For information with respect to StarSight's
selected financial data, see "Item 6--Selected Financial Data" of StarSight's
Form 10-K. For information with respect to StarSight's supplementary financial
information, see "Item 8--Financial Statements and Supplementary Data" of
StarSight's Form 10-K. For StarSight's management's discussion and analysis of
financial condition and results of operations, see "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
StarSight's Form 10-K. For information with respect to changes in and
disagreements with accountants on accounting and financial disclosure, see
"Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure" of StarSight's Form 10-K.
The following registered and unregistered trademarks owned by Gemstar may be
used in the Joint Proxy Statement/Prospectus: VCR Plus+, PlusCode, CallSet,
iPlus+, SpotPlus, G Code, INDEX Plus+, Instant Programmer, GUIDE Plus+,
Instant Info, ShowView, Control Tower, V-Set and C/3/. The following
registered and unregistered trademarks used by StarSight may be used in the
Joint Proxy Statement/Prospectus: StarSight, the StarSight logo, StarDesign,
and Star Design. This Joint Proxy Statement/Prospectus also includes
tradenames and trademarks of companies other than Gemstar and StarSight. The
use of any such third-party tradename or trademark herein is in editorial
fashion only and of benefit to the owner thereof, with no intentional
commercial use or infringement of such tradename or trademark.
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ENFORCEABILITY OF CIVIL LIABILITIES
Gemstar is a British Virgin Islands corporation. British Virgin Islands
corporations have members as owners instead of shareholders, and all
references to the shareholders of Gemstar in this Joint Proxy
Statement/Prospectus shall be deemed to refer to Gemstar's members. Certain of
Gemstar's directors, officers and controlling shareholders and certain counsel
to Gemstar named herein are resident outside of the U.S. All or a substantial
portion of the assets of such persons, including Gemstar, may be located
outside the U.S. As a result, it may not be possible for investors to effect
service of process upon such persons within the U.S. or to realize against
them upon judgments of courts of the U.S. predicated upon civil liability
provisions of the federal securities laws of the U.S. Gemstar has been advised
by its British Virgin Islands counsel, Harney, Westwood & Riegels, that there
is doubt as to the enforceability in such jurisdiction, in original actions or
in actions for enforcement of judgments of U.S. courts, of liabilities
predicated upon the federal securities laws of the U.S. Based on the
foregoing, there can be no assurance that U.S. investors will be able to
enforce any judgments in civil and commercial matters, including, judgments
under the federal securities laws against Gemstar or such other persons who
are not resident in the U.S.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus. The summary does not contain a complete
description of the terms of the Merger Agreement and the Merger and is
qualified in its entirety by reference to the full text of this Joint Proxy
Statement/Prospectus and the Appendices hereto. Shareholders are urged to read
this Joint Proxy Statement/Prospectus and the Appendices in their entirety.
Information contained in this Joint Proxy Statement/Prospectus contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of forward-
looking terminology, such as "may," "will," "expect," "anticipate," "estimate"
or "continue" or the negative thereof or other variations thereon or comparable
terminology. See "FORWARD LOOKING STATEMENTS." The matters set forth under the
caption "RISK FACTORS" in this Joint Proxy Statement/Prospectus constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such forward-
looking statements.
INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Gemstar (the "Gemstar Board") of
proxies from holders of Gemstar Ordinary Shares for use at the Gemstar Annual
Meeting and in connection with the solicitation by the Board of Directors of
StarSight (the "StarSight Board") of proxies from holders of StarSight Common
Stock for use at the StarSight Special Meeting.
At the Meetings, the holders of Gemstar Ordinary Shares will be asked to
approve the issuance of Gemstar Ordinary Shares as contemplated by the Merger
Agreement and the holders of StarSight Common Stock will be asked to approve
and adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger. A copy of the Merger Agreement is attached as Appendix A
to this Joint Proxy Statement/Prospectus. At the Gemstar Annual Meeting, the
holders of Gemstar Ordinary Shares will also be asked to approve and adopt the
Stock Incentive Plan Proposal.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to elect Dr. George F. Carrier and Teruyuki Toyama (collectively,
the "Director Nominees") to another term as Class II directors. Dr. George F.
Carrier was appointed a director of Gemstar in August 1994. Mr. Teruyuki Toyama
has been the President and Chief Executive Officer of Overseas Carrier Services
Co., Ltd. since 1993 and was appointed a director of Gemstar in August 1994. If
elected, each will serve as a director until the 2000 Annual Meeting, subject
to the provisions of Gemstar's Amended and Restated Articles of Association.
At the Gemstar Annual Meeting, the holders of the Gemstar Ordinary Shares
will further be asked to ratify the appointment of KPMG Peat Marwick LLP as
Gemstar's independent auditors for the year ended March 31, 1998.
THE COMPANIES
Gemstar. Gemstar develops, markets and licenses proprietary technologies and
systems that simplify and enhance the viewing and recording of video and
television programming. Gemstar has principal subsidiaries located in the
United States, the Netherlands, the British Virgin Islands, Hong Kong and
Canada.
Gemstar was organized in April 1992 as a British Virgin Islands corporation
and was reorganized in 1995. Gemstar's principal executive offices in the U.S.
are located at 135 North Los Robles Avenue, Suite 800, Pasadena, California
91101. Its telephone number is (818) 792-5700.
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StarSight. StarSight designs and markets an easy-to-use and accurate
electronic program guide (the "StarSight EPG") for identifying, selecting and
recording television programming. StarSight's customers subscribe to the
StarSight EPG directly from StarSight, for use with StarSight-capable
televisions, VCRs, TVCRs, satellite integrated receiver descramblers
("Satellite Receivers") and stand alone StarSight receivers. The StarSight EPG
is currently available to consumers in limited quantities of cable set-top
boxes, televisions, VCRs, TVCRs, Satellite Receivers and stand alone StarSight
receivers. A limited number of StarSight customers are able to subscribe to the
StarSight EPG through service providers such as local cable operators or local
telephone companies. In addition, StarSight licenses its intellectual property
for non-StarSight-capable products which provide guide features based on
StarSight's proprietary technology and patented inventions.
StarSight was incorporated as InSight Technology Corp. under the laws of
California in May 1986. In March 1989, StarSight changed its name to InSight
Telecast, Inc. and in June 1993 to StarSight Telecast, Inc. StarSight's
principal executive offices are located at 39650 Liberty Street, Third Floor,
Fremont, California 94538, and its telephone number is (510) 657-9900.
Sub. Sub, a California corporation, is a newly-formed, wholly-owned
subsidiary of Gemstar formed solely for the purpose of the Merger. Sub has no
material assets or liabilities and has not engaged in any material operations
since its incorporation. Sub's principal executive offices are located at 135
North Los Robles Avenue, Suite 800, Pasadena, California 91101. Its telephone
number is (818) 792-5700.
GEMSTAR'S REASONS FOR THE MERGER
The Gemstar Board has approved the Merger Agreement, has determined that the
Merger is advisable and fair and in the best interests of Gemstar and its
shareholders, and recommends that holders of shares of Gemstar Ordinary Shares
vote FOR approval of the issuance of Gemstar Ordinary Shares as contemplated by
the Merger Agreement.
In its deliberations with regard to the Merger Agreement and the Merger, the
Gemstar Board considered the respective businesses, financial conditions and
financial performance of Gemstar and StarSight (the "Companies"), as well as
the terms and conditions of the proposed Merger Agreement, and the anticipated
accounting and federal tax treatment of the Merger. The Gemstar Board also
considered the written opinion by Hambrecht & Quist to the effect that, based
upon the facts and circumstances as they existed at the time and subject to the
various assumptions and other conditions set forth in such opinion, as of
December 22, 1996, the Exchange Ratio was fair from a financial point of view
to the holders of Gemstar Ordinary Shares. The Gemstar Board was aware of, and
took into consideration, the structure of the Merger and the rights of Gemstar
shareholders to consider and vote upon the issuance of Gemstar Ordinary Shares
pursuant to the Merger. See "THE PLAN OF MERGER--Reasons for the Merger; Board
Recommendations--Gemstar's Reasons for the Merger."
RECOMMENDATION OF GEMSTAR'S BOARD OF DIRECTORS
The Gemstar Board has approved unanimously the Merger Agreement and the
Merger and believes that the terms of the Merger Agreement are fair to, and
that the Merger is in the best interests of, Gemstar and its shareholders and
therefore recommends that holders of Gemstar Ordinary Shares vote FOR approval
of the issuance of Gemstar Ordinary Shares as contemplated by the Merger
Agreement. A fuller account of the primary factors considered and relied upon
by the Gemstar Board in reaching its recommendation are referred to in "THE
PLAN OF MERGER--Reasons for the Merger; Board Recommendations--Gemstar's
Reasons for the Merger."
The Gemstar Board further recommends a vote for the Stock Incentive Plan
Proposal, a vote for the election of the Director Nominees and a vote for
ratification of the appointment of KPMG Peat Marwick LLP as Gemstar's
independent auditors for the year ending March 31, 1998. See "PROPOSAL TO
APPROVE AN AMENDMENT TO GEMSTAR'S STOCK INCENTIVE PLAN," "ELECTION OF GEMSTAR
CLASS II DIRECTORS" and "RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS."
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OPINION OF GEMSTAR'S FINANCIAL ADVISORS
Hambrecht & Quist has delivered its written opinion to the Gemstar Board,
dated December 22, 1996, stating that, as of such date and based upon and
subject to certain matters stated therein, the Exchange Ratio of 0.6062 of a
share of Gemstar Ordinary Shares for each issued and outstanding share of
StarSight Common Stock was fair, from a financial point of view, to the holders
of Gemstar Ordinary Shares. The full text of the opinion of Hambrecht & Quist,
which sets forth the assumptions made, matters considered and limitations on
the review undertaken by Hambrecht & Quist, is attached as Appendix B to this
Joint Proxy Statement/Prospectus and is incorporated herein by reference.
GEMSTAR SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS
ENTIRETY. Hambrecht & Quist performed certain financial analyses in connection
with providing its written opinion to Gemstar's Board. Based on these analyses,
StarSight's implied equity value ranged from approximately $55 million to
approximately $1,476 billion. See "THE PLAN OF MERGER--Opinions of Financial
Advisors Gemstar."
THE GEMSTAR ANNUAL MEETING
Date, Time and Place. The Gemstar Annual Meeting will be held on May 1, 1997,
at 7:00 a.m., California time, at 2-29-18 Nishi-Ikebukuro, Toshima-ku, Tokyo
171, Japan. At the Gemstar Annual Meeting, shareholders of record of Gemstar as
of the close of business on March 17, 1997 (the "Gemstar Record Date") will be
asked to consider and vote upon a proposal to approve the issuance of Gemstar
Shares as contemplated by the Merger Agreement, to approve the Stock Incentive
Plan Proposal, to elect Dr. George F. Carrier and Teruyuki Toyama to another
term as Class II directors of Gemstar and to ratify the appointment of KPMG
Peat Marwick LLP as Gemstar's independent auditors for the year ended March 31,
1988.
Record Date; Shares Entitled to Vote. Holders of record of Gemstar Ordinary
Shares on the Gemstar Record Date are entitled to notice of and to vote at the
Gemstar Annual Meeting. At the close of business on the Gemstar Record Date,
there were outstanding and entitled to vote 31,280,092 shares of Gemstar
Ordinary Shares, each holder of which will be entitled to cast one (1) vote for
each such share owned on each matter to be acted. See "THE GEMSTAR ANNUAL
MEETING--Record Date and Outstanding Shares."
Gemstar Votes Required. The rules of The Nasdaq National Market require that
the Gemstar shareholders approve the issuance of the Gemstar Ordinary Shares
pursuant to the Merger Agreement by the affirmative vote of the holders of a
majority of the shares of Gemstar Ordinary Shares voted at the Gemstar Annual
Meeting in person or by proxy. In the event that the issuance of the Gemstar
Ordinary Shares as contemplated by the Merger Agreement is approved by the
affirmative vote of the holders of a majority of the shares of Gemstar Ordinary
Shares voted at the Gemstar Annual Meeting and the Merger is subsequently
challenged, Gemstar may argue that an individual shareholder who voted in favor
of approving the issuance of the Gemstar Ordinary Shares is estopped from
challenging the issuance of Gemstar Ordinary Shares in the Merger under
applicable law. Approval of the Stock Incentive Plan Proposal, the election of
Dr. George F. Carrier and Teruyuki Toyama as directors of Gemstar and
ratification of the appointment of KPMG Peat Marwick LLP as Gemstar's
independent auditors also will require the affirmative vote of a majority of
the Gemstar Ordinary Shares which are present or represented at the Gemstar
Annual Meeting and entitled to vote thereon, are actually voted and were voted.
Abstentions and broker non-votes will have no effect on the result, although
they will be counted for purposes of determining the presence of a quorum for
the conduct of business at the Gemstar Annual Meeting. See "THE GEMSTAR ANNUAL
MEETING--Vote Required."
STARSIGHT'S REASONS FOR THE MERGER
The StarSight Board has approved the Merger Agreement, has determined that
the Merger is advisable and fair and in the best interests of StarSight and its
shareholders, and recommends that holders of shares of StarSight Common Stock
vote FOR approval and adoption of the Merger Agreement and the Merger.
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The StarSight Board's decision to approve the Merger Agreement and the Merger
was based, in large part on its assessment that in the competitive environment
in which StarSight operates, StarSight would not be able to achieve significant
net income for some time. The StarSight Board recognized that StarSight's long-
term success and its ability to achieve its business plan may require global
reach and broad acceptance by the marketplace. In addition, the StarSight Board
considered that the recent value of StarSight reflects the impact of events
which have had a short-term positive impact on the price of StarSight Common
Stock and that the prospective value of the combined StarSight/Gemstar company
might be higher than StarSight on a stand alone basis. Against these
considerations the StarSight Board weighed, among other things, the fact that
the Exchange Ratio offered a premium to StarSight shareholders. Based on the
last reported sale price of Gemstar Ordinary Shares on the Nasdaq National
Market on December 20, 1996, the last trading day before the announcement of
the proposed Merger, the Exchange Ratio would result in a per share purchase
price for StarSight Common Stock of $10.46, representing a premium of
approximately $1.59 per share to the last reported sale price per share of
StarSight Common Stock on such date. Based on the last reported sale price of
Gemstar Ordinary Shares on April 11, 1997, the latest practicable trading day
before the printing of this Joint Proxy Statement/Prospectus for which
information was obtainable, the Exchange Ratio would result in a per share
purchase price for StarSight Common Stock of $8.49, representing a premium of
approximately $0.87 per share to the last reported sale price per share of
StarSight Common Stock on such date. See "MARKET PRICE AND DIVIDENDS." In
addition, because the consideration was stock in the ongoing enterprise
combining StarSight and Gemstar, the StarSight Board considered that
StarSight's shareholders may have the opportunity to benefit from any synergies
to be achieved by such combination, including those resulting from the
combination of the intellectual property portfolios and the complimentary
nature of the companies' operations. StarSight's management advised the
StarSight Board that such synergies may be significant. StarSight's managment
did not, however, attempt to quantify such synergies. Further, there can be no
assurance that such synergies will actually be achieved. See "THE PLAN OF
MERGER--Reasons for the Merger; Board Recommendations--StarSight's Reasons for
the Merger" and "--Recommendation of StarSight's Board of Directors."
RECOMMENDATION OF STARSIGHT'S BOARD OF DIRECTORS
The StarSight Board has approved the Merger Agreement and the Merger and
believes that the terms of the Merger Agreement are fair to, and that the
Merger is in the best interests of, StarSight and its shareholders and
therefore recommends that holders of StarSight Common Stock vote FOR approval
and adoption of the Merger Agreement and the Merger. Two directors, James Meyer
and Jacques Thibon, recused themselves from discussions or votes by the
StarSight Board with respect to a transaction with Gemstar due to a possible
conflict of interest resulting from their positions as directors or officers of
Thomson multimedia S.A. ("Thomson") or its affiliates and existing business
arrangements between Thomson and each of StarSight and Gemstar. As a result,
Messrs. Meyer and Thibon did not participate in the StarSight Board's
discussion of matters relating to a possible transaction with Gemstar. One
StarSight director, John F. Doyle, voted against approval of the Merger
Agreement and the Merger. The StarSight Board's decision to approve the Merger
Agreement and the Merger was based, in large part on its assessment that in the
competitive environment in which StarSight operates, StarSight would not be
able to achieve significant net income for some time. The StarSight Board
recognized that StarSight's long-term success and its ability to achieve its
business plan may require global reach and broad acceptance in the marketplace.
In addition, the StarSight Board considered that the recent value of StarSight
reflects the impact of events which will have only a short-term positive impact
on the price of StarSight Common Stock and that the prospective value of the
combined StarSight/Gemstar company might be higher than StarSight on a stand
alone basis. Against these considerations it weighed, among other things, the
fact that the Exchange Ratio offered a premium to StarSight shareholders. Based
on the last reported sale price of Gemstar Ordinary Shares on the Nasdaq
National Market on December 20, 1996, the last trading day before the
announcement of the proposed Merger, the Exchange Ratio would result in a per
share purchase price for StarSight Common Stock of $10.46, representing a
premium of approximately $1.59 per share to the last reported sale price per
share of StarSight Common Stock on such date. Based on the last reported sale
price of Gemstar Ordinary Shares on April 11, 1997, the latest practicable
trading day before the printing of this Joint Proxy Statement/Prospectus for
which information was obtainable, the
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Exchange Ratio would result in a per share purchase price for StarSight Common
Stock of $8.49, representing a premium of approximately $0.87 per share to the
last reported sale price per share of StarSight Common Stock on such date. See
"MARKET PRICE AND DIVIDENDS." In addition, because the consideration was stock
in the ongoing enterprise combining StarSight and Gemstar, the StarSight Board
considered that StarSight's shareholders may have the opportunity to benefit
from any synergies to be achieved by such combination, including those
resulting from the combination of the intellectual property portfolios and the
complimentary nature of the companies' operations. StarSight's management
advised the StarSight Board that such synergies may be significant. StarSight's
management did not, however, attempt to quantify such synergies. Further, there
can be no assurance that such synergies will actually be achieved. In
considering the reports and opinions of StarSight's management with respect to
the Merger, the StarSight Board was apprised that such persons could have
personal interests in the Merger which may not be identical to the interests of
the other shareholders of StarSight. Other than apprising the StarSight Board
of such interests, StarSight did not take any other steps with respect to such
interests in the consideration of the Merger Agreement and the Merger by the
StarSight Board. For certain forward looking financial information regarding
Gemstar considered by the StarSight Board and StarSight's financial advisor,
see "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION." A fuller account of
the primary factors considered and relied upon by the StarSight Board in
reaching its recommendation are referred to in "THE PLAN OF MERGER--Reasons for
the Merger; Board Recommendations--StarSight's Reasons for the Merger."
OPINION OF STARSIGHT'S FINANCIAL ADVISORS
Smith Barney has delivered its written opinion, dated December 23, 1996, to
the StarSight Board, stating that, as of such date and based upon and subject
to certain matters stated therein, the Exchange Ratio of 0.6062 of a share of
Gemstar Ordinary Shares for each issued and outstanding share of StarSight
Common Stock was fair, from a financial point of view, to the holders of
StarSight Common Stock. The full text of the opinion of Smith Barney, which
sets forth the assumptions made, matters considered and limitations on the
review undertaken in connection with the opinion, is attached as Appendix C to
this Joint Proxy Statement/Prospectus and is incorporated herein by reference.
STARSIGHT SHAREHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS
ENTIRETY. See "THE PLAN OF MERGER--Opinions of Financial Advisors--StarSight."
THE STARSIGHT SPECIAL MEETING
Date, Time and Place. The StarSight Special Meeting will be held on May 1,
1997 at 7:00 a.m. California time at 3300 Kearney Street, Fremont, California
94538. At the StarSight Special Meeting, shareholders of record of StarSight,
as of the close of business on March 17, 1997 (the "StarSight Record Date")
will be asked to consider and vote upon a proposal to approve and adopt the
Merger Agreement and the Merger.
Record Date, Shares Entitled to Vote. Holders of record of StarSight Common
Stock at the close of business on the StarSight Record Date are entitled to
notice of and to vote at the StarSight Special Meeting. At the close of
business on the StarSight Record Date, there were a total of 25,613,145 shares
of StarSight Common Stock outstanding, each of which will be entitled to one
vote on each matter to be acted upon.
StarSight Votes Required. The required quorum for the transaction of business
at the StarSight Special Meeting is a majority of the shares of StarSight
Common Stock issued and outstanding on the StarSight Record Date. Abstentions
and broker non-votes each will be included in determining the number of shares
present for purposes of determining the presence of the quorum.
Pursuant to the California Corporations Code ("CCC") and the Restated
Articles of Incorporation of StarSight (the "StarSight Articles of
Incorporation"), and the Bylaws of StarSight (the "StarSight Bylaws"), approval
of the Merger Agreement and the Merger requires the affirmative vote of at
least a majority of the
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outstanding shares of StarSight Common Stock entitled to vote at the StarSight
Special Meeting. It is expected that all of the 14,636,337 shares of StarSight
Common Stock (which excludes shares subject to the Stock Options or the
Warrants) beneficially owned by directors and executive officers of StarSight
and their affiliates at the StarSight Record Date (representing approximately
57.1% of the total number of shares of StarSight Common Stock outstanding at
such date) will be voted for approval and adoption of the Merger Agreement. As
of the StarSight Record Date, Gemstar and its directors and executive officers
and their affiliates beneficially owned none of the outstanding shares of
StarSight Common Stock. In the event that the Merger Agreement and the
transactions provided for therein, including the Merger, are approved and
adopted by the affirmative vote of the holders of a majority of issued and
outstanding shares of StarSight Common Stock and the Merger is subsequently
challenged, StarSight may argue that an individual shareholder who voted in
favor of approving and adopting the Merger Agreement and the transactions
provided for therein, including the Merger is estopped from challenging the
merger under applicable state law. See "THE STARSIGHT SPECIAL MEETING."
THE MERGER
General
Effects of the Merger. The Merger will be consummated as soon as practicable
after Gemstar and StarSight shareholder approval and the satisfaction or waiver
of the other conditions to consummation of the Merger. Upon consummation of the
Merger, StarSight will become a wholly-owned subsidiary of Gemstar. The
shareholders of StarSight will become holders of Gemstar's Ordinary Shares (as
described below), and their rights will be governed by Gemstar's Memorandum of
Association, as amended and restated (the "Memorandum of Association"), and its
Articles of Association, as amended and restated (the "Articles of
Incorporation"). See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND
STARSIGHT."
Conversion of StarSight Common Stock. Pursuant to the Merger Agreement, as of
the Effective Time, (i) each issued and outstanding share of the capital stock
of Sub will be converted into and exchanged for one validly issued, fully paid
and nonassessable share of StarSight Common Stock, (ii) each share of StarSight
Common Stock that is owned by StarSight or by any of StarSight's subsidiaries
and each share of StarSight Common Stock that is owned by Gemstar, Sub or any
other subsidiary of Gemstar immediately prior to the Effective Time will
automatically be cancelled and retired without any conversion thereof and no
consideration will be delivered with respect thereto, and (iii) each share of
StarSight Common Stock issued and outstanding as of the Effective Time, other
than dissenting shares or shares to be cancelled in accordance with (ii) above,
will be converted by the Exchange Ratio. A cash payment will be made in lieu of
fractional shares of Gemstar Ordinary Shares.
All shares of StarSight Common Stock converted in the Merger will no longer
be outstanding and will automatically be cancelled and retired and will cease
to exist, and each holder of a certificate representing any such shares will
cease to have any rights with respect thereto, except the right to receive,
without interest, shares of Gemstar Ordinary Shares upon surrender of such
certificate.
Treatment of StarSight Stock Options. At the Effective Time, all Stock
Options then outstanding under the Stock Option Plan, whether vested or
unvested, will be assumed by Gemstar. Accordingly, each Stock Option shall be
deemed to constitute an option to acquire, on substantially the same terms and
conditions as were applicable under such Stock Option, the number of shares of
Gemstar Ordinary Shares the holder of such Stock Option would have been
entitled to receive pursuant to the Merger had such holder exercised such Stock
Option in full immediately prior to the Effective Time, at a price per share
equal to (y) the exercise price per share for the shares of StarSight Common
Stock otherwise purchasable pursuant to such Stock Option divided by (z) the
Exchange Ratio, with such exercise price per share rounded up to the nearest
whole cent. If the Merger Agreement and the Merger are approved by Gemstar
shareholders but the Stock Incentive Plan Proposal is not, approval of the
Merger Agreement and the Merger will be deemed to constitute approval of the
assumption by
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Gemstar of the outstanding Stock Options under the StarSight Stock Option Plan
as of the Effective Time of the Merger. See "PROPOSAL TO APPROVE AN AMENDMENT
TO GEMSTAR'S STOCK INCENTIVE PLAN." This assumption would be on a basis
reflecting a conversion of the Stock Options in the Merger into options to
purchase Gemstar Ordinary Shares, with appropriate adjustments to the number of
shares and the exercise price of the Stock Options as provided in the Merger
Agreement. The Stock Options, in these circumstances, would not be issued under
the Stock Incentive Plan. See "THE PLAN OF MERGER--Treatment of StarSight Stock
Options."
Treatment of StarSight Warrants. Each Warrant will, in accordance with its
terms, become an Adjusted Warrant exercisable for, or exchangeable for a new
Warrant (on substantially the same terms) that would be exercisable for the
number of shares of Gemstar Ordinary Shares equal to the number of shares
purchasable pursuant to the Warrant related to such Adjusted Warrant as of the
date of the Merger Agreement multiplied by the Exchange Ratio. The exercise
price of any Adjusted Warrant will be an amount equal to the exercise price of
the Warrant as of the date of the Merger Agreement divided by the Exchange
Ratio. See "THE PLAN OF MERGER--Treatment of StarSight Warrants."
Exchange of Certificates. As soon as practicable after the Effective Time,
Gemstar will mail a letter of transmittal with instructions to all holders of
record of StarSight Common Stock and the Warrants as of the Effective Time, for
use in surrendering their share certificates and Warrants in exchange for
Gemstar Ordinary Shares and a cash payment in lieu of fractional shares.
Certificates representing StarSight Common Stock and Warrants should not be
surrendered until the letter of transmittal is received. See "THE PLAN OF
MERGER--Exchange of Certificates."
Related Agreements
Affiliate Agreements. To help ensure that the Merger will be accounted for as
a "pooling of interests," the executive officers and directors of Gemstar and
StarSight and five percent (5%) shareholders of Gemstar and StarSight have
executed agreements (each an "Affiliate Agreement") that prohibit such persons
or their respective affiliates from disposing of their shares (i) during the
thirty (30) day period prior to the Effective Time and (ii) until Gemstar has
publicly released financial results for a period that includes at least thirty
(30) days of combined operations of Gemstar and StarSight. Such persons are not
prohibited under the Affiliate Agreements from selling up to 10% of the shares
held at the time of the Merger during the aforementioned period (limited in
total for all such persons to not more than 1% of StarSight's pre combination
outstanding shares) if the requirements of Rule 145 are complied with. Pursuant
to such agreements, the StarSight affiliates have also acknowledged the resale
restrictions imposed by Rule 145 promulgated under the Securities Act on shares
received by them in the Merger. See "THE PLAN OF MERGER--Related Agreements."
StarSight Significant Shareholder Agreement. In connection with the Merger
Agreement, certain significant shareholders of StarSight (collectively, the
"StarSight Significant Shareholders") entered into the Company Significant
Shareholder Agreement, dated as of December 23, 1996 (the "Company Significant
Shareholder Agreement"), with StarSight and Gemstar pursuant to which the
StarSight Significant Shareholders agreed to vote or cause to be voted all
shares of capital stock of StarSight 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 StarSight Common
Stock, representing approximately 51.0% of the outstanding Common Stock of
StarSight. 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
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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. Concurrently
with the Company Significant Shareholder Agreement, each StarSight Significant
Shareholder executed and delivered an Affiliate Agreement. See "THE PLAN OF
MERGER--Related Agreements."
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 StarSight 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 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 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 Gemstar 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
StarSight. The Parent Significant Shareholder Agreement terminates on June 30,
1997 unless the Merger Agreement is terminated earlier or extended, in which
case, the Parent Significant Shareholder Agreement will terminate on the same
date as the Merger Agreement. Concurrently with the Parent Significant
Shareholder Agreement, each Gemstar Significant Shareholder executed and
delivered an Affiliate Agreement. See "THE PLAN OF MERGER--Related Agreements."
Company Option Agreement. Concurrently with the execution of the Merger
Agreement, StarSight and Gemstar entered into a Company Option Agreement, dated
as of December 23, 1996 (the "Company Option Agreement"), pursuant to which
StarSight granted Gemstar an irrevocable option to purchase up to
5,276,034 shares of StarSight 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 below)
plus 30 days, or (iii) the payment by StarSight and the receipt by Gemstar of a
termination fee equal to $15 million (the "Company Termination Fee"); provided,
however, that the repurchase and registration rights provisions described below
shall terminate in accordance with their respective terms and not when the
Company Stock Option terminates. A "Company Takeover Proposal" means any
proposal (whether or not in writing and whether or not delivered to StarSight's
shareholders generally) regarding (i) a merger, consolidation, purchase of
assets (other than purchases of assets or inventory in the ordinary course of
business), tender offer, share exchange or other business combination or
similar transaction involving StarSight or any of its subsidiaries, (ii) any
proposal or offer to acquire in any manner, directly or indirectly, any equity
interest in or any voting securities of StarSight or any of its subsidiaries
which constitutes 10% or more of the total of such equity interests or voting
securities, or a substantial portion of the assets of StarSight or any of its
subsidiaries, (iii) the acquisition by any person of beneficial ownership or a
right to acquire beneficial ownership of, or the formation of any "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) which beneficially owns, or has the right to acquire beneficial
ownership of 10% or more of the then outstanding shares of StarSight's capital
stock, or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
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Upon any Company Purchase Event, or upon the failure of any of the StarSight
Significant Shareholders to vote in favor of the Merger at a duly held meeting
of StarSight's shareholders or at any adjournment or postponement thereof and,
in connection with such vote, the Merger is not approved by the shareholders of
StarSight, Gemstar, in lieu of exercising the Company Stock Option, may elect
to receive the Company Termination Fee in accordance with the terms of the
Merger Agreement. See "THE PLAN OF MERGER--Merger Expenses, Fees and Other
Costs."
If a Company Purchase Event occurs, upon five business days' prior written
notice (the "Company Put Notice") to StarSight, Sub will have the right to
cause StarSight (or any successor in interest to StarSight by merger, sale of
all or substantially all of the assets, or otherwise) to pay, (and StarSight
and any such successor, jointly and severally, will be obligated to pay) an
aggregate cancellation price (the "Company Cancellation Price") to Sub in
consideration for the cancellation of the Company Stock Option. The Company
Cancellation Price shall be equal to the product of (x) the number of shares of
StarSight Common Stock for which the Company Stock Option remains exercisable
multiplied by (y) the excess of (i) the average per share closing price of
shares of StarSight Common Stock as quoted on The Nasdaq National Market (or if
not then quoted thereon, on such other quotation system or exchange on which
the StarSight Common Stock is quoted) for the period of five trading days
ending on the trading day immediately prior to the occurrence of the Company
Put Notice over (ii) $10.46.
Subject to certain conditions, if requested by Gemstar at any time and from
time to time within three years of the first exercise of the Company Stock
Option, StarSight shall use its reasonable best efforts to prepare and file up
to two registration statements under the Securities Act if such registration is
necessary to permit the sale or other disposition of any or all shares of
StarSight Common Stock or other securities that have been acquired by or are
issuable to Gemstar upon exercise of the Company Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
StarSight effects a registration under the Securities Act of any StarSight
Common Stock for its own account or for any other shareholders of StarSight
(other than on Form S-4 or Form S-8, or any successor form thereto), StarSight
shall allow Gemstar to participate in such registration; provided, that
Gemstar's participation in such a registration statement shall not satisfy the
obligation of StarSight to effect the two registration statements at Gemstar's
request as set forth above.
Parent Option Agreement. Concurrently with the execution of the Merger
Agreement, StarSight 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 StarSight 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 below) plus 30 days, or
(iii) the payment by Gemstar and the receipt by StarSight of a termination fee
equal to $15 million (the "Parent Termination Fee"); provided, however, that
the repurchase and registration rights provisions described below shall
terminate in accordance with their respective terms and not when the Parent
Stock Option terminates. A "Parent Takeover Proposal" means any proposal
(whether or not in writing and whether or not delivered to Gemstar's
shareholders generally) regarding (i) a merger, consolidation, purchase of
assets (other than purchases of assets or inventory in the ordinary course of
business), tender offer, share exchange or other business combination or
similar transaction involving Gemstar or any of its subsidiaries, (ii) any
proposal or offer to acquire in any manner, directly or indirectly, any equity
interest in or any voting securities of Gemstar or any of its subsidiaries
which constitutes 10% or more of the total of such equity interests or voting
securities, or a substantial portion of the assets of Gemstar or any of its
subsidiaries, (iii) the acquisition by any person of beneficial ownership or a
right
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to acquire beneficial ownership of, or the formation of any "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) which beneficially owns, or has the right to acquire beneficial
ownership of 10% or more of the then outstanding shares of Gemstar's capital
stock, or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
Upon any termination of the Merger Agreement pursuant to Section 7.1(i), (k)
or (m) thereof, or upon the failure of any of the Gemstar Significant
Shareholders to vote in favor of the Merger at a duly held meeting of Gemstar's
shareholders or at any adjournment or postponement thereof and, in connection
with such vote, the Merger is not approved by the shareholders of Gemstar,
StarSight, in lieu of exercising the Parent Stock Option, may elect to receive
the Parent Termination Fee in accordance with the terms of the Merger
Agreement. See "THE PLAN OF MERGER--Merger Expenses, Fees and Other Costs."
If a Purchase Event occurs, upon five business days' prior written notice
(the "Parent Put Notice") to Gemstar, StarSight will have the right to cause
Gemstar (or any successor in interest to Gemstar by merger, sale of all or
substantially all of the assets, or otherwise) to pay (and Gemstar and such
successor, jointly and severally, will be obligated to pay) an aggregate
cancellation price (the "Parent Cancellation Price") to StarSight in
consideration for the cancellation of the Parent Stock Option. The Parent
Cancellation Price shall be equal to the product of (x) the number of shares of
Gemstar Ordinary Shares as to which the Parent Stock Option remains exercisable
multiplied by (y) the excess of (i) the average per share closing price of
shares of Gemstar Ordinary Shares as quoted on The Nasdaq National Market for
the period of five trading days ending on the trading day immediately prior to
the occurrence of the Parent Put Notice over (ii) $17.25.
Subject to certain conditions, if requested by StarSight at any time and from
time to time within three years of the first exercise if the Parent Stock
Option, Gemstar shall use reasonable best efforts to prepare and file up to two
registration statements under the Securities Act if such registration is
necessary to permit the sale or other disposition of any or all shares of
Gemstar Ordinary Shares or other securities that have been acquired by or are
issuable to StarSight upon exercise of the Parent Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
Gemstar effects a registration under the Securities Act of any Gemstar Ordinary
Shares for its own account or for any other shareholders of Gemstar (other than
on Form S-4 or Form S-8, or any successor form), Gemstar shall allow StarSight
to participate in such registration; provided, that StarSight's participation
in such a registration statement shall not satisfy the obligation of Gemstar to
effect the two registration statements at StarSight's request as set forth
above.
Interests of Certain Persons in the Merger
Change of Control/Severance Agreements. StarSight entered into employment
agreements with each of Larry W. Wangberg, Chairman and Chief Executive
Officer, Martin W. Henkel, Executive Vice President, Chief Financial Officer
and Secretary, Brian L. Klosterman, President and Chief Operating Officer, and
William Scharninghausen, Chief Accounting Officer, at the time of their initial
hiring by StarSight. Each existing employment agreement with StarSight 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 the Merger, StarSight will make a lump sum payment equal to the
executive's base salary, car allowance and guaranteed bonus for the remaining
term of such individual's prior employment agreement, totaling approximately
$3,385,164, approximately $678,090 and approximately $636,437, respectively. In
the case of Mr. Scharninghausen, upon consummation of the Merger, such
applicable lump sum cash payment shall be equal to one year of
Mr. Scharninghausen's current base salary less applicable withholdings or
approximately $123,833. Five other StarSight employees have existing employment
agreements with StarSight that contain provisions for lump sum severance
payments of an aggregate of approximately $788,960 that will be triggered by
the Merger. The amount of the lump sum payment to each of the StarSight
executives may vary based on the
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date of the closing of the Merger and each executive's base salary as of such
date. No additional services after the Merger are required to be provided in
connection with these payments. In addition, the severance provisions of the
existing employment agreements provide that each executive's stock options will
accelerate in accordance with the terms of such existing employment agreement.
As of March 17, 1997, the number of options subject to acceleration are
383,334, 99,792, 30,313, and 17,015, respectively, for Messrs. Wangberg,
Klosterman, Henkel and Scharninghausen. 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, StarSight will be required to 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. See
"THE PLAN OF MERGER--Interests of Certain Persons in the Merger--Employment
Agreements."
In connection with the December 23, 1996 employment agreements of Messrs.
Wangberg and Klosterman discussed below and pursuant to two separate letter
agreements entered into at the request of StarSight and dated as of December
23, 1996, by and among StarSight and Mr. Wangberg and Mr. Klosterman, Messrs.
Wangberg and Klosterman received from StarSight in 1996 certain lump sum cash
payments (the "Accelerated Payments") totaling approximately $100,000 and
$350,000, respectively, to which they are entitled under their respective
existing employment agreements. The payments made in 1996 will be deducted from
the lump sum payments Messrs. Wangberg and Klosterman are entitled to receive
at the Effective Time. In the event the Merger is not consummated, each of Mr.
Wangberg and Mr. Klosterman will seek any available refund or reduction in tax
liability and reimburse StarSight in the amount of any tax refund or reduction
in liability to which he is entitled with respect to the Accelerated Payments.
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
StarSight pursuant to the letter agreement, StarSight 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. See "THE PLAN OF
MERGER--Interests of Certain Persons in the Merger--Employment Agreements."
Employment Agreements. StarSight has entered into employment agreements, (the
"Executive Employment Agreements") each dated December 23, 1996, with Larry W.
Wangberg, Brian L. Klosterman, Martin W. Henkel and William Scharninghausen
(collectively, the "StarSight Executives") and the following other employees of
StarSight: Kenneth A. Milnes, Jonathan Orlick, Robert Russman, Daniel Donnelly
and Michael Hopkins (such other employees are hereinafter referred to as
"StarSight Employees"). All such employment agreements become effective at the
Effective Time of the Merger and provide for the employment of such persons for
a period (the "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. In addition, each employment agreement provides that the
Employment Period shall automatically be renewed unless either of the parties
thereto notifies the other of the termination thereof.
Generally, if StarSight terminates an employment agreement with the StarSight
Executives or the StarSight Employees without Cause (as defined below) during
the Employment Period, then the affected employee shall be entitled to continue
to receive his salary from StarSight (as specified in such employment
agreement) for the remainder of such employee's Employment Period. If an
employee is terminated for Cause, StarSight shall have no further obligations
to pay any salary or other compensation to such employee. The Employment Period
will also terminate in the event of the employee's death or disability, and in
each such case, StarSight will be required to make certain limited payments. An
employee shall be terminated for "Cause" if: (i) the employee has engaged in
illegal or other wrongful conduct substantially detrimental to the business or
reputation of StarSight or any affiliated company, or is charged with or
convicted of a felony; (ii) the employee refuses or fails to act in accordance
with any reasonable direction or order of the StarSight Board; provided that
the StarSight Board has given employee written notice of such refusal or
failure and the employee fails to comply with such direction or
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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 StarSight.
In addition, the employment agreements provide that 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,
StarSight 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, including without limitation, (i) solicit or interfere with any of
StarSight's suppliers or customers; (ii) employ, solicit for employment, or
recommend for employment any person employed by StarSight, during the period of
such person's employment by StarSight and for one year thereafter; or (iii)
engage in any business activity that is competitive with StarSight; provided
that in no event shall the employee engage in such competitive activities
during the period which he continues to receive payments pursuant to the
termination provisions of the applicable employment agreement. For the purposes
of the employment agreements, "competitive activities" are defined as business
activities that are directly competitive with any existing or presently planned
business of StarSight on the date of termination, which activity constitutes or
is anticipated to constitute more than 15% of the revenues of StarSight.
The employment agreements with the StarSight Executives and the StarSight
Employees also contain standard employee invention and intellectual property
confidentiality provisions and severance provisions relating to each such
employee's existing employment agreement with StarSight (collectively, the
"Prior Employment Agreements"). For a discussion of such severance provisions
for the StarSight Executives, see "THE PLAN OF MERGER--Interests of Certain
Persons in the Merger."
Indemnification and Insurance. The Merger Agreement provides that upon the
Effective Time, Gemstar will assume all of the obligations of StarSight under
StarSight's existing indemnification agreements with each of the directors and
officers of StarSight, as such agreements relate to the indemnification of such
person for expenses and liabilities arising from facts or events which occurred
on or before the Effective Time or relating to the Merger or transactions
contemplated by the Merger Agreement. The Merger Agreement also requires the
surviving corporation in the Merger or, at Gemstar's discretion, Gemstar to
maintain in effect for three years from the Effective Time, policies of
directors' and officers' liability insurance for the benefit of the directors
and officers of StarSight at the Effective Time containing terms and conditions
which are not materially less advantageous to the directors and officers of
StarSight than those policies maintained by StarSight at the date of the Merger
Agreement, with respect to matters occurring before the Effective Time, to the
extent available, and having the maximum available coverage under the current
StarSight directors' and officers' liability insurance. In lieu of the purchase
of such insurance by the surviving corporation in the Merger or Gemstar,
StarSight, with the written consent of Gemstar, may purchase a three-year
extended reporting period endorsement under its existing policies of directors'
and officers' liability insurance. See "THE PLAN OF MERGER--Interests of
Certain Persons in the Merger--Indemnification and Insurance."
Interests in StarSight Common Stock, Options and Warrants. As of the
StarSight Record Date, the executive officers and directors of StarSight or
their respective affiliates beneficially owned an aggregate of 15,496,307
shares of StarSight Common Stock (including 859,970 shares of StarSight Common
Stock subject to StarSight Options and StarSight Warrants exercisable within 60
days of the date of this Joint Proxy Statement/Prospectus). Based upon the
closing sale price of the Gemstar Ordinary Shares on the StarSight Record Date
of $14.25, and assuming the exercise of outstanding StarSight Options and
StarSight Warrants exercisable within 60 days of the date of this Joint Proxy
Statement/Prospectus, the aggregate dollar value of Gemstar Ordinary Shares to
be received in the Merger by the executive officers and directors of StarSight
and their respective affiliates is approximately $133,862,524. Pursuant to
certain plans, options or agreements of StarSight, all Stock Options held by
certain directors and executive officers will become immediately exercisable at
the Effective Time. See "THE PLAN OF MERGER--Treatment of StarSight Stock
Options" and "--Treatment of StarSight Warrants."
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REPRESENTATIONS AND COVENANTS OF STARSIGHT
Under the Merger Agreement, StarSight made a number of representations
regarding StarSight's capital structure, operations, financial condition and
other matters, including that (i) StarSight is a corporation duly organized,
validly existing and in good standing under the laws of California; (ii)
StarSight possesses the requisite corporate power and authority to enter into
the Merger Agreement and to consummate the Merger; (iii) StarSight does not
own, directly or indirectly, any capital stock or other ownership interest in
any corporation, partnership, joint venture or other entity; (iv) its
authorized capital stock consists of 50,000,000 shares of StarSight Common
Stock, no par value, and 5,000,000 shares of StarSight Preferred Stock, no par
value; (v) StarSight has filed with the Commission all required reports and
forms and other documents and all such documents comply in all material
respects with all applicable federal and state securities laws (the "StarSight
SEC Documents"); (vi) none of the information supplied by StarSight
specifically for inclusion or incorporation by reference in the Registration
Statement on Form F-4 (the "Form F-4") or the Joint Proxy Statement/Prospectus
contains any untrue statement of a material fact or omits any material fact;
(vii) except as disclosed in the StarSight SEC Documents filed prior to the
date of the Merger Agreement, since December 31, 1995, StarSight has conducted
its business only in the ordinary course consistent with prior practice; (viii)
all pending or threatened litigation and administrative proceedings have been
disclosed; (ix) except as disclosed in the StarSight SEC Documents filed prior
to the date of the Merger Agreement, StarSight has not adopted or amended in
any material respect any of its employee benefit plans, and, except as would
not have, in the aggregate, a material adverse effect on StarSight, any and all
such plans comply with the Employee Retirement Income Security Act, as amended
("ERISA"); (x) StarSight has timely filed all federal, state, local and foreign
tax returns and reports, and all such returns and reports contain accurate and
complete information in all material respects; (xi) no excess parachute
payment, as that term is defined in Section 280G(b)(1) of the Internal Revenue
Code of 1986, as amended (the "Code"), is provided for in any StarSight benefit
plan currently in effect; (xii) StarSight has complied with all applicable laws
and has in effect all federal, state, local and foreign governmental approvals
necessary for it to own, lease or operate its properties and assets; (xiii)
except for H. Joseph Horowitz and Smith Barney, no broker or other person is
entitled to any fee in connection with the Merger; (xiv) StarSight has received
the opinion of Smith Barney to the effect that based upon and subject to
certain matters stated therein as of the date of the Merger Agreement, the
Exchange Ratio was fair to the holders of StarSight Common Stock from a
financial point of view, and a signed copy of such opinion has been delivered
to Gemstar; (xv) except for confidential contracts set forth on Schedule
3.1(p)(1) of the Merger Agreement, all material contracts have been disclosed
to Gemstar; (xvi) StarSight has good and marketable title to, or valid
leasehold interests in, all of its material properties and assets; (xvii)
StarSight has not, and to its knowledge none of its affiliates has taken or
agreed to take any action that would prevent the Merger from being accounted
for as a "pooling of interests"; (xviii) approval of the StarSight shareholders
is the only vote of the holders of any class or series of its securities
necessary to approve the Merger Agreement; (xix) StarSight is not subject to
any noncompetition or similar restriction on its business; and (xx) StarSight
owns or possesses adequate and enforceable licenses or other rights to use all
patents, trade secrets, trade names, and inventions and processes used in and
material to its business.
StarSight has agreed that during the period from the date of the Merger
Agreement and continuing until the earlier of the termination of the Merger
Agreement pursuant to its terms or the Effective Time StarSight (i) will carry
on its business in the ordinary course; (ii) will use all reasonable efforts to
preserve its current business organizations; (iii) will keep available the
services of its current officers and employees; (iv) will preserve its
relationships with customers, suppliers and others having business dealings
with StarSight; (v) will confer with Gemstar prior to taking any material
actions or making any material management decisions regarding the business of
StarSight; and (vi) without Gemstar's prior written consent will not (a)
declare dividends or make changes in its stock; (b) except for the issuance of
StarSight Common Stock upon the exercise of Stock Options and Warrants
outstanding on the date of the Merger Agreement, issue or authorize any new
shares of its capital stock; (c) amend the StarSight Articles of Incorporation
or Bylaws; (d) acquire or agree to acquire any business or a substantial
portion of the assets of any business; (e) mortgage or otherwise encumber or
subject to lien or
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sell any property or assets except in the ordinary course of business; (f)
increase the rate or terms of compensation to any of its directors, executive
officers or employees other than usual and customary salary increases to non-
management employees; (g) change its fiscal year; (h) except for the incurrence
of indebtedness which, in the aggregate, does not exceed $250,000, incur any
indebtedness for borrowed money or guarantee any such indebtedness of another
person; (i) make or agree to make any new capital expenditures which
individually exceed $50,000 or which in the aggregate exceed $500,000; (j) make
or rescind any express or deemed election relating to taxes; (k) pay, discharge
or satisfy any claims or liabilities other than in the ordinary course of
business; (l) except in the ordinary course of business, modify, amend, renew
or fail to renew any material contract; or (m) authorize any of, or commit or
agree to take any of, the foregoing actions.
THE FOREGOING IS A SUMMARY OF THE REPRESENTATIONS, WARRANTIES AND COVENANTS
CONTAINED IN THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE
ACTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONTAINED THEREIN.
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, WHICH IS ATTACHED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS, IN ITS ENTIRETY.
REPRESENTATIONS AND COVENANTS OF GEMSTAR
Under the Merger Agreement, Gemstar made a number of representations
regarding Gemstar's capital structure, operations, financial condition and
other matters, including that (i) Gemstar is a corporation duly organized,
validly existing and in good standing under the laws of the British Virgin
Islands; (ii) Gemstar possesses the requisite corporate power and authority to
enter into the Merger Agreement and to consummate the Merger; (iii) except for
the capital stock of its subsidiaries, Gemstar does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, joint venture or other entity; (iv) Gemstar's authorized capital
stock consists of 500,000,000 shares of Gemstar Ordinary Shares, par value $.01
per share, and 50,000,000 preference shares, par value $.01 per share; (v)
Gemstar has filed with the Commission all required reports and forms and other
documents and all such documents comply in all material respects with all
applicable federal and state securities laws (the "Gemstar SEC Documents");
(vi) none of the information supplied by Gemstar specifically for inclusion or
incorporation by reference in the Form F-4 or the Joint Proxy
Statement/Prospectus contains any untrue statement of a material fact or omits
any material fact; (vii) except as disclosed in the Gemstar SEC Documents filed
prior to the date of the Merger Agreement, since December 31, 1995, Gemstar has
conducted its business only in the ordinary course consistent with prior
practice; (viii) all pending or threatened litigation and administrative
proceedings have been disclosed; (ix) except as disclosed in the Gemstar SEC
Documents filed prior to the date of the Merger Agreement, Gemstar has not
adopted or amended in any material respect any of its employee benefit plans,
and except as would not have, in the aggregate, a material adverse effect on
Gemstar, any and all such plans comply with ERISA; (x) Gemstar has timely filed
all federal, state, local and foreign tax returns and reports, and all such
returns and reports contain accurate and complete information; (xi) Gemstar has
complied with all applicable laws; (xii) except for Hambrecht & Quist and Alex.
Brown & Sons Incorporated, no broker or other person is entitled to any fee in
connection with the Merger; (xiii) Gemstar has received the opinion of
Hambrecht & Quist to the effect that, as of the date of the Merger Agreement,
the consideration to be received in the Merger was fair to Gemstar and its
shareholders from a financial point of view, and a signed copy of such opinion
has been delivered to StarSight; (xiv) except for confidential contracts set
forth on Schedule 3.2(o)(1) of the Merger Agreement, all material contracts
have been disclosed to StarSight; (xv) Gemstar has good and marketable title
to, or valid leasehold interests in, all of its material properties and assets;
(xvi) Gemstar has not, and to its knowledge none of its affiliates has taken or
agreed to take any action that would prevent the Merger from being accounted
for as a "pooling of interests"; (xvii) approval of the Gemstar Shareholders is
the only vote of the holders of any class or series of its securities necessary
to approve the Merger Agreement; (xviii) Gemstar is not subject to any
noncompetition or similar restriction on its business; (xix) Gemstar owns or
possesses adequate and enforceable licenses or other rights to use all patents,
trade secrets, trade names, and inventions and processes
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used in and material to its business; and (xx) Sub was formed solely for the
purpose of engaging in the transactions contemplated by the Merger Agreement
and has engaged in no other business activities.
Gemstar has agreed that during the period from the date of the Merger
Agreement and continuing until the earlier of the termination of the Merger
Agreement pursuant to its terms or the Effective Time, Gemstar will carry on
its business in the ordinary course and use all efforts to preserve its
relationships with customers, suppliers and others having business dealings
with Gemstar. Gemstar has further agreed that it will not, without StarSight's
prior written consent: (i) declare, set aside or pay any dividends on its
capital stock; (ii) split, combine, reclassify or acquire any of its capital
stock or issue any other securities in lieu of its capital stock; (iii) other
than the grant of up to 2 million Gemstar Ordinary Shares as stock options,
issue, deliver, sell, award, pledge, dispose of or otherwise encumber or
authorize or propose the issuance of any shares of its capital stock, voting
securities or convertible securities, (iv) amend its Articles of Association,
Memorandum of Association or comparable organizational documents; (v) acquire
or agree to acquire any business or a substantial portion of the assets of any
business which, in the aggregate, has a value in excess of $10,000,000 (vi)
mortgage or otherwise encumber or subject to any lien or sell, lease, exchange
or otherwise dispose of any of its properties or assets, except for sales of
its properties or assets in the ordinary course of business consistent with
past practice; (vii) change its fiscal year; (viii) except for the incurrence
of indebtedness which, in the aggregate, does not exceed $1,000,000, incur any
indebtedness for borrowed money or guarantee any such indebtedness of another
person; (ix) pay, discharge or satisfy any claims or liabilities other than in
the ordinary course of business; or (x) authorize any of, or commit or agree to
take any of, the foregoing actions.
THE FOREGOING IS A SUMMARY OF THE REPRESENTATIONS, WARRANTIES AND COVENANTS
CONTAINED IN THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE
ACTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONTAINED THEREIN.
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, WHICH IS ATTACHED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS, IN ITS ENTIRETY.
CONDITIONS TO THE MERGER
The obligations of Gemstar and StarSight to consummate the Merger will be
subject to the satisfaction of a number of other conditions, including (i) the
approval of the issuance of Gemstar Ordinary Shares as contemplated by the
Merger Agreement by the Gemstar shareholders and the approval of the Merger
Agreement and the transactions contemplated thereby by the StarSight
shareholders; (ii) the approval for listing on The Nasdaq National Market of
the shares of Gemstar Ordinary Shares issuable to StarSight's shareholders and
option and warrant holders pursuant to the Merger Agreement; (iii) the absence
of any litigation or proceedings brought by a governmental entity which seeks
to enjoin or prohibit the consummation of the Merger; (iv) the declaration by
the Commission that the Form F-4 is effective; (v) the absence of any stop
orders or proceedings initiated or threatened by the Commission for that
purpose with respect to the Form F-4; (vi) the expiration of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"); and (vii) 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 StarSight 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; and (ii) each of Gemstar and StarSight receiving an
opinion letter from their respective accounting firms, in form and substance
reasonably acceptable to Gemstar and StarSight, regarding the appropriateness
of "pooling of interests" accounting treatment under generally accepted
accounting principles.
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Gemstar's obligation to consummate the Merger is further conditioned upon
StarSight obtaining the consent or approval of each person whose consent or
approval will be required in connection with the Merger under all loan or
credit agreements, notes, mortgages, indentures, leases, or other agreements or
instruments to which it or any of its subsidiaries is a party, except those for
consents and approvals which, if not obtained, would not have a material
adverse effect on StarSight or Gemstar after the Effective Time. In addition,
no event shall have occurred which had a material adverse effect on StarSight,
provided however, that the following will not be deemed to have a material
adverse effect on StarSight: (A) changes in the prices of StarSight Common
Stock traded on The Nasdaq National Market; (B) developments in the litigation
between Gemstar and StarSight; and (C) the failure of StarSight to execute a
definitive settlement agreement with Scientific Atlanta, Inc. regarding (i) the
receipt by StarSight of an outstanding arbitration award, (ii) settlement of
pending litigation between StarSight and Scientific-Atlanta, Inc., (iii) the
terms of a multi-year license of StarSight's technology to Scientific Atlanta,
Inc., and (iv) other related matters.
StarSight's obligation to consummate the Merger is further conditioned upon
there not having occurred, from and including the date of the Merger Agreement,
Gemstar obtaining the consent or approval of each person whose consent or
approval will be required in connection with the Merger under all loan and
credit agreements, notes, mortgages, indentures, leases or other agreements or
instruments to which it or any of its subsidiaries is a party, except for
consents and approvals whose failure to obtain would not have a material
adverse effect on StarSight or Gemstar after the Effective Time, and any event
which has had a material adverse effect on Gemstar and its subsidiaries taken
as a whole; provided, however, that neither (i) changes or fluctuations in the
price of Gemstar Ordinary Shares on The Nasdaq National Market, nor (ii)
developments in pending litigation between Gemstar and StarSight will be deemed
to have such a material adverse effect.
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger could not be consummated until notifications
were given and certain information was furnished to the FTC and the Antitrust
Division of the Department of Justice (the "Antitrust Division") and specific
waiting period requirements were satisfied. All applicable waiting periods
under the HSR Act regarding the Merger have expired. Accordingly, Gemstar and
StarSight have complied with such applicable regulations as they relate to the
Merger.
TERMINATION OR AMENDMENT
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, StarSight accepts or recommends to its
shareholders a Company Superior Proposal (as such term is defined below); or
(vi) prior to the consummation of the Merger, Gemstar accepts or recommends to
its shareholders a Parent Superior Proposal (as such term is defined below).
The Merger Agreement may be terminated by Gemstar if the StarSight Board fails
to recommend, withdraws or modifies adversely its recommendation of the Merger
or StarSight fails to comply with its obligations under Section 5.1 of the
Merger Agreement following a Company Takeover Proposal. The Merger Agreement
may be terminated by StarSight if the Gemstar Board fails to recommend or
withdraws or modifies adversely its recommendation of the Merger or Gemstar
fails to comply with its
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obligations under Section 5.1 of the Merger Agreement following a Parent
Takeover Proposal. A "Company Superior Proposal" means a written, unsolicited,
bona fide Company Takeover Proposal made by a third party that is (based on
objective criteria and not on the subjective intent of the acquiror) likely to
be consummated and is financially superior to the Merger, as determined in each
case in good faith by StarSight's Board after consultation with, and the
receipt of an opinion from, StarSight's financial advisors, which shall be of
national reputation. A "Parent Superior Proposal" means a written, unsolicited,
bona fide Parent Takeover Proposal made by a third party that is likely to be
consummated and is financially superior to the Merger as determined in each
case in good faith by Gemstar's Board after consultation with, and the receipt
of an opinion from, Gemstar's financial advisors, which shall be of national
reputation.
In the event of a termination by Gemstar or StarSight, the Merger Agreement
will become void without any liability or obligation on the part of Gemstar,
Sub or StarSight, except with respect to the general provisions of Article VIII
of the Merger Agreement, and certain other provisions relating to, among other
things, the payment of fees and expenses incurred in connection with the Merger
and the Merger Agreement and the transactions contemplated by them. If the
Merger Agreement is terminated or the Merger is not consummated because
(i) StarSight, prior to the consummation of the Merger, accepts or recommends
to its shareholders a Company Superior Proposal, (ii) StarSight fails to
recommend or withdraws or modifies adversely its recommendation of the Merger
or fails to comply with its obligations under Section 5.1 of the Merger
Agreement following a Company Takeover Proposal, (iii) following a Company
Takeover Proposal, any approval of the shareholders of StarSight required for
the consummation of the Merger is not obtained, or (iv) the Company Significant
Shareholders fail to vote in favor of the Merger at a duly held meeting of
StarSight's shareholders with the result being that the Merger is not approved
by the shareholders of StarSight, StarSight, upon written notice from Gemstar
at any time of Gemstar's election to receive the Company Termination Fee in
lieu of Gemstar exercising the Company Stock Option (the "Company Termination
Fee Notice"), shall immediately pay to Gemstar the Company Termination Fee.
Following any termination of the Merger Agreement pursuant to the factors
listed above, StarSight shall give Gemstar at least thirty (30) days (and not
more than forty-five (45) days) prior written notice of the closing date of any
Company Takeover Proposal, and Gemstar, if it elects to receive the Company
Termination Fee upon such closing, shall give written notice to StarSight (the
"Company Payment Notice") at least five days prior to such closing (which
notice shall be effective only upon such closing), and StarSight shall pay the
Company Termination Fee upon such closing. If Gemstar has not delivered the
Company Payment Notice within such time frame, then upon (and only upon) the
closing of the Company Takeover Proposal, Gemstar's right to receive the
Company Termination Fee shall terminate. Payment of the Company Termination Fee
will not be in lieu of damages incurred in the event of breach of the Merger
Agreement.
If the Merger Agreement is terminated or the Merger is not consummated
because (i) Gemstar, prior to the consummation of the Merger, accepts or
recommends to its shareholders a Parent Superior Proposal, (ii) Gemstar fails
to recommend or withdraws or modifies adversely its recommendation of the
Merger or fails to comply with its obligations under Section 5.1 of the Merger
Agreement following a Parent Takeover Proposal, (iii) following a Parent
Takeover Proposal, any approval of the shareholders of Gemstar required for the
consummation of the Merger is not obtained, or (iv) the Parent Significant
Shareholders fail to vote in favor of the Merger at a duly held meeting of
Gemstar's shareholders with the result being that the Merger is not approved by
the shareholders of Gemstar, Gemstar, upon written notice from StarSight at any
time of StarSight's election to receive the Parent Termination Fee in lieu of
StarSight exercising the Parent Stock Option (the "Parent Termination Fee
Notice"), shall immediately pay to StarSight the Parent Termination Fee.
Following any termination of the Merger Agreement pursuant to the factors
listed above, Gemstar shall give StarSight at least thirty (30) days (and not
more than forty-five (45) days) prior written notice of the closing date of any
Parent Takeover Proposal, and StarSight, if it elects to receive the Parent
Termination Fee upon such closing, shall give written notice to Gemstar (the
"Parent Payment Notice") at least five days prior to such closing (which notice
shall be effective only upon such closing), and Gemstar shall pay the Parent
Termination Fee upon such closing. If StarSight has not delivered the Parent
Payment Notice within such time frame, then upon (and only upon) the
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closing of the Parent Takeover Proposal, StarSight's right to receive the
Parent Termination Fee shall terminate. Payment of the Parent Termination Fee
will not be in lieu of damages incurred in the event of breach 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 StarSight shareholders,
except that, after such approval, no amendment may be made that by law requires
the further approval of the shareholders of StarSight or Gemstar. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of Gemstar and StarSight.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Based upon opinions of tax counsel, which opinions rely upon certain
customary factual assumptions and representations, the Merger will qualify as a
tax-free reorganization for federal income tax purposes, so that except as
described in the following sentence, no gain or loss will be recognized by the
StarSight shareholders on the exchange of StarSight Common Stock for Gemstar
Ordinary Shares, except to the extent that StarSight shareholders receive cash
in lieu of fractional shares or upon exercise of dissenters rights. A StarSight
shareholder who is a United States person (as defined in Section 7701(a)(30) of
the Code) owning at least 5% of the Gemstar Ordinary Shares after the Merger
(taking into account the constructive ownership rules of Section 958 of the
Code) (a 5% Shareholder) will recognize gain under Section 367 (a) of the Code
with respect to the StarSight Common Stock exchanged in the Merger at the
Effective Time unless such 5% Shareholder enters into a five-year "gain
recognition agreement" with the United States Internal Revenue Service.
StarSight shareholders are urged to consult their own tax advisors regarding
the specific tax consequences to them of the Merger, including the applicable
federal, state, local and foreign tax consequences of the Merger to them in
their particular circumstances. See "THE PLAN OF MERGER--Certain Federal Income
Tax Matters."
ACCOUNTING TREATMENT
The Merger is intended to be treated as a pooling of interests for accounting
purposes. As a condition to each party's obligation to consummate the Merger,
Gemstar and StarSight shall have received from KPMG Peat Marwick LLP, as
independent auditors of Gemstar, and Deloitte & Touche LLP, as independent
auditors of StarSight, on the Closing Date, letters, dated as of such date, in
form and substance reasonably acceptable to Gemstar and StarSight regarding the
appropriateness of pooling-of-interests accounting treatment under generally
accepted accounting principles. StarSight has agreed to use commercially
reasonable efforts to cause its independent auditors, Deloitte & Touche LLP, to
cooperate fully with KPMG Peat Marwick LLP in connection with the delivery to
Gemstar of such letter. See "THE PLAN OF MERGER--Accounting Treatment."
MERGER EXPENSES AND OTHER COSTS
Except for the termination fees set forth in Section 7.5 of the Merger
Agreement, whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses; except
that those expenses, other than attorneys' and accountants' fees and expenses,
incurred in connection with printing the Joint Proxy Statement/Prospectus, as
well as the filing fee relating to the Joint Proxy Statement/Prospectus paid to
the Commission, will be shared equally by Gemstar and StarSight. See "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION"; "THE PLAN OF MERGER--
Conditions to the Merger" and "--Termination."
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DISSENTERS' RIGHTS
Pursuant to the terms of the Merger Agreement, if holders of at least 5% of
the outstanding shares of StarSight Common Stock have exercised dissenters'
rights in connection with the Merger under Sections 1300-1312 of the California
General Corporation law ("Section 1300"), any holder of StarSight Common Stock
may exercise dissenters' rights by voting against the Merger and following the
procedures set forth in Section 1300. If the holders of shares representing at
least 5% of the outstanding shares of StarSight's Common Stock do not exercise
dissenters' rights, then only a holder of StarSight's Common Stock with respect
to which there exists a restriction on transfer imposed by StarSight or by any
law or regulation will be so entitled.
A STARSIGHT SHAREHOLDER WISHING TO EXERCISE DISSENTERS' RIGHTS MUST VOTE
AGAINST THE MERGER AGREEMENT AND THE MERGER AT THE STARSIGHT SPECIAL MEETING.
HOWEVER, VOTING AGAINST THE MERGER AGREEMENT AND THE MERGER WILL NOT, IN AND OF
ITSELF, BE SUFFICIENT NOTICE OF SUCH SHAREHOLDERS' INTENTION TO DISSENT.
RATHER, ANY STARSIGHT SHAREHOLDER WISHING TO EXERCISE DISSENTERS' RIGHTS MUST
COMPLY WITH THE PROCEDURES SET FORTH IN SECTION 1300. SEE "DESCRIPTION OF
STARSIGHT CAPITAL STOCK--DISSENTERS' RIGHTS" AND THE FULL TEXT OF SECTION 1300,
A COPY OF WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
APPENDIX H AND IS INCORPORATED HEREIN BY REFERENCE.
PROPOSAL TO APPROVE AN AMENDMENT TO GEMSTAR'S STOCK INCENTIVE PLAN
Gemstar's Stock Incentive Plan, as amended, was adopted by the Gemstar Board
in 1994, revised in 1995 in connection with Gemstar's initial public offering
and further revised in 1996 (subject to shareholder approval) principally to
enable the assumption of options (and their conversion) in the Merger.
Shareholders previously approved the Stock Incentive Plan and the 1995
amendment. The Stock Incentive Plan authorized 5,600,000 Gemstar Ordinary
Shares for issuance; as of December 23, 1996, 637,833 Gemstar Ordinary Shares
remained available for issuance under the Plan, with no additional shares
available because of expiration or termination of options outstanding on that
date.
On December 22, 1996, the Gemstar Board approved, subject to shareholder
approval, an amendment to the Stock Incentive Plan which would increase the
number of shares reserved for issuance under the Stock Incentive Plan by
3,500,000 Gemstar Ordinary Shares. At the Gemstar Annual Meeting, the Gemstar
shareholders will be requested to approve the amendment.
The Gemstar Board believes that it is in Gemstar's best interest to increase
the number of shares reserved for issuance under the Stock Incentive Plan in
order to provide for sufficient shares to accommodate the assumption of the
StarSight Stock Options in accordance with the terms of the Merger Agreement,
if the Merger Agreement and Merger are approved. If the Merger Agreement is
approved and adopted, each StarSight Stock Option outstanding immediately prior
to the Effective Time under the Stock Option Plan which has not been exercised
in accordance with its terms, will be assumed by Gemstar on a converted basis
so that each Stock Option will be deemed to constitute an option to acquire, on
substantially the same terms and conditions as were applicable under the
StarSight Stock Option, the number, rounded down to the nearer whole integer,
of full shares of Gemstar Ordinary Shares that the holder of the StarSight
Stock Option would have been entitled to receive pursuant to the Merger had the
holder exercised the StarSight Stock Option in full, including unvested shares,
immediately prior to the Effective Time, at a price per share equal to (y) the
exercise price per share for the shares of StarSight Common Stock otherwise
purchasable pursuant to such Stock Option divided by (z) the Exchange Ratio,
with such exercise price per share rounded up to the nearer whole cent.
Accordingly, assuming that the consummation of the Merger and the conversion of
all of the StarSight Stock Options under the Stock Option Plan as of December
23, 1996 are converted in the Merger, Gemstar will need approximately 1,394,000
additional shares of Gemstar Ordinary Shares for issuance under the Stock
Incentive Plan to accommodate the assumption of the StarSight Stock Options.
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The Gemstar Board also believes that the additional shares, approximately
2,106,000 shares, authorized by the amendment are advisable in order that
Gemstar may continue to provide incentives to its key employees and other
eligible person through the opportunity to purchase Gemstar Ordinary Shares
under the Stock Incentive Plan. The Gemstar Board believes that in order to
attract and incentivize these persons to exert maximum efforts for the success
of Gemstar, it is necessary to continue to grant rights to purchase Gemstar
Ordinary Shares to them. Accordingly, the Gemstar Board recommends that the
Gemstar shareholders ratify and approve the Stock Incentive Plan amendment.
If the Merger is not consummated but the Gemstar shareholders have approved
the Stock Incentive Plan Amendment, the Gemstar Board will make all necessary
amendments to the Stock Incentive Plan to reflect an increase in the number of
Gemstar Ordinary Shares available under the Stock Incentive Plan by 2,000,000
shares only. If the Merger Agreement and the Merger are approved by Gemstar
shareholders but the Gemstar Stock Incentive Plan Proposal is not, approval of
the Merger Agreement and the Merger will be deemed to constitute approval of
the assumption by Gemstar of the outstanding Stock Options under the StarSight
Stock Option Plan as of the Effective Time of the Merger. See "PROPOSAL TO
APPROVE AN AMENDMENT TO GEMSTAR'S STOCK INCENTIVE PLAN." This assumption would
be on a basis reflecting a conversion of the Stock Options in the Merger into
options to purchase Gemstar Ordinary Shares, with appropriate adjustments to
the number of shares and the exercise price of the Stock Options as provided in
the Merger Agreement. The Stock Options, in these circumstances, would not be
issued under the Stock Incentive Plan.
ELECTION OF GEMSTAR'S CLASS II DIRECTORS
Gemstar's Amended and Restated Articles of Association provide that the
Gemstar Board shall consist of at least three but not more than 15 persons.
Currently there are seven directors. The directors are divided into three
classes, as nearly equal as possible, and each class has a staggered three year
term. The terms of office of directors in Class I, Class II and Class III end
following the annual meetings in 1999, 1997 and 1998, respectively. At the 1997
Annual Meeting, shareholders will elect two Class II directors to hold office
until the 2000 Annual Meeting, subject to the provisions of Gemstar's Amended
and Restated Articles of Association. The Gemstar Board has recommended Dr.
George F. Carrier and Mr. Teruyuki Toyama for election as Directors of Gemstar.
Their election will require the affirmative vote of a simple majority of the
shareholders present and voting. For the purpose of electing directors, each
shareholder is entitled to one vote for each Gemstar Ordinary Share held. See
"ELECTION OF GEMSTAR CLASS II DIRECTORS."
RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS
The selection of the independent auditors for the year ended March 31, 1998
is being submitted to the Gemstar shareholders for ratification. The Gemstar
Board has appointed KPMG Peat Marwick LLP to serve as Gemstar's independent
auditors for the year ended March 31, 1998, subject to ratification by the
holders of a majority of the Gemstar Ordinary Shares represented at the Gemstar
Annual Meeting. See "RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS."
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SELECTED HISTORICAL FINANCIAL DATA
The following selected financial information for Gemstar for the five years
ended March 31, 1996, and for StarSight for the years ended December 31, 1996
and 1995, six months ended December 31, 1994, and twelve months ended June 30,
1994 and 1993 have been derived from the audited financial statements of
Gemstar and StarSight, respectively.
On December 12, 1996, Gemstar completed its merger with VideoGuide which has
been accounted for under the pooling of interests method. As a result, the
historical financial information for Gemstar has been restated for the merger
of VideoGuide in Gemstar's supplemental consolidated financial statements for
all periods presented.
The summary historical financial data of Gemstar presented below as of
December 31, 1996 and for the nine months ended December 31, 1995 and 1996
have been derived from unaudited financial statements of Gemstar. The
unaudited financial statements reflect all material adjustments, consisting of
normal recurring adjustments which management considers necessary for a fair
presentation of such data. The summary historical financial data for StarSight
presented below as of December 31, 1996 and for the twelve months ended
December 31, 1995 and 1996 have been derived from audited financial statements
of StarSight. The data set forth below should be read in conjunction with the
consolidated financial statements, related notes and other financial
information, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in Gemstar's Annual Report on Form 20-F
for the fiscal year ended March 31, 1996, Gemstar's quarterly reports on Form
6-K, Gemstar's supplemental consolidated financial statements for the three-
year period ended March 31, 1996 and VideoGuide's financial statements for the
three-year period ended December 31, 1995 on Form 6-K, StarSight's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
31
<PAGE>
GEMSTAR SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
---------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Statement of
Operations Data:
Revenues.............. $ 677 $9,189 $27,025 $41,744 $ 53,869 $ 36,379 $ 46,072
Earnings (loss) from
operations (a)....... (2,922) 74 5,983 7,675 (23,411) (27,713) 11,273
Earnings (loss) from
continuing operations
before income taxes.. (2,853) 156 6,769 8,371 (21,335) (26,396) 14,418
Earnings (loss) from
continuing
operations........... (2,895) (263) 4,531 4,690 (26,832) (29,592) 9,298
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Historical
Balance Sheet Data:
Working capital......... $15,927 $22,654 $20,834 $ 1,761 $21,980 $31,099
Total assets............ 20,092 27,612 42,157 23,626 80,597 87,195
Debt.................... -- -- 9,812 -- -- --
Shareholders'
equity (b)............. 12,113 19,137 23,466 5,737 26,320 43,523
</TABLE>
STARSIGHT SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE SIX MONTHS
30, ENDED YEAR ENDED DECEMBER 31,
---------------- DECEMBER 31, ------------------------
1993 1994 1994(C) 1995 1996
------ -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Statement of
Operations
Data:
Revenues (e).......... $ -- $ -- $ 70 $ 1,913 $ 8,698
Loss from operations.. (9,855) (22,231) (21,071) (32,354) (25,761)
Loss before cumulative
effect of accounting
change (d)........... (9,687) (20,555) (20,261) (31,780) (25,049)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------- -----------------------
1993 1994 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Historical Balance Sheet Data:
Working capital.................. $23,900 $36,422 $23,939 $ 3,914 $15,603
Total assets..................... 28,037 56,695 40,831 16,333 35,031
Debt............................. 83 43 -- -- --
Shareholders' equity............. 25,366 52,767 34,179 8,343 9,838
</TABLE>
See Notes to Selected Historical Financial Information
32
<PAGE>
NOTES TO SELECTED HISTORICAL FINANCIAL INFORMATION
(a) Fiscal 1995 continuing operations of Gemstar included nonrecurring
expenses of $1.7 million consisting of professional fees and related costs
associated with Gemstar's initial public offering that were incurred prior
to the October 1994 postponement of the offering. Fiscal 1996 continuing
operations of Gemstar included nonrecurring expenses of $19.5 million for
inventory related losses.
(b) Cash dividends of $0.11, $0.29, and $0.18 per Gemstar Ordinary Share were
declared in the fiscal years ended March 31, 1993, 1994 and 1995.
(c) Effective January 1, 1995 StarSight changed its fiscal year from June 30
to December 31.
(d) Effective July 1, 1994 StarSight changed its method of accounting to
expense legal costs incurred in connection with patent infringement
litigation.
(e) StarSight operated as a development stage company from May 12, 1986
(inception) until December 31, 1994.
33
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following summary unaudited pro forma condensed combined financial data
should be read in conjunction with the unaudited pro forma condensed combined
financial statements and the related notes thereto included elsewhere in this
Proxy Statement/Prospectus.
The pro forma financial information assumes the Merger occurred on the first
day of the earliest period presented.
StarSight had a different fiscal year-end than Gemstar. Effective January 1,
1995, StarSight changed its fiscal year end from June 30 to December 31.
StarSight's results for the nine months ended December 31, 1996, were
conformed for the purposes of the respective unaudited pro forma financial
information for the nine months ended December 31, 1996. StarSight's results
for the twelve months ended December 31, 1995, 1994 and 1993 were combined
with the results of Gemstar for the years ended March 31, 1996, 1995 and 1994,
respectively. Accordingly, StarSight's results of operations for the three
months ended March 31, 1996 have been excluded from the unaudited pro forma
condensed combined statements of operations.
34
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF
GEMSTAR AND STARSIGHT
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED
-------------------------- DECEMBER 31,
1994 1995 1996 1996
------- ------- -------- ------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................ $27,025 $41,814 $ 55,782 $53,524
Loss from operations................ (9,661) (25,980) (55,765) (7,599)
Loss from continuing operations
before income taxes................ (7,961) (23,589) (53,115) (3,868)
Loss from continuing operations..... (10,199) (27,270) (58,612) (8,988)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Balance Sheet Data:
Working capital.................................................. $ 46,702
Total assets..................................................... 122,226
Shareholders' equity............................................. 53,361
</TABLE>
35
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth the historical earnings and book value per
share of Gemstar and StarSight. The unaudited pro forma combined information
is based on the historical financial statements of StarSight and the
supplemental financial statements of Gemstar as applicable (see "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS"), as adjusted to reflect
consummation of the Merger under the pooling of interests method. The
information set forth below should be read in conjunction with the respective
audited and unaudited consolidated financial statements of Gemstar and
StarSight including notes thereto, incorporated herein by reference, and the
Unaudited Pro Forma Condensed Combined Financial Statements appearing
elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------- -------------
1992 1993 1994 1995 1996 1995 1996
------ ----- ----- ----- ------ ------ -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical--Gemstar:
Earnings (loss) from
continuing operations per
share....................... $(0.10) $0.01 $0.16 $0.17 $(0.85) $(0.95) $0.28
Book value per share......... 0.52 0.81 0.99 0.24 0.85 0.76 1.39
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED
JUNE 30, ENDED DECEMBER 31,
-------------- DECEMBER 31, --------------
1993 1994 1994 1995 1996
------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Historical--StarSight:
Loss from continuing operations
per share...................... $(0.70) $(1.08) $(1.03) $(1.50) $(1.01)
Book value per share............ 3.25 2.58 1.63 0.38 0.38
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31,
YEAR ENDED MARCH 31, 1996
---------------------- ------------
1994 1995 1996
------ ------ ------ (UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma combined earnings (loss) from
continuing operations per share:
Per Gemstar share...................... $(0.27) $(0.67) $(1.32) $0.18
Equivalent per StarSight share(1)...... (0.16) (0.41) (0.80) 0.11
Pro forma combined book value per share:
Per Gemstar share...................... $ 0.77 $1.14
Equivalent per StarSight share(1)...... 0.47 0.69
</TABLE>
- --------
(1) Represents the equivalent of one (1) share of StarSight Common Stock.
Information calculated by multiplying the pro forma Gemstar information by
the Exchange Ratio (0.6062).
36
<PAGE>
RISK FACTORS
The following factors should be considered carefully by each Gemstar and
StarSight shareholder in connection with voting upon the Merger Agreement and
the transactions contemplated thereby. The following discussion contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of forward-
looking terminology, such as "may," "will," "expect," "anticipate," "estimate"
or "continue" or the negative thereof or other variations thereon or
comparable terminology. See "FORWARD LOOKING STATEMENTS." The matters set
forth below constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
INTEGRATION OF THE BUSINESSES
The Merger involves the integration of two companies that have previously
operated independently. Among the factors considered by the Gemstar Board and
the StarSight Board in connection with their respective approval of the Merger
Agreement and the Merger were the opportunities for efficiencies that could
result from the Merger. No assurance can be given that difficulties will not
be encountered in integrating the operations of StarSight and Gemstar or that
the benefits expected from such integration will be realized. There can be no
assurance that either company will retain its key personnel, that the
engineering teams of Gemstar and StarSight will successfully cooperate and
realize any technological benefits or that Gemstar will realize any of the
other anticipated benefits of the Merger. In addition, the announcement and
consummation of the Merger could cause customers and potential customers of
Gemstar and StarSight to delay or cancel orders for products as a result of
customer concerns and uncertainty over product evolution, integration and
support of the combined company's products. Such a delay or cancellation of
orders could have a material adverse effect on the business, operating results
or financial condition of either or both of Gemstar or StarSight.
The risks and difficulties associated with integrating Gemstar and StarSight
will be increased as a result of Gemstar's recent acquisition of VideoGuide.
On December 12, 1996, G/V Acquisition Subsidiary, a wholly-owned Delaware
subsidiary of Gemstar, was merged with and into VideoGuide, whereby, among
other things, VideoGuide survived the merger and became a wholly-owned
subsidiary of Gemstar (the "VideoGuide Merger"). Similar to the Merger between
Gemstar and StarSight, the VideoGuide Merger involved the integration of two
companies that previously operated independently. Gemstar and VideoGuide have
only recently begun the process of attempting to integrate their operations,
and no assurance can be given that difficulties will not be encountered. Any
delays or unexpected costs in connection with such integration could have a
material adverse effect on Gemstar's or StarSight's business, financial
condition or operating results. Moreover, the anticipated benefits of the
Merger may not be achieved unless the operations of VideoGuide are
successfully integrated with those of Gemstar and StarSight. The transition to
a combined company involving Gemstar, StarSight and VideoGuide will require
integration of the companies' product offerings and coordination of the
companies' research and development and sales and marketing efforts. The
difficulties of such assimilation may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel
with disparate business backgrounds and combining three different corporate
cultures. In addition, the process of integrating Gemstar, VideoGuide and
StarSight will require substantial attention from management and could cause
the interruption of, or a loss of momentum in, the business activities of
Gemstar or StarSight, which could have an adverse effect on their combined
operations. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA."
RISKS ASSOCIATED WITH FIXED EXCHANGE RATIO
As a result of the Merger, each outstanding share of StarSight Common Stock
will be converted into the right to receive 0.6062 of a share of Gemstar
Ordinary Shares. The Merger Agreement does not provide for adjustment of the
Exchange Ratio based on fluctuations in the price of Gemstar Ordinary Shares.
Because the Exchange Ratio is fixed and will not increase or decrease due to
fluctuations in the market price of either
37
<PAGE>
StarSight Common Stock or Gemstar Ordinary Shares, StarSight shareholders will
not be compensated for decreases in the market price of Gemstar Ordinary
Shares which could occur before the Effective Time. In the event that the
market price of Gemstar Ordinary Shares decreases or increases prior to the
Effective Time, the market value at the Effective Time of the Gemstar Ordinary
Shares to be received by StarSight shareholders in the Merger would
correspondingly decrease or increase. The market prices of Gemstar Ordinary
Shares and StarSight Common Stock as of a recent date are set forth herein
under "Markets Price and Dividends." StarSight shareholders are advised to
obtain recent market quotations for Gemstar Ordinary Shares and StarSight
Common Stock. The Gemstar Ordinary Shares and the StarSight Common Stock
historically have been subject to substantial price volatility. No assurance
can be given as to the market prices of Gemstar Ordinary Shares or StarSight
Common Stock at any time before the Effective Time or as to the market price
of Gemstar Ordinary Shares at any time thereafter. See "RISK FACTORS--
Volatility."
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER
The negotiation and implementation of the Merger will result in aggregate
pre-tax expenses to Gemstar and StarSight of approximately $11 million to $12
million. The restructuring charge, before estimated tax benefits, primarily
relates to costs associated with combining the operations of the two companies
and includes contractual payments due to certain employees aggregating to
approximately $5.7 million, including approximately $3.4 million to Larry W.
Wangberg (of which amount $100,000 was paid by StarSight in 1996), $678,090 to
Brian L. Klosterman (of which amount $350,000 was paid by StarSight in 1996),
$636,437 to Martin W. Henkel, approximately $123,833 to William
Scharninghausen and approximately $788,960 to five other StarSight employees,
and fees of financial advisors, attorneys and accountants of approximately
$5.7 million. Although the companies do not believe that the costs will exceed
the aforementioned range, there can be no assurance that the companies'
estimate is correct or that unanticipated contingencies will not occur that
will substantially increase the costs of combining the operations of the two
companies. In any event, costs associated with the Merger will negatively
impact results of operations in the quarter ending March 31, 1997.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
StarSight has experienced significant operating losses since inception and
negative cash flows from operating activities and anticipates that substantial
losses and substantial negative cash flow from operating activities will
continue in the future. As a result of incurring significant expenses in its
development and operating activities without generating significant revenues,
as of December 31, 1996, StarSight had an accumulated deficit of $115,735,000.
See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA." There can be no
assurance that significant revenues will ever be achieved or that StarSight
will ever be able to achieve revenues in excess of expenses. StarSight's
ability to increase revenues and achieve profitability will depend upon sales
of the StarSight EPG and the licensing of StarSight's intellectual property.
FLUCTUATIONS IN OPERATING RESULTS
The combined company's future operating results could be subject to
significant fluctuations, particularly on a quarterly basis. The combined
quarterly operating results may fluctuate due to numerous factors. Some of
these factors include significant changes or developments in the interactive
information services industry and in the development of consumer electronics
products and services and their market acceptance.
SEASONALITY AND VARIABILITY OF RESULTS
Gemstar experiences variability in its revenues and operating results on a
quarterly basis as a result of many factors. Most importantly, as
manufacturers have incorporated VCR Plus+ technology into an increasing number
of models, Gemstar's license revenues have displayed a seasonality typical of
those of consumer electronics products manufacturers. Shipments by
manufacturers of VCRs and televisions in general, and therefore VCRs and
televisions incorporating the VCR Plus+ technology, tend to be higher in the
third and fourth calendar quarters, or Gemstar's second and third fiscal
quarters. However, because Gemstar generally receives license revenues within
90 days after the end of the quarter in which the VCR or television
incorporating its technology is shipped, licensing revenues are typically
higher during Gemstar's third and fourth quarters. In addition,
38
<PAGE>
manufacturers' shipments vary from quarter to quarter depending on a number of
factors, including retail inventory levels and retail promotional activities.
As a result, Gemstar may experience variability in its quarterly license
revenues affecting period to period comparability and performance. Gemstar's
license revenues are also affected by the volume of shipments by
manufacturers. Gemstar's license agreements provide for volume discounts based
on the shipment volume in each calendar year by a given manufacturer, which
can lower the average per unit license fee for a manufacturer over the course
of a year. Gemstar has experienced declining average per unit VCR Plus+
license fees and expects this trend to continue. Gemstar anticipates that its
revenues and operating results will also be affected by the timing of market
introductions and market acceptance of new systems such as Index Plus+ and
Guide Plus+. There can be no assurance that Index Plus+, Guide Plus+ or other
future systems developed by Gemstar will ever result in significant revenues
or profits. Further, if these new systems achieve acceptance, the timing of
manufacturers' implementation and shipments is uncertain and may result in
greater variability of Gemstar's quarterly and annual operating results.
Another factor contributing to the variability in Gemstar's quarterly
operating results is the increase in Gemstar's marketing and advertising
expenditures in preparation for new product launches and in Gemstar's third
fiscal quarter during the fall holiday season. Gemstar's planned operating
expenditures each quarter are based, in part, on Gemstar's expectation as to
future revenues in the quarter. In addition, many of Gemstar's expenditures
are fixed costs. If revenues do not meet expectations in any given quarter,
operating results for the quarter may be materially adversely affected. In
addition, Gemstar's annual and quarterly results may be affected by
competition, general economic downturns and the mix of licensing revenues. As
a result, Gemstar believes that period to period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that Gemstar's
historic revenue growth or its profitability will continue on a quarterly or
annual basis.
DEPENDENCE ON SINGLE PRODUCT CATEGORY
Gemstar's historical revenues are almost entirely derived from the VCR Plus+
technology, consisting of license fees from VCR and television manufacturers,
newspapers and other publications. The life cycle of VCR Plus+ is difficult to
estimate due in large measure to uncertainties regarding the effect of new
products, applications or product enhancements, technological changes and the
emergence of new industry standards and future competition. Growth in VCR
Plus+ license revenues will come primarily from further penetration of
existing areas because virtually all major VCR and television manufacturers
have licensed the VCR Plus+ technology, and Gemstar has expanded into most
major areas worldwide. With increasing penetration of the VCR Plus+ technology
among major VCR and television manufacturers, volume discounts relating to the
VCR Plus+ license fees take effect. As a result, Gemstar has experienced
declining average per unit VCR Plus+ license fees and expects this trend to
continue. Gemstar has introduced new systems (e.g., Index Plus+ and Guide
Plus+) and has incurred, and will continue to incur, significant research and
development, sales and marketing and general and administrative expenses
relating to these new technologies and systems. There can be no assurance,
however, that Index Plus+, Guide Plus+ or any other new system will be
successful or result in significant revenues. As a result, Gemstar remains
dependent on revenues from the VCR Plus+ technology, and a decline in revenues
from licensing the VCR Plus+ technology would have a material adverse effect
on Gemstar's business, operating results and financial condition.
StarSight's revenues are comprised primarily of licensing revenues related
to StarSight's intellectual property portfolio and subscription revenues
related to StarSight's EPG service and will continue to account for
substantially all of StarSight's revenues for the foreseeable future.
Therefore, StarSight's future operating results, particularly in the near
term, are significantly dependent upon customer acceptance of the StarSight
EPG and StarSight's ability to continue to license its intellectual property
portfolio on favorable terms. There can be no assurance that the StarSight EPG
will achieve consumer acceptance or that StarSight will be successful in its
ability to continue to enter into favorable license arrangements, either of
which could have a material adverse effect on the business, operating results
and financial condition of StarSight.
39
<PAGE>
NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The industries in which Gemstar or StarSight derive revenues are
characterized by rapidly changing technologies, short product life cycles,
frequent introduction of new products and evolving industry standards.
Accordingly, the combined company's future performance will be dependent on
its ability to (i) identify emerging technological trends, (ii) identify
changing consumer needs, (iii) develop and maintain competitive technology,
(iv) enhance its technology by adding innovative features that differentiate
its technology from that of its competitors, and (v) bring technology to the
marketplace quickly at cost-effective prices. Gemstar has developed two
systems, Index Plus+ and Guide Plus+, and entered into license agreements with
manufacturers to permit incorporation of those two systems into VCRs, TVCRs
and televisions. StarSight has developed the StarSight EPG, a patented on-
screen interactive television program guide and VCR control service marketed
under the StarSight brand name, in which customers subscribe to the StarSight
EPG for use with StarSight-capable televisions, VCRs, TVCRs, Satellite
Receivers, stand alone StarSight receivers and cable converter boxes. Although
Index Plus+ and Guide Plus+ and the StarSight EPG were recently introduced,
there can be no assurance such systems will gain consumer acceptance. In
addition, Gemstar has entered into cross license agreements with the co-
developers of the Index Plus+ technology and will not receive any net revenues
as a result of the co-developers' incorporation of the technology into their
VCRs and televisions. If the introductions of the Index Plus+ and Guide Plus+
systems or the introduction of the StarSight EPG do not achieve consumer
acceptance, Gemstar's and StarSight's business, operating results and
financial condition could be materially adversely affected. In addition to the
risks inherent in the launch of Index Plus+ and Guide Plus+ or the StarSight
EPG, there can be no assurance that Gemstar and StarSight will successfully
complete the development of any future technology or that such technology will
be compatible with or incorporated into the technology or products of third
parties. Any significant delay or failure to develop new or enhanced
technology could have a material adverse effect on Gemstar's and StarSight's
business, operating results, cash flows and financial condition. There can be
no assurance that the level of consumer interest in or demand for VCRs, TVCRs
and televisions will continue or that other forms of entertainment delivery
systems that decrease the demand for VCRs, TVCRs and televisions will not be
introduced. The reduction in the demand for VCRs, TVCRs or televisions could
also adversely affect Gemstar's and StarSight's business, operating results
and financial condition.
RELIANCE ON THIRD PARTIES--GEMSTAR
Gemstar's business relies, and will continue to rely in the future, on
third-party manufacturers, publications and media services. Revenues from
Gemstar's VCR Plus+ system are derived from license revenues received from
manufacturers and publications. Gemstar has executed VCR Plus+ licensing
agreements with virtually every major television and VCR manufacturer. None of
these agreements requires the inclusion of the VCR Plus+ system into VCRs
manufactured by the licensees, and only a few of these agreements guarantee a
minimum licensing fee to Gemstar over their term. All of these agreements may
be terminated by the manufacturer without substantial financial penalty.
Gemstar's Index Plus+ and Guide Plus+ licensing agreements with television and
VCR manufacturers are structured similarly to Gemstar's VCR Plus+ licensing
agreements and are generally subject to the conditions and qualifications
described above.
Gemstar's VCR Plus+ system relies on consumer access to PlusCode Numbers
through licensed publications that carry the PlusCode Numbers. Gemstar
presently licenses the PlusCode Numbers to newspapers and major television
guides in VCR Plus+ markets worldwide. The license agreements call for royalty
payments to Gemstar and have initial terms ranging from one to seven years.
There is no assurance that these agreements will be renewed upon expiration
or, if renewed, that they will be on terms as favorable to Gemstar as existing
license agreements. In addition, Gemstar will be dependent on the cooperation
and support of publications in countries in which it is not presently doing
business in order to continue to expand the international availability of the
VCR Plus+ system.
Consumer acceptance of the Index Plus+ and Guide Plus+ systems depends on
the cooperation of both cable and television broadcasters. The Index Plus+ and
Guide Plus+ systems use the vertical blanking interval ("VBI") to transmit
textual information to VCRs and televisions incorporating the Index Plus+ and
Guide Plus+
40
<PAGE>
systems. The VBI is the unused air time between television pictures frames.
Television images are made by an electron gun behind the screen that moves a
beam of electrons rapidly back and forth from the top to the bottom of the
screen. When the beam reaches the bottom it is shut off and returns to the top
of the screen; the air time can be used by broadcasters to send other
information to the television, such as closed captions. The Index Plus+ system
accesses the VBI and automatically captures the titles of recorded programs
for inclusion in the directory and library when such titles are inserted into
the VBI by broadcasters. Gemstar has entered into agreements with cable and
television broadcasters, independent television stations, Capital Cities/ABC,
Fox, CBS, UPN, CBC and RTL to broadcast the information used in Index Plus+
and Guide Plus+ through the VBI and is in negotiations with other cable and
television broadcasters to support the Index Plus+ and Guide Plus+ systems.
There can be no assurance, however, that local cable operators will not
"strip" information required by Index Plus+ and Guide Plus+ from the vertical
blanking interval, so that such information would not be available to some
consumers. In such a case, additional hardware would have to be purchased by
the consumer to receive the data required for the Index Plus+ and Guide Plus+
systems, thereby decreasing the attractiveness of these systems, or Gemstar
would have to enter into agreements with local cable operators to ensure
retransmission of required information. There can be no assurance that such
agreements could be reached or that, if reached, they would be on terms
acceptable to Gemstar. In addition, increased use of digital broadcast
satellite technology, which does not involve a vertical blanking interval,
would require Gemstar's Index Plus+ and Guide Plus+ systems to be modified to
allow receipt of program data in digital form, and there can be no assurances
that such systems could be so modified in a commercially acceptable manner.
Gemstar has no control over the number of VCRs and televisions that will be
manufactured incorporating Gemstar's systems, and there can be no assurances
with respect to the quantity of VCRs and televisions that will include
Gemstar's systems or the amount of licensing revenues Gemstar will receive as
a result of inclusion by manufacturers of Gemstar's systems.
RELIANCE ON THIRD PARTIES--STARSIGHT
StarSight relies and will continue to rely in the future on the
manufacturing, marketing and signal transmission resources of various third
parties.
Manufacturers. In order to gain access to the StarSight EPG, potential
subscribers need to utilize StarSight-capable consumer electronics products.
Accordingly, StarSight's strategy is to have multiple third party
manufacturers provide consumers with as many StarSight-capable hardware
choices as possible. StarSight has entered into agreements with several
consumer electronics companies pursuant to which such entities have agreed to
incorporate StarSight's EPG technology into their products. In addition,
StarSight has entered into agreements with third party manufacturers of cable
converter boxes whereby such manufacturers will incorporate StarSight's EPG
technology into cable converter boxes manufactured by them. There can be no
assurance that sufficient quantities of televisions, VCRs, TVCRs, Satellite
Receivers and cable converter boxes incorporating StarSight's EPG technology
will be available to allow StarSight's EPG to achieve consumer acceptance or
that the manufacturing entities will devote manufacturing or distribution
resources adequate for the StarSight EPG to achieve such consumer 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 StarSight would be
able to negotiate alternative manufacturing relationships on commercially
acceptable terms.
Marketing. To be successful, StarSight must maximize the marketing and
distribution of the StarSight EPG. In the consumer electronics area, StarSight
is dependent on the distribution and marketing efforts of consumer electronics
manufacturers in conjunction with similar efforts by consumer electronics
retailers to successfully market the StarSight EPG to potential customers. In
the service provider area, StarSight believes that the most efficient method
of reaching a large number of customers is to use major cable operators and
telephone companies ("telcos") to offer and promote the StarSight EPG to their
customers, which will result in reliance by StarSight on such cable operators
and telcos. StarSight has entered into a limited number of agreements with
41
<PAGE>
such companies regarding the marketing of the StarSight EPG to their
customers. In addition, StarSight is in discussions with other cable operators
and telcos for similar agreements. There can be no assurance that StarSight
will be able to enter into such agreements with a sufficient number of
significant cable and telco operators to allow the StarSight EPG to achieve
commercial acceptance and viability among service providers.
Signal Transmission. StarSight is dependent on program networks for the
signal transmission of StarSight EPG data to subscribers. Such data is
embedded within the VBI of television signals transmitted by PBS, as well as
certain of the cable program networks, satellite program services and over-
the-air broadcast television stations owned and operated by Viacom, to
StarSight EPG subscribers. Cable operators could attempt to remove the
StarSight EPG data from their signal transmissions. This would make it
difficult for subscribers to receive the StarSight EPG, thereby limiting
StarSight's penetration in the marketplace. Since the introduction of the
StarSight EPG, StarSight has experienced a limited number of instances where a
cable operator has removed the VBI containing the StarSight EPG data resulting
in an interruption of service to a limited number of StarSight customers.
StarSight has been able to resolve these instances with no material costs or
inconvenience. Any increased costs or delays associated with finding
alternative means to distribute the StarSight EPG data to a potentially large
number of customers could have a material adverse effect on StarSight's
business.
COMPETITION
Competition in the delivery of television program schedule information is
very strong. To compete successfully, a company must produce and provide
product services which are relatively low in cost and easy for consumers to
use. Gemstar's systems and the StarSight EPG compete with other systems or
formats offered by other companies. These alternative systems or formats
currently include printed television schedules, on-screen, passive (non-
interactive) scrolling program guides, interactive program guides, internet
accessible program guides and other interactive electronic scheduling products
or services. Many of Gemstar's and StarSight's present and potential
competitors have, or may have, substantially greater resources than Gemstar or
StarSight to devote to further technological and new product developments.
There can be no assurance that based on these factors any of the products
offered by Gemstar or StarSight will be competitive with the existing or
future products or services of their competitors.
Printed television schedule competitors of Gemstar and StarSight include TV
Guide, local cable television guides and local, weekly and daily newspaper
guides, all of which have a significant consumer acceptance resulting from
their familiarity to television viewers, their broad base of distribution, and
their presentation of feature articles and entertainment news. The established
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 as channel capacity increases.
Gemstar and StarSight also compete with companies producing passive
electronic program guides for the cable industry such as that offered by
Prevue Networks, Inc. ("Prevue"). Such guides are typically offered as a part
of the basic cable service. There can be no assurance that existing or planned
electronic guide companies will not develop and sell electronic program guides
that offer features similar to or superior to Gemstar's or StarSight's
systems.
Several companies have announced their intentions to market electronic
program guides in set-top converters which appear to be similar to the Gemstar
or StarSight systems. 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 announced that it plans
to offer Quickvue which will deliver data directly into converters 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 converter box. Many of such companies have significantly greater resources
than Gemstar or StarSight 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 Gemstar or
StarSight.
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In addition, indexing systems currently built into VCRs that require the
user to manually enter program stops and titles compete with the Index Plus+
technology. Many companies, including some of the major VCR manufacturers,
have introduced or are developing new indexing systems. In the area of both
future recording and pre-recorded video materials, digital video disc players
with random access capabilities may also compete with Index Plus+ in the
future.
Manufacturers of cable box converters have indicated that the next
generation of converters will be able to provide an interactive guide which
would provide some features similar to those to the Gemstar and StarSight
systems. Many of these companies have significantly greater resources than
Gemstar or StarSight 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 Gemstar or
StarSight.
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 Gemstar and StarSight. Companies such as
Gateway 2000 have announced their intention to offer PCTVs using an
interactive program guide developed by Harman Interactive Group. (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 Gemstar or StarSight
systems. 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 Gemstar's or
StarSight's products.
The interactive electronic television guides that may compete with VCR
Plus+, whether existing now or developed in the future, may also compete with
Gemstar's Guide Plus+ system. Digital satellite system products either being
offered or expected to be offered by a number of manufacturers, including
Thomson, Sony, Panasonic, Uniden and others include an on-screen electronic
guide of programming offered by such systems. Scientific-Atlanta, Inc. and
General Instruments also have developed program guides for use in their cable
boxes, and Gemstar expects that other cable box and satellite receiver
manufacturers may develop program guides that would compete with Gemstar's
Guide Plus+ system.
There may be competitors with significant competitive strengths which are
not known to Gemstar or Starsight or discussed herein. Such potential
competitors may include larger, more established companies in both the
interactive multimedia services and interactive television fields that could
develop, deliver and sell on-screen program guides. There can be no assurance
that the Gemstar or StarSight systems will achieve consumer acceptance or that
they will be able to compete successfully with such known or unknown
competitors, some of which possess substantially greater financial, sales and
marketing resources than those of Gemstar or StarSight.
DEPENDENCE ON KEY EMPLOYEES
Gemstar and StarSight are dependent on certain key members of their
respective management, operations and development staff, the loss of whose
services could have a material adverse effect on Gemstar and StarSight,
respectively. Gemstar considers Henry C. Yuen, its Chief Executive Officer, to
be a key employee. StarSight considers Larry W. Wangberg and Brian L.
Klosterman to be its key employees. Although StarSight and Gemstar have
employment contracts with such key employees, such employment contracts would
generally not restrict the employee's ability to leave StarSight or Gemstar.
See "THE PLAN OF MERGER--Interests of Certain Persons in the Merger." Neither
Gemstar nor StarSight have obtained key man life insurance with respect to
these individuals.
Furthermore, recruiting and retaining additional qualified engineering,
marketing, and operations personnel will be critical to Gemstar's and
StarSight's success. There can be no assurance that Gemstar or StarSight will
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be able to recruit or retain such personnel on acceptable terms. Failure to
attract and retain key personnel could have a material adverse effect on
Gemstar's or StarSight's business, operating results, cash flows and financial
condition.
PASSIVE FOREIGN INVESTMENT COMPANY
A foreign corporation is classified as a "passive foreign investment
company" ("PFIC") if (1) 75% or more of its gross income (including the pro
rata gross income of any subsidiary of which the corporation owns 25% or more
of the stock by value) in a taxable year is passive income or (2) the average
percentage of its assets by value (including the pro rata value of the assets
of any subsidiary of which the corporation owns 25% or more of the stock by
value) which produce or are held for the production of passive income is at
least 50% in a taxable year. (For purposes of these tests, stock of a 25% or
more owned U.S. subsidiary is a non-passive asset and income from such stock
is non-passive income.) Passive income includes dividends, interest and
royalties but excludes royalties that are derived in the active conduct of a
trade or business (as defined for U.S. federal income tax purposes) and that
are received from an unrelated person.
Gemstar does not believe that it is currently a PFIC because, based on the
substantial management and operational functions of its subsidiaries in
connection with the creation and development of its proprietary products, the
royalty income of these subsidiaries is derived from the active conduct of a
trade or business and because the average value of assets producing passive
income is less than 50% of aggregate asset value. Characterization of royalty
income as active business income is based on the treatment of Gemstar's
operating subsidiaries, collectively, as the developer and licensor of the
proprietary products for purposes of this test. However, there is little
authority on which to rely in this area, and there can be no assurance that
the Internal Revenue Service will agree with this position. For purposes of
the assets test, Gemstar values its tangible and intangible assets on a fair
market basis. If, in the future, Gemstar is a "controlled foreign
corporation," as described in Section 957 of the Code, it would be required to
value its assets at their adjusted tax basis for purposes of the assets test,
which could increase the risk of Gemstar becoming a PFIC. If Gemstar were a
PFIC, a U.S. holder would be subject to increased tax liability upon the sale
of Gemstar Ordinary Shares at a gain or upon the receipt of certain dividends,
unless such U.S. holder makes an election (a "qualifying electing fund
election") to be taxed currently on his pro rata portion of Gemstar's income,
whether or not such income is distributed in the form of dividends or
otherwise.
A U.S. holder making a qualifying electing fund election is required for
each taxable year to include in income a pro rata share of the ordinary
earnings of the qualifying electing fund as ordinary income and a pro rata
share of the net capital gain of the qualifying electing fund as long-term
capital gain. Gemstar will, at the request of a shareholder making a
"qualifying electing fund election," comply with the applicable information
reporting requirements. U.S. holders should consult their tax advisors
regarding the consequences of PFIC status, including certain reporting
requirements applicable to U.S. shareholders of a PFIC, and the election to
treat Gemstar as a qualifying electing fund.
PATENT AND PROPRIETARY INFORMATION; LITIGATION
Gemstar's and StarSight's continuing success depends in part on each
company's respective ability to protect and maintain the proprietary nature of
its technology through a combination of patents, trade secrets, trademarks,
copyrights, licenses and other intellectual property arrangements. Gemstar
currently has 18 issued U.S. patents, including seven design patents, and 30
issued foreign patents, including 23 design patents. Gemstar also has numerous
pending U.S. and foreign patent applications, issued and pending trademark
registrations (some of which have been opposed by third parties) and computer
program copyrights in the U.S. and other countries. Gemstar has also acquired
the exclusive right to three patents broadly covering various aspects of
interactive, electronic on-screen television guides. StarSight holds six
patents in the U.S. and three foreign patents, and has a number of U.S. and
foreign patent applications pending. Gemstar and StarSight intend to protect
vigorously their intellectual property rights. There can be no assurance,
however, that Gemstar's or StarSight's pending patent applications will issue
or that a third party will not violate, or attempt to invalidate,
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Gemstar's or StarSight's intellectual property rights, possibly forcing
Gemstar or StarSight to expend substantial legal fees. Successful challenges
to certain of Gemstar's or StarSight's patents would materially adversely
affect Gemstar's or StarSight's business, operating results and financial
condition.
There can be no assurance that certain aspects of Gemstar's or StarSight's
technology will not be reverse-engineered by third parties without violating
Gemstar's or StarSight's proprietary rights. Gemstar's or StarSight's existing
protections also may not preclude competitors from developing products with
features and prices similar to or better than those of Gemstar or StarSight.
Gemstar and StarSight have from time to time received communications from
third parties asserting that features of certain of Gemstar's and StarSight's
technologies may infringe upon intellectual property rights of such parties.
There can be no assurance that third parties will not assert infringement
claims against Gemstar or StarSight in the future. An adverse determination in
any such dispute could result in the loss of Gemstar's or StarSight's
proprietary rights, subject Gemstar or StarSight to significant liabilities
and litigation costs or prevent Gemstar or StarSight from licensing their
technologies, any of which could have a material adverse effect on Gemstar's
or StarSight's business, operating results and financial condition. In
addition, if any of Gemstar's or StarSight's licensees determine that any
additional third party licenses are required as a result of any such dispute,
there can be no assurance that any such licenses would be available on terms
acceptable to Gemstar or StarSight, if at all.
Gemstar and StarSight are currently in litigation with each other over their
respective intellectual property rights. In the Merger Agreement, Gemstar and
StarSight agreed that all activity with respect to the pending litigation
between them will cease until the earlier of the termination of the Merger
Agreement or the Effective Time of the Merger.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Gemstar operates on a multinational basis, and, as a result, Gemstar is
subject to various risks, including a greater difficulty of administering
business globally, regulatory requirements such as tariff regulations, export
control restrictions, overlapping or differing tax structures, differences in
intellectual property protections, political and economic instability or
general trade restrictions. If any of these risks materialize, it could have a
material adverse effect on Gemstar's business, operating results and financial
condition. Gemstar generates a substantial amount of its income outside the
United States, and Gemstar and its subsidiaries generally are taxed at rates
substantially lower than U.S. tax rates. If Gemstar or its subsidiaries were
no longer able to qualify for such tax rates or if the tax laws were rescinded
or changed, Gemstar's operating results could be materially adversely
affected.
RIGHTS OF SHAREHOLDERS UNDER BRITISH VIRGIN ISLANDS LAW MAY BE LESS PROTECTED
THAN THOSE OF SHAREHOLDERS OF A CORPORATION INCORPORATED IN A U.S.
JURISDICTION
Gemstar is incorporated under the laws of the British Virgin Islands, and
its corporate affairs are governed by its Memorandum of Association and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of Gemstar's
management, directors and controlling shareholders and the rights of Gemstar's
shareholders differ from those that would apply if Gemstar were incorporated
in a jurisdiction within the U.S. Further, the rights of shareholders under
British Virgin Islands law are not as clearly established as the rights of
shareholders under legislation or judicial precedent in existence in most U.S.
jurisdictions. Thus, the public shareholders of Gemstar may have more
difficulty in protecting their interests in the face of actions by the
management, directors or controlling shareholders than they might have as
shareholders of a corporation incorporated in a U.S. jurisdiction. In
addition, there is doubt that the courts of the British Virgin Islands would
enforce, either in an original action or in an action for enforcement of
judgments of U.S. courts, liabilities that are predicated upon the securities
laws of the U.S. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND
STARSIGHT," and "COMPARISON OF U.S. AND BRITISH VIRGIN ISLANDS CORPORATE
LAWS."
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HOLDING COMPANY STRUCTURE; RESTRICTIONS ON SUBSIDIARY DIVIDENDS
Gemstar conducts all of its operations through subsidiaries. Accordingly,
the primary source of Gemstar's income is dividends and other distributions
from its subsidiaries. Some of Gemstar's subsidiaries were formed under and
have operations in countries other than the British Virgin Islands, the
jurisdiction of Gemstar's organization. In addition, each of Gemstar's
subsidiaries receives its revenues in either U.S. dollars or the local
currency of the jurisdictions in which it operates. As a consequence,
Gemstar's ability to obtain dividends or other distributions is subject to,
among other things, possible restrictions on dividends under applicable local
laws and foreign currency exchange regulations of the jurisdictions in which
its subsidiaries operate. In addition, dividends or distributions from
Gemstar's U.S. subsidiaries are subject to a 30% withholding tax, which makes
such dividends and distributions unattractive. The subsidiaries' ability to
pay dividends or make other distributions to Gemstar is also subject to the
subsidiaries having sufficient funds from their operations legally available
for the payment of dividends or other distributions which are not needed to
fund their operations, obligations or other business plans. Because Gemstar is
a shareholder of its subsidiaries, Gemstar's right to the assets of such
subsidiaries will be subordinated to the rights of all creditors and claimants
against its subsidiaries.
CONTROL BY MANAGEMENT
Prior to the Merger, Thomas Lau, Henry Yuen, Daniel Kwoh, Wilson Cho, Elsie
Leung and Roy Mankovitz, each members of Gemstar's management, collectively
owned approximately 62% of the outstanding Gemstar Ordinary Shares and voting
power of Gemstar. In addition, Mary Lau, Thomas Lau's sister, and Thomas Lau
together owned approximately 42% of the outstanding Gemstar Ordinary Shares
prior to the Merger. Immediately after the Merger, the members of management
listed above will retain approximately 42% of the outstanding Gemstar Ordinary
Shares. In addition, Thomas Lau and Mary Lau together will retain
approximately 28% of the outstanding Gemstar Ordinary Shares after the Merger.
Accordingly, Gemstar's management will continue to be able to control the
election of the Gemstar Board, and thus the direction and future operations of
Gemstar, including decisions regarding acquisitions and other business
opportunities and the declaration of dividends and the issuance of additional
capital stock and other securities, in each case without the supporting vote
of any other shareholder of Gemstar.
RESTATEMENT OF EARNINGS DUE TO POOLING OF INTEREST ACCOUNTING TREATMENT;
DILUTION
The pro forma restatement of Gemstar's historical financial information to
account for the Merger as a pooling-of-interests reflects a reduction in the
earnings per share of the combined company, as compared to Gemstar's
previously reported financial information. Such dilution and any future
dilution per share could have a material adverse effect on the price of
Gemstar Ordinary Shares. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
DATA."
VOLATILITY
The trading price of Gemstar Ordinary Shares and StarSight Common Stock have
fluctuated in the past and, in the future, could be subject to wide
fluctuations in response to quarterly variations in operating results, market
conditions in the industry, judicial determinations or other resolutions
regarding the status of Gemstar's or StarSight's intellectual property rights,
sales of Gemstar Ordinary Shares or StarSight Common Stock into the public
market by existing shareholders, changes in U.S. or international
communications laws, announcements of technological innovations or new
products by Gemstar or StarSight, its competitors or other third parties, and
other events or factors. In addition, stock markets in general have
experienced extreme price and volume fluctuations in recent years, which have
particularly affected the market prices of many high technology companies and
which have often been unrelated to the operating performance of such
companies. This volatility may adversely affect the market price for Gemstar
Ordinary Shares or StarSight Common Stock.
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MARKET PRICE AND DIVIDENDS
GEMSTAR
As of April 9, 1997, approximately 49% of the outstanding Gemstar Ordinary
Shares were held of record by approximately 117 U.S. holders. The following
sets forth the high and low closing price per share information reported on
The Nasdaq National Market for Gemstar Ordinary Shares, which are traded under
the symbol "GMSTF," for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996
Third Quarter (From October 11, 1995)..................... $38 1/4 $13 1/2
Fourth Quarter............................................ 37 3/4 21 1/4
FISCAL YEAR ENDING MARCH 31, 1997
First Quarter............................................. $ 40 $24 1/2
Second Quarter............................................ 31 5/8 24
Third Quarter............................................. 29 3/4 16 1/8
Fourth Quarter............................................ 18 1/2 9 5/8
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter (through April 11, 1997).................... $14 $10
</TABLE>
During fiscal 1993, the Gemstar Board declared a $3,000,000 cash dividend.
During fiscal 1994, the Gemstar Board declared an $8,000,000 cash dividend,
which was paid on June 1, 1994. During fiscal 1995 and prior to the
consummation of Gemstar's initial public offering in October 1995, the Gemstar
Board declared a $5,000,000 cash dividend, which was paid subsequent to March
31, 1995. The Gemstar Board currently intends to retain all earnings for use
in the business of the combined companies and has no present intention to pay
any cash dividends. Gemstar's future dividend policy will depend on its
earnings, capital requirements, financial condition or other factors
considered relevant by the Gemstar Board.
STARSIGHT
As of March 17, 1997, there were 324 holders of record of StarSight Common
Stock. StarSight Common Stock is traded on The Nasdaq National Market under
the symbol "SGHT." The following table sets forth the range of high and low
sale prices reported on The Nasdaq National Market for the StarSight Common
Stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter.............................................. $ 9 3/4 $5 1/2
Second Quarter............................................. 7 3/4 4 5/8
Third Quarter.............................................. 6 3 1/4
Fourth Quarter............................................. 6 7/8 2 1/4
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter.............................................. $ 7 1/2 $4 1/2
Second Quarter............................................. 11 3/4 5 3/8
Third Quarter.............................................. 10 1/2 4 1/4
Fourth Quarter............................................. 10 5 7/8
FISCAL YEAR ENDING DECEMBER 31, 1997
First Quarter.............................................. $ 9 5/8 $5 1/2
Second Quarter (through April 11, 1997).................... $ 7 3/4 $6
</TABLE>
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COMPARATIVE PER SHARE DATA
The following table sets forth the closing sale prices per share of Gemstar
Ordinary Shares and StarSight Common Stock on The Nasdaq National Market on
December 20, 1996, the last trading day before the announcement of the
proposed Merger; and on April 11, 1997, the latest practicable trading day
before the printing of this Joint Proxy Statement/Prospectus for which
information was obtainable, and the equivalent per share price for StarSight
Common Stock. The "equivalent per share price" for StarSight Common Stock as
of such dates equals the closing sale price per share of Gemstar Ordinary
Shares on such date multiplied by the Exchange Ratio of 0.6062. See "THE PLAN
OF MERGER--General."
<TABLE>
<CAPTION>
GEMSTAR STARSIGHT EQUIVALENT
ORDINARY SHARES COMMON STOCK PER SHARE PRICE
--------------- ------------ ---------------
<S> <C> <C> <C>
December 20, 1996............... $17 1/4 $8 7/8 $10.46
April 11, 1997.................. $14 $7 5/8 $ 8.49
</TABLE>
Gemstar and StarSight believe that StarSight Common Stock presently trades
on the basis of the value of the Gemstar Ordinary Shares expected to be issued
in exchange for such StarSight Common Stock in the Merger, discounted for the
time value of money and for the uncertainties associated with such a
transaction. Apart from the publicly disclosed information concerning Gemstar
which is included and incorporated by reference in this Joint Proxy
Statement/Prospectus, Gemstar cannot state with certainty what factors account
for changes in the market price of the Gemstar Ordinary Shares.
StarSight shareholders are advised to obtain current market quotations for
Gemstar Ordinary Shares and StarSight Common Stock. No assurance can be given
as to the market prices of Gemstar Ordinary Shares or StarSight Common Stock
at any time before the Effective Time or as to the market price of Gemstar
Ordinary Shares at any time thereafter. Because the Exchange Ratio is fixed,
the Exchange Ratio will not be adjusted to compensate StarSight shareholders
for decreases in the market price of Gemstar Ordinary Shares which could occur
before the Merger becomes effective. In the event the market price of Gemstar
Ordinary Shares decreases or increases prior to the Effective Time, the value
at the Effective Time of the Gemstar Ordinary Shares to be received in the
Merger in exchange for StarSight Common Stock would correspondingly decrease
or increase.
Following the Merger, all StarSight Common Stock will be owned by Gemstar
and, as a result, StarSight Common Stock will no longer be listed on The
Nasdaq National Market.
StarSight has never paid cash dividends on its shares of Common Stock.
During fiscal 1993, the Gemstar Board declared a $3,000,000 cash dividend.
During fiscal 1994, the Gemstar Board declared an $8,000,000 cash dividend,
which was paid on June 1, 1994. During fiscal 1995 and prior to the
consummation of Gemstar's initial public offering in October 1995, the Gemstar
Board declared a $5,000,000 cash dividend, which was paid subsequent to March
31, 1995. Pursuant to the Merger Agreement, each of Gemstar and StarSight has
agreed not to pay cash dividends pending the consummation of the Merger.
Subject to completion of the Merger, the StarSight Board presently intends to
continue a policy of retaining all earnings to finance the expansion of its
business. The Gemstar Board currently intends to retain all earnings for use
in the business of the combined companies and has no present intention to pay
cash dividends.
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THE PLAN OF MERGER
THE DETAILED TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE
MERGER AGREEMENT, WHICH IS INCLUDED IN FULL AS APPENDIX A TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING
SUMMARY DESCRIPTION OF THE TERMS OF THE MERGER AGREEMENT IS QUALIFIED IN ITS
ENTIRETY BY, AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN
THE MERGER AGREEMENT.
GENERAL
The Merger Agreement provides for the merger of Sub with and into StarSight,
with StarSight to be the surviving corporation of the Merger and a wholly-
owned subsidiary of Gemstar. The Merger will have the effects specified in the
CCC.
Immediately after the Effective Time, the directors of Gemstar will take all
actions necessary to cause the Gemstar Board to be expanded to consist of ten
persons, seven of whom shall have served on the Gemstar Board immediately
prior to the Effective Time, and three of whom shall have served on the
StarSight Board immediately prior to the Effective Time. The new directors of
Gemstar will be (i) George Smith, who will serve as a Class I director of
Gemstar, (ii) James Meyer, who will serve as a Class II director of Gemstar,
and (iii) Ajit Dalvi, who will serve as a Class III director of Gemstar, and
whose terms on the Gemstar Board shall expire at the time of Gemstar's 1999,
1997, and 1998 Annual Meetings of the Gemstar shareholders, respectively. If,
prior to the Effective Time, any of the above named persons shall decline or
be unable to serve as a director, then the party that designated such
director, either Gemstar or StarSight, shall designate another person, which
person shall be reasonably satisfactory to the other party, to serve as
director in lieu of the original designee.
The executive officers of Gemstar and StarSight are expected to continue to
serve in such capacities after the Merger, and the directors of Sub will
become the directors of StarSight and their rights will be governed by
Gemstar's Memorandum of Association and Articles of Association, as amended.
See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND STARSIGHT."
EFFECTIVE TIME OF THE MERGER
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned,
Gemstar, Sub and StarSight will cause the Merger Agreement to be duly filed
with the Secretary of State of the State of California. The Merger will become
effective upon the Effective Time or at such later time as Gemstar, Sub and
StarSight have agreed upon and designated in such filing as the Effective
Time.
CONVERSION OF STARSIGHT COMMON STOCK
Pursuant to the Merger Agreement, as of the Effective Time, (i) each issued
and outstanding share of the capital stock of Sub will be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
StarSight Common Stock, (ii) each share of StarSight Common Stock that is
owned by StarSight or by any of StarSight's subsidiaries and each share of
StarSight Common Stock that is owned by Gemstar, Sub or any other subsidiary
of Gemstar immediately prior to the Effective Time will automatically be
cancelled and retired without any conversion thereof and no consideration will
be delivered with respect thereto, and (iii) each share of StarSight Common
Stock issued and outstanding as of the Effective Time, other than Dissenting
Shares (as defined in Section 2.2(h) of the Merger Agreement), or shares to be
cancelled in accordance with (ii) above, will be converted by the Exchange
Ratio of Gemstar Ordinary Shares; no fractional shares of Gemstar Ordinary
Shares will be issued and, in lieu thereof, a cash payment will be made.
All shares of StarSight Common Stock, including Dissenting Shares, converted
in the Merger will no longer be outstanding and will automatically be
cancelled and retired and will cease to exist, and each holder of a
certificate representing any such shares will cease to have any rights with
respect thereto, except the right to
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receive, without interest, shares of Gemstar Ordinary Shares upon surrender of
such certificate, or in the case of the Dissenting Shares for the rights as
granted by the CCC.
TREATMENT OF STARSIGHT STOCK OPTIONS
At the Effective Time, all Stock Options then outstanding under the Stock
Option Plan, whether vested or unvested, will be assumed by Gemstar.
Accordingly, each Stock Option shall be deemed to constitute an option to
acquire, on substantially the same terms and conditions as were applicable
under such Stock Option, the number of shares of Gemstar Ordinary Shares the
holder of such Stock Option would have been entitled to receive pursuant to
the Merger had such holder exercised such Stock Option in full immediately
prior to the Effective Time, at a price per share equal to (y) the exercise
price per share for the shares of StarSight Common Stock otherwise purchasable
pursuant to such Stock Option divided by (z) the Exchange Ratio, with such
exercise price per share rounded up to the nearest whole cent. If the Merger
Agreement and the Merger are approved by Gemstar shareholders but the Stock
Incentive Plan Proposal is not, approval of the Merger Agreement and the
Merger will be deemed to constitute approval of the assumption by Gemstar of
the outstanding Stock Options under the StarSight Stock Option Plan as of the
Effective Time of the Merger. See "PROPOSAL TO APPROVE AN AMENDMENT TO
GEMSTAR'S STOCK INCENTIVE PLAN." This assumption would be on a basis
reflecting a conversion of the Stock Options in the Merger into options to
purchase Gemstar Ordinary Shares, with appropriate adjustments to the number
of shares and the exercise price of the Stock Options as provided in the
Merger Agreement. The Stock Options, in these circumstances, would not be
issued under the existing Gemstar Stock Incentive Plan.
TREATMENT OF STARSIGHT WARRANTS
Each Warrant will, in accordance with its terms, be an Adjusted Warrant to
become exercisable for, or exchangeable for a new Warrant (on substantially
the same terms) that would be exercisable for, the number of shares of Gemstar
Ordinary Shares equal to the number of shares of StarSight Common Stock
purchasable pursuant to the Warrant related to such Adjusted Warrant as of the
date of the Merger Agreement multiplied by the Exchange Ratio. The exercise
price of any Adjusted Warrant will be an amount equal to the exercise price of
the Warrant related to such Adjusted Warrant as of the date of the Merger
Agreement divided by the Exchange Ratio.
EXCHANGE OF CERTIFICATES
As of the Effective Time, Gemstar will deposit with ChaseMellon Shareholder
Services LLC (the "Exchange Agent"), as exchange agent for Gemstar Ordinary
Shares, certificates representing the shares of Gemstar Ordinary Shares
issuable pursuant to the Merger Agreement in exchange for outstanding shares
of StarSight Common Stock (such certificates representing shares of Gemstar
Ordinary Shares together with any dividends or distributions with respect
thereto being collectively referred to as the "Exchange Fund"), and cash in an
amount sufficient for payment in lieu of fractional shares pursuant to Section
2.2(e) of the Merger Agreement. The Exchange Agent will, pursuant to
irrevocable instructions, deliver the Gemstar Ordinary Shares to be issued
pursuant to the exchange procedures of the Merger Agreement out of the
Exchange Fund, and, except for the payment of cash in lieu of fractional
shares as contemplated by Section 2.2(e) of the Merger Agreement, the Exchange
Fund will not be used for any other purpose.
Promptly after the Effective Time, Gemstar will cause the Exchange Agent to
mail to each holder of a certificate or certificates which immediately prior
to the Effective Time represented outstanding shares of StarSight Common Stock
a letter of transmittal to be used by such holder in forwarding their
certificates representing such shares (the "Certificates") and instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Gemstar Ordinary Shares, cash in lieu of
fractional shares and any dividends or other distributions. If a transfer of
ownership of StarSight Common Stock is not registered in StarSight's transfer
records, a certificate representing the proper number of shares of Gemstar
Ordinary Shares may be issued to a person other than the person in whose name
the surrendered certificate is registered if such
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certificate, accompanied by all documents required to evidence and effect such
transfer, is properly endorsed with signature guarantee or otherwise in proper
form for transfer and the person requesting such payment pays any transfer or
other taxes required or establishes to Gemstar's satisfaction that such tax
has been paid or is not applicable. STARSIGHT SHAREHOLDERS ARE REQUESTED NOT
TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A NOTICE AND
TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
No interest will be paid or will accrue on cash payable with respect to
fractional shares, unpaid dividends or distributions, if any, which will be
paid upon surrender of Certificates.
No dividends or other distributions declared or made after the Effective
Time on Gemstar Ordinary Shares with a record date after the Effective Time
will be paid to the holder of any shares represented by a Certificate and no
cash payment in lieu of fractional shares will be paid until such Certificate
is surrendered for exchange. Subject to the effect of applicable laws,
following surrender of any such Certificate, there will be paid to the holder
of the certificates representing whole shares of Gemstar Ordinary Shares
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of any such cash payable in lieu of a fractional share
of Gemstar Ordinary Shares to which such holder is entitled and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Gemstar Ordinary
Shares, and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender, and a payment date subsequent to surrender, payable with respect to
such whole shares of Gemstar Ordinary Shares.
All shares of Gemstar Ordinary Shares issued upon the surrender for exchange
of Certificates in accordance with the Merger Agreement are deemed to have
been issued (and paid) in full satisfaction of all rights pertaining to the
shares of StarSight Common Stock theretofore represented by such Certificates,
subject, however, to StarSight's obligation to pay any dividends or make any
other distributions with a record date prior to the Effective Time which may
have been declared or made by StarSight on such shares of StarSight Common
Stock in accordance with the Merger Agreement or prior to the date thereof and
which remain unpaid at the Effective Time and have not been paid prior to
surrender. At the Effective Time, StarSight's stock transfer books will be
closed, and there will be no further transfers of shares of StarSight Common
Stock.
No fractional shares of Gemstar Ordinary Shares will be issued and any
holder of shares of StarSight Common Stock entitled under the Merger Agreement
to receive a fractional share will be entitled to receive only a cash payment
in lieu thereof, which payment will be equal to the fraction of a share of
Gemstar Ordinary Shares that would otherwise be issued multiplied by the
average closing price for a share of Gemstar Ordinary Shares on The Nasdaq
National Market (as reported in The Wall Street Journal) during the 20
consecutive trading days ending on the third trading day prior to the
Effective Time. The Exchange Agent will promptly pay cash amounts due with
respect to any fractional share interests upon surrender of the holder's
StarSight Certificates for exchange.
Any portion of the Exchange Fund that remains undistributed to the holders
of Certificates on the date twelve (12) months after the Effective Time will
be delivered to Gemstar. Any holders of Certificates who have not theretofore
complied with the exchange procedures in the Merger Agreement shall thereafter
look as a general creditor only to Gemstar for payment of the shares of
Gemstar Ordinary Shares, cash in lieu of fractional shares, and any dividends
or distributions with respect to Gemstar Ordinary Shares to which they are
entitled. None of StarSight, Gemstar, Sub or the Exchange Agent will be liable
to any holder of shares of StarSight Common Stock, the Warrants or Stock
Options for any shares of Gemstar Ordinary Shares (or dividends or
distributions with respect thereto) or cash from the Exchange Fund delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law.
Notwithstanding the foregoing, any shares of StarSight Common Stock held by
a holder who has exercised dissenters' rights for such shares in accordance
with the CCC and who, as of the Effective Time, has not effectively withdrawn
or lost such dissenters' rights ("Dissenting Shares"), will not be converted
into or
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represent a right to receive Gemstar Ordinary Shares, and will be entitled
only to such rights as are granted by the CCC. If, however, any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her dissenters' rights, then, as of the later of
the Effective Time or the occurrence of such event, such holder's shares will
automatically be converted into and represent only the right to receive
Gemstar Ordinary Shares, cash in lieu of any fractional shares of Gemstar
Ordinary Shares to which such holder is entitled pursuant to the Merger
Agreement, and any dividends or distributions to which such holder is entitled
pursuant to the Merger Agreement, without interest thereon, upon surrender of
the Certificates representing such shares.
The Exchange Agent will invest any cash included in the Exchange Fund, as
directed by Gemstar, on a daily basis. Any interest and other income resulting
from such investments will be paid to Gemstar. If any Certificates are lost,
stolen or destroyed, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificates, such shares of Gemstar Ordinary Shares, cash
in lieu of fractional shares and any dividends or other distributions to which
such holder is entitled pursuant to the Merger Agreement.
BACKGROUND OF THE MERGER
Since inception, StarSight has incurred substantial losses due to negative
cash flows from operations. In the first half of 1995, StarSight began to
experience liquidity concerns and by June 30, 1995, StarSight's cash position,
down to $14.8 million, was being depleted at the rate of approximately $2.7
million per month. Despite efforts to conserve cash, resulting in a reduced
depletion rate of about $700,000 per month, it was clear at this time that
StarSight would need to raise additional capital if it were to survive as an
independent entity. It was not certain that existing strategic investors in
StarSight would be willing to commit additional funding unless a new strategic
investor could be found. Furthermore, debt financing from a financial
institution was not possible because of negative cash flow.
At this point StarSight increased its efforts to search for strategic
alliances that could result in an infusion of capital into StarSight. The
StarSight Board, management and independent advisors to StarSight all pursued
a number of financial and strategic options for StarSight and throughout the
Fall of 1995, StarSight continued to pursue several funding possibilities. In
October 1995, StarSight entered into significant discussions and negotiations
with Thomson multimedia S.A. ("Thomson"). In addition, in November 1995 one of
the StarSight's independent advisors, H. Joseph Horowitz, contacted Gemstar to
discuss possible ways that StarSight and Gemstar might work together. The
primary goal of Mr. Horowitz' discussions with Gemstar was to attempt to
obtain a loan for StarSight in connection with a joint venture or similar
arrangement between the Companies. These discussions with Gemstar stemmed
solely from StarSight's attempts to uncover every possible source of
financing.
Mr. Horowitz acted as StarSight's principal negotiator during the
discussions with Gemstar. In his role as principal negotiator for StarSight,
Mr. Horowitz: (i) assisted StarSight in negotiations relating to a
transaction, (ii) participated in discussions with Gemstar, (iii) advised
StarSight management and the StarSight Board in the negotiations of the
strategic business terms of the proposed Merger, (iv) reported results of each
discussion with Gemstar to StarSight management, (v) evaluated Gemstar's
responses to StarSight's proposals and the possible responses from Gemstar
with respect to future discussions, (vi) advised StarSight's management and
the StarSight Board of aspects of the transaction terms in which he perceived
some flexibility on Gemstar's part or on which Gemstar was firmly committed to
its position, and (vii) received instructions from StarSight management and
the StarSight Board and implemented such direction in discussions with Gemstar
with regard to the timing, structure and pricing of a transaction.
In November 1995, during the course of discussions and negotiations between
StarSight and Thomson, some of the large existing StarSight shareholders
invested $5.0 million in StarSight to extend its cash resources and to provide
StarSight sufficient time to consummate a transaction with Thomson.
The first contact between Gemstar and management and the StarSight Board
occurred by virtue of an unsolicited December 29, 1995 offer letter from
Hambrecht & Quist, financial advisor to Gemstar, received by
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StarSight on January 2, 1996. StarSight did not provide any information to
Gemstar or Hambrecht & Quist relating to this offer prior to such contact and
it was subsequently confirmed that this offer was based solely on public
information. In this offer letter, Gemstar expressed its interest in entering
negotiations with StarSight regarding a possible merger transaction at a
proposed exchange ratio that would have resulted in the shareholders of
StarSight owning approximately 14.5% of the combined entity. At the time of
this Gemstar contact, StarSight had already reached agreement with Thomson
regarding a strategic alliance that would include a significant infusion of
capital by Thomson. A memorandum of understanding outlining the terms of the
Thomson alliance had been signed and publicly announced on December 14, 1995
and by early January 1996 the parties were actively negotiating the definitive
agreements. The StarSight Board and management of StarSight believed that the
infusion of capital resulting from a Thomson transaction was critical to
StarSight and its survival. Following a meeting of the StarSight Board on
January 5, 1996, StarSight summarily rejected Gemstar's offer without
proposing a counteroffer. The lack of a counteroffer by StarSight prompted
Hambrecht & Quist to suggest and to encourage that StarSight engage a
financial advisor. The StarSight Board determined that the Gemstar proposal
was not in the best interests of StarSight and its shareholders, and the
StarSight Board declined to engage the services of a financial advisor. From
this point until May 1996, contacts between StarSight and Gemstar were few. In
March 1996, StarSight and Thomson finalized several agreements, including a
Strategic Cooperation Agreement and a Securities Purchase Agreement, which
provide respectively for the incorporation and promotion of certain StarSight
technology and related services into selected product lines of Thomson and an
equity investment by Thomson in StarSight of $25,000,000. In May 1994 and
October 1995, StarSight and Thomson also entered into a License and Technical
Assistance Agreement and a DSS License Agreement whereby StarSight granted
Thomson a license to certain of its technology in connection with the
incorporation of such StarSight technology into certain of Thomson's products.
In May 1996, Henry Yuen, Chief Executive Officer of Gemstar, contacted
Thomson to investigate the possibility of developing a relationship with
Thomson, either directly or in combination with StarSight. This led to a
meeting on May 14, 1996 between Mr. Yuen, a representative of Thomson and
Mr. Horowitz, who acted as StarSight's principal negotiator. For the first
time, the StarSight Board determined that it was in the best interests of
StarSight and its shareholders to pursue strategic discussions with Gemstar,
and it engaged Smith Barney as its financial advisor to advise the StarSight
Board and to assist in the process of exploring a transaction with Gemstar.
The engagement of Smith Barney occurred on May 22, 1996.
From May through July 1996, Mr. Yuen and Mr. Horowitz (who acted as
StarSight's principal negotiator), together with representatives of Hambrecht
& Quist and Smith Barney, entered into preliminary discussions regarding a
possible strategic alliance or business combination of the Companies. A number
of telephonic discussions between the parties took place over this period, and
the respective management teams and their independent advisors, including Mr.
Horowitz on behalf of StarSight, discussed a possible strategic business
combination with the primary focus of these discussions being the difficulties
being faced by each of the parties in exchanging information in view of the
parties pending litigation, limitations on disclosures to one another and
appropriate protections of their respective interests. Broad discussions of
business strategies and potential synergies of a combined company took place
and the parties agreed to continue to discuss the terms of a potential
business combination between the two Companies.
In July 1996, the Gemstar Board held a meeting at which senior management of
Gemstar was authorized to approach StarSight regarding a possible merger
transaction at a proposed exchange ratio that would have resulted in the
shareholders of StarSight owning approximately 25% of the combined entity. On
July 31, 1996, Gemstar, through Hambrecht & Quist, proposed the terms of a
merger of the Companies at an exchange ratio that would have resulted in the
shareholders of StarSight holding approximately 25% of the outstanding capital
stock of the combined company after the transaction.
On August 23, 1996 the StarSight Board met to discuss the strategic
alternatives available to StarSight in order to enhance its long term
strategic position. The issue of a possible transaction with Gemstar and
Gemstar's offer of July 31, 1996 were discussed. At the conclusion of these
discussions the StarSight Board scheduled a board meeting for August 29, 1996
to continue discussions regarding a potential strategic business combination
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with Gemstar and directed StarSight's management and financial advisors to
prepare presentations regarding Gemstar's offer. At the August 29, 1996
meeting of the StarSight Board, StarSight's senior management and financial
advisors, including Mr. Horowitz as StarSight's principal negotiator, reviewed
with the StarSight Board the discussions between the representatives of the
two Companies concerning a possible strategic business combination in order to
enhance StarSight's long term strategic position. There was a discussion
concerning the factors that supported their respective complementary product
lines, technologies and market positions of StarSight and Gemstar and the
other strategic factors associated with a possible strategic business
combination with Gemstar. The StarSight Board also discussed possible terms of
the transaction and potential organizational structures of a combined company.
At this meeting representatives of Smith Barney made a presentation to the
StarSight Board regarding Gemstar's offer of July 31, 1996 and reviewed, among
other things, the strategic rationale for, and certain financial analyses
relating to, the proposed transaction. StarSight's legal counsel also
discussed the StarSight Board's fiduciary duties in considering a strategic
business combination and the strategic alternatives to such transaction. At
this time the StarSight Board agreed that management and StarSight's
independent advisors should continue to proceed with negotiation and
investigation of the proposed combination and authorized the advisors to
communicate to Gemstar that its July 31 offer was too low. Two StarSight
directors, James Meyer and Jacques Thibon, did not participate in the
discussion of matters relating to a possible transaction with Gemstar due to a
possible conflict of interest resulting from their positions as directors or
officers of Thomson or its affiliates, and existing business arrangements
between Thomson and each of StarSight and Gemstar. As a result, Messrs. Meyer
and Thibon continued to recuse themselves from StarSight Board meetings and
discussions regarding a possible Gemstar transaction and did not participate
in the votes by the StarSight Board with respect to the Merger.
On September 6, 1996, at a meeting of the StarSight Board, the management
and financial advisors to StarSight discussed with the StarSight Board the
status of the discussions with Gemstar and the feasibility of a business
combination. The StarSight Board also discussed the strategic alternatives
available to StarSight at this time, including continuing to execute its stand
alone business plan, engaging in various restructuring strategies involving
the sale, spin-off or other disposition of all or parts of certain of
StarSight's businesses or engaging in merger discussions with other third
parties. The StarSight Board of Directors did not pursue such other strategic
alternatives due to various factors, such as the uncertainty of StarSight's
long-term profitability, the lack of a near-term resolution of its litigation
with Gemstar, the likelihood of competition increasing in the future, the lack
of any positive responses from potential acquirers, and the uncertainty of the
financial success of these alternatives. Accordingly, StarSight Board believed
it to be in the best interests of StarSight and its shareholders to merge with
Gemstar. StarSight's legal counsel also continued its discussions with the
StarSight Board regarding the its fiduciary duties in considering a strategic
business combination and strategic alternatives, At the conclusion of the
meeting, the StarSight Board directed StarSight's senior management and
advisors, including Mr. Horowitz as StarSight's principal negotiator, to
continue discussions and investigations regarding a potential business
combination with Gemstar and to continue to explore the strategic alternatives
available to StarSight. Specifically, the StarSight Board authorized
Mr. Horowitz to communicate to Gemstar that an exchange ratio that would
result in the shareholders of StarSight owning between 30% and 35% of the
combined entity (subject to satisfactory negotiation of related transaction
issues) would probably be acceptable to StarSight. The StarSight Board also
requested that Smith Barney approach third parties to solicit indications of
interest in a possible acquisiton of StarSight.
Over the next several weeks, the senior management teams and advisors of
each company, including Mr. Horowitz as StarSight's principal negotiator,
continued to explore and investigate the feasibility of a possible strategic
business combination. To facilitate these discussions, on September 12, 1996,
the parties entered into mutual non-disclosure agreements under which each
agreed to maintain the confidentiality of the other party's confidential
information.
On September 18, 1996, the senior management teams of each company together
with Mr. Horowitz, as StarSight's principal negotiator, and representatives of
Hambrecht & Quist, Smith Barney and Alex. Brown met in Pasadena, California.
Then again on September 19, 1996, the senior management teams of each company
together with representatives of Hambrecht & Quist, Smith Barney and Alex.
Brown met in Fremont, California.
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At these two meetings, the senior management teams of each company introduced
themselves and presented history and background regarding themselves and the
companies. Topics discussed at these meetings include the companies' products,
their performance to date, due diligence and settlement of litigation between
the companies.
On September 20, 1996, at a meeting of the StarSight Board, the Board
reviewed the status of discussions with Gemstar and management's due diligence
meetings at Gemstar. The StarSight Board also discussed Gemstar's existing
business and the rate of growth of such business, pricing issues relating to
the potential transaction with Gemstar, and the possibility of such
transaction qualifying for treatment as a tax free reorganization. The
StarSight Board then discussed possible alternatives to the current proposal
submitted by Gemstar as well as the feasibility of other third parties
acquiring StarSight. StarSight's legal counsel continued its discussions with
the StarSight Board regarding the board members' fiduciary duties to StarSight
and its shareholders in connection with the proposed business combination.
During the remainder of September and throughout October, there continued to
be various meetings and telephone conversations between representatives of
Gemstar and StarSight, including Mr. Horowitz as StarSight's principal
negotiator, at which there were discussions concerning the potential exchange
ratio, due diligence issues (including the sharing of non-trade secret
information concerning intellectual property and protection of privileged
information) in light of the pending litigation, a potential stay of the
litigation proceedings, exchanges of information regarding licensing
activities by each company, the business, operations and technology of each
company and of the combined company that would result from a business
combination. During this time representatives of the Companies and their
respective senior management and legal advisors met to conduct due diligence
as to the business of each other's company and (together with their respective
financial advisors) to explore further the potential synergies between the
Companies and the operational and management issues associated with a business
combination. Gemstar's and StarSight's financial advisors had further
discussions regarding valuation issues relevant to negotiation of a mutually
acceptable exchange ratio and other terms and conditions of a potential
business combination. In addition, representatives of the independent auditors
of StarSight and Gemstar held discussions regarding the accounting treatment
of a potential business combination between Gemstar and StarSight, in
particular the availability of pooling of interests accounting treatment for a
potential business combination.
In late October 1996, Gemstar and StarSight agreed to submit letters to the
staff of the Commission requesting that the Commission concur with the views
of StarSight and Gemstar and their independent auditors that a repricing of
outstanding stock options effected by StarSight in November 1995 would not
preclude pooling of interests accounting treatment for a business combination
between StarSight and Gemstar. StarSight and Gemstar submitted such request to
the staff of the Commission on October 29, 1996. From October 29 until mid-
November, representatives of Gemstar and StarSight continued discussions
regarding a potential strategic business combination, although at a reduced
pace while the parties awaited the Commission's response. These discussions
focused principally upon due diligence issues and the potential exchange
ratio. On November 7, 1996, at a meeting of the StarSight Board, the StarSight
Board discussed with management the status of the potential transaction with
Gemstar. In particular, management discussed with the StarSight Board the
issues surrounding the pooling of interests accounting treatment for a
business combination and StarSight's and Gemstar's recent correspondence with
the staff of the Commission concerning this issue. In November 1996, the
Commission informed Gemstar that, based upon the facts presented in the
October 29 request, in the staff's view the subject stock option repricing
would not preclude pooling of interests accounting treatment for a potential
business combination.
On November 26, 1996, Gemstar provided to StarSight a draft of the Merger
Agreement and there ensued discussions between legal counsel to Gemstar and
legal counsel to StarSight regarding the proposed structure and other
principal terms of the Merger Agreement. From December 2 through December 12,
Gemstar and StarSight, together with their respective legal and financial
advisors, including Mr. Horowitz as StarSight's principal negotiator,
continued to negotiate the terms of definitive agreements relating to the
transaction, including the terms of the proposed stock option agreements, the
termination rights relating to the Merger Agreement, the conditions upon which
any breakup fees would be payable and the amount of such fees, and the
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representations, warranties and covenants to be made. In addition, continued
due diligence by Gemstar of StarSight and StarSight of Gemstar took place. On
December 3, 1996, at a meeting of the StarSight Board, the StarSight Board
discussed with its management and Mr. Horowitz, StarSight's principal
negotiator, the negotiations of the agreements of a business combination with
Gemstar. Management of StarSight and Mr. Horowitz, StarSight's principal
negotiator, discussed with the StarSight Board the material terms of the
definitive merger agreement and the status of due diligence meetings between
the Companies.
On December 11, 1996, the Gemstar Board held a telephonic board meeting at
which senior management of Gemstar discussed with the Gemstar Board the
history of events leading to the proposed transaction with StarSight, the
various business reasons for the contemplated acquisition of StarSight and the
potential risks of such a transaction. Gemstar's legal counsel summarized for
the Gemstar Board the fiduciary duties of the Gemstar Board in an acquisition
and presented an overview of the proposed transaction, the material terms of
the proposed merger agreement and the status of due diligence meetings between
the Companies. Representatives of Hambrecht and Quist advised the Gemstar
Board regarding various financial aspects of the Merger, including whether
Hambrecht & Quist was prepared to render a fairness opinion regarding the
proposed financial terms of the Merger. Gemstar's senior management and legal
counsel responded to questions regarding various aspects of the proposed
merger. At the conclusion of the meeting, the Gemstar Board agreed that
management should continue to proceed with negotiation of the terms of the
definitive Merger Agreement and related agreements.
On December 13, 1996, certain members of senior management of Gemstar,
Gemstar's legal counsel and representatives of Gemstar's financial advisors
met with certain members of senior management of StarSight, StarSight's legal
counsel and representatives of StarSight's financial advisors, including Mr.
Horowitz, StarSight's principal negotiator, (the "December 13, 1996 Meeting").
At this meeting each party conducted due diligence and the parties held face
to face negotiations regarding the terms of the definitive agreements relating
to the transaction.
On December 16, 1996, final due diligence by Gemstar of StarSight and
StarSight of Gemstar took place.
On December 16, 1996, the Gemstar Board held a telephonic board meeting at
which senior management of Gemstar reported to the Gemstar Board on the
results of negotiations between the Companies, including the discussions and
negotiations that took place at the December 13, 1996 Meeting. Further,
Gemstar's senior management summarized the transaction issues (which included
an appropriate exchange ratio, the treatment of StarSight's stock options and
warrants, the Merger Agreement's provisions regarding representations and
warranties, covenants relating to conduct of business, additional agreements,
conditions precedent, termination events and fees, and the terms of the Stock
Option agreements; all of such issues were resolved by negotiation on or about
December 23, 1996 as reflected in the Merger Agreement, a copy of which is
attached as Appendix A), updated the Gemstar Board on the various business
reasons for the contemplated acquisition of StarSight and again discussed
potential risks of such a transaction. Gemstar's legal counsel summarized
changes to the material terms of the proposed Merger Agreement since the
previous Gemstar Board meeting. Representatives of Hambrecht & Quist presented
to the Gemstar Board the results of its due diligence regarding the Companies,
reviewed detailed financial analyses and pro forma and other information with
respect to the Companies, responded to questions regarding various financial
aspects of the proposed Merger and delivered a draft of its proposed fairness
opinion regarding the proposed financial terms of the Merger. Gemstar's senior
management and legal counsel responded to questions regarding various aspects
of the proposed Merger. At the conclusion of the meeting, the Gemstar Board
agreed that management should continue to proceed with negotiation of the
terms of the definitive Merger Agreement and related agreements.
On December 16, 1996, at a meeting of the StarSight Board, the StarSight
Board discussed with management and Mr. Horowitz, StarSight's principal
negotiator, the status of negotiations of the agreements of a business
combination with Gemstar. The Board discussed with management the material
terms of the merger agreement as well as any outstanding open items (which
included an appropriate exchange ratio, the treatment of StarSight's stock
options and warrants, the Merger Agreement's provisions regarding
representations and warranties, covenants relating to conduct of business,
additional agreements, conditions precedent, termination
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events and fees, and the terms of the Stock Option agreements; all of such
items were resolved by negotiation on or about December 23, 1996 as reflected
in the Merger Agreement, a copy of which is attached as Appendix A). In
addition, management updated the Board on its due diligence meetings with
Gemstar.
On the evening of December 17, 1996, the StarSight Board met, with certain
attendees participating by telephone conference call, at which meeting the
senior management and legal and financial advisors and Mr. Horowitz,
StarSight's principal negotiator, of StarSight discussed (i) the status of the
discussions and the benefits and potential risks of a merger with Gemstar, and
(ii) the principal terms of the Merger Agreement and related documents,
including the Stock Option Agreements. StarSight's legal counsel discussed the
StarSight Board's fiduciary duties in considering a strategic business
combination and strategic alternatives, and had further discussions with the
StarSight Board on the principal terms of the Merger Agreement, the Stock
Option Agreements, the Affiliate Agreements and the Company Significant
Shareholder Agreement. In addition, management of StarSight presented to the
StarSight Board the results of its due diligence of Gemstar and responded to
questions regarding various aspects of the proposed Merger. In addition, Smith
Barney then delivered its oral opinion to the effect that, as of such date,
the Exchange Ratio currently being proposed was fair to the holders of
StarSight Common Stock from a financial point of view and made a presentation
to the StarSight Board regarding the various financial and comparative
analyses performed by Smith Barney in preparing that opinion. During its
presentation, the representatives of Smith Barney indicated that they had
approached and made preliminary inquiries of certain third parties to solicit
indications of interest in a possible acquisition of StarSight and that all
such inquiries were met with a negative response. At the conclusion of the
meeting, the StarSight Board agreed that management should continue to proceed
with negotiation of the terms of the definitive Merger Agreement and related
agreements.
On December 18, 1996, StarSight and Gemstar continued to negotiate the terms
of the Merger Agreement and related documents.
On the afternoon of December 19, 1996, at a specially scheduled meeting of
the StarSight Board, (i) management of StarSight and Mr. Horowitz, StarSight's
principal negotiator, reported that a tentative agreement had been reached
with respect to many of the principal terms of the Merger, (ii) management of
StarSight again made presentations to the StarSight Board regarding the risks
and benefits of the Merger, (iii) StarSight's legal advisors held further
discussions regarding the StarSight Board's fiduciary duties in considering a
strategic business combination and reviewed proposed definitive terms of the
Merger Agreement and related documents, including the Stock Option Agreements,
and (iv) the StarSight Board approved the Merger Agreement and related
agreements, subject to management's successful negotiation and disposition
within the parameters set by the StarSight Board, of the remaining terms that
had not yet been agreed to.
On the evening of December 19, 1996, the Gemstar Board held a telephonic
board meeting at which senior management of Gemstar reported to the Gemstar
Board the outcome of StarSight's board meeting held earlier in the day and
summarized the remaining transaction issues (which included an appropriate
exchange ratio, the treatment of StarSight's stock options and warrants, the
Merger Agreement's provisions regarding representations and warranties,
covenants relating to conduct of business, additional agreements, conditions
precedent, termination events and fees, and the terms of the Stock Option
agreements; all of such issues were resolved by negotiation on or about
December 23, 1996 as reflected in the Merger Agreement, a copy of which is
attached as Appendix A), Senior Management summarized again the risks of and
reasons for the Merger. A representative of Gemstar's independent auditors
updated and advised the Gemstar Board regarding the poolability of the
transaction from an accounting perspective. In addition, management of Gemstar
presented to the Gemstar Board the results of its due diligence of StarSight
and responded to questions regarding various aspects of the proposed Merger.
Further, Gemstar's legal counsel discussed various legal issues and summarized
changes to the material terms of the proposed Merger Agreement and related
agreements since the previous Gemstar Board meeting. Representatives of
Hambrecht & Quist updated the Gemstar Board regarding the results of their
continued due diligence regarding the Companies, responded to questions
regarding various financial aspects of the proposed Merger and its draft of
the proposed fairness opinion regarding the proposed financial terms of the
Merger. Gemstar's senior management and legal counsel recommended a course of
action for
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resolving the remaining transaction issues (which included an appropriate
exchange ratio, the treatment of StarSight's stock options and warrants, the
Merger Agreement's provisions regarding representations and warranties,
covenants relating to conduct of business, additional agreements, conditions
precedent, termination events and fees, and the terms of the Stock Option
agreements; all of such issues were resolved by negotiation on or about
December 23, 1996 as reflected in the Merger Agreement, a copy of which is
attached as Appendix A). The Gemstar Board agreed that management should
continue to proceed on that basis with the negotiation of the terms of the
definitive Merger Agreement and related agreements.
On December 20, 21, 22 and 23, Gemstar and StarSight, together with their
respective legal and financial advisors, including Mr. Horowitz who acted as
StarSight's principal negotiator, continued to negotiate the open terms (which
included the final exchange ratio, the treatment of StarSight's stock options
and warrants, the Merger Agreement's provisions regarding representations and
warranties, covenants relating to conduct of business, additional agreements,
conditions precedent, termination events and fees, and the terms of the Stock
Option agreements; all of which were resolved by negotiation on or about
December 23, 1996 as reflected in the Merger Agreement, a copy of which is
attached as Appendix A) of the definitive agreements relating to the
transaction.
On the evening of December 22, 1996, the Gemstar Board held a telephonic
board meeting at which (i) management of Gemstar reported on developments
regarding each of the remaining transaction issues that were identified in the
previous Gemstar Board meeting and reported that agreement had been reached
with respect to many of the principal terms of the Merger, (ii) management of
Gemstar again made presentations to the Gemstar Board regarding the risks and
reasons for the Merger, (iii) Gemstar's legal advisors again advised the
Gemstar Board regarding the Gemstar Board's fiduciary duties in considering a
strategic business combination and reviewed proposed definitive terms of the
Merger Agreement and related documents, including the Stock Option Agreements,
(iv) Hambrecht & Quist delivered its oral opinion to the effect that, as of
such date, the consideration to be paid by Gemstar pursuant to the Merger
Agreement is fair to Gemstar from a financial point of view, (v) after a
question and answer session, the Gemstar Board approved unanimously the Merger
Agreement and related agreements, subject to management's successful
negotiation and disposition within the parameters set by the Gemstar Board, of
the remaining terms that had not yet been agreed to, (vi) the Gemstar Board
approved unanimously the expansion of the Gemstar Board by three positions as
provided for in the Merger Agreement, and (vii) the Gemstar Board approved
unanimously the Stock Incentive Plan Proposal. During the evening of December
22, 1996 and the morning of December 23, 1996, the remaining open issues were
resolved through negotiations between representatives of Gemstar and StarSight
according to the parameters established by the Gemstar and StarSight Boards of
Directors.
On December 23, 1996, Smith Barney delivered to the StarSight Board its
written opinion (a copy of which is annexed hereto as Appendix C, and
shareholders are urged to carefully review this opinion) to the effect that,
as of such date, the Exchange Ratio was fair to the holders of StarSight
Common Stock from a financial point of view. On December 23, 1996, Hambrecht &
Quist delivered to the Gemstar Board its written opinion, dated December 22,
1996, (a copy of which is annexed hereto as Appendix B, and shareholders are
urged to carefully review this opinion) to the effect that, as of December 22,
1996, the consideration to be paid by Gemstar pursuant to the Merger Agreement
is fair to Gemstar from a financial point of view. On December 23, 1996, the
Merger Agreement and the Stock Option Agreements were executed by the
Companies, each of the members of the Gemstar Board and the StarSight Board
and certain officers of each of Gemstar and StarSight executed the Gemstar
Affiliate Agreements and StarSight Affiliate Agreements and certain
significant shareholders of each of Gemstar and StarSight executed the Company
Significant Shareholder Agreement and the Parent Significant Shareholder
Agreement and Gemstar and StarSight issued a joint press release announcing
the Merger.
REASONS FOR THE MERGER; BOARD RECOMMENDATIONS
In reaching their decision to approve the Merger Agreement, the Gemstar and
the StarSight Boards consulted with their respective management teams and
advisors and independently considered the proposed Merger Agreement, including
the material factors described below. Based upon their respective independent
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reviews of such factors and the business and operations of the other party,
the Gemstar Board and the StarSight Board each approved the Merger Agreement
and the transactions contemplated thereby. (One StarSight director, John F.
Doyle, voted against approval of the Merger Agreement and the Merger.) There
can be no assurance, however, that any of the efficiencies or opportunities
described in the following reason for the Merger will be achieved through the
consummation of the Merger.
Gemstar's Reasons for the Merger
The Gemstar Board has approved the Merger Agreement, has determined that the
Merger is advisable and fair and in the best interests of Gemstar and its
shareholders, and recommends that holders of shares of Gemstar Ordinary Shares
vote FOR approval and adoption of the Merger Agreement and the Merger.
In its deliberations with regard to the Merger Agreement and the Merger, the
Gemstar Board considered the respective businesses, financial conditions and
financial performance of the Companies, as well as the terms and conditions of
the proposed Merger Agreement, and the anticipated accounting and federal tax
treatment of the Merger. The Gemstar Board also considered the written opinion
by Hambrecht & Quist to the effect that, based upon the facts and
circumstances as they existed at the time and subject to the various
assumptions and other conditions set forth in such opinion, as of December 22,
1996, the Exchange Ratio was fair from a financial point of view to the
holders of Gemstar Ordinary Shares. The Gemstar Board was aware of, and took
into consideration, the structure of the Merger and the rights of Gemstar
shareholders to consider and vote upon the issuance of Gemstar Ordinary Shares
pursuant to the Merger.
In reaching its decision to approve the Merger Agreement and the Merger and
to recommend that Gemstar's shareholders vote to approve the Merger Agreement
and the Merger, the Gemstar Board also considered, among other things, the
following potentially positive factors:
(i) The Gemstar Board considered its knowledge of the business
operations, properties, assets, financial condition and operating results
of the Companies;
(ii) The Gemstar Board considered the reports and opinions of its
management and Hambrecht & Quist including those resulting from
management's due diligence investigations concerning the business,
technology, products, operations, financial condition and prospects of
StarSight;
(iii) The Gemstar Board considered Gemstar's future prospects and that
such prospects were likely to be enhanced as a result of the Merger;
(iv) The Gemstar Board considered the detailed financial analyses, pro
forma and other information with respect to the Companies presented by
Hambrecht & Quist, in its oral and written presentations (see "--Opinion of
Financial Advisors--Gemstar");
(v) The Gemstar Board considered the potential for increased value to the
Gemstar shareholders from the possibility of synergies from combining the
Companies' product lines and research programs;
(vi) At a special meeting of the Gemstar Board held on December 22, 1996
the Gemstar Board considered the oral opinion of Hambrecht & Quist that, as
of such date and based upon and subject to certain matters stated therein,
the consideration to be paid by Gemstar pursuant to the Merger Agreement
was fair to Gemstar from a financial point of view (See "--Opinion of
Financial Advisors--Gemstar"). Subsequently, Hambrecht & Quist delivered
its written opinion that, as of December 22, 1996 and based upon and
subject to certain matters stated therein; the consideration to be paid by
Gemstar pursuant to the Merger Agreement was fair to Gemstar;
(vii) The Gemstar Board considered the terms and conditions of the Merger
Agreement, the Company Option Agreement and the Parent Option Agreement,
which were the product of extensive arm's-length negotiations (See "THE
PLAN OF MERGER");
(viii) The Gemstar Board considered the compatibility of the respective
business philosophies of the Companies;
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(ix) The Gemstar Board considered the "no-solicitation" and "break-up"
provisions of the Merger Agreement; and
(x) The Gemstar Board considered that the Merger is conditioned upon
approval of the Merger Agreement by the holders of a majority of the
outstanding voting power of the StarSight Common Stock and that the
issuance of Gemstar Ordinary Shares in the Merger is conditioned upon the
vote of a majority of the Gemstar Ordinary Shares voting thereon.
The Gemstar Board also considered a variety of potentially negative factors
in its deliberations concerning the Merger Agreement and the Merger, but
believed these factors were outweighed by the positive factors and other
reasons for effecting the Merger that are described above. The potentially
negative factors considered by the Gemstar Board included the following
factors:
(i) The Gemstar Board considered the potential dilutive effect of the
issuance of Gemstar Ordinary Shares in the Merger;
(ii) The Gemstar Board considered the substantial charges expected to be
incurred in connection with the Merger, including the transaction expenses
arising from the Merger and costs associated with combining the operations
of the Companies;
(iii) The Gemstar Board considered the risk, that the market price of
Gemstar Ordinary Shares might be affected adversely by the public
announcement of the Merger;
(iv) The Gemstar Board considered StarSight's history of financial
losses;
(v) The Gemstar Board considered Hambrecht & Quist's analyses which
indicated that (a) the earnings per share of the pro forma company would be
lower in 1999 than for Gemstar as a stand-alone company and (b) the implied
equity value of StarSight ranged from approximately $41 million to $71
million (based upon an analysis of selected merger and acquisition
transactions) as compared to an implied consideration of $279 million;
(vi) The Gemstar Board considered the risk that the synergies anticipated
to be achieved in the Merger would not be achieved;
(vii) The Gemstar Board considered the risk that the operations of the
Companies would not be successfully integrated;
(viii) The Gemstar Board considered the risk that important technical and
management personnel might be lost prior to or after consummation of the
Merger;
(ix) The Gemstar Board considered the adverse effects on Gemstar's
business, operations and financial condition in the event the Merger was
unable to be consummated following public announcement that the Merger
Agreement had been entered into; and
(x) The Gemstar Board considered the other risks associated with the
Companies' businesses described above under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
Gemstar Board is not intended to be exhaustive but includes all material
factors considered by the Gemstar Board. In view of the variety of factors
considered in connection with its evaluation of the Merger Agreement and the
Merger, the Gemstar Board did not find it practicable to and did not quantify
or otherwise assign relative weight to the specific factors considered in
reaching its determination. In addition, individual members of the Gemstar
Board may have given different weights to different factors. Based on the
factors outlined above and on the opinion of its financial advisor, Hambrecht
& Quist, the Gemstar Board determined that the consideration to be paid by
Gemstar pursuant to the Merger Agreement was fair to Gemstar and its
shareholders from a financial point of view. The Gemstar Board voted
unanimously to recommend to the holders of Gemstar Ordinary Shares that the
Merger Agreement and the Merger be approved.
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Recommendation of Gemstar's Board of Directors
At the Gemstar Board meeting held to consider the Merger, the Gemstar Board
carefully considered and unanimously approved the terms of the Merger
Agreement and the transactions contemplated thereby as being fair and in the
best interest of Gemstar and its shareholders. The Gemstar Board unanimously
recommends that the shareholders vote FOR approval and adoption of the Merger
Agreement and the Merger.
StarSight's Reasons for the Merger
The StarSight Board has approved the Merger Agreement, has determined that
the Merger is advisable and fair and in the best interests of StarSight and
its shareholders, and recommends that holders of shares of StarSight Common
Stock vote FOR approval and adoption of the Merger Agreement and the Merger.
The StarSight Board's decision to approve the Merger Agreement and the
Merger was based, in large part on its assessment that in the competitive
environment in which StarSight operates, StarSight would not be able to
achieve significant net income for some time. The StarSight Board recognized
that StarSight's long-term success and its ability to achieve its business
plan may require global reach and broad acceptance by the marketplace. In
addition, the StarSight Board considered that the recent value of StarSight
reflects the impact of events which have had a short-term positive impact on
the price of StarSight Common Stock and that the prospective value of the
combined StarSight/Gemstar company might be higher than StarSight on a stand
alone basis. Against these considerations the StarSight Board weighed, among
other things, the fact that the Exchange Ratio offered a premium to StarSight
shareholders. Based on the last reported sale price of Gemstar Ordinary Shares
on the Nasdaq National Market on December 20, 1996, the last trading day
before the announcement of the proposed Merger, the Exchange Ratio would
result in a per share purchase price for StarSight Common Stock of $10.46,
representing a premium of approximately $1.59 per share to the last reported
sale price per share of StarSight Common Stock on such date. Based on the last
reported sale price of Gemstar Ordinary Shares on April 11, 1997, the latest
practicable trading day before the printing of this Joint Proxy
Statement/Prospectus for which information was obtainable, the Exchange Ratio
would result in a per share purchase price for StarSight Common Stock of
$8.49, representing a premium of approximately $0.87 per share to the last
reported sale price per share of StarSight Common Stock on such date. See
"MARKET PRICE AND DIVIDENDS." In addition, because the consideration was stock
in the ongoing enterprise combining StarSight and Gemstar, the StarSight Board
considered that StarSight's shareholders would have the opportunity to benefit
from any synergies to be achieved by such combination, including those
resulting from the combination of the intellectual property portfolios and the
complimentary nature of the companies' operations. StarSight's management
advised the StarSight Board that such synergies may be significant.
StarSight's management did not, however, attempt to quantify such synergies.
Further, there can be no assurance that such synergies will actually be
achieved.
In reaching its decision to approve the Merger Agreement and the Merger and
to recommend that StarSight's shareholders vote to approve the Merger
Agreement and the Merger, the StarSight Board also considered, among other
things, the following potentially positive factors:
(i) The StarSight Board considered its knowledge of the business
operations, properties, assets, financial condition and operating results
of StarSight;
(ii) The StarSight Board considered the reports and opinions of
StarSight's management and Smith Barney including those resulting from
management's due diligence investigations concerning the business,
technology, products, operations, financial condition and prospects of
Gemstar; In considering the reports and opinions of StarSight's management,
the StarSight Board was aware that such persons could have personal
interests in the Merger which may not be identical to the interests of the
other shareholders of StarSight. Other than having been apprised of such
interests of management, StarSight did not take any other steps with
respect to such interests in the consideration of the Merger Agreement and
the Merger by the StarSight Board. These interests are described below
under "--Interests of Certain Persons in the Merger."
(iii) The StarSight Board considered StarSight's future prospects and
that such prospects were likely to be enhanced as a result of the Merger;
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(iv) The StarSight Board considered the detailed financial analyses, pro
forma and other information with respect to StarSight and Gemstar presented
by Smith Barney, in its oral and written presentations (see "--Opinion of
Financial Advisors--StarSight");
(v) The StarSight Board considered the effect on shareholder value of
StarSight continuing as an independent entity, compared to the effect of a
combination with Gemstar, in the light of the financial condition and
prospects of StarSight and the current economic and industry environment,
including, but not limited to, (A) other possible strategic alternatives
for StarSight which the StarSight Board had examined, including continuing
to execute its stand alone business plan or engaging in various
restructuring strategies involving the sale, spin-off or other disposition
of all or parts of certain of StarSight's businesses, (B) the advice of
Smith Barney that if it did not combine with Gemstar, StarSight might be
forced to adopt a "free-guide" business model and face the challenge of
repositioning itself while managing confusion among customers and the
retail channel, (C) its judgement, based on preliminary inquiries of
certain third parties regarding their potential interest in engaging in
discussions regarding an acquisition of StarSight (which inquiries were met
with a negative response), that StarSight was unlikely to identify an
alternative business opportunity that would provide superior benefits to
StarSight and its shareholders, and (D) the potential for increased value
in the combined StarSight/Gemstar enterprise, as compared to either
StarSight or Gemstar alone, the possibility of synergies from combining
StarSight's and Gemstar's product lines and research programs;
(vi) At a special meeting of the StarSight Board on December 17, 1996 the
StarSight Board considered the oral opinion of Smith Barney that, as of
such date and based upon and subject to certain matters stated therein, and
subject to review of the definitive agreement, the Exchange Ratio was fair
from a financial point of view to the holders of StarSight Common Stock
(See "--Opinion of Financial Advisors--StarSight"). On December 23, 1996,
after review of the definitive agreements, Smith Barney delivered its
written opinion that, as of such date and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair from a financial point
of view to the holders of StarSight Common Stock;
(vii) The StarSight Board, with the assistance of StarSight's financial
advisors, also considered recent and current market prices of Gemstar
Ordinary Shares, and concluded that Gemstar Ordinary Shares were trading in
a reasonable range prior to the announcement of the transaction;
(viii) The StarSight Board considered the terms and conditions of the
Merger Agreement, the Company Option Agreement and the Parent Option
Agreement, which were the product of extensive arm's-length negotiations
(See "THE PLAN OF MERGER");
(ix) The StarSight Board considered that the Exchange Ratio represented a
premium of approximately 17.9% to the market value of StarSight Common
Stock on December 20, 1996, the last Nasdaq trading day prior to the
decision of the StarSight Board to authorize negotiation of definitive
agreements;
(x) The StarSight Board considered the compatibility of the respective
business philosophies of StarSight and Gemstar;
(xi) The StarSight Board considered the opportunity for StarSight
shareholders to participate, as holders of Gemstar Ordinary Shares, in a
larger company of which former StarSight shareholders would hold
approximately 33% of the equity of the combined company following the
Merger, and to do so by means of a transaction which is designed to be tax-
free to StarSight's shareholders;
(xii) The StarSight Board considered the "no-solicitation" provisions of
the Merger Agreement, and the fact that the Merger Agreement would permit
StarSight to negotiate with a third party who made an unsolicited offer
that is reasonably likely to be financially superior to the Merger and, as
long as StarSight pays the Termination Fee to Gemstar provided for in the
Merger Agreement, would permit StarSight to enter into a transaction with
such other party;
(xiii) The StarSight Board considered that the Merger is conditioned upon
approval of the Merger Agreement by the holders of a majority of the
outstanding voting power of the StarSight Common Stock and that the
issuance of Gemstar Ordinary Shares in the Merger is conditioned upon the
vote of a majority of the Gemstar Ordinary Shares voting thereon; and
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(xiv) The StarSight Board considered the impact of the Merger on the
interests of StarSight's customers, suppliers, employees, and the
communities in which StarSight has operated.
The StarSight Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger Agreement and the Merger
but believed these factors were outweighed by the positive factors and other
reasons for effecting the Merger that are described above. The potentially
negative factors considered by the StarSight Board included the following
factors:
(i) The StarSight Board considered the risks that the synergies
anticipated to be achieved in the Merger would not be achieved;
(ii) The StarSight Board considered the risk that the operations of the
two companies would not be successfully integrated;
(iii) The StarSight Board considered the risk that important technical
and management personnel might be lost prior to or after consummation of
the Merger;
(iv) The StarSight Board considered Smith Barney's analyses which
suggested that the Merger (without giving effect to potential synergies)
could be dilutive to Gemstar's earnings per share for each fiscal year
1998, 1999 and 2000;
(v) The StarSight Board considered the adverse effects on StarSight's
business, operations and financial condition in the event the Merger was
unable to be consummated following public announcement that the Merger
Agreement had been entered into; and
(vi) The StarSight Board considered the other risks associated with
StarSight's and Gemstar's businesses described above under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
StarSight Board is not intended to be exhaustive but includes all material
factors considered by the StarSight Board. In view of the variety of factors
considered in connection with its evaluation of the Merger, the StarSight
Board did not find it practicable to and did not quantify or otherwise assign
relative weight to the specific factors considered in reaching its
determination. In addition, individual members of the StarSight Board may have
given different weight to different factors. In the course of its
deliberations, the StarSight Board did not establish a range of value for
StarSight; however, based on the factors outlined above and on the opinion of
its financial advisor, Smith Barney, referred to at (vi) above, the StarSight
Board determined that the Merger is advisable and fair and in the best
interests of StarSight and its shareholders. The directors voting on the
Merger voted to recommend to the holders of StarSight Common Stock that the
Merger Agreement and the Merger be approved. For certain forward looking
financial information regarding Gemstar considered by the StarSight Board and
StarSight's financial advisor, see "PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION."
Recommendation of StarSight's Board of Directors
The StarSight Board has approved the Merger Agreement and the Merger and
believes that the terms of the Merger Agreement are fair to, and that the
Merger is in the best interests of, StarSight and its shareholders and
therefore recommends that holders of StarSight Common Stock vote FOR approval
and adoption of the Merger Agreement and the Merger. Two directors, James
Meyer and Jacques Thibon, recused themselves from discussions and votes by the
StarSight Board with respect to a transaction with Gemstar due to the possible
conflict of interest described above under "Background of the Merger." One
StarSight director voted against approval of the Merger Agreement and the
Merger.
OPINIONS OF FINANCIAL ADVISORS
Gemstar
Gemstar engaged Hambrecht & Quist and Alex. Brown & Sons Incorporated
("Alex. Brown") to act as its financial advisors in connection with the Merger
and engaged Hambrecht & Quist to render an opinion as to the fairness from a
financial point of view to Gemstar of the consideration to be paid by Gemstar
in connection with
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the Merger. Hambrecht & Quist rendered its oral opinion, and subsequently
confirmed in writing, on December 22, 1996, to the Gemstar Board that, as of
such date, the consideration to be paid by Gemstar pursuant to the Merger
Agreement is fair to Gemstar from a financial point of view. A COPY OF
HAMBRECHT & QUIST'S OPINION DATED DECEMBER 22, 1996, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND LIMITATION OF THE REVIEW
UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT & QUIST IS ATTACHED AS
APPENDIX B TO THE JOINT PROXY STATEMENT/PROSPECTUS. GEMSTAR SHAREHOLDERS ARE
ADVISED TO READ THE OPINION IN ITS ENTIRETY. THE OPINION WILL NOT BE UPDATED
PRIOR TO THE CLOSING OF THE MERGER. Shareholders should note that the opinion
was written for the information of the Gemstar Board in connection with their
evaluation of the merger, and may not be used for any other purpose without
the written consent of Hambrecht & Quist. Hambrecht & Quist has consented to
the use of its opinion in this Joint Proxy Statement/Prospectus. No
limitations were placed on Hambrecht & Quist by the Gemstar Board with respect
to the investigation made or the procedures followed in preparing and
rendering its opinion.
In its review of the Merger, and in arriving at its opinion, Hambrecht &
Quist, among other things: (i) reviewed the publicly available consolidated
financial statements of Gemstar for recent years and interim periods to date
and certain other relevant financial and operating date of Gemstar made
available to Hambrecht & Quist from published sources and from the internal
records of Gemstar; (ii) reviewed certain internal financial and operating
information relating to Gemstar provided by the management of Gemstar; (iii)
discussed with certain members of the management of Gemstar the business,
financial condition and prospects of Gemstar; (iv) reviewed the publicly
available financial statements of StarSight for recent years and interim
periods to date and certain other relevant financial and operating data of
StarSight made available to Hambrecht & Quist from published sources and from
the internal records of StarSight; (v) reviewed certain internal financial and
operating information, including certain projections, relating to StarSight
prepared by StarSight's financial advisor based upon information provided by
the management of StarSight; (vi) discussed with certain members of the
management of StarSight the business, financial condition and prospects of
StarSight; (vii) reviewed the recent reported prices and trading activity for
Gemstar's Ordinary Shares and StarSight's Common Stock and compared such
information and certain financial information of Gemstar and StarSight with
similar information for certain other companies engaged in business Hambrecht
& Quist considered comparable to those of Gemstar and StarSight; (viii)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions; (ix) reviewed the Merger
Agreement; (x) discussed the tax and accounting treatment of the Merger with
Gemstar and Gemstar's accountants; and (xi) performed such other analyses and
examinations and considered such other information, financial studies,
analyses and investigations and financial, economic and market data Hambrecht
& Quist deemed relevant. Hambrecht & Quist did not deem the StarSight
projections provided by StarSight's financial advisor to be material to their
analyses of their opinion.
Hambrecht & Quist did not independently verify any of the information
concerning Gemstar or StarSight considered in connection with their review of
the Merger and, for purposes of its opinion, Hambrecht & Quist assumed and
relied upon the accuracy and completeness of all such information. In
connection with its opinion, Hambrecht & Quist did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
Gemstar or StarSight, nor did they conduct a physical inspection of the
properties and facilities of Gemstar or StarSight. Hambrecht & Quist did not
prepare or obtain any evaluation or appraisal of any potential or pending
litigation involving Gemstar or StarSight, including litigation in which both
companies are adversaries. Hambrecht & Quist did not determine how its
fairness opinion would be affected if it did not evaluate or appraise any such
litigation. Hambrecht & Quist also assumed that neither Gemstar nor StarSight
was a party to any pending transactions, including external financings,
recapitalization or merger discussions, other than the Merger, certain
potential strategic partnerships disclosed to Hambrecht & Quist and those in
the ordinary course of conducting their respective businesses. For purposes of
its opinion, Hambrecht & Quist assumed that the Merger will qualify as a tax-
free reorganization under the Code for the shareholders of Gemstar and that
the Merger will be accounted for as a pooling of interest. Hambrecht & Quist's
opinion is necessarily based upon market economic, financial and other
conditions as they exist and can be evaluated as of the date of the opinion
and any subsequent change in such conditions would require a reevaluation of
such opinion.
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The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
summary of the Hambrecht & Quist analyses set forth below does not purport to
be a complete description of the presentation by Hambrecht & Quist to the
Gemstar Board. In arriving at its opinion, Hambrecht & Quist did not attribute
any particular weight to any analyses or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Hambrecht & Quist believes that its analyses
and the summary set forth below must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or of
the following summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the analyses set forth
in the Hambrecht & Quist presentation to the Gemstar Board and its opinion. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Gemstar and StarSight.
The analyses performed by Hambrecht & Quist (and summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to
be appraisals or to reflect the prices at which businesses actually may be
acquired.
The following is a brief summary of certain financial analyses performed by
Hambrecht & Quist in connection with providing its written opinion to
Gemstar's Board on December 22, 1996:
Contribution Analysis: Hambrecht & Quist analyzed the contribution of
Gemstar and StarSight to certain financial statement categories of the pro
forma combined company, including revenue, operating income and net income.
This contribution analysis was then compared to the pro forma ownership
percentage of Gemstar and StarSight shareholders of the pro forma combined
company. Hambrecht & Quist examined the expected contributions to the
combined company's pro forma revenues, pro forma operating income and pro
forma net income by Gemstar for fiscal 1998 and 1999 (i.e., the four
quarters ending March 31), derived from published Wall Street estimates,
and by StarSight for the same period, derived from estimates (as adjusted
by Hambrecht & Quist) provided by StarSight's financial advisors based upon
information provided by StarSight. Hambrecht & Quist observed that Gemstar
shareholders are expected to own approximately 67% of the combined company
equity at the close of the Merger, and the StarSight shareholders are
expected to own approximately 33% of the combined company equity at the
close of the Merger. In fiscal 1998, it was estimated that Gemstar and
StarSight would have contributed approximately 67% and 33%, respectively,
of the combined pro forma revenues; approximately 72% and 28%,
respectively, of the combined pro forma operating income; and approximately
69% and 31%, respectively, of the combined pro forma net income. With
respect to expected fiscal 1999 financial performance, it was estimated
that Gemstar and StarSight would have contributed approximately 73% and
27%, respectively, of the combined pro forma revenues; approximately 79%
and 21%, respectively, of the combined pro forma operating income; and
approximately 77% and 23%, respectively, of the combined pro forma net
income.
Pro Forma Analysis: Hambrecht & Quist analyzed the pro forma impact of
the proposed merger on Gemstar's earnings per share, using published Wall
Street estimates of EPS for Gemstar in fiscal 1998 and fiscal 1999 at $1.25
and $2.10. The analysis indicated that earnings per share of the pro forma
combined company in 1998 would be higher than for Gemstar as a stand alone
company and lower than for Gemstar as a stand alone company in 1999. The
actual results and savings achieved by the combined company resulting from
the Merger may vary from the projected results and such variations may be
material.
Premium Analysis: Hambrecht & Quist compared the implied price per share
of the offer as of December 22, 1996 to the last sale price of StarSight
Common Stock on both December 20, 1996 and November 22, 1996 (the twenty-
eighth calendar day preceding the announcement of the proposed merger) to
similar premiums for certain technology transactions announced since
January 1, 1990. Hambrecht & Quist analyzed 15 such public company to
public company technology transactions and additionally analyzed a larger
set of public and private company transactions that were in the technology
sector. The 15 public company to public company technology transactions
analyzed by Hambrecht & Quist are Cheyenne Software Inc./Computer
Associates International Inc., Atria Software Inc./Pure Software Inc.,
Continuum Co. Inc./Computer Sciences Corp., Davidson & Associates Inc./CUC
International Inc., Sierra On Line
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Inc./CUC International Inc., Tivoli Systems Inc./International Business
Machines Corp., The Learning Co./SoftKey International Inc., Minnesota
Educational Computing Corp./SoftKey International Inc., Lotus Development
Corp./International Business Machines Corp., Legent Corp./Computer
Associates International Inc., Powersoft Corp./Sybase Inc., Software
Toolworks Inc./Pearson PLC, Aldus Corp./Adobe Systems, Inc., Word Perfect
Corp./Novell Inc. and Intuit Inc./Microsoft Corp. Hambrecht & Quist noted
that the Intuit Inc./Microsoft Corp. transaction did not close. The 15
public company to public company technology transactions selected for the
premium analysis were based on the fact that, in Hambrecht & Quist's
judgment, the businesses of the target companies shared similar
characteristics to the business of StarSight, including a high portion of
license revenue, the value of market share, economies of scale, the pace of
technological change, competitive markets for human capital and competitive
product markets. Hambrecht & Quist observed that the average one-day
premium and average four-week premium paid in the selected 15 public
company to public company technology transactions was 47% and 60%,
respectively, and that the average one-day and average four-week premium
paid in the larger set of public company to public company technology
transactions was 39% and 45%, respectively. This compared with the proposed
merger in which the one-day premium offered was 18% and the four-week
premium offered was 47%.
Discounted Cash Flow Analysis: Hambrecht & Quist analyzed the theoretical
valuation of StarSight based on the unleveraged discounted cash flow of the
projected financial performance estimates of StarSight. To estimate the
total value of StarSight's business, before giving effect to its capital
structure, Hambrecht & Quist discounted to present value (i) the projected
stream of after-tax cash flows and (ii) the terminal value (the
hypothetical value derived by selling the enterprise in its entirety at
some future date) of StarSight's business, as reflected in the financial
performance estimates using discount rates ranging from 15% to 35%. The
foregoing discount rates represent a range of values which surround the
theoretical equity cost of capital of StarSight using the Capital Asset
Pricing Model and also reflect the risks associated with StarSight's
historical performance, evolving business model (including its intellectual
property portfolio, strategic relationships and product breadth) and the
competitive consumer electronics market in which StarSight sells its
products. While the range of discount rates used was broad, Hambrecht &
Quist believed that narrowing the range would not accurately reflect the
potential risks and rewards of StarSight's business given StarSight's
historical performance, evolving business model and the competitive
consumer electronics market. The terminal value was based on multiples of 5
to 25 times projected EBIT for the fiscal period ending March 31, 2001.
These multiples were based on multiples resulting from analysis of 13
publicly traded comparable companies and analysis of 15 selected merger and
acquisition transactions. The selected comparable publicly traded companies
had EBIT multiples which were negative in five of the cases and which
ranged from 16.3 to 109.9 in the remaining eight cases. The selected
comparable public company to public company transactions had EBIT multiples
which were negative in three of the cases and which ranged form 12.6 to
220.7 in the remaining twelve cases. Hambrecht & Quist narrowed the range
of EBIT multiples suggested by these transactions for purposes of its
analysis to a range that Hambrecht & Quist believed to be appropriate in
light of StarSight's historical performance, evolving business model and
the competitive consumer electronics market. Based on the discounted cash
flow analysis, StarSight's implied equity value ranged from approximately
$79 million to approximately $785 million.
Analysis of Publicly Traded Comparable Companies: Hambrecht & Quist
compared selected historical and projected financial information of
StarSight to publicly traded companies Hambrecht & Quist deemed to be
comparable to StarSight. Such data and ratios included market value, market
value to historical net income, price per share to historical and projected
earnings per share, market value to historical book value and earnings per
share growth rates. Hambrecht & Quist also examined the ratio of the
enterprise value (market value plus debt less cash) to the earnings before
interest and taxes and earnings before interest, taxes, depreciation and
amortization. All multiples were based on closing stock prices on
December 20, 1996. All forecasted data for such comparable companies were
based on publicly available, independent estimates by selected investment
banking firms. Companies used as comparable included selected high-growth
software companies including Adobe Systems Inc., America Online Inc.
Cybermedia Inc., Desktop Data Inc., Geoworks, Intuit Inc., Lycos Inc.,
Microsoft Corp., Moviefone Inc., Spyglass Inc., Symantec Corp., Visio Corp.
and Yahoo Inc. The foregoing companies were selected for inclusion in the
analysis of
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publicly traded comparable companies because, in the judgment of Hambrecht
& Quist, each of these pursues a strategy involving the licensing or sale
of consumer software or the use of technology which allows consumers to
search and evaluate information efficiently. The foregoing multiples were
applied to historical financial results of StarSight for the twelve-month
period ended September 30, 1996 and projected financial results of
StarSight derived from projections provided by StarSight's financial
advisors based upon information provided by StarSight. Hambrecht & Quist
determined that the average multiple of the last-twelve-months revenues for
these companies was 11.0. Hambrecht & Quist determined that the average
multiple of book value for these companies was 7.3. Hambrecht & Quist
determined that, for the expected results for calendar year 1997, the
average multiple of earnings per share for these companies was 57.9. Based
on the analysis of publicly traded comparable companies, StarSight's
implied equity value ranged from approximately $55 million to approximately
$1,476 billion. This compared with an implied value of $279 million of
StarSight in the Merger, based on the closing price of Gemstar Ordinary
Shares on December 20, 1996.
Analysis of Selected Merger and Acquisition Transactions: Hambrecht &
Quist compared the proposed merger with selected comparable merger and
acquisition transactions. This analysis included 15 comparable technology
transactions. In examining these transactions, Hambrecht & Quist analyzed
certain income statement and balance sheet parameters of the acquired
company relative to the consideration offered. Multiples analyzed included
consideration offered to historical revenue, to historical cash flow from
operations, to historical earnings before depreciation, interest and taxes,
to historical earnings before interest and taxes, to historical net cash
flow from operations, to historical income, to historical book value and to
historical net operating assets. Selected technology transactions analyzed
included Cheyenne Software Inc./Computer Associates International Inc.,
Atria Software Inc./Pure Software Inc., Continuum Co. Inc./Computer
Sciences Corp., Davidson & Associates Inc./CUC International Inc., Sierra
On Line Inc./CUC International Inc., Tivoli Systems Inc./International
Business Machines Corp., The Learning Co./SoftKey International Inc.,
Minnesota Educational Computing Corp./SoftKey International Inc.,
Lotus Development Corp./International Business Machines Corp., Legent
Corp./Computer Associates International Inc., Powersoft Corp./Sybase Inc.,
Software Toolworks Inc./Pearson PLC, Aldus Corp./Adobe Systems Inc.,
WordPerfect Corp./Novell Inc. and Intuit Inc./Microsoft Corp. Hambrecht &
Quist noted that the Intuit Inc./Microsoft Corp. transaction did not close.
The consideration offered in the forgoing transactions was an average
multiple of 6.9 times revenue, 43.9 times earnings before interest, taxes,
depreciation and amortization, 57.7 times earnings before interest and
taxes, 71.0 times net income, 10.6 times book value and 54.4 times cash
flow from operations. Based on the analysis of selected merger and
acquisition transactions, StarSight's implied equity value ranged from
approximately $55 million to $171 million. This compared with an implied
value of $279 million of StarSight in the Merger.
No company or transaction used in the above analysis is identical to Gemstar
or StarSight or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other facts that could affect the public trading values of
the companies or company to which they are compared.
The foregoing description of Hambrecht & Quist's opinion is qualified in its
entirety by reference to the full text of such opinion which is attached as
Appendix B to this Joint Proxy Statement/Prospectus.
Hambrecht & Quist, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, strategic alliances,
negotiated underwriting, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Hambrecht & Quist is familiar with Gemstar, having acted as a
managing underwriter of its initial public offering in 1995 and an additional
offering in April 1996. In the ordinary course of business, Hambrecht & Quist
acts as a market maker and broker in the publicly traded securities of Gemstar
and receives customary compensation in connection therewith, and also provides
research coverage for Gemstar. In the ordinary course of business, Hambrecht &
Quist actively trades in the equity and
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derivative securities of Gemstar for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position
in such securities.
Pursuant to an engagement letter dated December 12, 1996, Gemstar has agreed
to pay Hambrecht & Quist and Alex. Brown a fee ("Transaction Fee") equal to $1
million in connection with their services as financial advisors to Gemstar in
connection with the Merger. Such Transaction Fee is payable one half to each
upon consummation of the Merger. In addition, pursuant to the same engagement
letter dated December 12, 1996, Gemstar has agreed to pay Hambrecht & Quist a
fee equal to $500,000 in connection with its services in rendering a fairness
opinion. Gemstar has also agreed to reimburse Hambrecht & Quist and Alex.
Brown for their reasonable out-of-pocket expenses and to indemnify Hambrecht &
Quist and Alex. Brown against certain liabilities under the federal securities
laws or relating to or arising out of Hambrecht & Quist's or Alex. Brown's
role as financial advisor. Alex. Brown was not requested by the Gemstar Board
to, and did not, provide a fairness opinion in connection with the Gemstar
Board's consideration of the Merger Agreement and the Merger.
StarSight
Smith Barney was retained by StarSight to act as its financial advisor in
connection with a potential transaction involving Gemstar. In connection with
such engagement, StarSight requested that Smith Barney evaluate the fairness,
from a financial point of view, to the holders of StarSight Common Stock of
the consideration to be received by such holders pursuant to the terms and
subject to the conditions set forth in the Merger Agreement. On December 17,
1996, at a special meeting of the StarSight Board held to evaluate the
proposed Merger, Smith Barney rendered to the StarSight Board an oral opinion
(subsequently confirmed by delivery of a written opinion dated December 23,
1996 which reflected the final terms of the Merger Agreement) to the effect
that, as of the date of such opinion and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair, from a financial point of
view, to the holders of StarSight Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of StarSight and certain senior officers and
other representatives and advisors of Gemstar concerning the business,
operations and prospects of StarSight and Gemstar. Smith Barney examined
certain publicly available business and financial information relating to
StarSight and Gemstar as well as certain financial forecasts and other data
for StarSight and other data related to Gemstar which were provided to or
otherwise discussed with Smith Barney by the respective managements of
StarSight and Gemstar, including information relating to certain strategic
implications and operational benefits and synergies ("potential synergies")
anticipated to result from the Merger. Smith Barney reviewed the financial
terms of the Merger as set forth in the Merger Agreement in relation to, among
other things: current and historical market prices and trading volumes of
StarSight Common Stock and Gemstar Ordinary Shares; the respective companies'
historical and projected earnings and operating data; and the capitalization
and financial condition of StarSight and Gemstar. Smith Barney considered, to
the extent publicly available, the financial terms of certain other similar
transactions recently effected which Smith Barney considered relevant in
evaluating the Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations Smith Barney considered relevant in evaluating those of
StarSight and Gemstar. Smith Barney evaluated the potential pro forma
financial impact of the Merger on Gemstar. In connection with its engagement,
Smith Barney was requested to approach and hold discussions with certain third
parties to solicit indications of interest in a possible acquisition of
StarSight. In addition to the foregoing, Smith Barney conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Smith Barney deemed appropriate in arriving at its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial
forecasts and other information and data furnished to or otherwise reviewed by
or discussed with Smith Barney, the managements of StarSight and Gemstar
advised Smith Barney that such forecasts and other information and data were
prepared on bases reflecting reasonable estimates and judgments as to the
future financial performance of StarSight and Gemstar and the
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strategic implications and potential synergies anticipated to result from the
Merger. In preparing its analyses, Smith Barney assumed that, on a stand-alone
basis, StarSight would reduce costs as a percentage of revenues due to
spreading fixed marketing costs over a broader revenue base and would be able
to utilize a portion of StarSight's net operating losses to offset the tax
liability on pre-tax income over a period of time. Smith Barney assumed
various revenue, EBIT and earnings per share of Gemstar for 1997-1999 based on
Wall Street equity analyst reports. Smith Barney also relied upon, without
independent verification, StarSight management's assessment of the validity
of, and risks associated with, the products and technology of StarSight and
Gemstar. Smith Barney has assumed that the Merger will be treated as a pooling
of interest in accordance with generally accepted accounting principles and as
a tax free reorganization under the Code. Smith Barney's opinion related to
the relative values of StarSight and Gemstar. SMITH BARNEY DID NOT AND WILL
NOT EXPRESS ANY OPINION AS TO WHAT THE VALUE OF GEMSTAR ORDINARY SHARES
ACTUALLY WILL BE WHEN ISSUED TO STARSIGHT SHAREHOLDERS PURSUANT TO THE MERGER
OR THE PRICES AT WHICH GEMSTAR ORDINARY SHARES WILL TRADE SUBSEQUENT TO THE
MERGER, AND NO ASSURANCES CAN BE GIVEN AS TO SUCH VALUE OR SUCH SUBSEQUENT
TRADING VALUE OR THEIR FAIRNESS IN RELATION TO HISTORICAL OR CURRENT TRADING
VALUES OF STARSIGHT COMMON STOCK. See "RISK FACTORS--Risks Associated with
Fixed Exchange Ratio." Smith Barney did not make and was not provided with an
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of StarSight or Gemstar nor did Smith Barney make any physical
inspection of the properties or assets of StarSight or Gemstar. Smith Barney
noted that its opinion was necessarily based upon information available, and
financial, stock market and other conditions and circumstances existing and
disclosed, to Smith Barney as of the date of its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED DECEMBER 23,
1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX C AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF STARSIGHT COMMON STOCK ARE URGED
TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF
VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF
SMITH BARNEY SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE OPINION
WILL NOT BE UPDATED PRIOR TO THE CLOSING OF THE MERGER.
In preparing its opinion to the StarSight Board, Smith Barney performed a
variety of financial and comparative analyses, including those described
below. The summary of such analyses does not purport to be a complete
description of the analyses underlying Smith Barney's opinion. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Smith Barney believes that its analyses must be considered as a
whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its
analyses, Smith Barney made numerous assumptions with respect to StarSight,
Gemstar, industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of StarSight and Gemstar. The estimates contained in such analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by such
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Smith Barney's
opinion and financial analyses were only one of many factors considered by the
StarSight Board in its evaluation of the Merger and should not be viewed as
determinative of the views of the StarSight Board or management with respect
to the Exchange Ratio or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples
of StarSight and (i) the following selected "navigator" companies: Gemstar and
United Video Satellite Group, Inc. (the "Selected Navigator Companies") and
(ii) the following selected companies in other areas of the interactive
television industry: ACTV, Inc., Ascent
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Entertainment Group, Inc., LodgeNet Entertainment Corporation, NTN
Communications, Inc. and Source Media, Inc. Smith Barney compared Total
Enterprise Values (market value of outstanding shares plus net debt (total
debt plus preferred stock less cash and cash equivalents)) as multiples of,
among other things, latest twelve months revenues and earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Smith Barney also
compared the Total Enterprise Values as a multiple of, among other things,
estimated 1996 EBITDA and the estimated 1996 and 1997 price/earnings ratios
for each company. All multiples were based on closing stock prices as of
December 16, 1996.
Applying multiples for the Selected Navigator Companies of latest twelve
months revenues of 1.5 to 9.5 to corresponding financial data for StarSight
resulted in an equity reference range for StarSight of approximately $0.86 to
$2.61 per share which was outside the valuation ranges and therefore excluded.
Applying multiples of latest twelve months EBITDA valuation multiples of the
Selected Navigator Companies to corresponding financial data for StarSight was
not meaningful because StarSight had incurred losses in such latest 12 month
period. Applying multiples for the Selected Navigator Companies of projected
calendar 1997 price/earnings ratios of 14.5 to 15.4 to corresponding financial
data for StarSight resulted in an equity reference range for StarSight of
approximately $8.04 to $8.54 per share, as compared to the per share value
implied by the Exchange Ratio of approximately $10.91 based on a closing stock
price of Gemstar Ordinary Shares on December 16, 1996.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the transaction value multiples
paid in the following selected transactions deemed comparable by Smith Barney
(acquiror/target): United Video Satellite Group, Inc./Tele-Communications,
Inc. (June 1995) and Information Access Company (Ziff)/Thomson Corporation
(November 1994) (the "Selected Transactions"). Smith Barney compared the
transaction values of the Selected Transactions as a multiple of, among other
things, latest twelve months revenues, EBITDA, earnings before interest and
taxes and total assets. Multiples for each Selected Transaction were based on
information available at the time of announcement of the transaction. Applying
a multiple for the Selected Transactions of latest twelve months revenues of
2.7x to 5.7x to corresponding financial data for StarSight resulted in an
equity reference range of approximately $1.12 to $1.78 per share, which was
outside the valuation ranges and therefore excluded. Applying a multiple for
the Selected Transactions of latest twelve months EBITDA and latest twelve
months earnings per share to corresponding financial data for StarSight was
not meaningful because StarSight had incurred losses in such latest 12 month
period.
Premiums Paid Analysis. Using publicly available information, Smith Barney
also analyzed the control premiums paid in the following stock-for-stock
transactions between $250 million and $1 billion of companies with pro forma
ownership by the acquired company's shareholders of between 15% and 40%
(excluding combinations of financial institutions) in 1992 through 1996
(acquiror/target): Nellcor, Incorporated/Puritan-Bennett Corporation (5/95);
Proffitt's, Inc./Younkers, Inc. (10/95); Tosco Corporation/Circle K
Corporation (2/96); Boston Scientific Corporation/SciMed Life Systems, Inc.
(11/94); AccuStaff, Inc./Career Horizons, Inc. (8/96); Champion Enterprises,
Inc./Redman Industries, Inc. (8/96); Olsten Corporation/Lifetime Corporation
(5/93); IVAX Corporation/Zenith Laboratories, Inc. (8/94); Arrow Electronics,
Inc./Anthem Electronics, Inc. (9/94); USA Waste Services, Inc./Western Waste
Industries, Inc. (12/95); Thomas & Betts Corporation/Augat, Inc. (10/96);
Sybase, Inc./Powersoft Corporation (11/94); Adobe Systems, Inc./Aldus
Corporation (3/94); Cardinal Health, Inc./Pyxis Corporation (2/96); Sun
International Hotels Ltd./ Griffin Gaming & Entertainment (8/96); SoftKey
International, Inc./Minnesota Educational Computing Corporation (10/95);
Dresser Industries, Inc./Baroid Corporation (9/93); 3Com Corporation/Chipcom
Corporation (7/95); Corporate Express, Inc./US Delivery Systems, Inc. (1/96);
DSP Communications, Inc./ Proxim, Inc. (10/96); Tidewater, Inc./Hornbeck
Offshore Services, Inc. (11/95); Olsten Corporation/ Quantum Health Resources,
Inc. (5/96); and UNUM Corporation/Colonial Companies, Inc. (12/92). Based on
its review of such data, Smith Barney applied a control premium range of 0.0%
to 75.0% to StarSight's 20 day average closing stock price of $7.91 per share,
which resulted in an equity reference range for StarSight of approximately
$7.91 to $13.84 per share, as compared to the per share value implied by the
Exchange Ratio of approximately $10.91 based on a closing stock price of
Gemstar Ordinary Shares on December 16, 1996.
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No company, transaction or business used in the "Selected Company Analysis",
the "Selected Merger and Acquisition Transactions Analysis" or the "Premiums
Paid Analysis" as a comparison is identical to StarSight, Gemstar or the
Merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the Selected Navigator Companies, Selected Transactions or the
business segment, company or transaction to which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow
analysis of the projected free cash flow of StarSight for the fiscal years
ending March 31, 1998 through 2000, based on projections prepared by StarSight
management and assuming, among other things, discount rates of 20.0%, 25.0%
and 30.0% and terminal multiples of EBITDA of 6.0x, 8.0x and 10.0x. This
analysis resulted in an equity reference range for StarSight of approximately
$6.54 to $12.12 per share.
Contribution Analysis. Using information in respect of Gemstar obtained from
research reports generally available in the investment community and
information in respect of StarSight prepared by StarSight management, Smith
Barney analyzed the expected contributions of StarSight and Gemstar to (i) the
projected revenues of the merged entity, (ii) the projected earnings before
interest and taxes ("EBIT") of the merged entity and (iii) the projected net
income of the merged entity. This analysis resulted in (i) StarSight's
projected contribution to revenues as a percent of projected consolidated
revenues of the merged entity being 33.9% in 1997, 30.0% in 1998, 31.0% in
1999 and 34.5% in 2000, compared with a comparative enterprise value at the
date of the analysis of 34.6%, (ii) StarSight's projected contribution of EBIT
as a percent of the projected consolidated EBIT of the merged entity being
43.6% in 1997, 20.2% in 1998, 22.0% in 1999 and 27.7% in 2000, compared with a
comparative enterprise value at the date of the analysis of 34.6%, and
(iii) StarSight's projected contribution to net income as a percent of
projected consolidated net income of the merged entity being 48.8% in 1997,
23.6% in 1998, 27.4% in 1999 and 35.0% in 2000, compared with a projected pro-
forma ownership of StarSight shareholders in the merged entity immediately
after the merger of 32.9%. Smith Barney noted in its analysis that the 1997
financial data for StarSight included approximately $17.5 million of non-
recurring revenues.
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected earnings per share ("EPS") of Gemstar for the fiscal
years ended March 31, 1998 through 2000, based on estimates derived from Wall
Street equity analyst reports. The results of the pro forma merger analysis
suggested that the Merger (without giving effect to potential synergies) could
be dilutive to Gemstar's EPS for each such fiscal year 1998 through 2000.
Giving effect to potential synergies, StarSight and Gemstar expect that the
Merger will be nondilutive on a pro forma basis. The actual results achieved
by the Gemstar after the Merger may vary from projected results and the
variations may be material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain comparative
analyses, including, among other things, a review of (i) responses received
from third parties other than Gemstar; (ii) historical and projected financial
results of StarSight and Gemstar; (iii) current and historical market prices
and trading volume of StarSight Common Stock and Gemstar Ordinary Shares; (iv)
selected analysts' reports relating to StarSight, including analysts'
estimates as to the earnings growth potential of StarSight; and (v) the pro
forma ownership of Gemstar after the Merger.
Smith Barney has advised StarSight that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
StarSight and Gemstar for their own account or for the account of customers
and, accordingly, may at any time hold a long or short portion in such
securities. Smith Barney has in the past provided financial advisory and
investment banking services to StarSight unrelated to the Merger, for which
Smith Barney has received compensation. In addition, Smith Barney and its
affiliates may maintain relationships with StarSight and Gemstar.
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Smith Barney is a nationally recognized investment banking firm and was
selected by StarSight based on Smith Barney's experience and expertise with
respect to merger and acquisition transactions and familiarity with StarSight
and its business. Smith Barney regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
Pursuant to the terms of Smith Barney's engagement, StarSight has paid Smith
Barney $50,000, has agreed to pay Smith Barney $500,000 for delivery of Smith
Barney's fairness opinion and has agreed to pay Smith Barney an aggregate
financial advisory fee of approximately $1.5 million additional upon the
consummation of the Merger. StarSight also has agreed to reimburse Smith
Barney for travel and other out-of-pocket expenses incurred in performing its
services, including certain fees and expenses of its legal counsel, and to
indemnify Smith Barney and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Smith
Barney's engagement.
Pursuant to the terms of an agreement, H. Joseph Horowitz agreed to
participate in the negotiations of the Merger on behalf of StarSight and to
perform such other duties as may be requested by the StarSight Board of
Directors. As compensation for his services, StarSight agreed to pay Mr.
Horowitz a transaction fee based on 0.25% of the aggregate value of the
transaction if the Merger is consummated. The exact amount of such fee cannot
be calculated at present, but may be in excess of $700,000.
RELATED AGREEMENTS
Employment Agreements
StarSight has entered into employment agreements, each dated December 23,
1996, with Larry W. Wangberg, Brian L. Klosterman, Martin W. Henkel and
William Scharninghausen (collectively, the "StarSight Executives") and the
following other employees of StarSight: Kenneth A. Milnes, Jonathan Orlick,
Robert Russman, Daniel Donnelly and Michael Hopkins (such other employees are
hereinafter referred to as "StarSight Employees"). 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. Mr. Klosterman is entitled to an annual
bonus in an amount to be determined by the StarSight Board of not less than
50% of his then current base salary. Messrs. Wangberg and Henkel are not
entitled to receive any bonuses in connection with their respective employment
agreements. Messrs. Scharninghausen, Milnes, Orlick, Russman, Donnelly and
Hopkins are entitled to receive annual bonuses if granted in the sole and
absolute discretion of the StarSight Board in an amount to be determined in
the sole and absolute discretion of the StarSight Board. All such employment
agreements become effective at the Effective Time and provide for the
employment of such persons for a period (the "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. In addition, each employment
agreement provides that the Employment Period shall automatically be renewed
unless either of the parties thereto notifies the other of the termination
thereof.
Generally, if StarSight terminates an employment agreement with the
StarSight Executives or the StarSight Employees without Cause (as defined
below) during the Employment Period, then the affected employee shall be
entitled to continue to receive his salary from StarSight (as specified in
such employment agreement) for the remaining period of such employee's
Employment Period. If an employee is terminated for Cause, StarSight shall
have no further obligations to pay any salary or other compensation to such
employee. The Employment Period will also terminate in the event of the
employee's death or disability, and in each such case, StarSight will be
required to make certain limited payments. An employee shall be terminated for
"Cause" if: (i) the employee has engaged in illegal or other wrongful conduct
substantially detrimental to the business or reputation of StarSight or any
affiliated company, or is charged with or convicted of a felony; (ii) the
employee refuses or fails to act in accordance with any reasonable direction
or order of the StarSight Board; provided that the
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StarSight Board has given employee 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 StarSight.
In addition, the employment agreements provide that 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,
StarSight 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, including without limitation, (i) solicit or interfere with any of
StarSight's suppliers or customers; (ii) employ, solicit for employment, or
recommend for employment any person employed by StarSight, during the period
of such person's employment by StarSight and for one year thereafter; or (iii)
engage in any business activity that is competitive with StarSight; provided
that in no event shall the employee engage in such competitive activities
during the period which he continues to receive payments pursuant to the
termination provisions of the applicable employment agreement. For the
purposes of the employment agreements, "competitive activities" are defined as
business activities that are directly competitive with any existing or
presently planned business of StarSight on the date of termination, which
activity constitutes or is anticipated to constitute more than 15% of the
revenues of StarSight.
The employment agreements with the StarSight Executives and the StarSight
Employees also contain standard employee invention and intellectual property
confidentiality provisions and severance provisions relating to each such
employee's existing employment agreement with StarSight (collectively, the
"Prior Employment Agreements"). For a discussion of such severance provisions
for the StarSight Executives, see "--Interests of Certain Persons in the
Merger."
Affiliate Agreements
To help ensure that the Merger will be accounted for as a pooling of
interests the executive officers of Gemstar and StarSight and members of the
Gemstar Board and the StarSight Board and five percent (5%) shareholders of
Gemstar and StarSight executed agreements that prohibit such persons or their
respective affiliates from disposing of their shares (i) during the 30 day
period prior to the Effective Time and (ii) until Gemstar publicly releases
its first report of financial statements, including the financial results of
Gemstar and StarSight for a period of at least 30 days of "combined
operations" as defined by the Commission. Pursuant to such agreements,
StarSight affiliates have also acknowledged the resale restrictions imposed by
Rule 145 promulgated under the Securities Act on shares received by them in
the Merger.
Parent Option Agreement
Concurrently with the execution of the Merger Agreement, StarSight and
Gemstar entered into the Parent Option Agreement, pursuant to which Gemstar
granted StarSight the irrevocable Parent Stock 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 is exercisable, in whole or in part, at any
time and from time to time following the occurrence of a Purchase Event and
prior to termination of the Parent Option Agreement. A Purchase Event is
defined as 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
plus 30 days, or (iii) the payment by Gemstar and the receipt by StarSight of
the Parent Termination Fee; provided, however, that the repurchase and
registration rights provisions described below shall terminate in accordance
with their respective terms and not when the Parent Stock Option terminates.
Upon any termination of the Merger Agreement pursuant to Section 7.1(i), (k)
or (m) thereof, or upon the failure of any of the Gemstar Significant
Shareholders to vote in favor of the Merger at a duly held meeting of
Gemstar's shareholders or at any adjournment or postponement thereof and, in
connection with such vote, the
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Merger is not approved by the shareholders of Gemstar, StarSight, in lieu of
exercising the Parent Stock Option, may elect to receive the Parent
Termination Fee in accordance with the terms of the Merger Agreement. See "--
Merger Expenses, Fees and Other Costs."
If a Purchase Event occurs, upon issuance of the Parent Put Notice,
StarSight will have the right to cause Gemstar (or any successor in interest
to Gemstar by merger, sale of all or substantially all of the assets, or
otherwise) to pay and Gemstar (and such successor, jointly and severally),
will be obligated to pay, the Parent Cancellation Price to StarSight in
consideration for the cancellation of the Parent Stock Option. The Parent
Cancellation Price shall be equal to the product of (x) the number of shares
of Gemstar Ordinary Shares as to which the Parent Stock Option remains
exercisable multiplied by (y) the excess of (i) the average per share closing
price of shares of Gemstar Ordinary Shares as quoted on The Nasdaq National
Market (or if not quoted thereon, on such other quotation system or exchange
on which the StarSight Common Stock is quoted) for the period of five trading
days ending on the trading day immediately prior to the occurrence of the
Parent Put Notice over (ii) $17.25.
Subject to certain conditions, if requested by StarSight at any time and
from time to time within three years of the first exercise if the Parent Stock
Option, Gemstar shall use reasonable best efforts to prepare and file up to
two registration statements under the Securities Act if such registration is
necessary to permit the sale or other disposition of any or all shares of
Gemstar Ordinary Shares or other securities that have been acquired by or are
issuable to StarSight upon exercise of the Parent Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
Gemstar effects a registration under the Securities Act of any Gemstar
Ordinary Shares for its own account or for any other shareholders of Gemstar
(other than on Form S-4 or Form S-8, or any successor form), Gemstar shall
allow StarSight to participate in such registration; provided, that
StarSight's participation in such a registration statement shall not satisfy
the obligation of Gemstar to effect the two registration statements at
StarSight's request as set forth above.
Company Option Agreement
Concurrently with the execution of the Merger Agreement, StarSight and
Gemstar entered into the Company Option Agreement, pursuant to which StarSight
granted Gemstar the irrevocable Company Stock Option to purchase up to
5,276,034 shares of StarSight Common Stock at a purchase price of $10.46 per
share. 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 and prior to termination of the Company Option Agreement. A Company
Purchase Event is defined as 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 plus 30 days, or (iii) the payment by StarSight and the
receipt by Gemstar of the Company Termination Fee; provided, however, that the
repurchase and registration rights provisions described below shall terminate
in accordance with their respective terms and not when the Company Stock
Option terminates.
Upon any Company Purchase Event, or upon the failure of any of the StarSight
Significant Shareholders to vote in favor of the Merger at a duly held meeting
of StarSight's shareholders or at any adjournment or postponement thereof and,
in connection with such vote, the Merger is not approved by the shareholders
of StarSight, Gemstar, in lieu of exercising the Company Stock Option, may
elect to receive the Company Termination Fee in accordance with the terms of
the Merger Agreement. See "--Merger Expenses, Fees and Other Costs."
If a Company Purchase Event occurs, upon issuance of the Company Put Notice,
Sub will have the right to cause StarSight (or any successor in interest to
StarSight by merger, sale of all or substantially all of the assets, or
otherwise) to pay, and StarSight (and any such successor, jointly and
severally), will be obligated to pay the Company Cancellation Price to Sub in
consideration for the cancellation of the Company Stock Option. The Company
Cancellation Price shall be equal to the product of (x) the number of shares
of StarSight Common
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Stock for which the Company Stock Option remains exercisable multiplied by (y)
the excess of (i) the average per share closing price of shares of StarSight
Common Stock as quoted on The Nasdaq National Market (or if not then quoted
thereon, on such other quotation system or exchange on which the StarSight
Common Stock is quoted) for the period of five trading days ending on the
trading day immediately prior to the occurrence of the Company Put Notice over
(ii) $10.46.
Subject to certain conditions, if requested by Gemstar at any time and from
time to time within three years of the first exercise of the Company Stock
Option, StarSight shall use its reasonable best efforts to prepare and file up
to two registration statements under the Securities Act if such registration
is necessary to permit the sale or other disposition of any or all shares of
StarSight Common Stock or other securities that have been acquired by or are
issuable to Gemstar upon exercise of the Company Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
StarSight effects a registration under the Securities Act of any StarSight
Common Stock for its own account or for any other shareholders of StarSight
(other than on Form S-4 or Form S-8, or any successor form thereto), StarSight
shall allow Gemstar to participate in such registration; provided, that
Gemstar's participation in such a registration statement shall not satisfy the
obligation of StarSight to effect the two registration statements at Gemstar's
request as set forth above.
Gemstar Significant Shareholder Agreement
In connection with the Merger Agreement, the Gemstar Significant
Shareholders entered into the Parent Significant Shareholder Agreement with
StarSight and Gemstar pursuant to which the Gemstar Significant Shareholders
agreed to vote or cause to be voted all shares of capital stock of Gemstar
owned of record, beneficially owned, held in any capacity by, or under control
of, any such Gemstar Significant Shareholder in favor of 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 shares of Gemstar
Ordinary Shares. In addition, the Parent 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
Gemstar 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 StarSight. The Parent Significant Shareholder
Agreement terminates on June 30, 1997 unless the Merger Agreement is
terminated earlier or extended, in which case, the Parent Significant
Shareholder Agreement will terminate on the same date as the Merger Agreement.
Concurrently with the Parent Significant Shareholder Agreement, each Gemstar
Significant Shareholder executed and delivered an Affiliate Letter.
StarSight Significant Shareholder Agreement
In connection with the Merger Agreement, the StarSight Significant
Shareholders entered into the Company Significant Shareholder Agreement with
StarSight and Gemstar pursuant to which the StarSight Significant Shareholders
agreed to vote or cause to be voted all shares of capital stock of StarSight
owned of record, beneficially owned, held in any capacity by, or under control
of, any such StarSight Significant Shareholder in favor of 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
StarSight Common Stock, representing approximately 51.0% of the outstanding
shares of StarSight Common Stock. 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
Agreement of Plan of Merger is terminated earlier or extended, in which case,
the Company Significant Shareholder Agreement will terminate on the same date
as the Merger Agreement. Concurrently with the Company Significant Shareholder
Agreement, each StarSight Significant Shareholder executed and delivered an
Affiliate Letter.
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REPRESENTATIONS AND COVENANTS OF STARSIGHT
Under the Merger Agreement, StarSight made a number of representations
regarding StarSight's capital structure, operations, financial condition and
other matters, including that (i) StarSight is a corporation duly organized,
validly existing and in good standing under the laws of California; (ii)
StarSight possesses the requisite corporate power and authority to enter into
the Merger Agreement and to consummate the Merger; (iii) StarSight does not
own, directly or indirectly, any capital stock or other ownership interest in
any corporation, partnership, joint venture or other entity; (iv) StarSight's
authorized capital stock consists of 50,000,000 shares of StarSight Common
Stock, no par value, and 5,000,000 shares of StarSight Preferred Stock, no par
value; (v) StarSight has filed with the Commission the StarSight SEC
Documents, which represent all required reports and forms and other documents
and all such documents comply in all material respects with all applicable
federal and state securities laws; (vi) none of the information supplied by
StarSight specifically for inclusion or incorporation by reference in the
Registration Statement on Form F-4 (the "Form F-4") or the Joint Proxy
Statement/Prospectus contains any untrue statement of a material fact or omits
any material fact; (vii) except as disclosed in the StarSight SEC Documents
filed prior to the date of the Merger Agreement, since December 31, 1995,
StarSight has conducted its business only in the ordinary course consistent
with prior practice; (viii) all pending or threatened litigation and
administrative proceedings have been disclosed; (ix) except as disclosed in
the StarSight SEC Documents filed prior to the date of the Merger Agreement,
StarSight has not adopted or amended in any material respect any of its
employee benefit plans, and, except as would not have, in the aggregate, a
material adverse effect on StarSight, any and all such plans comply with the
Employee Retirement Income Security Act, as amended ("ERISA"); (x) StarSight
has timely filed all federal, state, local and foreign tax returns and
reports, and all such returns and reports contain accurate and complete
information in all material respects; (xi) no excess parachute payment, as
that term is defined in Section 280G(b)(1) of the Code, is provided for in any
StarSight benefit plan currently in effect; (xii) StarSight has complied with
all applicable laws and has in effect all federal, state, local and foreign
governmental approvals necessary for it to own, lease or operate its
properties and assets; (xiii) except for H. Joseph Horowitz and Smith Barney,
no broker or other person is entitled to any fee in connection with the
Merger; (xiv) StarSight has received the opinion of Smith Barney to the effect
that based upon and subject to certain matters stated therein as of the date
of the Merger Agreement, the Exchange Ratio was fair to the holders of
StarSight Common Stock from a financial point of view, and a signed copy of
such opinion has been delivered to Gemstar; (xv) except for confidential
contracts set forth on Schedule 3.1(p)(1) of the Merger Agreement, all
material contracts have been disclosed to Gemstar; (xvi) StarSight has good
and marketable title to, or valid leasehold interests in, all of its material
properties and assets; (xvii) StarSight has not, and to its knowledge none of
its affiliates has taken or agreed to take any action that would prevent the
Merger from being accounted for as a "pooling of interests"; (xviii) approval
of the StarSight shareholders is the only vote of the holders of any class or
series of its securities necessary to approve the Merger Agreement; (xix)
StarSight is not subject to any noncompetition or similar restriction on its
business; and (xx) StarSight owns or possesses adequate and enforceable
licenses or other rights to use all patents, trade secrets, trade names, and
inventions and processes used in and material to its business.
StarSight has agreed that during the period from the date of the Merger
Agreement and continuing until the earlier of the termination of the Merger
Agreement pursuant to its terms or the Effective Time StarSight (i) will carry
on its business in the ordinary course; (ii) will use all reasonable efforts
to preserve its current business organizations; (iii) will keep available the
services of its current officers and employees; (iv) will preserve its
relationships with customers, suppliers and others having business dealings
with StarSight; (v) will confer with Gemstar prior to taking any material
actions or making any material management decisions regarding the business of
StarSight; and (vi) without Gemstar's prior written consent will not (a)
declare dividends or make changes in its stock; (b) except for the issuance of
StarSight Common Stock upon the exercise of Stock Options and Warrants
outstanding on the date of the Merger Agreement, issue or authorize any new
shares of its capital stock; (c) amend the StarSight Articles of Incorporation
or Bylaws; (d) acquire or agree to acquire any business or a substantial
portion of the assets of any business; (e) mortgage or otherwise encumber or
subject to lien or sell any property or assets except in the ordinary course
of business; (f) increase the rate or terms of compensation to any of its
directors, executive officers or employees other than usual and customary
salary increases to non-management employees; (g) change its fiscal year; (h)
except for the incurrence of indebtedness
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which, in the aggregate, does not exceed $250,000, incur any indebtedness for
borrowed money or guarantee any such indebtedness of another person; (i) make
or agree to make any new capital expenditures which individually exceed
$50,000 or which in the aggregate exceed $500,000; (j) make or rescind any
express or deemed election relating to taxes; (k) pay, discharge or satisfy
any claims or liabilities other than in the ordinary course of business; (l)
except in the ordinary course of business, modify, amend, renew or fail to
renew any material contract; or (m) authorize any of, or commit or agree to
take any of, the foregoing actions.
THE FOREGOING IS A SUMMARY OF THE REPRESENTATIONS, WARRANTIES AND COVENANTS
CONTAINED IN THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE
ACTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONTAINED THEREIN.
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, WHICH IS ATTACHED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS, IN ITS ENTIRETY.
REPRESENTATIONS AND COVENANTS OF GEMSTAR
Under the Merger Agreement, Gemstar made a number of representations
regarding Gemstar's capital structure, operations, financial condition and
other matters, including that (i) Gemstar is a corporation duly organized,
validly existing and in good standing under the laws of the British Virgin
Islands; (ii) Gemstar possesses the requisite corporate power and authority to
enter into the Merger Agreement and to consummate the Merger; (iii) except for
the capital stock of its subsidiaries, Gemstar does not own, directly or
indirectly, any capital stock or other ownership interest in any corporation,
partnership, joint venture or other entity; (iv) Gemstar's authorized capital
stock consists of 500,000,000 shares of Gemstar Ordinary Shares, par value
$.01 per share, and 50,000,000 preference shares, par value $.01 per share;
(v) Gemstar has filed with the Commission the Gemstar SEC Documents, which
represent all required reports and forms and other documents and all such
documents comply in all material respects with all applicable federal and
state securities laws; (vi) none of the information supplied by Gemstar
specifically for inclusion or incorporation by reference in the Form F-4 or
the Joint Proxy Statement/Prospectus contains any untrue statement of a
material fact or omits any material fact; (vii) except as disclosed in the
Gemstar SEC Documents filed prior to the date of the Merger Agreement, since
December 31, 1995, Gemstar has conducted its business only in the ordinary
course consistent with prior practice; (viii) all pending or threatened
litigation and administrative proceedings have been disclosed; (ix) except as
disclosed in the Gemstar SEC Documents filed prior to the date of the Merger
Agreement, Gemstar has not adopted or amended in any material respect any of
its employee benefit plans, and except as would not have, in the aggregate, a
material adverse effect on Gemstar, any and all such plans comply with ERISA;
(x) Gemstar has timely filed all federal, state, local and foreign tax returns
and reports, and all such returns and reports contain accurate and complete
information; (xi) Gemstar has complied with all applicable laws; (xii) except
for Hambrecht & Quist and Alex. Brown, no broker or other person is entitled
to any fee in connection with the Merger; (xiii) Gemstar has received the
opinion of Hambrecht & Quist to the effect that, as of the date of the Merger
Agreement, the consideration to be received in the Merger was fair to Gemstar
and its shareholders from a financial point of view, and a signed copy of such
opinion has been delivered to StarSight; (xiv) except for confidential
contracts set forth on Schedule 3.2(o)(1) of the Merger Agreement, all
material contracts have been disclosed to StarSight; (xv) Gemstar has good and
marketable title to, or valid leasehold interests in, all of its material
properties and assets; (xvi) it has not, and to its knowledge none of its
affiliates has taken or agreed to take any action that would prevent the
Merger from being accounted for as a "pooling of interests"; (xvii) approval
of the Gemstar Shareholders is the only vote of the holders of any class or
series of its securities necessary to approve the Merger Agreement; (xviii)
Gemstar is not subject to any noncompetition or similar restriction on its
business; (xix) Gemstar owns or possesses adequate and enforceable licenses or
other rights to use all patents, trade secrets, trade names, and inventions
and processes used in and material to its business; and (xx) Sub was formed
solely for the purpose of engaging in the transactions contemplated by the
Merger Agreement and has engaged in no other business activities.
Gemstar has agreed that during the period from the date of the Merger
Agreement and continuing until the earlier of the termination of the Merger
Agreement pursuant to its terms or the Effective Time, Gemstar will carry on
its business in the ordinary course and use all efforts to preserve its
relationships with customers,
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suppliers and others having business dealings with Gemstar. Gemstar has
further agreed that it will not, without StarSight's prior written consent:
(i) declare, set aside or pay any dividends on its capital stock; (ii) split,
combine, reclassify or acquire any of its capital stock or issue any other
securities in lieu of its capital stock; (iii) other than the grant of up to 2
million Gemstar Ordinary Shares as stock options, issue, deliver, sell, award,
pledge, dispose of or otherwise encumber or authorize or propose the issuance
of any shares of its capital stock, voting securities or convertible
securities, (iv) amend its Articles of Association, Memorandum of Association
or comparable organizational documents; (v) acquire or agree to acquire any
business or a substantial portion of the assets of any business which, in the
aggregate, has a value in excess of $10,000,000 (vi) mortgage or otherwise
encumber or subject to any lien or sell, lease, exchange or otherwise dispose
of any of its properties of assets, except for sales of its properties or
assets in the ordinary course of business is consistent with past practice;
(vii) change its fiscal year; (viii) except for the incurrence of indebtedness
which, in the aggregate, does not exceed $1,000,000, incur any indebtedness
for borrowed money or guarantee any such indebtedness of another person; (ix)
pay, discharge or satisfy any claims or liabilities other than in the ordinary
course of business; or (x) authorize any of, or commit or agree to take any
of, the foregoing actions.
THE FOREGOING IS A SUMMARY OF THE REPRESENTATIONS, WARRANTIES AND COVENANTS
CONTAINED IN THE MERGER AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY THE
ACTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONTAINED THEREIN.
SHAREHOLDERS ARE URGED TO READ THE MERGER AGREEMENT, WHICH IS ATTACHED AS
APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS, IN ITS ENTIRETY.
CONDITIONS TO THE MERGER
The obligations of Gemstar and StarSight to consummate the Merger will be
subject to the satisfaction of a number of other conditions, including (i) the
approval of the issuance of Gemstar Ordinary Shares as contemplated by the
Merger Agreement by the Gemstar shareholders and the approval of the Merger
Agreement and the transactions contemplated thereby by the StarSight
shareholders; (ii) the approval for listing on The Nasdaq National Market of
the shares of Gemstar Ordinary Shares issuable to StarSight's shareholders and
option and warrant holders pursuant to the Merger Agreement; (iii) the absence
of any litigation or proceedings brought by a governmental entity which seeks
to enjoin or prohibit the consummation of the Merger; (iv) the declaration by
the Commission that the Form F-4 is effective; (v) the absence of any stop
orders or proceedings initiated or threatened by the Commission for that
purpose with respect to the Form F-4; (vi) the expiration of the applicable
waiting period under the HSR Act; and (vii) 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 StarSight 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; and (ii) each of Gemstar and StarSight receiving
an opinion letter from their respective accounting firms, in form and
substance reasonably acceptable to Gemstar and StarSight, regarding the
appropriateness of "pooling of interests" accounting treatment under generally
accepted accounting principles.
Gemstar's obligation to consummate the Merger is further conditioned upon
StarSight obtaining the consent or approval of each person whose consent or
approval will be required in connection with the Merger under all loan or
credit agreements, notes, mortgages, indentures, leases, or other agreements
or instruments to which it or any of its subsidiaries is a party, except those
for consents and approvals which, if not obtained, would not have a material
adverse effect on StarSight or Gemstar after the Effective Time. In addition,
no event shall have occurred which had a material adverse effect on StarSight,
provided however, that the following will not be deemed to have a material
adverse effect on StarSight: (A) changes in the prices of StarSight Common
Stock traded on The Nasdaq National Market; (B) developments in the litigation
between Gemstar and StarSight; and
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(C) the failure of StarSight to execute a definitive settlement agreement with
Scientific-Atlanta, Inc. regarding (i) the receipt by StarSight of an
outstanding arbitration award, (ii) the settlement of pending litigation
between StarSight and Scientific-Atlanta, Inc., (iii) the terms of a multi-
year license of StarSight's technology to Scientific-Atlanta, Inc., and (iv)
other related matters.
StarSight's obligation to consummate the Merger is further conditioned upon
there not having occurred, from and including the date of the Merger
Agreement, Gemstar obtaining the consent or approval of each person whose
consent or approval will be required in connection with the Merger under all
loan and credit agreements, notes, mortgages, indentures, leases or other
agreements or instruments to which it or any of its subsidiaries is a party,
except for consents and approvals whose failure to obtain would not have a
material adverse effect on StarSight or Gemstar after the Effective Time, and
any event which has had a material adverse effect on Gemstar and its
subsidiaries taken as a whole; provided, however, that neither (i) changes or
fluctuations in the price of Gemstar Ordinary Shares on The Nasdaq National
Market, nor (ii) developments in pending litigation between Gemstar and
StarSight will be deemed to have such a material adverse effect.
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger could not be consummated until notifications were given and certain
information was furnished to the FTC and the Antitrust Division and specific
waiting period requirements were satisfied. All applicable waiting periods
under the HSR Act regarding the Merger have expired. Accordingly, Gemstar and
StarSight have complied with such applicable regulations as they relate to the
Merger.
At any time before or after consummation of the Merger, the Antitrust
Division or the FTC, or any state, could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin the consummation of the Merger or seeking divestiture of
substantial assets of Gemstar or StarSight. Private parties may also seek to
take legal action under the antitrust laws under certain circumstances. In
addition, non-United States governmental and regulatory authorities may seek
to take action under applicable antitrust laws. There can be no assurance that
a challenge to the Merger will not be made or, if such challenge is made, that
Gemstar will prevail.
The obligations of Gemstar and StarSight to consummate the Merger are
subject to the condition that there be no preliminary or permanent injunction
or other order by any federal, state or foreign court of competent
jurisdiction that prevents consummation of the Merger, and that there be no
statute, rule, regulation, executive order, stay, decree or judgment by any
court or governmental authority that prohibits or restricts the consummation
of the Merger. See "--Conditions to the Merger." Either Gemstar or StarSight
may terminate the Merger Agreement if any court of competent jurisdiction
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger. See "--Termination
or Amendment."
TERMINATION OR AMENDMENT
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, StarSight
accepts or recommends to its shareholders a Company Superior Proposal; or (vi)
prior to the consummation of the Merger,
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Gemstar accepts or recommends to its shareholders a Parent Superior Proposal.
The Merger Agreement may be terminated by Gemstar if the StarSight Board fails
to recommend, withdraws or modifies adversely its recommendation of the Merger
or StarSight fails to comply with its obligations under Section 5.1 of the
Merger Agreement following a Company Takeover Proposal, The Merger Agreement
may be terminated by StarSight 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.
In the event of a termination by Gemstar or StarSight, the Merger Agreement
will become void without any liability or obligation on the part of Gemstar,
Sub or StarSight, except with respect to the general provisions of Article
VIII of the Merger Agreement, and certain other provisions relating to, among
other things, the payment of fees and expenses incurred in connection with the
Merger and the Merger Agreement and the transactions contemplated by them. If
the Merger Agreement is terminated or the Merger is not consummated because
(i) StarSight, prior to the consummation of the Merger, accepts or recommends
to its shareholders a Company Superior Proposal, (ii) StarSight fails to
recommend or withdraws or modifies adversely its recommendation of the Merger
or fails to comply with its obligations under Section 5.1 of the Merger
Agreement following a Company Takeover Proposal, (iii) following a Company
Takeover Proposal, any approval of the shareholders of StarSight required for
the consummation of the Merger is not obtained, or (iv) the Company
Significant Shareholders fail to vote in favor of the Merger at a duly held
meeting of StarSight's shareholders with the result being that the Merger is
not approved by the shareholders of StarSight, StarSight, upon written notice
from Gemstar at any time of Gemstar's election to receive the Company
Termination Fee in lieu of Gemstar exercising the Company Stock Option (the
"Company Termination Fee Notice"), shall immediately pay to Gemstar the
Company Termination Fee. Following any termination of the Merger Agreement
pursuant to the factors listed above, StarSight shall give Gemstar at least
thirty (30) days (and not more than forty-five (45) days) prior written notice
of the closing date of any Company Takeover Proposal, and Gemstar, if it
elects to receive the Company Termination Fee upon such closing, shall give
written notice to StarSight (the "Company Payment Notice") at least five days
prior to such closing (which notice shall be effective only upon such
closing), and StarSight shall pay the Company Termination Fee upon such
closing. If Gemstar has not delivered the Company Payment Notice within such
time frame, then upon (and only upon) the closing of the Company Takeover
Proposal, Gemstar's right to receive the Company Termination Fee shall
terminate. Payment of the Company Termination Fee will not be in lieu of
damages incurred in the event of breach of the Merger Agreement.
If the Merger Agreement is terminated or the Merger is not consummated
because (i) Gemstar, prior to the consummation of the Merger, accepts or
recommends to its shareholders a Parent Superior Proposal, (ii) Gemstar fails
to recommend or withdraws or modifies adversely its recommendation of the
Merger or fails to comply with its obligations under Section 5.1 of the Merger
Agreement following a Parent Takeover Proposal, (iii) following a Parent
Takeover Proposal, any approval of the shareholders of Gemstar required for
the consummation of the Merger is not obtained, or (iv) the Parent Significant
Shareholders fail to vote in favor of the Merger at a duly held meeting of
Gemstar's shareholders with the result being that the Merger is not approved
by the shareholders of Gemstar, Gemstar, upon written notice from StarSight at
any time of StarSight's election to receive the Parent Termination Fee in lieu
of StarSight exercising the Parent Stock Option (the "Parent Termination Fee
Notice"), shall immediately pay to StarSight the Parent Termination Fee.
Following any termination of the Merger Agreement pursuant to the factors
listed above, Gemstar shall give StarSight at least thirty (30) days (and not
more than forty-five (45) days) prior written notice of the closing date of
any Parent Takeover Proposal, and StarSight, if it elects to receive the
Parent Termination Fee upon such closing, shall give written notice to Gemstar
(the "Parent Payment Notice") at least five days prior to such closing (which
notice shall be effective only upon such closing), and Gemstar shall pay the
Parent Termination Fee upon such closing. If StarSight has not delivered the
Parent Payment Notice within such time frame, then upon (and only upon) the
closing of the Parent Takeover Proposal, StarSight's right to receive the
Parent Termination Fee shall terminate. Payment of the Parent Termination Fee
will not be in lieu of damages incurred in the event of breach of the Merger
Agreement.
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Amendment
The Merger Agreement may be amended prior to the Effective Time by the
parties at any time before or after approval by the StarSight shareholders,
except that, after such approval, no amendment may be made that by law
requires the further approval of the shareholders of StarSight or Gemstar. The
Merger Agreement may not be amended except by an instrument in writing signed
on behalf of Gemstar and StarSight.
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
StarSight Common Stock. This discussion is based on currently existing
provisions of the Code, existing and proposed Income Tax Regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to Gemstar or StarSight's
shareholders as described herein.
StarSight shareholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
StarSight shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, who are subject to the alternative
minimum tax provisions of the Code, who are foreign persons, or who acquired
their shares in connection with stock option or stock purchase plans or in
other compensatory transactions. The following discussion only addresses the
federal income tax consequences of the Merger itself. It does not address the
tax consequences of the Merger under foreign, state or local tax laws, or the
tax consequences of the adjustments to or exchanges of Warrants issued by
StarSight. The tax consequences of an exchange of warrants pursuant to a
reorganization are unclear under current law. The IRS has recently issued a
private letter ruling (which may not be relied upon by taxpayers other than
the one to whom it is issued) providing for tax-free treatment of such an
exchange under certain circumstances. In addition, the Treasury Department
recently issued proposed regulations, to be effective 60 days after the
publication of such regulations in final form, pursuant to which exchanges of
warrants in connection with a tax-free reorganization would not be taxable to
the warrantholder. Because of the current uncertain state of the law, no
opinion is being given by tax counsel concerning the tax consequences to the
Warrantholders of an exchange of Warrants. If the exchange of the Warrants is
taxable, then each Warrantholder would recognize gain to the extent of the
excess of the fair market value, if any, of the Gemstar warrants received,
over such Warrantholder's tax basis in the StarSight Warrants surrendered.
Such gain would be capital if the stock into which the Warrants are
exercisable would be capital assets in the hands of the Warrantholders.
ACCORDINGLY, STARSIGHT SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER IN THEIR PARTICULAR CIRCUMSTANCES AND INCLUDING ANY ALTERNATIVE MINIMUM
TAX CONSEQUENCES TO THEM OF THE MERGER OR OTHER TRANSACTIONS ATTENDANT TO THE
MERGER.
Neither Gemstar nor StarSight has requested a ruling from the Internal
Revenue Service (the "IRS") with regard to any of the federal income tax
consequences of the Merger.
Based upon certain factual assumptions, representations and qualifications,
O'Melveny & Myers LLP, counsel to Gemstar, and Wilson Sonsini Goodrich &
Rosati, Professional Corporation, counsel to StarSight, are each of the
opinion that the Merger will qualify as a reorganization for federal income
tax purposes under Section 368(a)(1) of the Code. As a reorganization within
the meaning of Section 368(a)(1) of the Code, the following tax consequences
will result to Gemstar, Sub, StarSight and the StarSight shareholders, as
specifically set forth in paragraphs (a) through (h):
(a) No gain or loss will be recognized by the holders of StarSight Common
Stock (other than a 5% Shareholder as defined in (f) below) upon the
receipt of Gemstar Ordinary Shares solely in exchange for such
StarSight Common Stock in the Merger (except to the extent of cash
received in lieu of fractional shares).
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(b) The aggregate tax basis of the Gemstar Ordinary Shares so received by
StarSight shareholders in the Merger (including any fractional share of
Gemstar Ordinary Shares not actually received) will be the same as the
aggregate tax basis of the StarSight Common Stock surrendered in
exchange therefor.
(c) The holding period of the Gemstar Ordinary Shares so received by each
StarSight shareholder in the Merger will include the period for which
the StarSight Common Stock surrendered in exchange therefor was
considered to be held, provided that the StarSight Common Stock so
surrendered is held as a capital asset at the Effective Time.
(d) Cash payments received by holders of StarSight Common Stock in lieu of
a fractional share will be treated as if such fractional share of
Gemstar Ordinary Shares had been issued in the Merger and then redeemed
by Gemstar. A StarSight shareholder receiving such cash will recognize
gain or loss upon such payment, measured by the difference (if any)
between the amount of cash received and the basis in such fractional
share. The gain or loss should be capital gain or loss provided that
such share of StarSight Common Stock was held as a capital asset at the
Effective Time.
(e) A shareholder of StarSight Common Stock who exercises dissenters'
rights or appraisal rights under applicable law with respect to a share
of StarSight Common Stock and receives payments for stock will
recognize capital gain or loss (if such stock was held as a capital
asset at the Effective Time) measured by the difference between the
amount of cash received and the shareholder's basis in such share,
provided that such shareholder owns no shares of Gemstar Ordinary
shares (either actually or constructively) following such exercise. If
such dissenting shareholder owns shares of Gemstar Ordinary shares
(either actually or constructively) following such exercise, the
payment may be treated as equivalent to a dividend, and subject to tax
at ordinary rates, to the extent of accumulated earnings and profits.
Because the treatment of the cash payment to such dissenting
shareholder who owns shares of Gemstar Ordinary shares following such
exercise will depend upon the particular circumstances of the
shareholder, no opinion is expressed as to such treatment.
(f) A StarSight shareholder who is a United States person, i.e., a citizen
or resident of the United States (including individual nonresident
aliens married to a citizen or resident of the United States, whereboth
spouses have made a currently effective election to treat such
individuals as a United States resident for purposes of their income
taxes, wage withholding, and excise taxes on transfers to foreign
entities), a domestic partnership, a domestic corporation, an estate
other than a foreign estate, or any trust if a court within the United
States is able to exercise primary supervision over the administration
of the trust, and one or more United States fiduciaries have authority
to control all substantial decisions of the trust, owning (actually or
constructively) at least 5% of either the total voting power or the
total value of the Gemstar Ordinary Shares after the Merger (taking
into account ownership by attribution) (a "5% shareholder") will
recognize gain with respect to the StarSight Common Stock exchanged in
the Merger upon the Effective Time, unless such 5% Shareholder enters
into a gain recognition agreement with the IRS, as provided by
applicable regulations.
(g) StarSight will not recognize gain or loss solely as a result of the
Merger.
(h) Neither Gemstar nor Sub will recognize gain or loss solely as a result
of the Merger.
An opinion concerning paragraphs (a) through (g) has been received by
StarSight from its counsel, Wilson Sonsini Goodrich & Rosati, and an opinion
concerning paragraph (h) has been received by Gemstar and Sub from their
counsel, O' Melveny & Myers LLP.
By entering into a gain recognition agreement, a 5% Shareholder agrees to
retroactively recognize the gain (if any) that would have been recognized had
the Merger been taxable (and pay interest upon any taxes due) in the event of
(i) a disposition by Gemstar, prior to the end of five years following the
taxable year of the Merger, of the StarSight Common Stock acquired in the
Merger or (ii) any disposition by StarSight, not in the ordinary course of
business, of all or a substantial portion of its assets. A gain recognition
agreement must be filed with the 5% Shareholder's tax return for the taxable
year which includes the Effective Time and a 5% Shareholder is
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also subject to certain annual information reporting requirements. ALL 5%
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
TIMING AND THE EFFECT OF ENTERING INTO A GAIN RECOGNITION AGREEMENT.
Certain shareholders have represented in Continuity of Interest Certificates
to the effect that such shareholders have no plan or intention to dispose of
more than 50 percent of the shares of Gemstar to be received in the Merger. To
satisfy the "continuity of interest" requirement, StarSight shareholders must
not, pursuant to a plan or intent existing at or prior to the Effective Time,
dispose of or transfer so much of either (i) their StarSight Common Stock in
anticipation of the Merger or (ii) the Gemstar Ordinary Shares to be received
in the Merger (collectively, "Planned Dispositions"), such that the StarSight
shareholders, as a group, would no longer have a significant equity interest
in the StarSight business being conducted by Gemstar after the Merger.
StarSight shareholders will generally be regarded as having a significant
equity interest as long as the Gemstar Ordinary Shares received in the Merger
(after taking into account Planned Dispositions), in the aggregate, represent
a substantial portion of the entire consideration received by StarSight
shareholders in the Merger. While representations have been obtained from
certain shareholders to the effect that such shareholders have no plan or
intention to dispose of more than 50 percent of the shares of Gemstar to be
received in the Merger, there is no assurance that such shareholders will in
fact not dispose of such shares. Accordingly, there is no assurance that the
IRS could not successfully challenge the reorganization for failing the
"continuity of interest" requirement or that the IRS could not successfully
challenge the Merger as a tax-free reorganization.
A successful IRS challenge to the reorganization status of the Merger (as
result of failure of the "continuity of interest" requirement or otherwise)
would result in significant tax consequences. A StarSight shareholder would
recognize taxable gain or loss with respect to each share of StarSight Common
Stock surrendered equal to the difference between the shareholder's basis in
such share and the fair market value, as of the Effective Time, of the Gemstar
Ordinary Shares received in exchange therefor. In such event, a shareholder's
aggregate basis in the Gemstar Ordinary Shares so received would equal its
fair market value, and the shareholder's holding period for such stock would
begin the day after the Merger.
ACCOUNTING TREATMENT
The Merger is expected to be treated as a "pooling of interests" for
accounting purposes. Under this accounting treatment, the recorded assets and
liabilities and the operating results of both Gemstar and StarSight are
carried forward to the combined operations of the surviving corporation at
their recorded amounts. No recognition of goodwill in the combination is
required of either party to the Merger.
To support the treatment of the Merger as a "pooling of interests," the
affiliates of Gemstar and StarSight have entered into agreements imposing
certain resale limitations on their shares. See "--Related Agreements--
Affiliates Agreements" above. As a condition to each party's obligation to
consummate the Merger, Gemstar and StarSight shall have received from KPMG
Peat Marwick LLP, as independent auditors of Gemstar, and Deloitte & Touche
LLP, as independent auditors of StarSight, on the Closing Date, letters, dated
as of such date, in form and substance reasonably acceptable to Gemstar and
StarSight regarding the appropriateness of pooling-of-interests accounting
treatment under generally accepted accounting principles. StarSight has agreed
to use commercially reasonable efforts to cause its independent auditors,
Deloitte & Touche LLP, to cooperate fully (including, without limitation,
delivering to StarSight a letter substantially similar to the letter delivered
by KPMG Peat Marwick LLP to Gemstar) with KPMG Peat Marwick LLP in connection
with the delivery to Gemstar of such letter. See "--Accounting Treatment."
AFFILIATES' RESTRICTIONS ON SALES OF GEMSTAR ORDINARY SHARES
The Gemstar Ordinary Shares to be issued in the Merger will have been
registered under the Securities Act pursuant to a Registration Statement on
Form F-4, thereby allowing such shares to be traded without restriction by all
former holders of StarSight Common Stock who (i) are not deemed to be
"affiliates" of StarSight at the
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time of the Special Meeting (as "affiliates" is defined for purposes of Rule
145 under the Securities Act) and (ii) who did not become "affiliates" of
Gemstar after the Merger. StarSight shareholders who may be deemed to be
"affiliates" of StarSight will be so advised prior to the Merger.
The Merger Agreement requires Gemstar and StarSight to obtain, no later than
5 days after the date of the Merger Agreement, from each of their respective
affiliates a written agreement prohibiting such persons from disposing of
their shares (i) during the 30 day period prior to the Effective Time and (ii)
until Gemstar publicly releases its first report of financial statements,
including the financial results of Gemstar and StarSight for a period of at
least 30 days of "combined operations" as defined by the Commission. Pursuant
to such agreements, StarSight affiliates have also acknowledged the resale
restrictions imposed by Rule 145 promulgated under the Securities Act on
shares received by them in the Merger. In general, Rule 145, as currently in
effect, imposes restrictions on the manner in which such affiliates may make
resale of Gemstar Ordinary Shares and also on the number of shares of Gemstar
Ordinary Shares that such affiliates, and others (including persons with whom
the affiliates act in concert), may sell within any three-month period. These
restrictions will generally apply for at least a period of two years after the
Merger (or longer, if the person remains an affiliate of Gemstar or
StarSight).
MERGER EXPENSES, FEES AND OTHER COSTS
Except for the termination fees set forth in Section 7.5 of the Merger
Agreement, whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses; except
that those expenses, other than attorneys' and accountants' fees and expenses,
incurred in connection with printing the Proxy Statement and Form F-4, as well
as the filing fee relating to the Proxy Statement and Form F-4 paid to the
Commission, will be shared equally by Gemstar and StarSight. See "UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Employment Agreements
On December 23, 1996, StarSight entered into employment agreements with each
of Larry W. Wangberg, Chairman and Chief Executive Officer, Martin W. Henkel,
Executive Vice President, Chief Financial Officer and Secretary, Brian L.
Klosterman, President and Chief Operating Officer, and William
Scharninghausen, Chief Accounting Officer (the "Executive Employment
Agreements"). Each Executive Employment Agreement will become effective only
upon the consummation of the Merger and the Executive Employment Agreements
provide for the employment of such persons for a period (the "Employment
Period") of one year for Mr. Scharninghausen, two years for Mr. Wangberg,
three years for Mr. Klosterman and six months for Mr. Henkel. StarSight
entered into employment agreements with five other non-executive officer
employees (the "Non-executive Employees") on the same date which also become
effective only upon the Effective Time.
Severance Provisions. Each of the above-named executives also has an
existing employment agreement with StarSight containing 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 the Merger,
StarSight will make in accordance with the severance provisions of the
existing employment agreements 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, totalling approximately $3,385,164, approximately
$678,090 and approximately $636,437 respectively. In the case of Mr.
Scharninghausen, upon consummation of the Merger, such lump sum cash payment
shall be equal to one year of Mr. Scharninghausen's current base salary,
approximately $123,833, less applicable withholdings. Lump sum payments of an
aggregate of approximately $788,960 will also be due to the Non-executive
Employees upon the closing of the Merger in accordance with the severance
provisions of their existing employment agreements. The amount of the lump sum
payment to each of the StarSight's executives may vary based on the date of
closing of the Merger and each executive's base salary as of that date. In
addition, the severance provisions of the existing employment agreements
provide that each executive's stock
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options will accelerate in accordance with the terms of such executive's
existing 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 and
17,015 for Messrs. Wangberg, Klosterman, Henkel and Scharninghausen,
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, StarSight 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 employment agreements of Messrs. Wangberg and
Klosterman and pursuant to two separate letter agreements entered into at the
request of StarSight and dated as of December 23, 1996, by and among StarSight
and Mr. Wangberg and Mr. Klosterman, Messrs. Wangberg and Klosterman received
from StarSight in 1996 certain lump sum cash payments (the "Accelerated
Payments") totalling approximately $100,000 and $350,000, respectively, to
which they are entitled under their respective existing employment agreements.
The Accelerated Payments will be deducted from the lump sum payment to which
Messrs. Wangberg and Klosterman are entitled to receive 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 StarSight 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 StarSight pursuant to the
letter agreement, StarSight 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.
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 StarSight Board and
subject to certain conditions, the executive is prevented from properly
performing his duties by reason of any physical or mental incapacity. If the
executive is terminated for disability, StarSight shall be required to pay the
executive's annual salary (or monthly salary, in the case of Mr. Henkel) up
through the last day of the month in which the StarSight Board determines that
the executive is disabled. In the event of the death of the executive,
StarSight shall pay to the executive's beneficiaries or estate the portion of
the executive's annual salary (or monthly salary, in the case of Mr. Henkel)
payable by StarSight through the end of the month in which death occurs. In
addition, StarSight may terminate the executive's employment with or without
Cause (as defined below). In the event that the termination is with Cause,
StarSight shall have no liability to the executive. If termination is without
Cause, StarSight shall pay a lump sum payment upon such termination of an
amount equal to the remaining annual salary through the expiration of the
employment agreement, and thereafter, all obligations of StarSight shall
terminate; provided, however, in the case of Messrs. Klosterman and
Scharninghausen, StarSight shall pay Mr. Klosterman or Mr. Scharninghausen, as
the case may be, an amount equal to the lesser of (x) such executive's annual
salary and (y) the remaining annual salary through the applicable expiration
of the employment agreement. The applicable expiration of Messrs. Klosterman's
and Scharninghausen's employment agreements are three years from the Effective
Time and one year from the Effective Time, respectively. 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 period for which the bonus is paid. Under the Executive Employment
Agreements, termination shall be for "Cause" if: (i) the executive has engaged
in illegal or other wrongful conduct substantially detrimental to the business
or reputation of StarSight 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
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order of the StarSight Board; provided that the StarSight Board has given
executive written notice of such refusal or failure and executive fails to
comply with such direction or order within thirty days after the date of such
notice; or (iii) the executive has engaged in any fraud, embezzlement,
misappropriation or similar conduct against StarSight.
Noncompetition Provisions. Each of the Executive Employment Agreements
provides that during the Employment Period the executive 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, StarSight
or any affiliated company. In addition, subject to certain conditions, for a
period of one year after the termination of the Employment Period, the
executive will not for himself or any third party, directly or indirectly, (i)
divert or attempt to divert from StarSight 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 StarSight, during the period of such person's employment by
StarSight and for one year thereafter; or (iii) engage in any business
activity that is competitive with StarSight; 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 StarSight on the date of termination, which activity
constitutes or is anticipated to constitute more than 15% of the revenues of
StarSight.
Wangberg Employment Agreement. Mr Wangberg's employment agreement ("Wangberg
Employment Agreement") provides that StarSight 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 StarSight Board and Mr.
Wangberg has agreed to devote to StarSight 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 employment agreement
("Klosterman Employment Agreement") provides that StarSight 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
StarSight Board, an annual performance bonus (or other special bonuses), in
such amounts as determined by the StarSight 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, StarSight will grant
to Mr. Klosterman a nonqualified stock option under Gemstar's 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
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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 employment agreement ("Henkel
Employment Agreement") provides that StarSight 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
StarSight Board and Mr. Henkel has agreed to devote to StarSight 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 StarSight'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.
Scharninghausen Employment Agreement. Mr. Scharninghausen's employment
agreement ("Scharninghausen Employment Agreement") provides that StarSight
will employ Mr. Scharninghausen 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 Scharninghausen Employment Agreement. The scope of Mr.
Scharninghausen's employment will be determined by the StarSight Board. Mr.
Scharninghausen'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.
Mr. Scharninghausen's annual salary under the Scharninghausen Employment
Agreement shall be $123,833 a year. In addition, Mr. Scharninghausen shall be
eligible for benefits made available generally to other employees of the
company. Upon the Effective Time, StarSight shall grant to the executive a
nonqualified stock option under Gemstar's Stock Incentive Plan to purchase
11,000 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.
Scharninghausen will also be eligible to receive, in the sole and absolute
discretion of the StarSight Board, an annual bonus in such amount as
determined by the StarSight Board.
Indemnification and Insurance
The Merger Agreement provides that, upon the Effective Time, Gemstar will
assume all of the obligations of StarSight under StarSight's existing
indemnification agreements with each of the directors and officers of
StarSight, as such agreements relate to the indemnification of such person for
expenses and liabilities arising from facts or events which occurred on or
before the Effective Time or relating to the Merger or transactions
contemplated by the Merger Agreement. In addition, the Merger Agreement
provides that the Articles of Incorporation and the Bylaws of the surviving
corporation in the Merger shall contain the provisions with respect to
indemnification and exculpation from liability substantially identical to
those set forth in the StarSight Restated Articles of Incorporation and Bylaws
and that such provisions shall not be amended, repealed or otherwise modified
for a period of six years from the Effective Time in any manner that would
adverse affect the rights thereunder of the directors or officers prior to the
Effective Time, unless such modification is required by law.
The Merger Agreement also requires the surviving corporation in the Merger
or, at Gemstar's discretion, Gemstar to maintain in effect for three years
from the Effective Time, policies of directors' and officers' liability
insurance for the benefit of the directors and officers of StarSight at the
Effective Time containing terms and conditions which are not materially less
advantageous to the directors and officers of StarSight than those policies
maintained by StarSight at the date of the Merger Agreement, with respect to
matters occurring before the
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Effective Time, to the extent available, and having the maximum available
coverage under the current StarSight directors' and officers' liability
insurance. The surviving corporation in the Merger and Gemstar shall not be
obligated to make annual premium payments for such insurance to the extent
such premiums exceed 175% of the annual premium payments paid as of the date
of the Merger Agreement by StarSight for such insurance if the surviving
corporation in the Merger and Gemstar shall provide the maximum coverage
available at 175% of such premiums. In lieu of the purchase of such insurance
by the surviving corporation in the Merger or Gemstar, StarSight, with the
written consent of Gemstar, may purchase a three-year extended reporting
period endorsement under its existing policies of directors' and officers'
liability insurance.
Interests in StarSight Common Stock, Options and Warrants
As of the StarSight Record Date, the executive officers and directors of
StarSight or their respective affiliates beneficially owned an aggregate of
15,496,307 shares of StarSight Common Stock (including 859,970 shares of
StarSight Common Stock subject to StarSight Options and StarSight Warrants
exercisable within 60 days of the StarSight Record Date). Based upon the
closing sale price of the Gemstar Ordinary Shares on the StarSight Record Date
of $14.25, and assuming the exercise of outstanding StarSight Options and
StarSight Warrants exercisable within 60 days of the StarSight Record Date,
the aggregate dollar value of Gemstar Ordinary Shares to be received in the
Merger by the executive officers and directors of StarSight and their
affiliates is approximately $133,862,524. Pursuant to certain plans, options
or agreements of StarSight, all options and restricted stock awards held by
certain directors and executive officers will become immediately exercisable
at the time of the Merger. See "--Treatment of StarSight Stock Options" and
"--Treatment of StarSight Warrants." In addition, the Executive Employment
Agreements provide for full and immediate vesting of all options and
restricted stock awards upon the Effective Time. See "--Employment
Agreements."
The foregoing interests of the directors and certain members of management
of StarSight in the Merger may mean that such persons have personal interests
in the Merger which may not be identical to the interests of other
shareholders.
THE STARSIGHT SPECIAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
StarSight Common Stock as part of the solicitation of proxies by the StarSight
Board for use at the StarSight Special Meeting to be held May 1, 1997 at 7:00
a.m., California time, at 3300 Kearney Street, Fremont, California 94538 and
at any adjournments or postponements thereof. This Joint Proxy
Statement/Prospectus, and the accompanying Proxy Card, are first being mailed
to holders of StarSight Common Stock on or about April 18, 1997.
The purpose of the StarSight Special Meeting is to consider and vote upon a
proposal to approve and adopt the Merger Agreement, which sets forth the terms
and conditions of the Merger and the transactions contemplated thereby. Upon
consummation of the Merger, each outstanding share of StarSight Common Stock
will be converted into the right to receive 0.6062 of a share of Gemstar
Ordinary Shares, with cash paid in lieu of fractional shares. In addition, as
a result of the Merger, each outstanding option to purchase StarSight Common
Stock will be assumed by Gemstar and converted into an option to acquire such
number, rounded down to the nearest whole integer, of full shares of Gemstar
Ordinary Shares as the holder would have been entitled to receive had such
holder exercised such option in full immediately prior to the Effective Time
of the Merger at an exercise price equal to the exercise price per share of
StarSight Common Stock under such option immediately prior to the effective
time of the Merger, divided by the Exchange Ratio. In addition, as a result of
the Merger, each stock purchase warrant issued by StarSight to purchase shares
of StarSight Common Stock shall, in accordance with its terms, be adjusted to
become exercisable for, or exchangeable for a new warrant (on substantially
the same terms) that would be exercisable for, the number of shares of Gemstar
Ordinary Shares equal to the number of shares purchasable pursuant to the
warrant as of the date of the Merger Agreement multiplied by the Exchange
Ratio. The exercise price of the warrant shall be an amount equal to the
exercise
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price of the warrant as of the date of the Merger Agreement divided by the
Exchange Ratio. See "THE PLAN OF MERGER--Treatment of StarSight Stock Options"
and "--Treatment of StarSight Warrants."
Based on the last reported sale price of Gemstar Ordinary Shares on The
Nasdaq National Market on April 11, 1997, the latest practicable trading day
before the printing of this Joint Proxy Statement/Prospectus for which
information was obtainable, the Exchange Ratio would result in a per share
purchase price for StarSight Common Stock of $8.49, representing a premium of
approximately $0.87 per share to the last reported sale price per share of
StarSight Common Stock on such date. See "MARKET PRICE AND DIVIDENDS." If the
Merger is completed, StarSight shareholders will no longer hold any interest
in StarSight other than through their interest in shares of Gemstar Ordinary
Shares. Consummation of the Merger is subject to a number of conditions,
including the receipt of required regulatory and shareholder approvals.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of StarSight Common Stock at the close of business on
March 17, 1997 are entitled to notice of and to vote at the StarSight Special
Meeting. As of the close of business on the StarSight Record Date, there were
25,613,145 shares of StarSight Common Stock outstanding and entitled to vote,
held of record by 324 shareholders. A majority, or 12,806,573 of these shares,
present in person or represented by proxy, will constitute a quorum for the
transaction of business. Each StarSight shareholder is entitled to one vote
for each share of StarSight Common Stock held as of the StarSight Record Date.
VOTING OF PROXIES
The StarSight Proxy Card accompanying this Joint Proxy Statement/Prospectus
is solicited on behalf of the StarSight Board for use at the StarSight Special
Meeting. Shareholders are requested to complete, date and sign the
accompanying proxy and promptly return it in the accompanying envelope or
otherwise mail it to StarSight. All proxies that are properly executed and
returned, and that are not revoked, will be voted at the StarSight Special
Meeting in accordance with the instructions indicated thereon. EXECUTED BUT
UNMARKED PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. The StarSight Board does not presently intend to
bring any other business before the StarSight Special Meeting other than the
specific proposals referred to in this Joint Proxy Statement/Prospectus and
specified in the notice of the StarSight Special Meeting. So far as is known
to the StarSight Board, no other matters are to be brought before the
StarSight Special Meeting. As to any business that may properly come before
the StarSight Special Meeting, including, among other things, consideration of
any motion made for adjournment of the StarSight Special Meeting (including,
without limitation, for purposes of soliciting additional votes for approval
and adoption of the Merger Agreement), however, it is intended that proxies,
in the form enclosed, will be voted in respect thereof in accordance with the
judgment of the persons voting such proxies. A StarSight shareholder who has
given a proxy may revoke it at any time before it is exercised at the
StarSight Special Meeting, by (i) filing a written notice of revocation with,
or delivering a duly executed proxy bearing a later date, to, Martin W.
Henkel, Executive Vice President, Chief Financial Officer and Secretary,
StarSight Telecast, Inc., 39650 Liberty Street, Fremont, California 94538, or
(ii) attending the StarSight Special Meeting and voting in person (although
attendance at the StarSight Special Meeting will not, by itself, revoke a
proxy).
VOTE REQUIRED
Pursuant to the CCC and the StarSight Restated Articles of Incorporation and
the StarSight Bylaws, approval and adoption of the Merger Agreement and the
Merger requires the affirmative vote of at least a majority of the outstanding
shares of StarSight Common Stock entitled to vote at the StarSight Special
Meeting. SINCE THE REQUIRED VOTING OF THE STARSIGHT SHAREHOLDERS IS BASED UPON
THE NUMBER OF OUTSTANDING SHARES OF STARSIGHT COMMON STOCK, RATHER THAN UPON
THE SHARES ACTUALLY VOTED, THE FAILURE BY THE HOLDER OF ANY SUCH SHARES TO
SUBMIT A PROXY OR TO VOTE IN PERSON AT THE STARSIGHT SPECIAL MEETING
(INCLUDING ABSTENTIONS AND "BROKER NON-VOTES") WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. IN
THE EVENT THAT THE MERGER AGREEMENT AND THE TRANSACTIONS PROVIDED FOR
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THEREIN, INCLUDING THE MERGER, ARE APPROVED AND ADOPTED BY THE AFFIRMATIVE
VOTE OF THE HOLDERS OF A MAJORITY OF ISSUED AND OUTSTANDING SHARES OF
STARSIGHT COMMON STOCK AND THE MERGER IS SUBSEQUENTLY CHALLENGED, STARSIGHT
MAY ARGUE THAT AN INDIVIDUAL SHAREHOLDER THAT VOTES IN FAVOR OF APPROVING AND
ADOPTING THE MERGER AGREEMENT AND THE TRANSACTIONS PROVIDED FOR THEREIN,
INCLUDING THE MERGER, IS ESTOPPED FROM CHALLENGING THE MERGER UNDER APPLICABLE
STATE LAW.
THE MATTERS TO BE CONSIDERED AT THE STARSIGHT SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF STARSIGHT. ACCORDINGLY, SHAREHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN
THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
It is expected that all of the 14,636,337 shares of StarSight Common Stock
(which excludes shares subject to StarSight Options and StarSight Warrants)
beneficially owned by directors and executive officers of StarSight or their
respective affiliates at the StarSight Record Date (representing approximately
57.1% of the total number of shares of StarSight Common Stock outstanding at
such date) will be voted for approval and adoption of the Merger Agreement.
Pursuant to the terms of the Company Significant Shareholder Agreement, PVI
Transmission Inc., Thomson, Cox Communications, Inc., Virgin Interactive
Entertainment, Inc., Tribune Company and Providence Journal Company have
agreed to vote or cause to be voted all of the shares of StarSight Common
Stock beneficially owned or held by them or under their control in favor of
the Merger and other transactions provided for in or contemplated by the
Merger Agreement and against any inconsistent proposals or transactions. See
"THE PLAN OF MERGER--Related Agreements--StarSight Significant Shareholder
Agreement." As of the StarSight Record Date, Gemstar and its directors and
executive officers and their affiliates beneficially owned none of the
outstanding shares of StarSight Common Stock.
ABSTENTIONS; BROKER NON-VOTES
If an executed StarSight proxy is returned and the shareholder has
specifically abstained from voting on any matter, the shares represented by
such proxy will be considered present at the StarSight Special Meeting for
purposes of determining a quorum. If an executed proxy is returned by a broker
holding shares in street name which indicates that the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
such shares will be considered present at the meeting for purposes of
determining a quorum. Since the required vote of the StarSight shareholders is
based upon the number of outstanding shares of StarSight Common Stock,
abstentions and broker non-votes will have the same effect as a vote against
approval and adoption of the Merger Agreement.
SOLICITATION OF PROXIES AND EXPENSES
StarSight will bear the cost of the solicitation of proxies in the enclosed
form from its shareholders. In addition to solicitation by mail, the
directors, officers and employees of StarSight may solicit proxies from
shareholders by telephone, telegram, letter, facsimile or in person. Following
the original mailing of the proxies and other soliciting materials, StarSight
will request that brokers, custodians, nominees and other record holders
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of StarSight Common Stock and request authority for the
exercise of proxies. In such cases, StarSight, upon the request of the record
holders, will reimburse such record holders for their reasonable expenses.
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THE GEMSTAR ANNUAL MEETING
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the holders of
Gemstar Ordinary Shares as part of the solicitation of proxies by the Gemstar
Board for use at the Gemstar Annual Meeting to be held May 1, 1997 at 7:00
a.m., California time, at 2-29-18 Nishi-Ikebukuro, Toshima-ku, Tokyo 171,
Japan and at any adjournments or postponements thereof. This Joint Proxy
Statement/Prospectus, and the accompanying Proxy Card, are first being mailed
to holders of Gemstar Ordinary Shares on or about April 18, 1997.
The purpose of the Gemstar Annual Meeting is to consider and vote upon a
proposal to approve the issuance of Gemstar Ordinary Shares as contemplated by
the Merger Agreement. Upon consummation of the Merger, each outstanding share
of StarSight Common Stock will be converted into the right to receive 0.6062
of a share of Gemstar Ordinary Shares, with cash paid in lieu of fractional
shares. In addition, as a result of the Merger, each outstanding option to
purchase StarSight Common Stock will be assumed by Gemstar and converted into
an option to acquire such number, rounded down to the nearest whole integer,
of full shares of Gemstar Ordinary Shares as the holder would have been
entitled to receive had such holder exercised such option in full immediately
prior to the Effective Time of the Merger at an exercise price equal to the
exercise price per share of StarSight Common Stock under such option
immediately prior to the Effective Time of the Merger, divided by the Exchange
Ratio. In addition, as a result of the Merger, each stock purchase warrant
issued by StarSight to purchase shares of StarSight Common Stock shall, in
accordance with its terms, be adjusted to become exercisable for, or
exchangeable for a new warrant (on substantially the same terms) that would be
exercisable for, the number of shares of Gemstar Ordinary Shares equal to the
number of shares purchasable pursuant to the warrant as of the date of the
Merger Agreement multiplied by the Exchange Ratio. The exercise price of the
new warrant shall be an amount equal to the exercise price of the warrant as
of the date of the Merger Agreement divided by the Exchange Ratio. See "THE
PLAN OF MERGER--Treatment of StarSight Stock Options" and "--Treatment of
StarSight Warrants."
Based on the last reported sale price of Gemstar Ordinary Shares on The
Nasdaq National Market on April 11, 1997, the Exchange Ratio would result in a
per share purchase price for StarSight Common Stock of $8.49. If the Merger is
completed, StarSight shareholders will no longer hold any interest in
StarSight other than through their interest in shares of Gemstar Ordinary
Shares. Consummation of the Merger is subject to a number of conditions,
including the receipt of required regulatory and shareholder approvals.
At the Gemstar Annual Meeting, the holders of Gemstar Ordinary Shares will
also be asked to approve and adopt the Stock Incentive Plan Proposal to elect
Dr. George F. Carrier and Teruyuki Toyama to another term as Class II
directors of Gemstar and to ratify the appointment of KPMG Peat Marwick LLP as
Gemstar's independent auditors. See "PROPOSAL TO APPROVE AN AMENDMENT TO
GEMSTAR'S STOCK INCENTIVE PLAN," "ELECTION OF GEMSTAR CLASS II DIRECTORS" and
"RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS."
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record at the close of business on the Record Date are
entitled to notice of and to vote at the Gemstar Annual Meeting. At the close
of business on the Record Date, there were outstanding and entitled to vote
31,280,092 shares of Gemstar Ordinary Shares, each holder of which will be
entitled to cast one (1) vote for each such share owned on each matter to be
acted upon.
VOTE REQUIRED
The rules of The Nasdaq National Market require that the Gemstar
Shareholders approve the issuance of the Gemstar Ordinary Shares pursuant to
the Merger Agreement by the affirmative vote of the holders of a majority of
the shares of Gemstar Ordinary Shares voted at the Gemstar Annual Meeting, in
person or by proxy.
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Approval of the Stock Incentive Plan Proposal, the election of Dr. George F.
Carrier and Teruyuki Toyama as directors and ratification of the appointment
of KPMG Peat Marwick LLP as Gemstar's independent auditors also will require
the affirmative vote of a majority of the Gemstar Ordinary Shares which are
present or represented at the Gemstar Annual Meeting and entitled to vote
thereon and are actually voted. Abstentions and broker non-votes will have no
effect on the results, although they will be counted for purposes of
determining the presence of a quorum for the conduct of business at the
Gemstar Annual Meeting.
THE MATTERS TO BE CONSIDERED AT THE GEMSTAR ANNUAL MEETING ARE OF GREAT
IMPORTANCE TO THE SHAREHOLDERS OF GEMSTAR. ACCORDINGLY, SHAREHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
It is expected that all of the 19,426,063 shares of Gemstar Ordinary Shares
beneficially owned by directors and executive officers of Gemstar or their
respective affiliates (excluding shares subject to options exercisable for
Gemstar Ordinary Shares) at the Gemstar Record Date (representing
approximately 62.10% of the total number of shares of Gemstar Ordinary Shares
outstanding at such date) will be voted for approval and adoption of the
Merger Agreement and approval of the Stock Incentive Plan Proposal. Pursuant
to the terms of the Parent Significant Shareholder Agreement, Dynamic Core
Holdings Limited, Henry Yuen and Creative Assets Limited have agreed to vote
or cause to be voted all of the shares of Gemstar Ordinary Shares beneficially
owned or held by them or under their control in favor of the Merger and other
transactions provided for in or contemplated by the Merger Agreement and
against any inconsistent proposals or transactions. See "THE PLAN OF MERGER--
Related Agreements--Gemstar Significant Shareholder Agreement."
SOLICITATION OF PROXIES AND EXPENSES
Gemstar will bear the costs of solicitation of proxies in the enclosed form
from its shareholders. In addition to solicitation by mail, the directors,
officers and employees of Gemstar may solicit proxies from shareholders by
telephone, telegram, telecopy, letter or in person. Following the original
mailing of the proxies and other soliciting materials, Gemstar will request
that brokers, custodians, nominees and other record holders forward copies of
the proxy and other soliciting materials to persons for whom they hold shares
of Gemstar Ordinary Shares and request authority for the exercise of proxies.
In such cases, Gemstar, upon the request of the record holders, will reimburse
such record holders for their reasonable expenses. Any proxy given pursuant to
this solicitation may be revoked by the person giving it at any time before
its use by delivering to Gemstar of a written notice of revocation or a duly
executed proxy bearing a later date or by attending the Gemstar Annual Meeting
and voting in person.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements as
of December 31, 1996 and the related unaudited pro forma condensed combined
statements of operations for the nine months ended December 31, 1996, and for
each of the years in the three-year period ended March 31, 1996, have been
prepared giving effect to the Merger as if it occurred on the first day of the
earliest period presented. On December 12, 1996, Gemstar completed its merger
with VideoGuide which has been accounted for under the pooling of interests
method. Accordingly, the historical financial information for Gemstar has been
restated for the merger of VideoGuide in Gemstar's supplemental consolidated
financial statements for all periods presented.
StarSight has a different fiscal year-end than Gemstar. Effective January 1,
1995, StarSight changed its fiscal year end from June 30 to December 31.
StarSight's results for the nine months ended December 31, 1996, were
conformed for the purposes of the respective unaudited pro forma financial
information for the nine months ended December 31, 1996. StarSight's results
for the twelve months ended December 31, 1995, 1994 and 1993 were combined
with the results of Gemstar for the years ended March 31, 1996, 1995 and 1994,
respectively. Accordingly, StarSight's results of operations for the three
months ended March 31, 1996 have been excluded from the unaudited pro forma
condensed combined statements of operations.
The Merger is expected to be treated as a pooling of interests for
accounting purposes.
The proforma adjustments are described in the accompanying notes. Such pro
forma condensed combined information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations that would have actually been reported had the Merger been
consummated as of the beginning of the periods presented, nor is it
necessarily indicative of future financial position or results of operations.
These unaudited pro forma condensed combined financial statements are based
upon the respective historical consolidated financial statements and notes
thereto of Gemstar and StarSight incorporated by reference herein or have been
derived from audited financial statements not included herein, and do not
incorporate any benefits from cost savings or synergies of operations of the
combined operations.
The data set forth below should be read in conjunction with the consolidated
financial statements, related notes and other financial information, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in Gemstar's Annual Report on Form 20-F for the fiscal
year ended March 31, 1996, Gemstar's quarterly reports on Form 6-K, Gemstar's
supplemental consolidated financial statements for the three-year period ended
March 31, 1996 and VideoGuide's financial statements for the three-year period
ended December 31, 1995 on Form 6-K, StarSight's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
93
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA GEMSTAR
GEMSTAR STARSIGHT ADJUSTMENTS STARSIGHT
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents......... $42,742 $ 25,708 $ 68,450
Accounts receivable............... -- 3,047 3,047
Short-term investments............ 22,516 1,989 24,505
Prepaid expenses and other current
assets........................... 4,352 352 4,704
------- -------- --------
Total current assets............ 69,610 31,096 100,706
Property and equipment, net......... 4,639 1,074 5,713
Intangible assets, net.............. 4,150 2,861 7,011
Investments......................... 6,528 -- 6,528
Other assets........................ 2,268 -- 2,268
------- -------- --------
$87,195 $ 35,031 $122,226
======= ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses......................... $31,772 $ 4,249 $ 36,021
Current portion of deferred
revenue.......................... 6,739 11,170 17,909
Other current liabilities......... -- 74 74
------- -------- --------
Total current liabilities....... 38,511 15,493 54,004
Deferred revenue, less current
portion............................ 1,772 9,700 11,472
Other liabilities................... 3,389 -- 3,389
Shareholders' equity:
Ordinary shares................... 313 125,972 (125,972)(a) 467
154 (a)
Additional paid-in capital........ 60,536 -- 125,972 (a) 186,354
(154)(a)
Accumulated deficit............... (17,255) (115,735) (132,990)
Unearned compensation............. -- (399) (399)
Cumulative translation
adjustments...................... (71) -- (71)
------- -------- --------
Net shareholders' equity........ 43,523 9,838 53,361
$87,195 $ 35,031 $122,226
======= ======== ========
</TABLE>
See notes to Unaudited Pro Forma Combined Financial Statements
94
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31, 1996
--------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- ---------
GEMSTAR STARSIGHT
NINE MONTHS ENDED NINE MONTHS ENDED GEMSTAR
DECEMBER 31, 1996 DECEMBER 31, 1996 STARSIGHT
----------------- ----------------- ---------
<S> <C> <C> <C> <C>
Revenues..................... $ 46,072 $ 7,452 $ 53,524
Operating costs and expenses
(b).......................... 34,799 26,324 61,123
-------- -------- --------
Earnings (loss) from
operations................... 11,273 (18,872) (7,599)
Other income................. 3,145 586 3,731
-------- -------- --------
Earnings (loss) from
continuing operations before
income taxes................ 14,418 (18,286) (3,868)
Income taxes................. 5,120 -- 5,120
-------- -------- --------
Earnings (loss) from
continuing operations........ $ 9,298 $(18,286) $ (8,988)
======== ======== ========
Earnings (loss) from
continuing operations per
share....................... 0.28 (0.72) (0.18)
======== ======== ========
Shares used in per share
calculation................. 33,738 25,614 49,265
======== ======== ========
<CAPTION>
YEAR ENDED MARCH 31, 1996
--------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------- ---------
GEMSTAR STARSIGHT
YEAR ENDED YEAR ENDED GEMSTAR
MARCH 31, 1996 DECEMBER 31, 1995 STARSIGHT
----------------- ----------------- ---------
<S> <C> <C> <C> <C>
Revenues..................... $ 53,869 $ 1,913 $ 55,782
Operating costs and expenses. 77,280 34,267 111,547
-------- -------- --------
Loss from operations......... (23,411) (32,354) (55,765)
Other income................. 2,076 574 2,650
-------- -------- --------
Loss from continuing
operations before
income taxes................ (21,335) (31,780) (53,115)
Income taxes................. 5,497 -- 5,497
-------- -------- --------
Loss from continuing
operations.................. $(26,832) $(31,780) $(58,612)
======== ======== ========
Loss from continuing
operations per share........ (0.85) (1.50) (1.32)
======== ======== ========
Shares used in per share
calculation................. 31,458 21,164 44,288
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
95
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1995
------------------------------------------
HISTORICAL PRO FORMA
-------------------------------- ---------
GEMSTAR STARSIGHT
YEAR ENDED YEAR ENDED GEMSTAR
MARCH 31, 1995 DECEMBER 31, 1994 STARSIGHT
-------------- ----------------- ---------
<S> <C> <C> <C>
Revenues........................... $41,744 $ 70 $ 41,814
Operating costs and expenses....... 34,069 33,725 67,794
------- -------- ---------
Earnings (loss) from operations.... 7,675 (33,655) (25,980)
Other income ...................... 696 1,695 2,391
------- -------- ---------
Earnings (loss) from continuing
operations before income taxes..... 8,371 (31,960) (23,589)
Income taxes....................... 3,681 -- 3,681
------- -------- ---------
Earnings (loss) from continuing
operations......................... $ 4,690 $(31,960) $ (27,270)
======= ======== =========
Earnings (loss) from continuing
operations per share.............. 0.31 (1.55) (0.67)
======= ======== =========
Shares used in per share
calculation....................... 28,159 20,558 40,621
======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1994
-----------------------------------------------
HISTORICAL PRO FORMA
-------------------------------- ---------
GEMSTAR STARSIGHT
YEAR ENDED YEAR ENDED GEMSTAR
MARCH 31, 1994 DECEMBER 31, 1993 STARSIGHT
-------------- ----------------- ---------
<S> <C> <C> <C> <C>
Revenues........................ $27,025 $ -- $ 27,025
Operating costs and expenses.... 21,042 15,644 36,686
------- -------- --------
Earnings (loss) from operations. 5,983 (15,644) (9,661)
Other income.................... 786 914 1,700
------- -------- --------
Earnings (loss) from continuing
operations before income taxes.. 6,769 (14,730) (7,961)
Income taxes.................... 2,238 -- 2,238
------- -------- --------
Earnings (loss) from continuing
operations...................... $ 4,531 $(14,730) $(10,199)
======= ======== ========
Earnings (loss) from continuing
operations per share........... 0.16 (0.90) (0.27)
======= ======== ========
Shares used in per share
calculation.................... 28,159 16,347 38,069
======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
96
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) Reflects conversion of 25,492,139 shares of StarSight common stock into
approximately 15,453,334 Gemstar Ordinary shares.
(b) Gemstar reached and paid settlements with certain vendors that resulted in
a gain from forgiveness of debt of approximately $5.9 million.
(c) Gemstar and StarSight will incur direct transaction costs of approximately
$6,000,000 associated with the Merger, consisting of transaction fees for
attorneys, accountants, financial printing and other related charges.
Gemstar and StarSight will also incur additional costs related to
severance and other integration costs. All of these non-recurring costs
will be charged to operations as incurred. Accordingly, these costs are
not reflected in the unaudited pro forma condensed financial statements.
(d) StarSight operated as a development stage company from May 12, 1986
(inception) until December 31, 1994.
97
<PAGE>
DESCRIPTION OF STARSIGHT CAPITAL STOCK
GENERAL
The authorized capital stock of StarSight consists of 50,000,000 shares of
StarSight Common Stock, no par value and 5,000,000 shares of preferred stock,
no par value ("StarSight Preferred Stock"). As of March 17, 1997, there were
25,613,145 shares of StarSight Common Stock outstanding which were held of
record by 324 shareholders.
STARSIGHT COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders, except that upon giving the
legally required notice, shareholders may cumulate their votes in the election
of directors. The holders of StarSight Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
StarSight Board out of funds legally available therefor, subject to
preferences that may be applicable to any outstanding StarSight Preferred
Stock. In the event of liquidation, dissolution or winding up of StarSight,
holders of StarSight Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding StarSight Preferred Stock. Holders of StarSight Common Stock have
no preemptive or conversion rights or other subscription rights, except as may
otherwise have been granted pursuant to a contract between StarSight and a
holder of StarSight Common Stock. There are no redemption or sinking fund
provisions applicable to the StarSight Common Stock. All outstanding shares of
StarSight Common Stock are fully paid and non-assessable.
PREFERRED STOCK
The StarSight Board has the authority to issue shares of StarSight Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences and the number of shares
constituting any series, without any further vote or action by the
shareholders. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of StarSight
Common Stock. In addition, because the terms of such StarSight Preferred Stock
may be fixed by the StarSight Board without shareholder action, the StarSight
Preferred Stock could be designated and issued quickly in the event StarSight
requires additional equity capital. The StarSight Preferred Stock could also
be designated and issued with terms calculated to defeat a proposed take-over
of StarSight, or with terms making the removal of management more difficult.
Under certain circumstances, this could have the effect of decreasing the
market price of the StarSight Common Stock. As a condition to the Merger
Agreement, StarSight has agreed not to issue or authorize any new shares of
its capital stock, including the StarSight Preferred Stock until the Effective
Time of the Merger or termination of the Merger Agreement, whichever comes
first.
REGISTRATION RIGHTS
The holders of approximately 21,779,731 shares of StarSight Common Stock or
Warrants to purchase StarSight Common Stock, or their transferees
(collectively the "Registration Rights Holders"), are entitled to certain
rights with respect to the registration of such shares under the Securities
Act. Under the terms of registration rights agreements between StarSight and
the Registration Rights Holders, if StarSight proposes to register any of its
securities under the Act, either for its own account or the account of other
security holders exercising registration rights, the Registration Rights
Holders are entitled to notice of such registration and are entitled to
include shares of such StarSight Common Stock therein, provided, among other
conditions, that the underwriters of any offering have the right to limit the
number of such shares included in such registration a "Piggyback
Registration"). In addition, the Registration Rights Holders may, under
certain circumstances, require StarSight, beginning six months after
StarSight's initial public offering and on not more than one occasion, to file
a registration statement under the Act at StarSight's expense with respect to
their shares of StarSight Common Stock (a "Demand Registration"). StarSight is
required to use its best efforts to effect such
98
<PAGE>
registration, subject to certain conditions and limitations. In addition,
certain shareholders have special rights to a demand registration of its
holdings of StarSight securities. With respect to all Registration Rights
Holders, StarSight has also undertaken to use its best efforts to qualify for
registration on Form S-3 and, when such registration becomes available and
subject to certain conditions and limitations, holders of the aforementioned
shares may require StarSight, on not more than two occasions, to register all
or a portion of their shares pursuant to a registration statement on Form S-3,
to be prepared by StarSight at its expense.
In connection with the Merger, StarSight and certain of the Registration
Rights Holders have entered into agreements whereby such holders' registration
rights are terminated effective upon consummation of the Merger. Subsequent to
the Effective Time, no former holders of StarSight Common Stock or Warrants
shall have any registration rights with respect to the Gemstar shares or
warrants received in the transaction other than those provided by the Form F-4
filed by Gemstar in connection with the Merger.
DISSENTERS' RIGHTS
Pursuant to the terms of the Merger Agreement, if holders at least 5% of the
outstanding shares of StarSight Common Stock have exercised dissenters' rights
in connection with the Merger under Sections 1300-1312 of the California
General Corporation law ("Section 1300"), any holder of StarSight Common Stock
may exercise dissenters' rights by voting against the Merger and following the
procedures set forth in Section 1300. If the holders of shares representing at
least 5% of the outstanding shares of StarSight's Common Stock do not exercise
dissenters' rights, then only a holder of StarSight's Common Stock with
respect to which there exists a restriction on transfer imposed by StarSight
or by any law or regulation will be so entitled.
The most likely source of restrictions on transfer imposed by law or
regulation that would entitle a holder of StarSight Common Stock to
dissenters' rights if holders of at least 5% of the outstanding shares of
StarSight's Common Stock do not exercise such rights are the restrictions
imposed by the Securities Act. In general, the restrictions on transfer
imposed by the Securities Act and the Rules and Regulations promulgated
thereunder, as currently in effect, would only restrict sales of StarSight
Common Stock by affiliates of StarSight and by holders of restricted StarSight
Common Stock that have held such shares for less than two years (including the
holding period of any prior owners other than an affiliate).
A STARSIGHT SHAREHOLDER WISHING TO EXERCISE DISSENTERS' RIGHTS MUST VOTE
AGAINST THE MERGER AT THE STARSIGHT SPECIAL MEETING. HOWEVER, VOTING AGAINST
THE MERGER WILL NOT, IN AND OF ITSELF, BE SUFFICIENT NOTICE OF SUCH
SHAREHOLDERS' INTENTION TO DISSENT. RATHER, ANY STARSIGHT SHAREHOLDER WISHING
TO EXERCISE DISSENTERS' RIGHTS MUST COMPLY WITH THE PROCEDURES SET FORTH IN
SECTION 1300. THE FOLLOWING SUMMARY OF THE PROVISIONS OF SECTION 1300 IS NOT
INTENDED TO BE A COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SECTION 1300, A COPY OF WHICH IS
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX H AND IS
INCORPORATED HEREIN BY REFERENCE. IN THE EVENT THAT THE MERGER AGREEMENT AND
THE TRANSACTIONS PROVIDED FOR THEREIN, INCLUDING THE MERGER, ARE APPROVED AND
ADOPTED BY THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF ISSUED AND
OUTSTANDING SHARES OF STARSIGHT COMMON STOCK AND THE MERGER IS SUBSEQUENTLY
CHALLENGED, STARSIGHT MAY ARGUE THAT AN INDIVIDUAL SHAREHOLDER THAT VOTES IN
FAVOR OF APPROVING AND ADOPTING THE MERGER AGREEMENT AND THE TRANSACTIONS
PROVIDED FOR THEREIN, INCLUDING THE MERGER, IS ESTOPPED FROM CHALLENGING THE
MERGER UNDER APPLICABLE STATE LAW.
A StarSight shareholder wishing to exercise dissenters rights must, not
later than the date of the StarSight Special Meeting (currently scheduled for
May 1, 1997), demand in writing from StarSight, the purchase of his or her
shares and payment to the shareholder of such shares fair market value. A
holder of StarSight Common Stock who elects to exercise dissenters' rights
should mail or deliver his or her written demand to StarSight at 39650 Liberty
Street, Fremont, California 94538, directed to the attention of StarSight's
Secretary. The demand should specify the holder's name and mailing address,
the number of shares owned by such shareholder and state that such holder is
demanding a purchase of his or her shares, and must also contain a statement
as to what the shareholder claims to be the fair market value of such shares,
determined in accordance with the provisions of Section 1300. The fair market
value of the shares of StarSight Common Stock will be determined as of the day
before the first announcement of the terms of the proposed Merger, excluding
any appreciation or depreciation as a consequence of the proposed Merger. Such
statement of the fair market value constitutes an offer by the
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<PAGE>
StarSight shareholder to sell the shares to StarSight at that price. If the
Merger is approved by the required vote of StarSight's shareholders and is not
abandoned or terminated and the holders of shares representing at least 5% of
the outstanding shares of StarSight Common Stock exercise dissenters' rights
with respect to the Merger, each holder of shares of StarSight Common Stock
who has given timely notice and who votes against the Merger and follows the
procedures set forth in Section 1300 will be entitled to have his or her
shares of StarSight Common Stock purchased by StarSight for cash at their fair
market value. If the holders of shares representing at least 5% of the
outstanding shares of StarSight Common Stock do not exercise dissenters'
rights, then only a holder of StarSight Common Stock with respect to which
there exists a restriction on transfer imposed by StarSight or by any law or
regulation will be so entitled. The shares of stock with respect to which
holders have perfected their purchase demand in accordance with Section 1300
and have not effectively withdrawn or lost such rights are referred to herein
as "Dissenting Shares." If a StarSight shareholder has a beneficial interest
in StarSight Shares that are held of record in the name of another person,
such as a trustee or nominee, and such shareholder desires to perfect any
dissenters' rights such beneficial shareholder may have, such beneficial
shareholder must act promptly to cause the holder of record timely and
properly to follow the steps summarized above.
Within ten days after approval of the Merger by StarSight's shareholders,
StarSight must mail a notice of such approval (the "Approval Notice") to all
of its shareholders who have voted against the Merger, together with a
statement of the price determined by StarSight to represent the fair market
value of the applicable Dissenting Shares (determined in accordance with the
immediately preceding paragraph), a brief description of the procedures to be
followed in order for the shareholder to pursue his dissenters' rights, and a
copy of Sections 1300-1304 of the California General Corporation Law. The
statement of price made in the Approval Notice constitutes an offer to
purchase all Dissenting Shares at the stated amount. Only a holder of record
of shares of StarSight Common Stock at March 17, 1997 (or his or her duly
appointed representative) is entitled to assert a purchase demand for the
shares registered in that holder's name.
Within 30 days following the mailing of StarSight's Approval Notice,
StarSight shareholders exercising dissenters' rights must submit the
certificate(s) representing the Dissenting Shares to StarSight for endorsement
as Dissenting Shares.
If StarSight and the shareholder agree that the shares are Dissenting Shares
and agree upon the purchase price of the shares, the dissenting shareholder is
entitled to the agreed upon price with interest thereon at the legal rate on
judgments from the date of such agreement. Payment for the Dissenting Shares
must be made within thirty (30) days after the later of the date of such
agreement or the date on which all statutory and contractual conditions to the
Merger are satisfied, and is subject to the surrender by the shareholder of
the certificate(s) representing the Dissenting Shares.
If StarSight denies that the shares are Dissenting Shares, or if StarSight
and the shareholder fail to agree upon the fair market value of the shares
then within six months after the date the Approval Notice was mailed to
shareholders, any shareholder who has made a valid written purchase demand may
file a complaint in the Superior Court of Alameda County, California (the
"Court") requesting a determination as to whether the shares are Dissenting
Shares or as to the fair market value of such holder's shares, or both, or may
intervene in any pending action brought by any other shareholder.
Any holder of Dissenting Shares who has duly demanded the purchase of his or
her shares under Section 1300 will not, after the Effective Time be entitled
to the payment of dividends or other distributions on such Dissenting Shares
(except dividends or other distributions payable to shareholders of record as
of a date prior to the Effective Time).
If any holder of shares of StarSight Common Stock who demands the purchase
of his or her shares under Section 1300 fails to perfect, or effectively
withdraws or loses his or her right to such purchase, the shares of such
holder will be converted into a right to receive that number of shares of
Gemstar Ordinary Shares equal to the Exchange Ratio times the number of shares
of StarSight Common Stock held by such person, in accordance with the Merger
Agreement. Dissenting Shares lose their status as Dissenting Shares if (a) the
Merger is abandoned; (b) the shares are transferred prior to their submission
for the required endorsement or are surrendered for conversion into shares of
another class in accordance with the Restated Articles of Incorporation
100
<PAGE>
of StarSight; (c) the dissenting shareholder fails to make a timely written
demand for purchase, along with a statement of fair market value; (d) the
dissenting shareholder votes for the approval and adoption of the Merger
Agreement; (e) the dissenting shareholder and StarSight do not agree upon the
status of the shares as Dissenting Shares or do not agree on the purchase
price, but StarSight nor the shareholder files a complaint or intervenes in a
pending action within six months after mailing of the Approval Notice or (f)
with StarSight's consent, the holder delivers a written withdrawal of such
holder's demand for purchase of his or her shares.
Pursuant to the Merger Agreement, StarSight will give Gemstar prompt notice
of any demands received by StarSight and Gemstar will have the right to
participate in all negotiations and proceedings with respect to the demands.
StarSight will not, except with the prior written consent of Gemstar, make any
payment with respect to, or settle or offer to settle, any such demands.
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<PAGE>
STARSIGHT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 17, 1997, the number and percentage
of outstanding StarSight Common Stock owned beneficially by each person known
by StarSight to own beneficially more than 5% of the outstanding StarSight
Common Stock, by each director and by each executive officer of StarSight as
and by the executive officers and directors as a group.
<TABLE>
<CAPTION>
COMMON STOCK APPROXIMATE
FIVE PERCENT SHAREHOLDERS, DIRECTORS BENEFICIALLY PERCENTAGE
AND CERTAIN EXECUTIVE OFFICERS OWNED OWNED(1)
------------------------------------ ------------ -----------
<S> <C> <C>
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
135 North Los Robles Avenue, Suite 800
Pasadena, California 911091
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 Boylston 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)................................... 5,711,391 22.3
James E. Meyer(10).................................... 5,343,333 19.4
Jacques Thibon(11).................................... 5,343,333 19.4
Ajit M. Dalvi(12)..................................... 2,206,647 8.6
Donn M. Davis(13)..................................... 1,132,518 4.4
Larry W. Wangberg(14)................................. 466,666 1.8
Martin W. Henkel(15).................................. 215,506 *
John F. Doyle(16)..................................... 139,998 *
Brian L. Klosterman(17)............................... 127,520 *
William Scharninghausen(18)........................... 54,927 *
Jack C. Clifford(19).................................. 40,000 *
John W. Goddard(20)................................... 37,334 *
Edward D. Horowitz(21)................................ 10,467 *
All directors and executive officers as a group (13
persons)(22)......................................... 15,496,307 58.5
</TABLE>
102
<PAGE>
- --------
* Less than 1%.
(1) Applicable percentage of ownership is based on 25,613,145 shares of
StarSight Common Stock outstanding as of March 17, 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
StarSight Common Stock subject to options and warrants currently
exercisable or exercisable within 60 days after March 17, 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 StarSight 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 StarSight Common Stock held by Virgin Interactive Entertainment Inc.,
an affiliate of Viacom; and (iii) 99,166 shares of StarSight Common Stock
issuable pursuant to options exercisable within 60 days after March 17,
1997 held by current or former employees of Viacom held for Viacom's
benefit. Excludes (i) 36,500 shares of StarSight Common Stock held by
Sumner M. Redstone, the controlling shareholder of NAI; and (ii) 4,167
shares of StarSight Common Stock issuable pursuant to options exercisable
within 60 days of March 17, 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 StarSight Common Stock subject to currently exercisable Warrants held
by Thomson. Excludes 20,000 shares of StarSight Common Stock issuable
pursuant to options held by Messrs. Meyer and Thibon exercisable within
60 days of March 17, 1997 over which Thomson does not possess sole or
shared voting or investment control and therefore of which it is not a
beneficial owner.
(4) Reflects ownership of an option to purchase 5,276,034 shares of StarSight
Common Stock (the "Company Option") as reported on Schedule 13D dated
January 2, 1997 filed with the Commission by Gemstar. Represents
Gemstar's beneficial ownership interest under the Company Stock Option
Agreement. Gemstar may 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 13D/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 Messrs. Chambers and
Anthony may be deemed to have the power to vote and dispose of the
2,166,647 shares of StarSight Common Stock held by CCI. Excludes 40,000
shares of StarSight Common Stock issuable pursuant to options held by
Ajit M. Dalvi, an executive officer of CCI exercisable within 60 days of
March 17, 1997 over which CCI does not possess sole or shared voting or
investment control and therefore of which it is not a beneficial owner.
(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 dispositive
power and sole voting power with respect to 1,382,000 of such shares of
StarSight Common Stock.
(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 dispositive power and sole voting
power with respect to 1,122,518 of such shares of StarSight Common Stock.
Excludes 10,000 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Davis exercisable within 60 days of March 17, 1997
over which Tribune does not possess sole or shared voting or investment
control and therefore of which it is not a beneficial owner.
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(8) Effective February 17, 1997, The Providence Journal Company was purchased
by A.H. Belo Corporation ("A.H. Belo"). The Providence Journal Company
will remain a wholly-owned subsidiary of A.H. Belo. Excludes 40,000
shares of StarSight Common Stock issuable pursuant to StarSight Options
exercisable within 60 days of March 17, 1997, held by Jack C. Clifford, a
former officer of The Providence Journal Company.
(9) Includes 5,684,158 shares of StarSight Common Stock held and beneficially
owned by Viacom or over which Viacom has voting power, to which Mr.
Dooley disclaims beneficial ownership. Includes 20,000 shares held by
Mr. Dooley for the benefit of Viacom exercisable within 60 days after
March 17, 1997.
(10) Includes 5,333,333 shares of StarSight Common Stock held and beneficially
owned by Thomson to which Mr. Meyer disclaims beneficial ownership.
Includes 10,000 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Meyer exercisable within 60 days after March 17,
1997.
(11) Includes 5,333,333 shares of StarSight Common Stock held and beneficially
owned by Thomson to which Mr. Thibon disclaims beneficial ownership.
Includes 10,000 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Thibon exercisable within 60 days after March 17,
1997.
(12) Includes 2,166,647 shares of StarSight Common Stock held and beneficially
owned by CCI to which Mr. Dalvi disclaims beneficial ownership. Includes
40,000 shares of StarSight Common Stock issuable pursuant to options held
by Mr. Dalvi exercisable within 60 days after March 17, 1997.
(13) Includes 1,122,518 shares of StarSight Common Stock held and beneficially
owned by Tribune to which Mr. Davis disclaims beneficial ownership.
Includes 10,000 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Davis exercisable within 60 days after March 17,
1997.
(14) Includes 466,666 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Wangberg exercisable within 60 days after March 17,
1997.
(15) Includes 187,069 shares of StarSight Common Stock held by the Henkel
Family Trust TRUA December 24, 1992 over which Mr. Henkel has voting and
investment power. Also includes 28,437 shares of StarSight Common Stock
issuable pursuant to options held by Mr. Henkel exercisable within 60
days after March 17, 1997.
(16) Includes 84,000 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Doyle exercisable within 60 days after March 17,
1997.
(17) Includes 126,250 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Klosterman exercisable within 60 days after March 17,
1997.
(18) Includes 54,444 shares of StarSight Common Stock issuable pursuant to
options held by Mr. Scharninghausen exercisable within 60 days after
March 17, 1997.
(19) Excludes 791,897 shares of StarSight Common Stock held and beneficially
owned by Providence Journal, to which Mr. Clifford disclaims beneficial
ownership. Includes 40,000 shares of StarSight Common Stock issuable
pursuant to options held by Mr. Clifford exercisable within 60 days after
March 17, 1997.
(20) Excludes 5,684,158 shares of StarSight 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
options held by Mr. Goddard for the benefit of Viacom. Includes 4,167
shares of StarSight Common Stock issuable pursuant to Stock Options held
by Mr. Goddard exercisable within 60 days after March 17, 1997.
(21) Excludes 5,684,158 shares of StarSight Common Stock held and beneficially
owned by Viacom or over which Viacom has voting power to which Mr.
Horowitz disclaims beneficial ownership and 53,333 shares subject to
options held by Mr. Horowitz for the benefit of Viacom exercisable within
60 days of March 17, 1997.
(22) Includes 859,970 shares of StarSight Common Stock issuable pursuant to
options granted to executive officers and directors of StarSight
exercisable within 60 days after March 17, 1997 and 2,000,000 shares of
StarSight Common Stock issuable pursuant to currently exercisable
warrants held by Thomson.
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DESCRIPTION OF GEMSTAR CAPITAL STOCK
The following is a brief description of the rights of holders of fully paid
Gemstar Ordinary Shares and the authorized but unissued preference shares, par
value $0.01 per share, of Gemstar (the "Preference Shares"). This description
does not purport to be complete and is qualified in its entirety by reference
to the Memorandum of Association and Articles of Association of Gemstar and to
the relevant provisions of the British Virgin Islands International Business
Companies Ordinance (Cap. 291), as amended.
ORDINARY SHARES
Gemstar's Memorandum of Association authorizes the issuance of an aggregate
of 500,000,000 Ordinary Shares. All of the issued Gemstar Ordinary Shares are,
for purposes of the issue, credited as fully paid and nonassessable (except
that in the case of Gemstar Ordinary Shares issued for a promissory note or
other written obligation for payment of a debt, the holder of such Gemstar
Ordinary Shares is liable for the amount unpaid on the promissory note, and
such Gemstar Ordinary Shares may be subject to forfeiture), and accordingly no
further contribution of capital may be required by Gemstar from holders of
Gemstar Ordinary Shares. Under British Virgin Islands law, nonresidents of
British Virgin Islands may freely hold, vote and transfer Gemstar Ordinary
Shares in the same manner as British Virgin Islands residents.
In its acquisition of E Guide, Inc. ("E Guide"), Gemstar granted to E
Guide's former shareholders, who received an aggregate of 3,511,494 Gemstar
Ordinary Shares in the exchange, certain registration rights, including those
for Demand Registrations and Piggyback Registrations, with respect to the
Gemstar Ordinary Shares they received in the exchange.
PREFERENCE SHARES
Gemstar's Memorandum of Association authorizes the issuance of an aggregate
of 50,000,000 Preference Shares. The Gemstar Board has the authority, without
shareholder action, to establish or increase the number of shares of any
series of Preference Shares, and to establish the dividend rights and rates,
voting rights, redemption provisions and liquidation preference with respect
to any such Preference Shares, all of which may take precedence over
comparable rights of the existing Gemstar Ordinary Shares. Any variance in the
terms of Preference Shares after initial issuance thereof which affects the
holders of Gemstar Ordinary Shares must be approved by a majority of the
holders of Gemstar Ordinary Shares. As a condition to the Merger Agreement,
Gemstar has agreed not to issue or authorize any new shares of its capital
stock, including Gemstar Preference Shares, until the Effective Time of the
Merger or termination of the Merger Agreement, whichever comes first.
DIVIDENDS
Holders of Gemstar Ordinary Shares are entitled to participate in the
payment of dividends in proportion to their holdings. The Gemstar Board may
declare and pay dividends in respect of any accounting period out of the
surplus of Gemstar legally available for distribution. Cash dividends, if any,
will be paid in U.S. Dollars.
VOTING RIGHTS
Every Gemstar shareholder who is present in person or by proxy at a meeting
of Gemstar shall have one vote for each Gemstar Ordinary Share held by such
shareholder. In addition, holders of Preference Shares shall have such voting
rights, if any, as determined by the Gemstar Board. The Articles of
Association of Gemstar make no provision for cumulative voting.
DIRECTORS
Under Gemstar's Articles of Association, the number of directors of Gemstar
may not be less than three nor more than fifteen. Members of Gemstar's Board
may be appointed by the shareholders or by the directors to fill a vacancy or
as an addition to the existing directors. Members of Gemstar Board may be
removed, with cause, by a resolution of the shareholders of Gemstar or by a
resolution of the other members of Gemstar Board.
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FIDUCIARY DUTIES AND INDEMNIFICATION
For a discussion of fiduciary responsibilities and indemnification of
Gemstar's officers and directors under British Virgin Islands law and
Gemstar's Memorandum of Association and Articles of Association, see
"COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND STARSIGHT."
QUORUM
The quorum required to constitute a valid general meeting of shareholders
consists of shareholders present in person or by proxy together holding not
less than 50% of all shares entitled to vote at the meeting. If a meeting is
adjourned for lack of a quorum, it will stand adjourned to the next business
day at the same time and place or to such other day at such other time and
place as the directors may determine, and if at the adjourned meeting there
are present in person or by proxy within one hour from the time appointed for
the meeting at least one-third of the shares entitled to vote at the meeting,
the shareholder or shareholders present shall be a quorum. Meetings may also
be called upon the written request of shareholders holding more than 50% of
the outstanding voting shares of Gemstar. A meeting convened upon the written
request of shareholders shall be dissolved if a quorum is not present at the
first meeting.
RESOLUTIONS
Resolutions of shareholders may be adopted at shareholders' meetings by the
affirmative vote of a simple majority of the shares entitled to vote thereon
that are represented at the meeting and voted. In addition, shareholders may
act by written consent without a meeting by the consent of the holders of an
absolute majority of the outstanding shares entitled to vote on such matters,
provided that notice of any such actions is subsequently furnished to all
shareholders. Resolutions of directors may be adopted at meetings of the
Gemstar Board by the affirmative vote of a simple majority of the directors
present at the meeting who voted and did not abstain. In addition, directors
may act by written consent without a meeting by the consent of all directors.
Gemstar may amend its Memorandum of Association and its Articles of
Association by a resolution of shareholders or by a resolution of directors;
provided, however, that certain provisions in the Articles of Association
relating to the election of directors may be amended only by the shareholders
upon an affirmative vote of not less than 75 percent of the outstanding shares
entitled to vote thereon. Accordingly, directors of Gemstar have the power to
amend most of the provisions of the Articles of Association and to take many
actions without shareholder approval. For example, Gemstar directors may amend
Gemstar's Memorandum of Association to increase or reduce Gemstar's authorized
capital, an action which would typically require shareholder approval under
the laws of most U.S. jurisdictions.
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GEMSTAR SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of March 17, 1997, the number and percentage
of outstanding Gemstar Ordinary Shares owned beneficially by each person known
by Gemstar to own beneficially more than 5% of the outstanding Gemstar
Ordinary Shares, by each director and by each executive officer of Gemstar and
by the officers and directors of Gemstar as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF
BENEFICIALLY SHARES
NAME AND POSITION OWNED(1) OUTSTANDING
----------------- ------------ -----------
<S> <C> <C>
Thomas L. H. Lau(2)................................ 11,608,825 37.1%
StarSight Telecast, Inc.(3)........................ 6,341,824 16.9
Henry C. Yuen(4)................................... 5,011,990 16.0
Daniel S. W. Kwoh(5)............................... 2,460,890 7.9
Wilson K. C. Cho(6)................................ 2,217,407 7.1
Elsie Ma Leung(7).................................. 342,499 1.1
Roy J. Mankovitz(8)................................ 448,702 1.4
Larry Goldberg(9).................................. 255,000 *
George F. Carrier(10).............................. 6,000 *
Teruyuki Toyama(11)................................ 6,000 *
Executive Group (6 persons)........................ 10,736,488 34.3
Non-Executive Director Group (3 persons)........... 11,620,825 37.1
Executive Officers and Directors as a group (9
persons) ......................................... 22,357,313 71.4
</TABLE>
- --------
* Less than 1%.
(1) Applicable percentage of ownership is based on 31,280,092 shares of
Gemstar Ordinary Shares outstanding as of March 17, 1997 together with
applicable options or warrants for such shareholder. Beneficial ownership
is determined in accordance with the rules of the Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares subject to options held by
that person that are currently exercisable or that become exercisable
within 60 days following March 17, 1997 are deemed outstanding. However,
such shares are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(2) The sole shareholder of Dynamic Core Holdings Limited is Thomas Lau.
Includes 86,250 shares issuable upon exercise of currently exercisable
options. Does not include 143,750 options that are not currently
exercisable and do not become exercisable within 60 days following March
17, 1997.
(3) Represents StarSight's beneficial ownership interest under the Parent
Stock Option Agreement. StarSight may exercise the Parent Stock Option at
any time after the termination of the Merger Agreement under certain
circumstances. See "THE PLAN OF MERGER--Certain Related Agreements."
(4) Includes 1,950,000 shares issuable upon exercise of currently exercisable
options. Does not include 650,000 options that are not currently
exercisable and do not become exercisable within 60 days following March
17, 1997.
(5) The total number of shares includes 7,245 Ordinary Shares held by Dr.
Kwoh as custodian for Leslie Y. Kwoh and 40,250 shares issuable upon
exercise of currently exercisable options. Does not include 74,750
options that are not currently exercisable and do not become exercisable
within 60 days following March 17, 1997.
(6) Of the shares held by Dr. Cho, 1,470,225 are owned by Creative Assets
Limited, the sole shareholder of which is Dr. Cho. The total number of
shares held by Dr. Cho also includes 40,250 shares issuable upon exercise
of currently exercisable options. Does not include 74,750 options that
are not currently exercisable and do not become exercisable within 60
days following March 17, 1997.
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(7) Includes 292,500 shares issuable upon exercise of currently exercisable
options. Does not include 117,500 options that are not currently
exercisable and do not become exercisable within 60 days following
March 17, 1997.
(8) Includes 255,000 shares issuable upon exercise of currently exercisable
options. Does not include 117,500 options that are not currently
exercisable and do not become exercisable within 60 days following
March 17, 1997.
(9) Includes 255,000 shares issuable upon exercise of currently exercisable
options. Does not include 117,500 options that are not currently
exercisable and do not become exercisable within 60 days following
March 17, 1997 .
(10) Includes 6,000 shares issuable upon exercise of currently exercisable
options.
(11) Includes 6,000 shares issuable upon exercise of currently exercisable
options.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND STARSIGHT
StarSight is incorporated in the State of California, and Gemstar is a
company incorporated under the laws of the British Virgin Islands. Pursuant to
the Merger, Sub will be merged with and into StarSight and StarSight will
become a wholly-owned subsidiary of Gemstar. StarSight will continue to be
governed by the law of the State of California and Gemstar will continue to be
governed by the laws of the British Virgin Islands. Gemstar's members are
governed by its Articles of Association and Memorandum of Association, as
amended, and the laws of the British Virgin Islands. The rights of StarSight
shareholders are governed by the StarSight Articles of Incorporation, the
Bylaws of StarSight and the CCC.
The following is a summary comparison of differences between the rights of
(i) Gemstar Shareholders under the laws of the British Virgin Islands and
Gemstar's Articles of Association and Memorandum of Association, and (ii) the
rights of StarSight shareholders under the CCC and StarSight's Articles of
Incorporation and Bylaws. This summary does not purport to be complete and is
qualified in its entirety by reference to the corporate statutes of the
British Virgin Islands and California and the respective corporate charters
and bylaws of Gemstar and StarSight.
SHAREHOLDER POWER TO CALL SHAREHOLDER MEETING
Under the CCC a special meeting of shareholders may be called by the board
of directors, the chairman of the board, the president, a holder of 10% or
more of the shares entitled to vote at the meeting, or any other person
authorized to do so in the corporation's articles of incorporation or bylaws.
Pursuant to the Articles of Association of Gemstar, upon the written request
of members holding 50% or more of the outstanding voting shares in the capital
of Gemstar, the directors must convene a meeting of members.
DISSOLUTION
Under the CCC shareholders holding a majority of the total voting power may
authorize the corporation's dissolution with or without the approval of the
corporation's board of directors, and this right may not be modified by the
articles of incorporation. Under British Virgin Islands law and Gemstar's
Memorandum and Articles of Association, members may, by a resolution of
members, commence to wind up and dissolve Gemstar. "Resolution of Members"
means (a) a resolution approved at a duly convened and constituted meeting of
the members of Gemstar by the affirmative vote of (i) a simple majority of the
votes of the shares which were present at the meeting and entitled to vote
thereon and were voted and not abstained, or (ii) simple majority of the votes
of each class or series of shares which were present at the meeting and
entitled to vote thereon as a class or series and were voted and not abstained
and of a simple majority of the votes of the remaining shares entitled to vote
thereon which were present at the meeting and were voted and not abstained; or
(b) a resolution consented to in writing by (i) an absolute majority of the
votes of shares entitled to vote thereon, or (ii) an absolute majority of the
votes of each class or series of shares entitled to vote thereon as a class or
series and of an absolute majority of the votes of the remaining shares
entitled to vote thereon.
SIZE OF BOARD OF DIRECTORS
The CCC permits the board of directors of a California corporation to change
the authorized number of directors by amendment to the corporation's bylaws or
in the manner provided in the bylaws unless the number of directors is fixed
in the corporation's articles of incorporation in which case a change in the
number of directors may be made only by amendment to the articles of
incorporation.
Under Gemstar's Articles of Association, the number of directors of Gemstar
may not be less than three nor more than fifteen. Directors may be elected by
the members or appointed by the directors to fill a vacancy or as an addition
to the existing directors.
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CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. This method of electing
directors makes changes in the composition of the board of directors more
difficult. California law permits certain qualifying corporations to provide
for a classified board of directors by adopting amendments to their articles
of incorporation or bylaws. Although StarSight qualifies to adopt a classified
board of directors, it has not done so. Each StarSight director stands for
election annually.
Gemstar, pursuant to British Virgin Island Law, has adopted a classified
board. Each year, one-third of Gemstar's directors stand for election, and
each director serves a three year term once elected.
REMOVAL OF DIRECTORS
Under the CCC, any director or the entire board of directors of a California
corporation may be removed with or without cause by a majority of the
outstanding shares entitled to vote. However, no individual director may be
removed (unless the entire board is removed) if the number of votes cast
against removal would be sufficient to elect the director under cumulative
voting.
Under British Virgin Islands law, directors may be removed, with cause, by a
resolution of the members of Gemstar or by a resolution of directors.
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
Under the CCC shareholders may execute an action by written consent in lieu
of a meeting of shareholders. The CCC permits a corporation to eliminate such
actions by written consent in its articles of incorporation.
Under British Virgin Islands law members may act by written consent without
a meeting by the consent of the holders of an absolute majority of the votes
of the outstanding shares entitled to vote on such matters, provided that
notice of any such action is subsequently furnished to all members. Certain
actions may be taken by resolution of the directors. Such actions include
amendments to Gemstar's Memorandum of Association and certain amendments to
its Articles of Association, an increase or reduction in Gemstar's authorized
capital and a change in Gemstar's name.
VOTING REQUIREMENTS
Unless otherwise specified in a California corporation's articles of
incorporation, an amendment to the articles of incorporation requires the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon. Furthermore, under the CCC, the holders of the outstanding shares of
a class are entitled to vote as a class upon any proposed amendment to the
articles of incorporation, whether or not entitled to vote thereon by the
provisions of the corporation's articles of incorporation if the amendment
would (i) increase or decrease the aggregate number of authorized shares of
such class, (ii) effect an exchange, reclassification or cancellation of all
or part of the shares of such class other than a stock split, (iii) effect and
exchange or create a right of exchange of all or part of the shares of another
class into the shares of such class, (iv) change the rights, preferences,
privileges or restrictions of the shares, (v) create a new class of shares
having rights, preferences or privileges prior to the shares of such class,
(vi) increase the rights, preferences or privileges or the number of
authorized shares of any class having rights, preferences or privileges prior
to the shares of such class.
Under the CCC, with certain exceptions, any merger, consolidation or sale of
all or substantially all of a California corporation's assets must be approved
by the corporation's board of directors and a majority vote of each class of
shares outstanding. California law also requires that holders of nonredeemable
common stock receive nonredeemable common stock in a merger of the corporation
with the holder of more than fifty percent (50%) but less than ninety percent
(90%) of the common stock or its affiliate unless all of the holders of the
common stock consent to the transaction.
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California law provides that, except in certain circumstances, when a tender
offer or a proposal for a reorganization or for a sale of assets is made by an
interested party (generally a controlling or managing person of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to the
shareholders. This fairness opinion requirement does not apply to a
corporation that has less than 100 shareholders, or to a transaction that has
qualified under California state securities laws. Furthermore, if a tender of
shares or vote is sought following a proposal by an interested party and a
later proposal is made by another party at least ten days before the
interested party's proposal is accepted, the shareholders must be informed of
the later offer and be afforded a reasonable opportunity to withdraw any vote,
consent or proxy, or to withdraw any tendered shares.
Under British Virgin Islands law and Gemstar's Articles of Association
resolutions may be adopted at members' meetings by the affirmative vote of a
simple majority of the votes of the shares which were present at the meeting
and entitled to vote thereon that are represented at the meeting and voted.
Every member who is present in person or by proxy at a meeting of Gemstar
shall have one vote for each share of Gemstar Ordinary Shares held by such
member. In addition, holders of preference shares have such voting rights, if
any, as determined by the board of directors at the time of the first issue of
such shares. Abstentions and broker non-votes will have no effect on the
results, although they will be counted for purposes of determining the
presence of a quorum for the conduct of business at the meetings of Gemstar
members.
RIGHTS OF DISSENTING SHAREHOLDERS
Generally, shareholders of a California corporation who dissent from a
merger or consolidation of the corporation for which a shareholders' vote is
required are entitled to appraisal rights, requiring the surviving corporation
to purchase the dissenting shares at fair value. Shareholders of a California
corporation whose shares are listed on a national securities exchange, or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System, generally do not have appraisal rights unless the
holders of at least five percent (5%) of the class of outstanding shares claim
the right or the corporation or any law restricts the transfer of the shares.
Appraisal rights are also unavailable if the shareholders or the corporation
itself, or both, immediately before the reorganization will own immediately
after the reorganization equity securities constituting more than five-sixths
of the voting power of the surviving or acquiring corporation or its parent
entity. California law general affords appraisal rights in sale of asset
reorganizations.
British Virgin Islands law provides for mergers or consolidations upon the
approval of the directors of the constituent companies and of the members
entitled to vote thereon. British Virgin Island law provides for compulsory
appraisal of the interests of a member who dissents from a merger of a company
(except where such company is the surviving company), or a consolidation,
sale, transfer, lease, exchange or other disposition of more than 50% of the
assets of a company (not made in the usual course of its business), or a
redemption of his shares (in certain circumstances following a merger), or, if
permitted by a court, in the case of an amendment to a company's memorandum of
association or articles of association, a reorganization, merger (where such
company is the surviving company), separation of businesses of a company,
certain sales, transfers, exchanges or other dispositions, or consolidation,
winding-up and dissolution or any combination of the above.
INSPECTION OF SHAREHOLDER LIST
California law allows any shareholder to inspect the shareholders list for a
purpose reasonably related to such person's interests as a shareholder and to
inspect a list of shareholders entitled to vote at a meeting within a ten day
period before a shareholders' meeting for any purpose germane to the meeting.
In addition, California law provides for an absolute right to inspect and copy
the corporation's shareholder list by individuals holding an aggregate of five
percent (5%) or more of a corporation's voting shares, or shareholders holding
an aggregate of one percent (1%) or more of these shares who have filed a
Schedule 14B with the Securities and Exchange Commission in connection with a
contested election of directors. The latter provision has not been amended in
response to the elimination of Schedule 14B under the revised proxy rules.
Under California law, absolute inspection rights also apply to a corporation
formed under the laws of any other state if its principal executive offices
are in California or it customarily holds meetings of its board in California.
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British Virgin Islands law provides that a member may for a proper request
in writing specifying the purpose to inspect the share register books records,
minutes and consents kept by a company and make extracts or copies thereof.
However, British Virgin Islands law also provides that a company such as
Gemstar may refuse such a request if the company determines by a resolution of
directors that it is not in the best interests of the company or its members
to comply with such request. Upon refusal by the company of the said request,
the member may before the expiration of a period of 90 days of his receiving
notice of the refusal, apply to a court for an order to allow inspection.
DIVIDENDS
California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. Subject to any
restriction contained in a corporation's articles of incorporation, the CCC
provides that a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares,
other than repurchases of shares issued under employee stock plans
contemplated by Section 408 of the CCC) unless either (a) the corporation's
retained earnings immediately before the proposed distribution equal or exceed
the amount of the proposed distribution, or (b) immediately after giving
effect to the distribution, the corporation's assets (excluding goodwill,
capitalized research and development expenses and deferred charges) would be
at least equal to its current liabilities (or 1.25 times its current
liabilities if the average pre-tax and pre-interest expense earnings for the
preceding two fiscal years were less than the average interest expense for
those years). These tests are applied to California corporations on a
consolidated basis.
Holders of Gemstar Ordinary Shares are entitled to participate in the
payment of dividends in proportion to their holdings. The Gemstar Board may
declare and pay dividends in respect of any accounting period out of the
surplus of Gemstar legally available for distribution.
BYLAWS
Under the CCC, the authority to adopt, amend, or repeal the bylaws of a
California corporation is held exclusively by the shareholders unless such
authority is conferred upon the board of directors in the corporation's
articles of incorporation or a bylaw approved by a majority of the outstanding
shares. The Articles of Incorporation of StarSight expressly grants to its
directors the power to make, alter, or repeal any bylaws. However, certain
bylaw amendments relating to the number of directors must be approved by the
shareholders. See "COMPARISON OF RIGHTS OF SHAREHOLDERS OF GEMSTAR AND
STARSIGHT--Size of Board of Directors."
Under British Virgin Island law, Gemstar's Memorandum of Association may be
amended and certain amendments of its Articles of Association may be made by
action taken by a resolution of the board of directors.
TRANSACTIONS INVOLVING OFFICERS OR DIRECTORS
Under California law, any loan or guaranty to or for the benefit of a
director or officer of the corporation or its parent requires approval of the
shareholders unless it is provided under a plan approved by shareholders
owning a majority of the outstanding shares of the corporation. However, under
the CCC, shareholders of a corporation with 100 or more shareholders of
record, such as StarSight, may approve a bylaw authorizing the board of
directors alone to approve loans or guaranties to or on behalf of officers
(whether or not the officers are directors) if the board determines that the
loan or guaranty may reasonably be expected to benefit the corporation.
Gemstar's Articles of Association provide that no agreement or transaction
between Gemstar and one or more of its directors of any Person (as defined in
Gemstar's Articles of Association) in which any director has a financial
interest or to whom any director is related including as a director of that
other Person is void or voidable for this reason only or by reason only that
the director is present at the meeting of directors or at the meeting of the
committee of directors which approves the agreement or transaction or that the
vote of consent of the director
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is counted for that purpose if the material facts of the interest of each
director in the agreement or transaction and his interest in or relationship
to any other party to the agreement or transaction are disclosed in good faith
or are known by the other directors. In addition, a director who has an
interest in any particular business to be considered at a meeting of directors
or members may be counted for purposes of determining whether the meeting is
duly constituted.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under the CCC, vacancies in the board of directors, other than those created
by the removal of a director, and newly created directorships may be filled by
the board of directors. If the number of directors is less than a quorum, a
vacancy may be filled by the unanimous written consent of the directors then
in office, by the affirmative vote of a majority of the directors at a duly
noticed meeting (or by waivers of notice) or by the sole remaining director. A
vacancy created by the removal of a director may be filled by the board of
directors only if so authorized by a corporation's articles of incorporation
or a bylaw approved by the corporation's shareholders.
Pursuant to the Articles of Association of Gemstar, the directors may at any
time appoint any individual to be a director either to fill a vacancy or as an
addition to the existing directors. A vacancy occurs through death,
resignation or removal of a director.
LIMITATION OF LIABILITY OF DIRECTORS
Under the CCC, a corporation may include in its articles of incorporation a
provision which would, subject to the limitations described below, eliminate
or limit directors liability for monetary damages for breaches of their
fiduciary duty of care. California law does not permit the elimination of
monetary liability where the liability is based on (a) intentional misconduct
or knowing and culpable violation of law, (b) acts or omissions that a
director believes to be contrary to the best interests of the corporation or
its shareholders, or that involve the absence of good faith on the part of the
director, (c) receipt of an improper personal benefit, (d) acts of omissions
that show reckless disregard for the director's duty to the corporation or its
shareholders, where the director in the ordinary course of performing his
duties should be aware of a risk of serious injury to the corporation or its
shareholders, (e) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders, (f) interested transactions between the
corporation and the director in which the director has a material financial
interest, and (g) liability for improper distributions, loans or guarantees.
The Articles of Incorporation of StarSight contain provisions limiting a
director's liability to the fullest content permitted by the CCC.
California law permits indemnification of expenses incurred in derivative or
third party actions, except that with respect to derivative actions (a) no
indemnification may be made when a person is adjudged liable to the
corporation in the performance of a duty to the corporation or its
shareholders, unless a court determines the person is entitled to indemnity
for expenses, and then such indemnification may be made only to the extent
that the court determines, and (b) no indemnification may be made without
court approval in respect of amounts paid or expenses incurred in settling or
otherwise disposing of a threatened or pending action, or amounts incurred in
defending a pending action that is settled or otherwise disposed of, without
court approval.
California law requires indemnification where the individual has
successfully defended the action on the merits. California law permits a
California corporation to make mandatory the permissive indemnification
provided by California law to the extent doing so is authorized in the
corporation's articles of incorporation. If so authorized, rights to this
additional indemnification may be provided by agreements or bylaw provisions.
Under California law, there are two limitations on such additional rights to
indemnification whereby (a) such indemnification is not permitted for acts,
omissions or transactions from which a director of a California corporation
may not be relieved of personal responsibility and (b) such indemnification is
not permitted in circumstances where California law expressly prohibits
indemnification.
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Under British Virgin Islands law, liability of a corporate director to the
corporation is limited to cases where the director has not acted honestly and
in good faith and with a view to the best interests of the company or to cases
where the director has not exercised the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. Under
Gemstar's Articles of Association, the Gemstar Board is authorized to
indemnify any person who is made or threatened to be made a party to a legal
or administrative proceeding by virtue of being a director, officer or
liquidator of the company, provided such person acted honestly and in good
faith and with a view to the best interests of the company and, in the case of
a criminal proceeding, such person had no reasonable cause to believe that his
conduct was unlawful. Gemstar's Articles of Association also obligate Gemstar
to indemnify any director, officer or liquidator of the company who was
successful in any of the aforementioned proceedings against expenses and
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceedings, regardless of whether such person met the
standard of conduct described in the preceding sentence.
While British Virgin Islands law does permit a member of a British Virgin
Islands company to sue its directors derivatively (i.e in the name of and for
the benefit of the company) and to sue the company and its directors for the
member's benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in
the rights of members of a British Virgin Islands company being more limited
than those of stockholders of a corporation organized in California.
BUSINESS COMBINATIONS/REORGANIZATIONS
Under British Virgin Islands law, directors of Gemstar have the power to
take certain actions without member approval, subject to the approval of a
court, including to implement a reorganization, certain mergers or
consolidations. certain sales, transfers, exchanges or dispositions of assets,
property, parts of the business or securities of the company, the winding-up
or dissolution of the company, or any combination thereof, if they determine
any such action is in the best interests of the company, its creditors or its
members.
SHAREHOLDER DERIVATIVE SUITS
Under the CCC a shareholder bringing a derivative action on behalf of the
corporation need not have been a shareholder at the time of the transaction in
question, provided that certain tests are met. California law also provides
that the corporation or the defendant in a derivative suit may make a motion
to the court for an order requiring the plaintiff to furnish a security bond.
While British Virgin Islands law does permit a member of a British Virgin
Islands company to sue its directors derivatively (i.e. in the name of and for
the benefit of company) and to sue the company and its directors for the
member's benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in
the rights of members of a British Virgin Islands company being more limited
than those of stockholders of a corporation organized in California.
COMPARISON OF U.S. AND
BRITISH VIRGIN ISLANDS CORPORATE LAWS
Gemstar is incorporated under the laws of the British Virgin Islands, and
its corporate affairs are governed by its Memorandum of Association and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. As noted in the following paragraphs, principles of
law relating to such matters as the fiduciary duties of Gemstar's management,
directors and controlling shareholders and the rights of Gemstar's
shareholders differ from those that would apply if Gemstar were incorporated
in a jurisdiction within the U.S. Further, the rights of shareholders under
British Virgin Islands law are not as clearly established as the rights of
shareholders under legislation or judicial precedent in existence in most U.S.
jurisdictions. Thus, the
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public shareholders of Gemstar may have more difficulty in protecting their
interests in the face of actions by the management, directors or controlling
shareholders than they might have as shareholders of a corporation
incorporated in a U.S. jurisdiction. In addition, there is doubt that the
courts of the British Virgin Islands would enforce, either in an original
action or in an action for enforcement of judgments of U.S. courts,
liabilities that are predicated upon the securities laws of the U.S.
Under the laws of many jurisdictions in the U.S., majority and controlling
shareholders generally have certain "fiduciary" responsibilities to the
minority shareholders. Shareholder action must be taken in good faith and
actions by controlling shareholders which are obviously unreasonable may be
declared null and void. British Virgin Islands law protecting the interests of
minority shareholders may not be as protective as the law protecting minority
shareholders in U.S. jurisdictions in circumstances in which shareholder
action is not taken in good faith and when actions by controlling shareholders
are unreasonable.
While British Virgin Islands law does permit a member of a British Virgin
Islands company to sue its directors derivatively (i.e., in the name of and
for the benefit of the company) and to sue the company and its directors for
the member's benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in
the rights of members of a British Virgin Islands company being more limited
than those of shareholders of a corporation organized in the U.S. For example,
in some U.S. jurisdictions, a shareholder who desires to bring a derivative
action on behalf of a corporation need not necessarily have been a shareholder
at the time of the transaction in question if certain tests are met.
As noted above under "DESCRIPTION OF GEMSTAR CAPITAL STOCK," Gemstar may
amend its Memorandum of Association and its Articles of Association by a
resolution of shareholders or by a resolution of directors; provided, however,
that certain provisions in the Articles of Association relating to the
election of directors may be amended only by the shareholders upon an
affirmative vote of not less than 75 percent of the outstanding shares
entitled to vote thereon. Accordingly, directors of Gemstar have the power to
amend most of the provisions of the Articles of Association and to take many
actions without shareholder approval. For example, Gemstar directors may amend
Gemstar's Memorandum of Association to increase or reduce Gemstar's authorized
capital, an action which would typically require shareholder approval under
the laws of most U.S. jurisdictions. In addition, as a British Virgin Islands
company, the directors of Gemstar, subject to court approval but without
shareholder approval (unless the court requires shareholder approval), may,
among other things, implement a reorganization; certain mergers or
consolidations; certain sales, transfers, exchanges or dispositions of assets,
property, parts of the business or securities of the company; the winding-up
or dissolution of the company, or any combination thereof, if they determine
any such action is in the best interests of the company, its creditors, or its
shareholders.
British Virgin Islands law protecting the interests of shareholders with
respect to actions taken by directors may not be as protective in all
circumstances as the law protecting shareholders in U.S. jurisdictions. As in
most U.S. jurisdictions, the board of directors of a British Virgin Islands
corporation is charged with the management of the affairs of the corporation.
Under British Virgin Islands law, liability of a corporate director to the
company is limited to cases where the director has not acted honestly and in
good faith and with a view to the best interests of the company or to cases
where the director has not exercised the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. In most
U.S. jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a
duty of loyalty, pursuant to which they must protect the interests of the
corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any
profit or advantage. Many U.S. jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated
or limited.
The laws of certain U.S. jurisdictions permit indemnification of expenses
incurred in derivative or third- party actions, except that with respect to
derivative actions (a) no indemnification may be made when a person is
adjudged liable to the corporation in the performance of a duty to the
corporation or its shareholders, unless a
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court determines the person is entitled to indemnity for expenses, and then
such indemnification may be made only to the extent that the court determines,
and (b) no indemnification may be made without court approval in respect of
amounts paid or expenses incurred in settling or otherwise disposing of a
threatened or pending action, or amounts incurred in defending a pending
action that is settled or otherwise disposed of, without court approval.
Certain U.S. laws require indemnification where the individual has
successfully defended the action on the merits. Under its Articles of
Association, Gemstar is authorized to indemnify any person who is made or
threatened to be made a party to a legal or administrative proceeding by
virtue of being a director, officer or liquidator of Gemstar, provided such
person acted honestly and in good faith and with a view to the best interests
of Gemstar and, in the case of a criminal proceeding, such person had no
reasonable cause to believe that his conduct was unlawful. Gemstar's Articles
of Association also obligate Gemstar to indemnify any director, officer or
liquidator of Gemstar who was successful in any proceeding against expenses
and judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding, regardless of whether such person met the
standard of conduct described in the preceding sentence.
The foregoing description of material differences between British Virgin
Islands and U.S. corporate laws is only a summary and does not purport to be
complete or to address every applicable aspect of such laws. See
"ENFORCEABILITY OF CIVIL LIABILITIES."
For a description of laws or regulations affecting dividends and other
payments in respect of the Gemstar Ordinary Shares, see "BRITISH VIRGIN
ISLANDS TAXATION" and "EXCHANGE CONTROLS."
PROPOSAL TO APPROVE AN AMENDMENT TO
GEMSTAR'S STOCK INCENTIVE PLAN
Gemstar's Stock Incentive Plan, as amended, was adopted by the Gemstar Board
in 1994, revised in 1995 in connection with Gemstar's initial public offering
and further revised in 1996 (subject to shareholder approval) principally to
enable the assumption of options (and their conversion) in the Merger.
Shareholders previously approved the Stock Incentive Plan and the 1995
amendment. The Stock Incentive Plan authorized 5,600,000 Gemstar Ordinary
Shares for issuance; as of December 23, 1996, 637,833 Gemstar Ordinary Shares
remained available for issuance under the Plan, with no additional shares
available because of expiration or termination of options outstanding on that
date.
On December 22, 1996, the Gemstar Board approved, subject to shareholder
approval, an amendment to the Stock Incentive Plan which would increase the
number of shares reserved for issuance under the Stock Incentive Plan by
3,500,000 Gemstar Ordinary Shares. At the Gemstar Annual Meeting, the Gemstar
shareholders will be requested to approve the amendment.
The Gemstar Board believes that it is in Gemstar's best interest to increase
the number of shares reserved for issuance under the Stock Incentive Plan in
order to provide for sufficient shares to accommodate the assumption of the
StarSight Stock Options in accordance with the terms of the Merger Agreement,
if the Merger Agreement and Merger are approved. If the Merger Agreement is
approved and adopted, each StarSight Stock Option outstanding immediately
prior to the Effective Time under the Stock Option Plan which has not been
exercised in accordance with its terms, will be assumed by Gemstar on a
converted basis so that each Stock Option will be deemed to constitute an
option to acquire, on substantially the same terms and conditions as were
applicable under the StarSight Stock Option, the number, rounded down to the
nearer whole integer, of full shares of Gemstar Ordinary Shares that the
holder of the StarSight Stock Option would have been entitled to receive
pursuant to the Merger had the holder exercised the StarSight Stock Option in
full, including unvested shares, immediately prior to the Effective Time, at a
price per share equal to (y) the exercise price per share for the shares of
StarSight Common Stock otherwise purchasable pursuant to such Stock Option
divided by (z) the Exchange Ratio, with such exercise price per share rounded
up to the nearer whole cent. Accordingly, assuming
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that the consummation of the Merger and the conversion of all of the StarSight
Stock Options under the Stock Option Plan as of December 23, 1996 are
converted in the Merger, Gemstar will need approximately 1,394,000 additional
shares of Gemstar Ordinary Shares for issuance under the Stock Incentive Plan
to accommodate the assumption of the StarSight Stock Options.
The Gemstar Board also believes that the additional shares, approximately
2,106,000 shares, authorized by the amendment are advisable in order that
Gemstar may continue to provide incentives to its key employees and other
eligible person through the opportunity to purchase Gemstar Ordinary Shares
under the Stock Incentive Plan. The Gemstar Board believes that in order to
attract and incentivize these persons to exert maximum efforts for the success
of Gemstar, it is necessary to continue to grant rights to purchase Gemstar
Ordinary Shares to them. Accordingly, the Gemstar Board recommends that the
Gemstar shareholders ratify and approve the Stock Incentive Plan amendment.
If the Merger is not consummated but the Gemstar shareholders have approved
the Stock Incentive Plan Amendment, the Gemstar Board will make all necessary
amendments to the Stock Incentive Plan to reflect an increase in the number of
Gemstar Ordinary Shares available under the Stock Incentive Plan by 2,000,000
shares only. If the Merger Agreement and the Merger are approved by Gemstar
shareholders but the Stock Incentive Plan Proposal is not, approval of the
Merger Agreement and the Merger will be deemed to constitute approval of the
assumption by Gemstar of the outstanding Stock Options under the StarSight
Stock Option Plan as of the Effective Time of the Merger. This assumption
would be on a basis reflecting a conversion of the Stock Options in the Merger
into options to purchase Gemstar Ordinary Shares, with appropriate adjustments
to the number of shares and the exercise price of the Stock Options as
provided in the Merger Agreement. The Stock Options, in these circumstances,
would not be issued under the Stock Incentive Plan. Further, if the Stock
Incentive Plan Proposal is not approved by the Gemstar shareholders, certain
options that are to be granted under the Stock Incentive Plan to certain
StarSight executives upon the Effective Time of the Merger as provided for in
their employment agreements will be granted outside of the Stock Incentive
Plan.
SUMMARY OF THE STOCK INCENTIVE PLAN
The provisions of the Stock Incentive Plan, as amended by the Stock
Incentive Plan Proposal, are summarized below. This Summary is qualified in
its entirety by reference to the complete text of the amended Stock Incentive
Plan, and uses terms defined in the Plan. A copy of the Plan is available from
Gemstar on request to Larry Goldberg, Corporate Secretary, at the address set
forth on the cover page.
Gemstar established the Stock Incentive Plan to attract, reward and retain
personnel and to provide long-term incentives to those key employees
(including executive officers and directors of Gemstar and its subsidiaries)
and certain other eligible persons, including non-employee directors, and
certain consultants, advisors and agents who render or have rendered bona fide
services to Gemstar or a subsidiary (collectively, with key employees,
"Eligible Persons"). Approximately 200 persons are considered eligible under
the Stock Incentive Plan. Each employee of StarSight, approximately 120
persons, holds StarSight Stock Options that will be converted as a result of
the Merger. The Stock Incentive Plan provides that no award will be granted
thereunder if such award would cause Gemstar to be (i) a controlled foreign
corporation within the meaning of Section 957 of the Code, (ii) a foreign
personal holding company within the meaning of Section 552 of the Code or
(iii) a personal holding company within the meaning of Section 542 of Gemstar.
The Stock Incentive Plan will be administered by Gemstar's Compensation
Committee. The Compensation Committee is empowered to grant options to
purchase Gemstar Ordinary Shares ("Options") to any Eligible Person, interpret
the Stock Incentive Plan and make other determinations thereunder. Because
Gemstar has been a foreign private issuer (as defined under the Exchange Act),
all Eligible Persons have been exempt from the provisions of Section 16 of the
Exchange Act. Because Gemstar will no longer qualify as a foreign private
issuer if the Merger Agreement is approved and the Merger consummated, the
Compensation Committee may be reconstituted to satisfy certain Rule 16b-3
requirements for Compensation Committee administration of the Stock Incentive
Plan or may be administered by the Board in the case of executive officers or
directors, in order to secure the benefits of exemptions from Section 16b
liability under the Exchange Act.
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Stock Options
Under the Stock Incentive Plan, an Option represents the right to purchase
Ordinary Shares at a future date at a specified price ("Option Price"). The
Option Price is generally the closing price for one Gemstar Ordinary Share
reported on The Nasdaq National Market ("fair market value") on the date of
grant, but may be a greater or lesser amount as determined by the Compensation
Committee. Typically, the only consideration received by Gemstar for the grant
of an Option under the Stock Incentive Plan will be the rendering of services
by the optionee to or for the benefit of Gemstar. In the context of the
Merger, the consideration for the StarSight holders will include the StarSight
Stock Options which are to be assumed and converted and for which the Gemstar
options will be substituted in the Merger.
An Option may either be an incentive stock option ("ISO"), as defined in the
Code, or a nonqualified stock option. An ISO may not be granted to a person
who owns more than 10% of the voting power of all classes of shares of Gemstar
unless the Option price is at least 110% of the fair market value of the
Gemstar Ordinary Shares on the date of grant and the Option by its terms is
not exercisable more than five years after the date of grant. The aggregate
fair market value of Gemstar Ordinary Shares (determined at the time the
Option is granted) for which ISOs may be first exercisable by an Option holder
during any calendar year under the Stock Incentive Plan may not exceed
$100,000. A nonqualified stock option is not subject to any of these
limitations. Gemstar has not granted any ISOs to date.
Full payment for shares purchased on the exercise of any Option must be made
at the time of such exercise in cash, in exchange for a promissory note by the
Option holder in favor of Gemstar, by notice and third-party payment, in
Gemstar Ordinary Shares having a fair market value equal to the Option price,
or any combination of cash, promissory notes, third-party payments and shares.
In addition, Option holders may be permitted to reduce the number of shares to
be delivered, to deliver already owned Gemstar Ordinary Shares (subject to
certain holding periods) or to obtain loans from Gemstar in order to satisfy
applicable tax withholding requirements.
The Compensation Committee and the Gemstar Board have broad discretion under
the Stock Incentive Plan to grant and (with the concurrence of the Option
holder) amend Options and to structure their terms.
Transferability
Options are not transferable by a holder other than by will or the laws of
descent and distribution or as may be permitted in award agreements as
approved by the Compensation Committee or the Gemstar Board (subject to
applicable securities laws), and awards are exercisable, during the optionee's
lifetime, only by the holder or (in case of disability) his or her personal
representatives; provided, however, as to all of the foregoing, that the
Compensation Committee may establish exceptions to limits on transfer and
exercise, subject to such conditions and procedures as it may impose, to the
extent permitted by law and other provisions of the Stock Incentive Plan.
Gemstar Ordinary Shares Issuable Upon the Exercise of Options Granted Under
the Stock Incentive Plan
If the Stock Incentive Plan Proposal is approved by Gemstar shareholders, a
maximum of 9,100,000 Gemstar Ordinary Shares may be issued upon the exercise
of Options. Shares relating to Options which are not exercised or which expire
or are cancelled will again become available for grant purposes under the
Stock Incentive Plan to the extent permitted by law. The 9,100,000 maximum
number of shares available under the Stock Incentive Plan represents
approximately 19% of Gemstar Ordinary Shares issued and outstanding and
eligible to vote after the Merger. The maximum number of Gemstar Ordinary
Shares that may be delivered pursuant to Options granted during any one-year
term to any individual Eligible Person under the Stock Incentive Plan may not
exceed 3,000,000 shares, subject to certain adjustments.
The number and kind of securities available under the Stock Incentive Plan
are subject to adjustment in the event of recapitalizations, stock splits,
stock dividends, distributions, certain reorganizations, or similar
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extraordinary transactions or events (including a Change in Control Event (as
defined in the Stock Incentive Plan)) in respect of Gemstar or Gemstar
Ordinary Shares. These adjustments, particularly in the case of
reorganizations, may include cash settlement, conversion or exchange of
outstanding Options, adjustments to the exercise prices of outstanding Options
or changes in the securities, cash or other property deliverable upon exercise
of outstanding Options. A Change of Control Event will be deemed to occur
under the Stock Incentive Plan if, among other things: (i) the shareholders of
Gemstar approve of (a) a dissolution or liquidation of Gemstar, (b) certain
agreements of merger or consolidation resulting in Gemstar's shareholders, or
entities associated or affiliated with them, holding less than 50% of the
voting stock of the surviving entity, or (c) the sale of substantially all the
assets of Gemstar to a person who is not an affiliated person of Gemstar; (ii)
during any period not longer than two consecutive years, the individuals who
at the beginning of the period constituted members of the Gemstar Board cease
to constitute at least a majority thereof, unless each new Gemstar Board
member was approved by a three-fourths vote of Gemstar Board members then
still in office who were Gemstar Board members at the beginning of such
period; or (iii) any person (other than any person who beneficially owned more
than 50% of Gemstar's outstanding voting securities at the time the Stock
Incentive Plan was adopted, or any successor, affiliate, associate or relative
of such beneficial owner) becomes the beneficial owner of Gemstar securities
representing 50% or more of the combined voting power of Gemstar's outstanding
securities.
Grants of Options
In addition to the Options to be granted in the Merger in accordance with
the Merger Agreement, on December 22, 1996, Gemstar's Board agreed to grant,
upon the Effective Time, an Option to purchase 100,000 shares of Gemstar
Ordinary Shares to Mr. Klosterman (the "Klosterman Option") and an Option to
purchase 11,000 shares of Gemstar Ordinary Shares to Mr. Scharninghausen, (the
"Scharninghausen Option"), each with an exercise price equal to the fair
market value of Gemstar Ordinary Shares at the Effective Time. See "THE PLAN
OF MERGER--Interests of Certain Persons in the Merger." The Klosterman Option,
the Scharninghausen Option and the other Options to be granted in the Merger
become exercisable as to 1/48th of the shares subject to the Option each
month, provided that the Option may not be exercised for one year following
the Effective Time. All of these Options are 10-year Options, subject to
earlier Termination in certain events. Gemstar has not determined how the
remaining Options that are the subject of the Stock Incentive Plan Proposal
will be allocated. The closing price of a share of Gemstar Ordinary Shares on
The Nasdaq National Market on Wednesday, January 15, 1997 was $17.37.
On January 22, 1996, the Compensation Committee granted additional Options
under the Stock Incentive Plan to one non-executive employee to acquire 10,000
Gemstar Ordinary Shares. The Options vest in annual, one-third installments
over a three-year period and are exercisable at a price of $19.98 per Gemstar
Ordinary Share.
On August 16, 1995, the Gemstar Board granted 10-year Options relating to
4,485,500 Ordinary Shares to 12 Eligible Persons under the Stock Incentive
Plan.
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The table below sets forth, with respect to Gemstar's directors and
executive officers, the difference between the market price and exercise price
as of December 20, 1996, of the Options granted under the Stock Incentive Plan
as of December 20, 1996 and the number of Gemstar Ordinary Shares subject to
such Options. The exercise price per share for the 1995 Options was $11.90 per
Gemstar Ordinary Share. Other than the options shown as granted to StarSight
officers and employees, the options in the following table were granted under
the Stock Incentive Plan as previously approved by the Gemstar shareholders.
The options shown as granted to StarSight officers and employees were granted
under the StarSight Stock Option Plan. Therefore, approval of the Stock
Incentive Plan Proposal will not ratify any of the grants of options listed in
the following table:
PLAN BENEFITS TO GEMSTAR OFFICERS AND DIRECTORS
AS OF DECEMBER 23, 1996(1)
<TABLE>
<CAPTION>
VALUE(2) OF
UNEXERCISED
GEMSTAR NUMBER OF
OPTIONS AT GEMSTAR
DECEMBER 20, OUTSTANDING
NAME AND POSITION 1996 OPTIONS
----------------- ------------ -----------
<S> <C> <C>
Thomas L. H. Lau
Chairman............................................. $1,230,500 230,000
Henry C. Yuen
Chief Executive Officer.............................. 13,910,000 2,600,000
Daniel S. W. Kwoh
Senior Vice President--Technology.................... 615,250 115,000
Wilson K. C. Cho
Senior Vice President--Engineering and Operations.... 615,250 115,000
Elsie Ma Leung
Chief Financial Officer.............................. 2,193,500 410,000
Roy J. Mankovitz
Assistant Secretary, Corporate Counsel--Intellectual
Property............................................. 1,992,875 372,500
Larry Goldberg
Secretary and Corporate Counsel...................... 1,992,875 372,500
George F. Carrier
Director............................................. 32,100 6,000
Teruyuki Toyama
Director............................................. 32,100 6,000
Executive Group (6 persons)........................... 21,319,750 3,985,000
Non-Executive Director Group (3 persons).............. 1,294,700 242,000
Non-Executive Officer Employee Group (3 persons)...... 1,382,975 258,500
StarSight Officers & Employees (3).................... 8,543,273 1,428,641
</TABLE>
- --------
(1) The Options granted under the Stock Incentive Plan expire on the tenth
anniversary of their award date. The option agreements pursuant to which
the initial Options were granted include different vesting and post-
employment termination schedules.
(2) The reported value of each Option is based solely on the difference
between the price of each Gemstar Ordinary Share at the close of market on
December 20, 1996 ($17.25) and the exercise price per share for each such
option. The value of the Options, as such, and benefits or amounts that
will ultimately be realized by such persons are not readily determinable.
The holders of the Options are eligible for additional grants under the
Stock Incentive Plan.
(3) The reported value estimates the pro forma value of the StarSight Stock
Options on an as converted basis and is based solely on the difference
between the price of each Gemstar Ordinary Share at the close of market on
December 20, 1996 ($17.25) and the weighted average adjusted exercise
price per share for the converted options as of December 20, 1996
($11.27).
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Subject to early termination or acceleration provisions, an Option generally
will be exercisable, in whole or in part, from the date specified in the
related award agreement until the expiration date determined by the
Compensation Committee. In no event, however, is an Option exercisable prior
to six months, or more than ten years, after its date of grant.
Termination of Employment
The Compensation Committee retains the right to establish the effect of a
termination of employment on the rights and benefits under each Option granted
to an Eligible Person, and the Compensation Committee may make distinctions
among such treatments based upon the cause of termination.
Acceleration of Options
Upon the occurrence of a Change in Control Event, the Compensation
Committee, in its discretion, may provide for acceleration of exercisability
or for certain other limited benefits under some or all Options and may
determine the extent and duration of such rights.
If any fully vested or fully accelerated Option is not exercised prior to
(i) a dissolution of Gemstar, (ii) a reorganization or other transaction in
which Gemstar does not survive or (iii) the consummation of a reorganization
that results in a change of control of Gemstar approved by the Gemstar Board,
and no provision has been made for the survival, substitution or exchange of
such Option, the Option will terminate upon the occurrence of the dissolution
or reorganization.
Termination of or Changes to the Stock Incentive Plan
The Gemstar Board may terminate or amend the Stock Incentive Plan. If an
amendment would (i) materially increase the benefits accruing to Eligible
Persons under the Stock Incentive Plan, (ii) materially increase the aggregate
number of shares which may be issued under the Stock Incentive Plan, or (iii)
materially modify the requirements as to eligibility for participation under
the Stock Incentive Plan, the amendment must be approved, to the extent deemed
necessary by the Gemstar Board or the Compensation Committee or then required
by applicable law, by Gemstar's shareholders. Unless previously terminated by
the Gemstar Board, the Stock Incentive Plan will terminate in August 2004.
Federal Income Tax Consequences
The following is a general description of Federal income tax consequences to
participants and Gemstar relating to nonqualified stock options and ISOs and
certain other awards that may be granted under the Stock Incentive Plan. This
discussion does not purport to cover all tax consequences relating to stock
options and other awards.
An optionee will not recognize income upon the grant of a nonqualified stock
option but upon its exercise will recognize ordinary compensation income equal
to the excess of the fair market value of the Gemstar Ordinary Shares on the
date of exercise over the exercise price for the shares. The tax basis of the
Option shares in the hands of the optionee will equal the exercise price plus
the amount of income recognized upon exercise, and the holding period will
commence on that date. An optionee who sells Option shares will recognize
capital gain or loss measured by the difference between the tax basis of the
shares and the amount realized on the sale. Gemstar or a subsidiary will be
entitled to a deduction equal to the amount of ordinary compensation income
recognized by the optionee at the time of exercise.
An optionee will not recognize income upon the grant or exercise of an ISO
to purchase Gemstar Ordinary Shares. (Alternative minimum tax consequences are
beyond the scope of this summary.) If an optionee sells the shares acquired
upon exercise of an ISO more than two years after the grant date and more than
one year after exercise, long-term capital gain or loss will be recognized
equal to the difference between the sales price and the
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<PAGE>
exercise price. If the optionee sells the shares within two years after the
grant date or within one year after exercise, the optionee will recognize
ordinary compensation income in an amount equal to the lesser of the
difference between (i) the exercise price and the fair market value of such
shares on the date of exercise or (ii) the exercise price and the sales
proceeds. Any remaining gain or loss will be treated as a capital gain or
loss. Generally speaking, Gemstar or a subsidiary will be entitled to a
deduction equal to the amount of ordinary compensation income recognized by
the optionee at the same time the optionee recognizes the income.
If, as a result of a Change in Control Event, an Eligible Person's Options
or other rights become immediately exercisable, or cash, shares or other
benefits covered by another type of award are immediately vested or issued,
the additional economic value attributable to the acceleration or issuance may
be deemed a "parachute payment" under Section 280G of the Code. In such case,
the Eligible Person may be subject to a 20% non-deductible excise tax as to
all or a portion of such economic value, in addition to any income tax
payable. Gemstar will not be entitled to a deduction for that portion of any
parachute payment that is subject to the excise tax.
Notwithstanding the foregoing discussion with respect to the deductibility
of option-related compensation, under the Stock Incentive Plan, Section 162(m)
of the Code renders non-deductible to a publicly-held corporation certain
compensation in excess of $1,000,000 paid in any year to certain of its
executive officers unless the excess compensation is "performance-based" (as
defined) or is otherwise exempt from Section 162(m). Gemstar believes the
Options granted to date are not subject to these limits. However, Options and
certain (but not all) other types of awards that Gemstar may grant to
executive officers under the Stock Incentive Plan may not qualify for the
exemption from Section 162(m) for performance-based compensation. No
assurances can be given that all future compensation paid under the Stock
Incentive Plan to any executive officer (including compensation in respect of
the Options granted in August 1995) will in fact be deductible if it should,
together with other non-exempt compensation paid to such executive officer,
exceed $1,000,000.
Non-Exclusivity
The Stock Incentive Plan does not limit the authority of the Gemstar Board
to authorize other compensation under any other plan or authority. The
shareholder approval of the Stock Incentive Plan Proposal will not, however,
constitute advance approval of any such other compensation.
Recommendation of Gemstar's Board of Directors
The Gemstar Board has approved unanimously the Stock Incentive Plan Proposal
and believes that it is in the best interests of Gemstar and its shareholders
and therefore recommends that holders of Gemstar Ordinary Shares vote FOR
approval and adoption of the Stock Incentive Plan Proposal.
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ELECTION OF GEMSTAR CLASS II DIRECTORS
Gemstar's Amended and Restated Articles of Association provide that the
Gemstar Board shall consist of at least three but not more than 15 persons.
Currently there are seven directors. The directors are divided into three
classes, as nearly equal as possible, and each class has a staggered three
year term. The terms of office of directors in Class I, Class II and Class III
end following the annual meetings in 1999, 1997 and 1998, respectively. At the
Gemstar Annual Meeting, shareholders will elect two Class II directors to hold
office until the 2000 Annual Meeting, subject to the provisions of Gemstar's
Amended and Restated Articles of Association. The Gemstar Board has
recommended two nominees for election as directors of Gemstar. Persons are
elected directors by a simple majority of the shareholders present and voting.
For the purpose of electing directors, each shareholder is entitled to one
vote for each Gemstar Ordinary Share held.
The accompanying proxy solicited by the Gemstar Board will be voted for the
election of the two nominees named below, unless the proxy card is marked to
withhold authority to vote. Each nominee is presently a member of the Gemstar
Board and was previously elected to the present term of office by the
shareholders of Gemstar.
The nominees for election are:
DR. GEORGE F. CARRIER
TERUYUKI TOYAMA
If any of the nominees should become unavailable for election to the Gemstar
Board, the persons named in the proxy or their substitutes shall be entitled
to vote for a substitute to be designated by the Gemstar Board. The Gemstar
Board has no reason to believe that it will be necessary to designate a
substitute nominee.
INFORMATION REGARDING THE GEMSTAR BOARD
Set forth below is information regarding each nominee to serve on the
Gemstar Board. The ages shown below are as of April 11, 1997.
<TABLE>
<C> <C> <S>
Dr. George F. Carrier 78 Consultant and Director
Teruyuki Toyama 66 Director
</TABLE>
Dr. George F. Carrier was appointed a director of Gemstar in August 1994. He
served on the faculty of Harvard University from 1952 until he retired in
1988. While at Harvard, he served as Gordon McKay Professor of Mechanical
Engineering and T. Jefferson Coolidge, Professor of Applied Mathematics. Since
1988, Dr. Carrier has served as a private consultant to TRW Inc.'s Aerospace
and Automotive Divisions and has provided research support to the National
Science Foundation. Dr. Carrier holds a B.S. (Mechanical Engineering) from
Cornell University and a Ph.D. (Applied Mechanics) from Cornell University.
Mr. Teruyuki Toyama was appointed a director of Gemstar in August 1994.
Since 1993, Mr. Toyama has been the President and Chief Executive Officer of
Overseas Courier Services Co., Ltd. Prior to that, Mr. Toyama worked for over
40 years in various capacities with Asahi Shimbun. From 1991 to 1993, he was
Senior Managing Director and Chief Operating Officer of Asahi Shimbun. From
1987 to 1991, he was Managing Director in charge of Advertising. Prior to 1987
he served as Director of the Advertising Division and as a Board Director. Mr.
Toyama holds a degree in Foreign Studies from Tokyo University.
INFORMATION REGARDING GEMSTAR'S COMPENSATION OF DIRECTORS AND OFFICERS
Each of Gemstar's executive officers entered into multiple year employment
agreements with Gemstar effective April 1, 1994. Such agreements provide for
increases in base salary as well as formula bonuses. For fiscal 1997, the
aggregate remuneration paid or accrued by Gemstar and its subsidiaries to all
directors and officers of Gemstar as a group (9 persons) for services in all
capacities was approximately $5 million.
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Each director of Gemstar who is not an employee of Gemstar is paid $25,000
per year for services as a director of Gemstar and $1,000 per Board or
Committee meeting attended. All directors are reimbursed for their out-of-
pocket expenses incurred in connection with attendance at meetings of, and
other activities relating to service on, the Gemstar Board or any committee
thereof. In addition, directors who are not full-time employees are eligible
to participate in, and each director has received awards pursuant to, the
Company's 1994 Stock Incentive Plan. The two nominees of the Gemstar Board are
not employees of Gemstar.
RATIFICATION OF GEMSTAR'S INDEPENDENT AUDITORS
The selection of the independent auditors for the year ended March 31, 1998
is being submitted to the Gemstar shareholders for ratification. The Gemstar
Board has appointed KPMG Peat Marwick LLP to serve as Gemstar's independent
auditors for the year ended March 31, 1998, subject to ratification by the
holders of a majority of the Gemstar Ordinary Shares represented at the
Gemstar Annual Meeting.
BRITISH VIRGIN ISLANDS TAXATION
Under the laws of the British Virgin Islands as currently in effect, a
holder of Gemstar Ordinary Shares who is not a resident of the British Virgin
Islands is (i) exempt from British Virgin Islands income tax on dividends paid
with respect to the Gemstar Ordinary Shares and (ii) is not liable for British
Virgin Islands income tax on gains realized on sale or disposition of such
Gemstar Ordinary Shares. In addition, the British Virgin Islands does not
impose a withholding tax on dividends paid by Gemstar. A company incorporated
under the International Business Companies Ordinance (Cap. 291), as amended,
is deemed not to be a resident for this purpose.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands. In addition, the Gemstar Ordinary Shares are not subject to
any transfer taxes, stamp duties or similar charges. There is no income tax
treaty or convention currently in effect between the U.S. and the British
Virgin Islands.
EXCHANGE CONTROLS
There are currently no exchange control restrictions on remittances of
dividends on the Gemstar Ordinary Shares or on the conduct of Gemstar's
operations in the British Virgin Islands, where it is incorporated.
LEGAL MATTERS
The validity of the Gemstar Ordinary Shares offered hereby and certain
British Virgin Islands tax matters will be passed upon for Gemstar by Harney,
Westwood & Riegels, British Virgin Islands. Certain other legal matters
(including certain tax matters) will be passed upon for Gemstar by O'Melveny &
Myers LLP. Certain legal matters in connection with the Merger will be passed
upon for StarSight by Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
EXPERTS
The consolidated financial statements and supplemental consolidated
financial statements of Gemstar as of March 31, 1995 and 1996 and for each of
the years in the three-year period ended March 31, 1996, have been included in
the appendices hereto in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, included in such appendices, and
upon the authority of said firm as experts in accounting and auditing.
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The financial statements of VideoGuide as of December 31, 1994 and 1995 and
June 30, 1996, and for the period from September 8, 1993 (date of inception)
through December 31, 1993, the years ended December 31, 1994 and 1995 and the
six month period ended June 30, 1996, have been included in the appendices
hereto in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, included in such appendices, and upon the
authority of said firms as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of
VideoGuide as of December 31, 1994 and 1995 and June 30, 1996 contains an
explanatory paragraph that states that VideoGuide's recurring losses from
operations and net capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
The balance sheets of StarSight Telecast, Inc. as of December 31, 1996 and
1995 and the related statements of operations, shareholders' equity and 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 included in
this Joint Proxy Statement/Prospectus from StarSight Telecast, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1996, which is included in
the appendices hereto, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is included in such appendices
(which report expresses an unqualified opinion 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), and
have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
FORWARD LOOKING STATEMENTS
Gemstar and StarSight believe that information set forth in this Joint Proxy
Statement/Prospectus under the captions "RISK FACTORS," and "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION" contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act,
and Section 21E of the Exchange Act, which statements represent Gemstar's and
StarSight's reasonable judgments concerning the future and are subject to
risks and uncertainties that could cause Gemstar's and StarSight's actual
operating results and financial position to differ materially. Such forward
looking statements include the following: Gemstar's belief that its revenues
and operating results will be affected by the timing of market introductions
and market acceptance of new systems such as Index Plus+ and Guide Plus+;
Gemstar's belief that the large and growing installed base of VCR Plus+
represents an important platform from which to launch related technologies and
services; Gemstar's belief that Guide Plus+ has a number of unique features
that distinguish it from other existing or announced interactive guides;
Gemstar's intention to pursue a licensing strategy for Guide Plus+ similar to
VCR Plus+ with license fees based on units shipped that incorporate the Guide
Plus+ technology; Gemstar's belief that its technologies may enable it to
create additional value-added services for broadcasters and consumers;
StarSight's belief that the revenues and operating results will be affected by
the market acceptance of the StarSight EPG; and StarSight's belief that it
will continue to incur substantial losses and negative cash flow from
operations.
Gemstar and StarSight caution that the above statements are further
qualified by important factors that could cause Gemstar's and StarSight's
actual operating results to differ materially from those in the forward
looking statements. Such factors include, without limitation, those set forth
in this Joint Proxy Statement/Prospectus under "RISK FACTORS" and the
following: difficulties encountered in the integration of the operations of
Gemstar and StarSight; financial losses that StarSight has experienced since
it commenced doing business; the amount of StarSight's liabilities and its
financial condition; the risk that the public market price of Gemstar's
Ordinary Shares might be adversely affected by the Merger; inability to
maintain adequate liability insurance to cover legal claims; dependence on key
personnel; and possible volatility of the stock price. See "RISK FACTORS."
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APPENDICES
FOR THE
GEMSTAR INTERNATIONAL GROUP LIMITED
JOINT PROXY STATEMENT/PROSPECTUS
AND THE
STARSIGHT TELECAST, INC.
JOINT PROXY STATEMENT
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED ("GEMSTAR")
AND
STARSIGHT TELECAST, INC. ("STARSIGHT")
TABLE OF APPENDICES
-------------------
<TABLE>
<S> <C>
APPENDIX A AGREEMENT AND PLAN OF MERGER
APPENDIX B OPINION OF HAMBRECHT & QUIST
APPENDIX C OPINION OF SMITH BARNEY INC.
APPENDIX D STARSIGHT SIGNIFICANT SHAREHOLDER AGREEMENT
APPENDIX E GEMSTAR SIGNIFICANT SHAREHOLDER AGREEMENT
APPENDIX F COMPANY OPTION AGREEMENT
APPENDIX G PARENT OPTION AGREEMENT
APPENDIX H CALIFORNIA GENERAL CORPORATION LAW--CHAPTER 13 DISSENTERS' RIGHTS
APPENDIX I GEMSTAR'S ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
MARCH 31, 1996 FILED ON JUNE 10, 1996
APPENDIX J GEMSTAR'S REPORT ON FORM 6-K REGARDING ITS FINANCIAL RESULTS FOR
THE QUARTER ENDED JUNE 30, 1996 FILED ON OCTOBER 30, 1996
APPENDIX K GEMSTAR'S REPORT ON FORM 6-K REGARDING ITS FINANCIAL RESULTS FOR
THE QUARTER ENDED SEPTEMBER 30, 1996 FILED ON JANUARY 16, 1997
APPENDIX L GEMSTAR'S REPORT ON FORM 6-K, FILED ON JANUARY 16, 1997, CONTAINING
FIVE PRESS RELEASES CONCERNING RECENT BUSINESS DEVELOPMENTS
APPENDIX M GEMSTAR'S REPORT ON FORM 6-K, FILED ON MARCH 11, 1997, REGARDING
ITS FINANCIAL RESULTS FOR THE QUARTER ENDED DECEMBER 31, 1996,
CERTAIN SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE-YEAR PERIOD ENDED MARCH 31, 1996 AND VIDEOGUIDE'S FINANCIAL
STATEMENTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
APPENDIX N GEMSTAR'S FORM S-8 REGISTRATION STATEMENT WITH RESPECT TO GEMSTAR'S
1994 STOCK INCENTIVE PLAN, AS AMENDED
APPENDIX O GEMSTAR'S FORM 8-A FOR REGISTRATION OF CERTAIN CLASSES OF
SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934, DATED SEPTEMBER 28, 1995
APPENDIX P STARSIGHT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
APPENDIX Q STARSIGHT'S REGISTRATION STATEMENT ON FORM 8-A AS DECLARED
EFFECTIVE BY THE COMMISSION ON JULY 23, 1993 PURSUANT TO SECTIONS
12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
7
<PAGE>
APPENDIX A
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 23, 1996
BY AND AMONG
GEMSTAR INTERNATIONAL GROUP LIMITED,
G/S ACQUISITION SUBSIDIARY
AND
STARSIGHT TELECAST, INC.
- --------------------------------------------------------------------------------
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated as of December
23, 1996 by and among Gemstar International Group Limited, a British Virgin
Islands corporation ("Parent"), G/S Acquisition Subsidiary, a California
corporation and a direct wholly owned subsidiary of Parent ("Sub"), and
StarSight Telecast, Inc., a California corporation (the "Company").
BACKGROUND
a. The respective Boards of Directors of Parent, Sub and the Company have
approved the merger of Sub with and into the Company (the "Merger"), upon the
terms and subject to the conditions set forth in this Agreement and in
accordance with the Corporations Code of California (the "CCC"), whereby each
issued and outstanding share of common stock of the Company, no par value per
share (the "Company Common Stock"), other than shares to be cancelled in
accordance with Section 2.1(b), will be converted into the right to receive a
certain number of ordinary shares, $.01 par value per share, of Parent
("Parent Common Stock"), such number to be determined as provided herein.
b. The Merger requires the approval of the holders of a majority of the
outstanding shares of the Company Common Stock (the "Company Shareholder
Approval").
c. The rules of The Nasdaq National Market require that the members of
Parent ("Parent Shareholders") approve the issuance of the Parent Common Stock
pursuant to this Agreement by the affirmative vote of the holders of a
majority of the shares of Parent Common Stock voted at a meeting of Parent's
Shareholders in person or by proxy (the "Parent Shareholder Approval" and
together with the Company Shareholder Approval, the "Shareholder Approvals").
d. Parent, Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
e. For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization within the meaning of Sections 368(a)(1)(A) and
(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code").
f. For accounting purposes, it is intended that the Merger will be accounted
for as a "pooling-of-interests."
g. Concurrently with the execution of this Agreement and as an inducement to
Parent to enter into this Agreement, PVI Transmission, Inc., THOMSON
multimedia S.A., Cox Communications, Inc., Spelling Entertainment, Inc.,
Tribune Company and Providence Journal Company, shareholders of the Company
(the "Company Significant Shareholders"), have entered into an agreement with
Parent (the "Company Significant Shareholder Agreement") pursuant to which the
Company Significant Shareholders have, among other things, agreed (i) to vote
their shares of the Company Common Stock in favor of the Merger, (ii) to sign
and deliver to Parent affiliate letters substantially in the form contemplated
by this Agreement and (iii) to take certain other actions as provided therein.
h. Concurrently with the execution of this Agreement and as an inducement to
the Company to enter into this Agreement, Dynamic Core Holdings Limited, Henry
Yuen and Creative Assets Limited, shareholders of Parent (the "Parent
Significant Shareholders"), have entered into an agreement with the Company
(the "Parent Significant Shareholder Agreement") pursuant to which the Parent
Significant Shareholders have, among other things, agreed (i) to vote their
shares of Parent Common Stock in favor of the issuance of the Parent Common
Stock pursuant to the Merger Agreement, (ii) to sign and deliver to the
Company an affiliate letter substantially in the form contemplated by this
Agreement and (iii) to take certain other actions as provided therein.
A-2
<PAGE>
i. Concurrently with the execution of this Agreement and as an inducement to
Parent to enter into this Agreement, the Company and Parent have entered into
a Company Option Agreement (the "Company Option Agreement") pursuant to which
the Company shall grant to Parent an option to purchase shares of Company
Common Stock as set forth in the Company Option Agreement.
j. Concurrently with the execution of this Agreement and as an inducement to
the Company to enter into this Agreement, the Company and Parent have entered
into a Parent Option Agreement (the "Parent Option Agreement") pursuant to
which Parent shall grant to the Company an option to purchase shares of Parent
Common Stock as set forth in the Parent Option Agreement.
AGREEMENT
In consideration of the representations, warranties, covenants and
agreements contained in this Agreement, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement and the agreement of merger, in substantially the form
attached hereto as Exhibit 1.1 (the "Merger Agreement"), and in accordance
with the CCC, Sub shall be merged with and into the Company at the Effective
Time (as defined in Section 1.3). Following the Merger, the separate corporate
existence of Sub shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of the Company and of Sub in accordance with the
CCC.
SECTION 1.2 Closing. Unless this Agreement shall have been terminated
pursuant to Section 7.1, the closing of the Merger will take place at 10:00
a.m. on a date to be specified by the parties, which shall be no later than
the second business day after satisfaction or waiver of the conditions set
forth in Article VI (the "Closing Date"), at the offices of O'Melveny & Myers
LLP, 610 Newport Center Drive, 17th Floor, Newport Beach, California, unless
another time, date or place is agreed to in writing by the parties hereto.
SECTION 1.3 Effective Time. Subject to the provisions of this Agreement and
the Merger Agreement, as soon as practicable on or after the Closing Date, an
officer's certificate of each of the Company and Sub shall be executed in
accordance with Section 1103 of the CCC, and a duly executed Merger Agreement
with such officers' certificates attached and, if applicable, a certificate of
satisfaction by the California Franchise Tax Board with respect to Sub shall
be filed with the Secretary of State of the State of California, as provided
in the CCC. The Merger shall become effective at such time as the Merger
Agreement is duly filed with the California Secretary of State, or at such
other time as Sub and the Company shall agree should be specified in the
Merger Agreement (the date and time of such filing, or such later date or time
as may be set forth therein, being the "Effective Time").
SECTION 1.4 Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Merger Agreement and Section 1107 of the CCC and
all other effects specified in the applicable provisions of the CCC.
SECTION 1.5 Articles of Incorporation and By-laws.
(a) The Articles of Incorporation of the Sub in effect at the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation until duly
amended in accordance with the terms thereof and the CCC; provided, however,
that at the Effective Time the Articles of Incorporation of the Surviving
Corporation shall be amended so that the name of the Surviving Corporation
shall be "StarSight Telecast, Inc."
A-3
<PAGE>
(b) The Bylaws of Sub in effect at the Effective Time shall be the Bylaws of
the Surviving Corporation until duly amended in accordance with the terms
thereof and the CCC.
SECTION 1.6 Directors. At the Effective Time, the directors of the Company
immediately prior to the Effective Time shall be deemed to have resigned at
such time and the directors of Sub prior to the Effective Time shall be the
directors of the Surviving Corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified.
SECTION 1.7 Officers. The officers of the Company immediately prior to the
Effective Time shall become the officers of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective
successors are duly elected and qualified.
SECTION 1.8 Alternative Structure. Notwithstanding anything to the contrary
herein, the parties to this Agreement may, by mutual written consent, elect,
in lieu of merging Sub into the Company as hereinabove provided, to merge the
Company into Sub. In such event, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect the foregoing change.
SECTION 1.9 Additional Actions. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of Sub or the Company or otherwise to carry out
this Agreement, the officers and directors of the Surviving Corporation shall
be authorized, so long as such action is not in conflict with this Agreement,
to execute and deliver, in the name and on behalf of Sub or the Company, all
such deeds, bills of sale, assignments and assurances and to take and do, in
the name and on behalf Sub or the Company, all such other actions and things
as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties or assets
in the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Sub, the Company, or the
holders of any shares of the Company Common Stock or any shares of capital
stock of Sub:
(a) Capital Stock of Sub. Each share of the capital stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted
into and exchanged for one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent Owned Stock. Each share of
the Company Common Stock that is owned by the Company or by any subsidiary
of the Company and each share of the Company Common Stock that is owned by
Parent, Sub or any other subsidiary of Parent immediately prior to the
Effective Time shall automatically be cancelled and retired without any
conversion thereof and no consideration shall be delivered with respect
thereto.
(c) Conversion of Company Common Stock. Each share of Company Common
Stock issued and outstanding as of the Effective Time, other than shares to
be cancelled in accordance with Section 2.1(b) and any Dissenting Shares
(as defined and to the extent provided in Section 2.2(h) below), shall be
converted, subject to Section 2.1(f) and 2.2(e), into .6062 shares (the
"Exchange Ratio") of Parent Common Stock.
(d) Stock Options: Company Employee Stock Purchase Plan. At the Effective
Time, all options to purchase the Company Common Stock (each, a "Company
Stock Option") then outstanding under the
A-4
<PAGE>
Company's 1989 Stock Incentive Program (the "Stock Option Plan") shall be
assumed by Parent in accordance with Section 5.4 hereof. At the Effective
Time, the Company shall terminate the Company's Employee Stock Purchase
Plan (the "Company Purchase Plan") in accordance with Section 5.4 hereof.
(e) Conversion of Warrants. Each stock purchase warrant issued by the
Company to purchase shares of Company Common Stock (collectively, the
"Warrants"), shall, in accordance with its terms, be adjusted (an "Adjusted
Warrant") to become exercisable for, or exchangeable for a new warrant (on
substantially the same terms) that would be exercisable for, the number of
shares of Parent Common Stock equal to the Warrant Conversion Number (as
defined below). The exercise price of any Adjusted Warrant (the "Adjusted
Exercise Price") shall be an amount equal to the exercise price of the
Warrant related to such Adjusted Warrant as of the date of this Agreement
divided by the Exchange Ratio. The "Warrant Conversion Number" for any
Adjusted Warrant shall be equal to the number of shares purchasable
pursuant to the Warrant related to such Adjusted Warrant as of the date of
this Agreement multiplied by the Exchange Ratio.
As of the Effective Time, all such shares of the Company Common Stock
shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and the holders of certificates or
instruments previously evidencing such shares of the Company Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights with respect thereto except as otherwise provided herein or by law.
Each certificate previously representing the Company Common Stock shall
thereafter represent the right to receive a certificate representing the
shares of Parent Common Stock into which the Company Common Stock was
converted in the Merger. Such certificates previously representing shares
of the Company Common Stock shall be exchanged for certificates
representing whole shares of Parent Common Stock issued in consideration
therefor upon the surrender of such certificates in accordance with the
provisions of Section 2.2, without interest. No fractional shares of Parent
Common Stock shall be issued, and, in lieu thereof, a cash payment shall be
made pursuant to Section 2.2(e).
(f) Adjustment to Exchange Ratio. If between the date of this Agreement
and the Effective Time, the outstanding shares of Parent Common Stock or
the Company Common Stock shall have been changed into a different number of
shares or a different class by reason of any reclassification,
recapitalization, split-up, stock dividend, stock combination, exchange of
shares, readjustment or otherwise, then the Exchange Ratio shall be
correspondingly adjusted; provided, however, that any such changes shall be
subject to Section 4.1 below.
SECTION 2.2 Exchange of Certificates.
(a) Exchange Agent. Parent shall deposit, or shall cause to be deposited,
with ChaseMellon Shareholder Services, L.L.C., as exchange agent for Parent
Common Stock (the "Exchange Agent") as of the Effective Time (or otherwise
when requested by the Exchange Agent from time to time in order to effect any
exchange pursuant to this Section 2.2), for the benefit of the holders of
shares of the Company Common Stock for exchange in accordance with this
Article II and the Merger Agreement through the Exchange Agent, certificates
representing the shares of Parent Common Stock issuable pursuant to Section
2.1 in exchange for outstanding shares of the Company Common Stock (such
certificates representing shares of Parent Common Stock together with any
dividends or distributions with respect thereto, being collectively referred
to as the "Exchange Fund"), and cash in an amount sufficient for payment in
lieu of fractional shares pursuant to Section 2.2 (e). The Exchange Agent
shall, pursuant to irrevocable instructions, deliver the Parent Common Stock
contemplated to be issued pursuant to Section 2.1 out of the Exchange Fund.
Except as contemplated by Section 2.2(e), the Exchange Fund shall not be used
for any other purpose.
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, Parent shall instruct the Exchange Agent to mail to each
holder of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of the Company Common Stock
(including holders of record pursuant to purchases made under the Company
Purchase Plan immediately prior to the Effective Time pursuant to Section 5.4)
(for convenience of reference, the certificates of the Company Common Stock
are referred to as the "Certificates"), (i) a letter of transmittal (which
shall be in customary form and shall specify that delivery shall
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be effected, and risk of loss and title to the Certificates shall pass, only
upon proper delivery of the Certificates to the Exchange Agent) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, and such other documents as
may reasonably be required by the Exchange Agent, and the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
evidencing that number of whole shares of Parent Common Stock which such
holder has the right to receive in respect of the shares of the Company Common
Stock formerly evidenced by such Certificate (after taking into account the
provisions of this Agreement and all shares of the Company Common Stock then
held of record by such holder, cash in lieu of fractional shares of Parent
Common Stock to which such holder is entitled pursuant to Section 2.2(e) and
any dividends or other distributions to which such holder is entitled pursuant
to Section 2.2(c), and the Certificate so surrendered shall forthwith be
cancelled. In the event of a transfer of ownership of the Company Common Stock
which is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Common Stock may be issued
to a person other than the person in whose name the Certificate so surrendered
is registered, if such Certificate, accompanied by all documents required to
evidence and effect such transfer, shall be properly endorsed with signature
guarantee or otherwise be in proper form for transfer and the person
requesting such payment shall pay any transfer or other taxes required by
reason of the issuance of shares of Parent Common Stock to a person other than
the registered holder of such Certificate or establish to the satisfaction of
Parent that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate evidencing whole shares of Parent Common Stock, cash
in lieu of any fractional shares of Parent Common Stock to which such holder
is entitled pursuant to Section 2.2(e) and any dividends or other
distributions to which such holder is entitled pursuant to Section 2.2(c). No
interest will be paid or will accrue on any cash payable pursuant to Section
2.2(c) or 2.2(e).
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.2(e), in each
case until the surrender of such Certificate in accordance with this Article
II. Subject to the effect of applicable escheat laws, following surrender of
such Certificate, there shall be paid to the holder of the certificate
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of any such
cash payable in lieu of a fractional share of Parent Common Stock to which
such holder is entitled pursuant to Section 2.2(e) and the amount of dividends
or other distributions with a record date after the Effective Time theretofore
paid with respect to such whole shares of Parent Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time but prior to such surrender and with a
payment date subsequent to such surrender payable with respect to such whole
shares of Parent Common Stock.
(d) No Further Ownership Rights in the Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms of this Article II (including any cash paid pursuant
to Section 2.2(c) or 2.2(e)) shall be deemed to have been issued (and paid) in
full satisfaction of all rights pertaining to the shares of the Company Common
Stock theretofore represented by such Certificates, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been declared or made by the Company on such shares of the Company Common
Stock in accordance with the terms of this Agreement or prior to the date of
this Agreement and which remain unpaid at the Effective Time and have not been
paid prior to surrender. At the Effective Time, the stock transfer books of
the Company shall be closed, and there shall be no further registrations of
transfers of shares of the Company Common Stock, or transfer or exercise of
the Warrants or Stock Options thereafter on the records of the Company. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, Parent or the Exchange Agent for any reason, they shall be
cancelled and exchanged as provided in this Article II.
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(e) No Fractional Shares.
(i) No Certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a shareholder of Parent.
(ii) Each holder of a Certificate issued and outstanding at the Effective
Time who would otherwise be entitled to receive a fractional share of
Parent Common Stock upon surrender of such Certificate for exchange
pursuant to this Article II (after taking into account all Warrants, Stock
Options and shares of Company Common Stock then held by such holder) shall
receive, in lieu thereof, cash in an amount equal to the value of such
fractional share, which shall be equal to the fraction of a share of Parent
Common Stock that would otherwise be issued multiplied by the average
closing price for a share of Parent Common Stock on The Nasdaq National
Market (as reported in The Wall Street Journal) during the 20 consecutive
trading days ending on the third trading day prior to the Effective Time.
(iii) As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Certificates with respect to any
fractional share interests, the Exchange Agent shall promptly pay such
amounts to such holders of Certificates subject to and in accordance with
the terms of Section 2.2(c).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the holders of Certificates for twelve months after
the Effective Time shall be delivered to Parent, upon demand, and any holders
of Certificates who have not theretofore complied with this Article II shall
thereafter look as a general creditor only to Parent for payment of the shares
of Parent Common Stock, any cash in lieu of fractional shares of Parent Common
Stock and any dividends or distributions with respect to Parent Common Stock
to which they are entitled.
(g) No Liability. None of Parent, Sub, the Company or the Exchange Agent
shall be liable to any holder of shares of the Company Common Stock, the
Warrants or Stock Options for any shares of Parent Common Stock (or dividends
or distributions with respect thereto) or cash from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(h) Company Dissenting Shares.
(i) Notwithstanding any provision of this Agreement to the contrary, any
shares of the Company Common Stock held by a holder who has exercised
dissenters' rights for such shares in accordance with the CCC and who, as
of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive Parent Common Stock pursuant to Section
2.1(c), but the holder thereof shall only be entitled to such rights as are
granted by the CCC.
(ii) Notwithstanding the provisions of subsection (i), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her dissenters' rights, then, as of the later
of the Effective Time or the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to
receive Parent Common Stock, cash in lieu of any fractional shares of
Parent Common Stock to which such holder is entitled pursuant to Section
2.2(e) and any dividends or other distributions to which such holder is
entitled pursuant to Section 2.2(c), without interest thereon, upon
surrender of the certificate(s) representing such shares.
(iii) The Company shall give Parent (i) prompt notice of any written
demand received by the Company to require the Company to purchase shares of
the Company's Common Stock pursuant to the applicable provisions of the CCC
and (ii) the opportunity to participate in all negotiations and proceedings
with respect to such demands. The Company shall not, except with the prior
written consent of Parent, voluntarily make any payment with respect to any
such demands or offer to settle or settle any such demands.
(i) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by Parent, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Parent.
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(j) Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of Parent Common
Stock, cash in lieu of fractional shares of Parent Common Stock to which such
holder is entitled pursuant to Section 2.2(e) and any dividends or other
distributions to which such holder is entitled pursuant to Section 2.2(c).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company. Except as set
forth in the Company SEC Documents (as defined in Section 3.1(e)) or on the
disclosure schedule (provided that an item on such disclosure schedule shall
be deemed to qualify only the particular subsection or subsections of this
Section 3.1 specified for such item) delivered by the Company to Parent prior
to the execution of this Agreement (the "Company Disclosure Schedule"), the
Company represents and warrants to Parent and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company and each of
its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is organized
and has the requisite corporate power and authority to carry on its
business as now being conducted. The Company and each of its subsidiaries
is duly qualified or licensed to do business and is in good standing in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so qualified or
licensed (individually or in the aggregate) would not have a "material
adverse effect" (as defined in Section 8.3) on the Company. The Company has
delivered to Parent complete and correct copies of its articles of
incorporation and by-laws and has delivered or shall deliver prior to
closing the articles of incorporation and by-laws or other organizational
documents of its other subsidiaries, in each case as amended to the date of
this Agreement.
(b) Subsidiaries. The Company does not own, directly or indirectly, any
capital stock or other ownership interest in any corporation, partnership,
joint venture or other entity.
(c) Capital Structure. The authorized capital stock of the Company
consists of 50,000,000 shares of the Company Common Stock, no par value,
and 5,000,000 shares of the Company's Preferred Stock, no par value. At the
close of business on December 20, 1996, (i) 25,541,311 shares of the
Company Common Stock were issued and outstanding, (ii) no shares of the
Company Common Stock were held by the Company in its treasury, (iii)
2,356,216 shares of the Company Common Stock were reserved for issuance
upon exercise of the Stock Options, (iv) 994,908 shares of the Company
Common Stock were reserved for issuance upon exercise of Company Stock
Options available for grant under the Stock Option Plan, (v) 38,122 shares
of the Company Common Stock were reserved for issuance under the Company
Purchase Plan, and (vi) 3,000,000 shares of the Company Common Stock were
reserved for issuance upon exercise of the Warrants. As of December 20,
1996, there are no shares of the Company's Preferred Stock issued or
outstanding. Except as set forth above, at the close of business on
December 20, 1996, no shares of capital stock or other voting securities of
the Company were issued, reserved for issuance or outstanding. All options
to purchase shares of Company Common Stock were granted under the Stock
Option Plan. There are no outstanding stock appreciation rights of the
Company and no outstanding limited stock appreciation rights or other
rights to redeem for cash options or warrants of the Company. All
outstanding shares of capital stock of the Company are, and all shares
which may be issued upon the exercise of Stock Options and Warrants will
be, when issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. There are no bonds,
debentures, notes or other indebtedness of the Company having the right to
vote (or convertible into, or exchangeable for, securities having the right
to vote) on any matters on which shareholders of the Company may vote.
Except as set forth above, as of the date of this Agreement, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which the Company
or any of its subsidiaries is a party or by
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which any of them is bound obligating the Company or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other voting securities of the
Company or of any of its subsidiaries or obligating the Company or any of
its subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There are no outstanding contractual obligations of the
Company or any of its subsidiaries to repurchase, redeem or otherwise
acquire any shares of capital stock (or options to acquire any such shares)
of the Company or any of its subsidiaries. There are no agreements,
arrangements or commitments of any character (contingent or otherwise)
pursuant to which any person is or may be entitled to receive any payment
based on the revenues, earnings or financial performance of the Company or
any of its subsidiaries or assets or calculated in accordance therewith
(other than ordinary course payments or commissions to sales
representatives of the Company based upon revenues generated by them
without augmentation as a result of the transactions contemplated hereby)
or to cause the Company or any of its subsidiaries to file a registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), or which otherwise relate to the registration of any securities of
the Company.
(d) Authority; Noncontravention. The Company has the requisite corporate
power and authority to enter into this Agreement and, subject to the
Company Shareholder Approval, to consummate the transactions contemplated
by this Agreement. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of the Company, subject to the Company
Shareholder Approval of this Agreement. This Agreement has been duly
executed and delivered by the Company and constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance
with its terms, subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to creditors rights
generally and (ii) the availability of injunctive relief and other
equitable remedies. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will not, conflict with,
or result in any violation of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material
benefit under, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its subsidiaries under, (i)
the articles of incorporation or by-laws of the Company or the comparable
charter or organizational documents of any of its subsidiaries, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable
to the Company or any of its subsidiaries or their respective properties or
assets or (iii) subject to the governmental filings and other matters
referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or
any of its subsidiaries or their respective properties or assets, other
than, in the case of clauses (ii) or (iii), any such conflicts, violations,
defaults, rights or Liens that individually or in the aggregate would not
(x) have a material adverse effect on the Company, (y) impair in any
material respect the ability of the Company to perform its obligations
under this Agreement or (z) prevent or materially delay the consummation of
any of the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any federal, state or local government or any court, administrative
or regulatory agency or commission or other governmental authority or
agency, domestic or foreign (a "Governmental Entity"), is required by the
Company or any of its subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated by this Agreement, except for (i)
the filing with the Federal Trade Commission and the Antitrust Division of
the Department of Justice (the "Specified Agencies") of a premerger
notification and report form by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) the filing with
the Securities and Exchange Commission (the "SEC") of (x) the Proxy
Statement (as defined in Section 5.1) and (y) such reports under Section
13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (iii) the filing of the Merger
Agreement with the California Secretary of State and appropriate documents
with the relevant authorities of other states
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in which the Company is qualified to do business and (iv) such other
consents, approvals, orders, authorizations, registrations, declarations
and filings, including under (x) the laws of any foreign country in which
the Company or any of its subsidiaries conducts any business or owns any
property or assets or (y) the "takeover" or "blue sky" laws of various
states, the failure of which to be obtained or made would not, individually
or in the aggregate, have a material adverse effect on the Company or
prevent or materially delay the consummation of any of the transactions
contemplated by this Agreement.
(e) SEC Documents; Financial Statements. The Company has filed with the
SEC all required reports and forms and other documents (the "Company SEC
Documents"). As of their respective dates, the Company SEC Documents
complied in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
of the SEC promulgated thereunder applicable to such Company SEC Documents
and none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to the
extent that information contained in any Company SEC Document has been
revised or superseded by a later-filed Company SEC Document filed and
publicly available prior to the date of this Agreement, none of the Company
SEC Documents contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the Company SEC Documents comply as to form in all material
respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles (except, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated
financial position of the Company and its consolidated subsidiaries as of
the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments consisting of normal,
recurring accruals that are not material). Except as set forth in the
Company SEC Documents filed prior to the date of this Agreement, and except
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice since the date of the most recent
consolidated balance sheet included in the Company SEC Documents, neither
the Company nor any of its subsidiaries has any liabilities or obligations
of any nature (whether accrued, absolute, contingent or otherwise) required
by generally accepted accounting principles to be set forth on a
consolidated balance sheet of the Company and its consolidated subsidiaries
or in the notes thereto which are, individually or in the aggregate,
material to the business, results of operations or financial condition of
the Company.
(f) Information Supplied. None of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Form F-4 (as defined in Section 5.1) will, at the time
the Form F-4 is filed with the SEC, at any time it is amended or
supplemented or at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading or (ii) the Proxy Statement will, at the date it is
first mailed to the Company's shareholders or the Parent's shareholders or
at the time of the Company Shareholders' Meeting or the Parent
Shareholders' Meeting (as defined in Section 5.1(d)), contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation or warranty is made by the Company with
respect to statements made or incorporated by reference therein based on
information supplied by Parent or Sub specifically for inclusion or
incorporation by reference in the Proxy Statement.
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(g) Absence of Certain Changes or Events. Except as disclosed in the SEC
Documents filed prior to the date of this Agreement, since December 31,
1995, the Company has conducted its business only in the ordinary course
consistent with prior practice, and there has not been (i) any material
adverse change in the Company or any of its subsidiaries, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of the Company's
capital stock, (iii) any split, combination or reclassification of any of
its capital stock or any issuance or the authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, (iv) any granting by the Company or any of its
subsidiaries to any officer or employee of the Company or any of its
subsidiaries of any increase in compensation, except in the ordinary course
of business consistent with prior practice or as was required under
employment agreements in effect as of the date of the most recent audited
financial statements included in the SEC Documents filed prior to the date
of this Agreement (a list of all such employment agreements being set forth
in Section 3.1(g) of the Company Disclosure Schedule), (v) any granting by
the Company or any of its subsidiaries to any such officer or employee of
any increase in severance or termination pay, except as was required under
employment, severance or termination agreements in effect as of the date of
the most recent audited financial statements included in the SEC Documents
filed prior to the date of this Agreement, (vi) any entry into, or renewal
or modification of, by the Company or any of its subsidiaries of any
employment, consulting, severance or termination agreement with any such
officer or employee, (vii) any damage, destruction or loss, whether or not
covered by insurance, that has or could have a material adverse effect on
the Company or any of its subsidiaries or (viii) any change in accounting
methods, principles or practices by the Company materially affecting its
assets, liabilities or business, except insofar as may have been required
by a change in generally accepted accounting principles.
(h) Litigation. Except as disclosed in the SEC Documents filed prior to
the date of this Agreement, there is no suit, action, investigation, audit
or proceeding pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries that, individually or in the
aggregate, could reasonably be expected to (i) have a material adverse
effect on the Company, (ii) impair in any material respect the ability of
the Company to perform its obligations under this Agreement or (iii)
prevent the consummation of any of the transactions contemplated by this
Agreement, nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator outstanding against the Company or
any of its subsidiaries having, or which is reasonably likely to have, any
effect referred to in the foregoing clauses (i), (ii) or (iii).
(i) Absence of Changes in Benefit Plans. Except (i) as disclosed in the
SEC Documents filed prior to the date of this Agreement, (ii) as would not
have, in the aggregate, a material adverse effect on the Company, or (iii)
as required by applicable law, since January 1, 1996, there has not been
any adoption or amendment by the Company or any of its subsidiaries of any
collective bargaining agreement or any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding (collectively, "Benefit Plans") providing
benefits to any current or former employee, officer or director of the
Company or any of its subsidiaries. Except as disclosed in the SEC
Documents filed prior to the date of this Agreement, there exist no
employment, consulting, severance, termination or indemnification
agreements, arrangements or understandings between the Company or any of
its subsidiaries and any current or former officer or director of the
Company or any of its subsidiaries as to which unsatisfied or potential
obligations of the Company of greater than $50,000 exist. Except as
disclosed in the SEC Documents filed prior to the date of this Agreement
and except as would not have, in the aggregate, a material adverse effect
on the Company, since January 1, 1996, neither the Company nor any of its
subsidiaries has taken any action to accelerate any rights or benefits
under any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director or
officer or for the benefit of employees generally.
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(j) ERISA Compliance.
(i) the Company has delivered to Parent true, complete and correct
copies of all "employee pension benefit plans" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (sometimes referred to herein as "Pension Plans"), "employee
welfare benefit plans" (as defined in Section 3(1) of ERISA) and all
other Benefit Plans currently maintained, or contributed to, or
required to be maintained or contributed to, by the Company or any
other person or entity that, together with the Company, is treated as a
single employer under Section 414(b), (c), (m) or (o) of the Code (each
a "Commonly Controlled Entity"), including all employment, termination,
severance or other contracts for the benefit of any current or former
employees, officers or directors of the Company or any of its
subsidiaries as to which unsatisfied or potential obligations of the
Company of greater than $50,000 exist. The Company has delivered to
Parent true, complete and correct copies of (v) the most recent annual
report on Form 5500 filed with the Internal Revenue Service with
respect to each of its Benefit Plans (if any such report was required),
(w) the most recently prepared actuarial report for each such Benefit
Plan (if any such report was required), (x) the most recent summary
plan description for each such Benefit Plan for which such summary plan
description is required, (y) the most recently received Internal
Revenue Service determination letter for each such Benefit Plan and (z)
each trust agreement and group annuity contract relating to any such
Benefit Plan.
(ii) Except as would not have, in the aggregate, a material adverse
effect on the Company, each of the Company's and its subsidiaries'
Benefit Plans has been administered in accordance with its terms.
Except as would not have, in the aggregate, a material adverse effect
on the Company, the Company, each of its subsidiaries and all such
Benefit Plans are in compliance with applicable provisions of ERISA and
the Code.
(iii) All of the Company's and its subsidiaries' Pension Plans
intended to be qualified under Section 401(a) of the Code have been the
subject of determination letters from the Internal Revenue Service to
the effect that such Pension Plans are qualified and exempt from
federal income taxes under Section 401(a) and 501(a), respectively, of
the Code and, to the knowledge of the Company, no such determination
letter has been revoked nor has revocation of such determination letter
been threatened, nor has any such Pension Plan been amended since the
date of its most recent determination letter or application therefor in
any respect that could reasonably be expected to adversely affect its
qualification or materially increase its costs.
(iv) No Pension Plan that the Company or any of its subsidiaries
maintains is subject to Title V of ERISA.
(v) To the knowledge of the Company, none of the Company, any of its
subsidiaries, any officer of the Company or any of its subsidiaries or
any of the Company's or its subsidiaries' Benefit Plans which are
subject to ERISA, including, without limitation, its Pension Plans, any
trusts created thereunder or any trustee or administrator thereof, has
engaged in a non-exempt "prohibited transaction" (as such term is
defined in Section 406 of ERISA or Section 4975 of the Code) or any
other breach of fiduciary responsibility that could reasonably be
expected to subject the Company, or any of its subsidiaries or any
officer of the Company or any of its subsidiaries, to tax or penalty
under ERISA, the Code or other applicable law that, except as would not
have, in the aggregate, a material adverse effect on the Company, has
not been corrected. Neither any of such Benefit Plans nor any of such
trusts has been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect
thereto, during the last five years.
(vi) The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any
benefits payable to or in respect of any employee or former employee of
the Company or any subsidiary of the Company or the beneficiary or
dependent of any such employee or former employee.
(vii) With respect to any of the Company's or any of its
subsidiaries' Benefit Plans that is an employee welfare benefit plan,
(x) no such Benefit Plan is funded through a "welfare benefit fund,"
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as such term is defined in Section 419(e) of the Code, (y) each such
Benefit Plan that is a "group health plan," as such term is defined in
Section 5000(b)(1) of the Code, complies in all material respects with
the applicable requirements of Section 4980B(f) of the Code and (z)
each such Benefit Plan (including any such Benefit Plan covering
retirees or other former employees) may be amended or terminated
without a material adverse effect on the Company.
(viii) Except as would not have, in the aggregate, a material adverse
effect on the Company, no Commonly Controlled Entity has incurred any
material liability to a Pension Plan of the Company or any of its
subsidiaries (other than for contributions not yet due).
(K) Taxes.
(i) Each of the Company and its subsidiaries has timely filed all
federal, state, local and foreign tax returns and reports required to
be filed by it through the date hereof and shall timely file all such
returns and reports required to be filed on or before the Effective
Time. All such returns and reports are and will be true, complete and
correct in all material respects. The Company and each of its
subsidiaries has paid and discharged (or the Company has paid and
discharged on such subsidiary's behalf) all taxes due from them, other
than such taxes as are being or will be contested in good faith by
appropriate proceedings and are, in the judgment of the management of
the Company, adequately reserved for on the most recent financial
statements contained in the SEC Documents filed prior to the date of
this Agreement. The most recent financial statements contained in the
SEC Documents filed prior to the date of this Agreement properly
reflect in accordance with generally accepted accounting principles all
taxes payable by the Company and its subsidiaries for all taxable
periods and portions thereof through the date of such financial
statements.
(ii) No claim or deficiency for any taxes has been proposed,
threatened, asserted or assessed by the Internal Revenue Service (the
"IRS") or any other taxing authority or agency against the Company, or
any of its subsidiaries which, if resolved against the Company or any
of its subsidiaries, would, individually or in the aggregate, have a
material adverse effect upon the Company. Neither the Company nor any
of its subsidiaries has waived any statute of limitations in respect of
any taxes or agreed to any extension of time with respect to a tax
assessment or deficiency. The federal income tax returns of the Company
and each of its subsidiaries consolidated in such returns have been
examined by and settled with the IRS for all years through the year
ended December 31, 1992.
(iii) Neither the Company nor any of its subsidiaries has taken or
agreed to take any action or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the Merger from
qualifying as a reorganization within the meaning of Section
368(a)(1)(A) and (a)(2)(E) of the Code.
(iv) Neither the Company nor any of its subsidiaries has filed a
consent under Code Section 341(f) concerning collapsible corporations.
Neither the Company nor any of its subsidiaries has been a United
States real property holding corporation within the meaning of Code
Section 897(c)(2). Each of the Company and its subsidiaries has
disclosed on its federal income tax returns all positions taken therein
that could give rise to a substantial understatement of federal income
tax within the meaning of Code Section 6662. Neither the Company nor
any of its subsidiaries is a party to any tax allocation or tax sharing
agreement. Neither the Company nor any of its subsidiaries has any
liability for the taxes of any person (other than any of the Company
and its subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local, or foreign law), as a transferee
or successor, by contract, or otherwise.
(v) As used in this Agreement, "taxes" shall include all federal,
state, local and foreign income, property, sales, excise and other
taxes, of any nature whatsoever (whether payable directly or by
withholding), together with any interest and penalties, additions to
tax or additional amounts imposed with respect thereto. Notwithstanding
the definition of "subsidiary" set forth in Section 8.3 of this
Agreement, for the purposes of this Section 3.1(k), references to the
Company and each of its subsidiaries shall include former subsidiaries
of the Company for the periods during which any such corporations were
included in the consolidated federal income tax return of the Company.
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(l) No Excess Parachute Payments. Any amount that could be received
(whether in cash or property or the vesting of property) as a result of any
of the transactions contemplated by this Agreement by any employee, officer
or director of the Company or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any employment, severance or termination agreement,
other compensation arrangement or Benefit Plan currently in effect would
not be characterized as an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code).
(m) Compliance with Applicable Laws.
(i) Each of the Company and its subsidiaries has in effect all
federal, state, local and foreign governmental approvals,
authorizations, certificates, filings, franchises, licenses, notices,
permits and rights ("Permits") necessary for it to own, lease or
operate its properties and assets and to carry on its business as now
conducted, and there has occurred no default under any such Permit,
except for the lack of Permits and for defaults under Permits which
lack or default individually or in the aggregate would not have a
material adverse effect on the Company. The Company does not have any
reason to believe any Governmental Entity is considering limiting,
suspending or revoking any of the Company's or its subsidiaries'
Permits. Except as disclosed in the SEC Documents filed prior to the
date of this Agreement, the Company and its subsidiaries are in
compliance with (and have not violated) all applicable statutes, laws,
ordinances, rules, orders and regulations (including, without
limitation, those relating to safety, hiring, promotion or pay of
employees) of any Governmental Entity, except for noncompliance which
individually or in the aggregate would not have a material adverse
effect on the Company.
(ii) To the knowledge of the Company, the Company and each of its
subsidiaries is, and has been, and each of the Company's former
subsidiaries, while subsidiaries of the Company, was, in compliance in
all material respects with all applicable Environmental Laws, except
for noncompliance which individually or in the aggregate would not have
a material adverse effect on the Company. The term "Environmental Laws"
means any federal, state, local or foreign statute, code, ordinance,
rule, regulation, policy, guideline, permit, consent, approval,
license, judgment, order, writ, decree, injunction or other
authorization, including the requirement to register underground
storage tanks, relating to: (A) emissions, discharges, releases or
threatened releases of Hazardous Material (as defined below) into the
environment, including, without limitation, into ambient air, soil,
sediments, land surface or subsurface, buildings or facilities, surface
water, groundwater, publicly owned treatment works, septic systems or
land; or (B) the generation, treatment, storage, disposal, use,
handling, manufacturing, transportation or shipment of Hazardous
Material.
(iii) During the period of ownership or operation by the Company and
its subsidiaries of any of their respective current or previously owned
or leased properties, there have been no releases of Hazardous Material
in, on, under or affecting such properties or, to the knowledge of the
Company, any surrounding site, except in each case for those which
individually or in the aggregate are not reasonably likely to have a
material adverse effect on the Company. Prior to the period of
ownership or operation by the Company and its subsidiaries of any of
their respective current or previously owned or leased properties, to
the knowledge of the Company, no Hazardous Material was generated,
treated, stored, disposed of, used, handled or manufactured at, or
transported, shipped or disposed of from, such current or previously
owned or leased properties, and there were no releases of Hazardous
Material in, on, under or affecting any such property or any
surrounding site, except in each case for those which individually or
in the aggregate are not reasonably likely to have a material adverse
effect on the Company. The term "Hazardous Material" means (A)
hazardous materials, contaminants, constituents, medical wastes,
hazardous or infectious wastes and hazardous substances as those terms
are defined in the following statutes and their implementing
regulations: the Hazardous Materials Transportation Act, 49 U.S.C.
(S) 1801 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
(S) 6901 et seq., the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act, 42 U.S.C. (S) 9601 et seq., the Clean Water
Act,
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33 U.S.C. (S) 1251 et seq. and the Clean Air Act, 42 U.S.C. (S) 7401 et
seq., (B) petroleum, including crude oil and any fractions thereof, (C)
natural gas, synthetic gas and any mixtures thereof, (D) asbestos
and/or asbestos-containing material and (E) polychlorinated biphenyls
("PCBs") or materials or fluids containing PCBs in excess of 50 ppm.
(n) Brokers. No broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by the Company, is
entitled to any broker's, finder's, financial advisor's or other similar
fee or commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of the Company.
(o) Opinion of Financial Advisor. The Company has received the opinion of
Smith Barney Inc., dated the date of this Agreement, to the effect that, as
of such date, the Exchange Ratio is fair to the Company's shareholders from
a financial point of view, and a signed copy of such opinion has been
delivered to Parent.
(p) Contracts; Debt Instruments. Other than those agreements set forth on
Schedule 3.1(p)(1), which agreements are confidential and will not be made
available, Schedule 3.1(p)(2) sets forth, as of the date of this Agreement,
a true and complete list of each material agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation (collectively,
"Company Agreements") of the Company or any of its subsidiaries (a) which
would be required by Rule 601 of SEC Regulation S-K to be filed as an
exhibit to an Annual Report on Form 10-K (including any Benefit Plan) or is
a Company Agreement (i) with respect to the acquisition or disposition of a
material amount of the Company's assets (whether or not such Company
Agreement has been fully performed), (ii) contains a covenant not to
compete with the Company or covenant by the Company not to compete with
others (iii) with an Affiliate (as such term is defined in Rule 12B-2 under
the Exchange Act) of the Company (whether such Company Agreement is oral or
written), (b) with respect to indebtedness for money borrowed (other than
trade payables in the ordinary and usual course of business), (c) pursuant
to which the Company or any of its subsidiaries is licensing its technology
or intellectual property rights or pursuant to which the Company or any of
its subsidiaries is a licensee of technology or intellectual property
rights of others, (d) which constitutes an employment or consulting
agreement of the Company or any of its subsidiaries and provides for
severance payments, termination payments, change-in-control payments or
other similar payments, or (e) which constitutes any other liability
(including, without limitation, any guarantee, surety contract, indemnity
agreement or arrangement or similar instrument), obligation or transaction
and, in the case of any item referred to in this clause (e), is material to
the Company and its subsidiaries or their businesses taken as a whole (the
items referred to in clauses (a) through (e) of this sentence being
referred to herein as "Company Material Contracts"). Except as hereinabove
provided, a true and complete copy of each Company Material Contract has
been made available to Parent or its representative. Each Company Material
Contract is a valid and legally binding obligation of the Company or its
subsidiaries, whichever is applicable, is in full force and effect, all
material obligations required to be performed thereunder as of the date
hereof by the Company or its subsidiaries, whichever is applicable, have
been performed to date, and to the knowledge of the Company, no other party
to any such Company Material Contract is in default in any material respect
under the terms thereof except for such failures to perform or defaults
which individually and in the aggregate would not have a material adverse
effect on the Company.
(q) Title to Properties.
(i) The Company and its subsidiaries have good and marketable title
to, or valid leasehold interests in, all their material properties and
assets except for such as are no longer used or useful in the conduct
of their businesses or as have been disposed of in the ordinary course
of business and except for defects in title, easements, restrictive
covenants and similar encumbrances or impediments that, individually or
in the aggregate, would not have a material adverse effect on the
Company. All such material properties and assets, other than properties
and assets in which the Company or any of its subsidiaries has
leasehold interests, are free and clear of all Liens, except for taxes
not yet due and Liens that, individually or in the aggregate, would not
have a material adverse effect on the Company.
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(ii) Each of the Company and its subsidiaries has complied with the
terms of all material leases to which it is a party and under which it
is in occupancy, and all such leases are in full force and effect,
except for such failures to comply or to be in full force and effect
which would not, individually or in the aggregate, have a material
adverse effect on the Company. Each of the Company and its subsidiaries
enjoys peaceful and undisturbed possession under all such material
leases, except where failures to have so would not, individually or in
the aggregate, have a material adverse effect on the Company.
(r) Accounting Matters. Neither the Company nor, to its best knowledge,
any of its affiliates has taken or agreed to take any action or is aware of
any condition that would prevent Parent from accounting for the business
combination to be effected by the Merger as a pooling-of-interests.
(s) Voting Requirements. The Company Shareholder Approval is the only
vote of the holders of any class or series of the Company's securities
necessary to approve this Agreement and the transactions contemplated by
this Agreement.
(t) Noncompetition. The Company and its subsidiaries are not, and after
the Effective Time neither the Surviving Corporation nor Parent will be (by
reason of any agreement to which the Company is a party) subject to any
non-competition or similar restriction on their respective businesses.
(u) Intellectual Property. The Company and each of its subsidiaries owns
or possesses adequate and enforceable licenses or other rights to use all
patents, trade secrets, trade names, trademarks, inventions and processes
used in and material to the business of the Company or such subsidiary as
currently conducted, and such licenses and rights will not be affected by
the consummation of the Merger. Except as disclosed in the Company SEC
Documents filed prior to the date of this Agreement, neither the Company
nor any of its subsidiaries has received any notice of conflict or
infringement which asserts the rights of others with respect to such
licenses and rights. The Company owns or rightfully possesses (i) the
source code, recorded on computer magnetic media and in written form, for
its information systems programs, including both the information systems
programs themselves and the product related infrastructure (the "Company
Software"), and (ii) all commentary, explanations, specifications,
documentation, proprietary information, test programs and program
specifications, compiler and assembler descriptions of proprietary or third
party system utilities, and descriptions of system/program generation and
programs not owned by the Company but required for use or support, relating
to the Company Software that are reasonably necessary for the Surviving
Corporation to maintain and enhance the Company Software, and to provide a
commercially standard level of service and support to users of the Company
Software without the aid of any other party and without use of any other
material.
(v) The Company Significant Shareholders beneficially own and have the
right to vote, in the aggregate, approximately 52% of the total issued and
outstanding shares of Company Common Stock.
(w) On December 23, 1996, the Company received a wire transfer in the
amount of $20 million from Microsoft Corporation.
SECTION 3.2 Representations and Warranties of Parent and Sub. Except as set
forth in the Parent SEC Documents (as defined in Section 3.2(e)) or on the
disclosure schedule (provided that an item on such disclosure schedule shall
be deemed to qualify only the particular subsection or subsections of this
Section 3.2 specified for such item) delivered by Parent to the Company prior
to the execution of this Agreement (the "Parent Disclosure Schedule"), Parent
and Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Parent and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and
has the requisite corporate power and authority to carry on its business as
now being conducted. Parent and each of its subsidiaries is duly qualified
or licensed to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership or leasing of its
properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse effect
on Parent.
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Parent has delivered to the Company complete and correct copies of its
memorandum of association and articles of association and the articles of
incorporation and by-laws of Sub, in each case as amended to the date of
this Agreement.
(b) Subsidiaries. The Parent Disclosure Schedule lists each subsidiary of
the Parent and its jurisdiction of incorporation or organization. All the
outstanding shares of capital stock of each such subsidiary have been
validly issued and are fully paid and nonassessable and are owned by the
Parent, by another subsidiary of the Parent or by the Parent and another
such subsidiary, free and clear of all Liens. Except for the capital stock
of its subsidiaries, and as disclosed in the Parent Disclosure Schedule,
the Parent does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity.
(c) Capital Structure. The authorized capital stock of Parent consists of
500,000,000 shares of Parent Common Stock, par value $.01 per share, and
50,000,000 preference shares, par value $.01 per share ("Parent Preference
Shares"). At the close of business on December 20, 1996, (i) 31,281,505
shares of Parent Common Stock and no shares of Parent Preference Shares
were issued and outstanding, (ii) no shares of Parent Common Stock were
held by Parent in its treasury and (iii) 5,600,000 shares of Parent Common
Stock were reserved for issuance upon exercise of outstanding employee
stock options to purchase shares of Parent Common Stock. Except as set
forth above, at the close of business on December 20, 1996, no shares of
capital stock or other voting securities of the Parent were issued,
reserved for issuance or outstanding. All options to purchase shares of
Parent Common Stock were granted under Parent's 1994 Stock Incentive Plan
(the "Stock Incentive Plan"). There are no outstanding stock appreciation
rights of Parent and no outstanding limited stock appreciation rights or
other rights to redeem for cash options or warrants of Parent. All
outstanding shares of capital stock of Parent are, and all shares which may
be issued upon the exercise of stock options will be, and all shares which
may be issued pursuant to this Agreement will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other
indebtedness of Parent having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on
which shareholders of Parent may vote. Except as set forth above, as of the
date of this Agreement, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which Parent or any of its subsidiaries is a
party or by which any of them is bound obligating Parent or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other voting securities of
Parent or of any of its subsidiaries or obligating Parent or any of its
subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There are no outstanding contractual obligations of Parent or
any of its subsidiaries to repurchase, redeem or otherwise acquire any
shares of capital stock (or options to acquire any such shares) of Parent
or its subsidiaries. Except as described in the Parent SEC Documents (as
defined in Section 3.2(e) below), there are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which
any person is or may be entitled to receive any payment based on the
revenues, earnings or financial performance of Parent or any of its
subsidiaries or assets or calculated in accordance therewith (other than
ordinary course payments or commissions to sales representatives of Parent
based upon revenues generated by them without augmentation as a result of
the transactions contemplated hereby) or to cause Parent or any of its
subsidiaries to file a registration statement under the Securities Act, or
which otherwise relate to the registration of any securities of Parent. As
of the date of this Agreement, the authorized capital stock of Sub consists
of 1,000 shares of common stock, par value $.01 per share, of which 100
shares have been validly issued, are fully paid and nonassessable and are
owned by Parent free and clear of any Liens.
(d) Authority; Noncontravention. Parent and Sub have the requisite
corporate power and authority to enter into this Agreement and, subject to
the Parent Shareholder Approval, to consummate the transactions
contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action on
the part of Parent and Sub, subject to the Parent Shareholder Approval of
this Agreement. This
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Agreement has been duly executed and delivered by Parent and Sub and
constitutes a valid and binding obligation of each such party, enforceable
against each such party in accordance with its terms, subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to creditors rights generally and (ii) the
availability of injunctive relief and other equitable remedies. The
execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions of this Agreement will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of any obligation or to loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of Parent or any
of its subsidiaries under, (i) Parent's memorandum of association or
articles of association or Sub's articles of incorporation or by-laws or
the comparable charter or organizational documents of any other subsidiary
of Parent, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession,
franchise or license applicable to Parent or any of its subsidiaries or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective
properties or assets, other than, in the case of clauses (ii) or (iii), any
such conflicts violations, defaults, rights or Liens that individually or
in the aggregate would not (x) have a material adverse effect on Parent,
(y) impair in any material respect the ability of Parent and Sub to perform
their respective obligations under this Agreement or (z) prevent or
materially delay the consummation of any of the transactions contemplated
by this Agreement. No consent, approval, order or authorization of, or
registration, declaration or filing with any Governmental Entity is
required by Parent or any of its subsidiaries in connection with the
execution and delivery of this Agreement or the consummation by Parent or
Sub, as the case may be, of any of the transactions contemplated by this
Agreement, except for (i) the filing with the Specified Agencies of a
premerger notification and report form under the HSR Act, (ii) the filing
with the SEC of (x) the Form F-4 and (y) such reports under Sections 13(a),
13(d) and 16(a) of the Exchange Act as may be required in connection with
this Agreement and the transactions contemplated by this Agreement, (iii)
the filing of the Merger Agreement with the California Secretary of State
and appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business and (iv) such other consents,
approvals, orders, authorizations, registrations, declarations and filings,
including under (x) the laws of any foreign country in which the Company or
any of its subsidiaries conducts any business or owns any property or
assets or (y) the "takeover" or "blue sky" laws of various states, the
failure of which to be obtained or made would not, individually or in the
aggregate, have a material adverse effect on Parent or prevent or
materially delay the consummation of any of the transactions contemplated
by this Agreement.
(e) SEC Documents; Financial Statements. Parent has filed with the SEC
all required reports and forms and other documents (the "Parent SEC
Documents"). As of their respective dates, the Parent SEC Documents
complied in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
of the SEC promulgated thereunder applicable to such Parent SEC Documents,
and none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Except to the
extent that information contained in any Parent SEC Document has been
revised or superseded by a later-filed Parent SEC Document filed and
publicly available prior to the date of this Agreement, none of the Parent
SEC Documents contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of Parent included
in the Parent SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles (except, in the case of unaudited
statements, as permitted by Form 6-K of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the consolidated financial position of Parent
and its
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consolidated subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end
adjustments). Except as set forth in the Parent SEC Documents, and except
for liabilities and obligations incurred in the ordinary course of business
consistent with past practice since the date of the most recent
consolidated balance sheet included in the Parent SEC Documents, neither
Parent nor any of its subsidiaries has any material liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise) required by generally accepted accounting principles to be
recognized or disclosed on a consolidated balance sheet of Parent and its
consolidated subsidiaries or in the notes thereto which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of the Parent and its consolidated subsidiaries taken
as a whole.
(f) Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion or incorporation by reference in
(i) the Form F-4 will, at the time the Form F-4 is filed with the SEC, at
any time it is amended or supplemented or at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading or (ii) the Proxy Statement will,
at the date the Proxy Statement is first mailed to the Company's
Shareholders or the Parent's shareholders or at the time of the Company
Shareholders' Meeting or the Parent Shareholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Form F-4 will comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations
promulgated thereunder, except that no representation or warranty is made
by Parent or Sub with respect to statements made or incorporated by
reference in either the Form F-4 or the Proxy Statement based on
information supplied by the Company specifically for inclusion or
incorporation by reference therein.
(g) Absence of Certain Changes or Events. Except as disclosed in the
Parent SEC Documents filed prior to the date of this Agreement, since
December 31, 1995, Parent has conducted its business only in the ordinary
course consistent with prior practice, and there has not been (i) any
material adverse change in Parent or any of its subsidiaries, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of Parent's
capital stock, (iii) any split, combination or reclassification of any of
its capital stock or any issuance or the authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, (iv) any granting by Parent or any of its
subsidiaries to any officer or employee of Parent or any of its
subsidiaries of any increase in compensation in excess of $300,000 per
annum, not to exceed $1,000,000 in the aggregate, except in the ordinary
course of business consistent with prior practice or as was required under
employment agreements in effect as of the date of the most recent audited
financial statements included in the SEC Documents filed prior to the date
of this Agreement (a list of all such employment agreements being set forth
in Section 3.2(g) of Parent Disclosure Schedule), (v) any granting by
Parent or any of its subsidiaries to any such officer or employee of any
increase in severance or termination pay, except as was required under
employment, severance or termination agreements in effect as of the date of
the most recent audited financial statements included in the SEC Documents
filed prior to the date of this Agreement, (vi) any entry into, or renewal
or modification of, by Parent or any of its subsidiaries of any employment,
consulting, severance or termination agreement with any such officer or
employee, (vii) any damage, destruction or loss, whether or not covered by
insurance, that has or could have a material adverse effect on Parent or
any of its subsidiaries or (viii) any change in accounting methods,
principles or practices by Parent materially affecting its assets,
liabilities or business, except insofar as may have been required by a
change in generally accepted accounting principles.
(h) Litigation. Except as disclosed in the Parent SEC Documents filed
prior to the date of this Agreement, there is no suit, action or proceeding
pending, or to the knowledge of Parent, threatened against Parent or any of
its subsidiaries that, individually or in the aggregate, could reasonably
be expected to (i) have a material adverse effect on Parent, (ii) impair in
any material respect the ability of Parent to
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perform its obligations under this Agreement or (iii) prevent the
consummation of any of the transactions contemplated by this Agreement, nor
is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against Parent or any of its
subsidiaries having, or which is reasonably likely to have any effect
referred to in the foregoing clauses (i), (ii) or (iii).
(i) Absence of Changes in Benefit Plans. Except (i) as disclosed in the
SEC Documents filed prior to the date of this Agreement (ii) as would not
have, in the aggregate, a material adverse effect on Parent or any of its
subsidiaries, or (iii) as required by applicable law, since January 1,
1996, there has not been any adoption or amendment by Parent or any of its
subsidiaries of any collective bargaining agreement or any Benefit Plans
providing benefits to any current or former employee, officer or director
of Parent or any of its subsidiaries. Except as disclosed in the SEC
Documents filed prior to the date of this Agreement, there exist no
employment, consulting, severance, termination or indemnification
agreements, arrangements or understandings between Parent or any of its
subsidiaries and any current or former officer or director of Parent or any
of its subsidiaries as to which unsatisfied or potential obligations of
Parent of greater than $100,000 exist. Except as disclosed in the SEC
Documents filed prior to the date of this Agreement and except as would not
have, in the aggregate, a material adverse effect on Parent or any of its
subsidiaries, since January 1, 1996, neither Parent nor any of its
subsidiaries has taken any action to accelerate any rights or benefits
under any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director or
officer or for the benefit of employees generally.
(j) ERISA Compliance.
(i) Parent has delivered to the Company true, complete and correct
copies of all "employment pension benefit plans" (as defined in Section
3(2) of ERISA, "employee welfare benefit plans" (as defined in Section
3(1) of ERISA) and all other Benefit Plans currently maintained, or
contributed to, or required to be maintained or controlled to, by
Parent or any other person or entity that, together with Parent, is
treated as a Commonly Controlled Entity, including all employment,
termination, severance or other contracts for the benefit of any
current or former employees, officers or directors of Parent or any of
its subsidiaries as to which unsatisfied or potential obligations of
Parent of greater than $100,000 exist. Parent has delivered to the
Company true, complete and correct copies of (v) the most recent annual
report on Form 5500 filed with the Internal Revenue Service with
respect to each of its Benefit Plans (if any such report was required),
(w) the most recently prepared actuarial report for each such Benefit
Plan (if any such report was required), (x) the most recent summary
plan description for each such Benefit Plan for which such summary plan
description is required, (y) the most recently received Internal
Revenue Service determination letter for each such Benefit Plan and (z)
each trust agreement and group annuity contract relating to any such
Benefit Plan.
(ii) Except as would not have, in the aggregate, a material adverse
effect on Parent, each of Parent's and its subsidiaries' Benefit Plans
has been administered in accordance with its terms. Except as would not
have, in the aggregate, a material adverse effect on Parent or any of
its subsidiaries; Parent, each of its subsidiaries and all such Benefit
Plans are in compliance with applicable provisions of ERISA and the
Code.
(iii) As of the date of this Agreement, none of Parent's and its
subsidiaries' Pension Plans intended to be qualified under Section
401(a) of the Code have been the subject of determination letters from
the Internal Revenue Service to the effect that such Pension Plans are
qualified and exempt from federal income taxes under Section 401(a) and
501(a), respectively, of the Code and, to the knowledge of Parent and
Sub, no such determination letter has been revoked nor has revocation
of such determination letter been threatened, nor has any such Pension
Plan been amended since the date of its most recent determination
letter or application therefor in any respect that could reasonably be
expected to adversely affect its qualification or materially increase
its costs.
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(iv) No Pension Plan that Parent or any of its subsidiaries maintains
is subject to Title IV of ERISA.
(v) To the knowledge of Parent, none of Parent, any of its
subsidiaries, any officer of Parent or any of its subsidiaries or any
of Parent's or its subsidiaries' Benefit Plans which are subject to
ERISA, including, without limitation, its Pension Plans, any trusts
created thereunder or any trustee or administrator thereof, has engaged
in a non-exempt "prohibited transaction" (as such term is defined in
Section 406 of ERISA or Section 4975 of the Code) or any other breach
of fiduciary responsibility that could reasonably be expected to
subject Parent, or any of its subsidiaries or any officer of Parent or
any of its subsidiaries, to tax or penalty under ERISA, the Code or
other applicable law that, except as would not have, in the aggregate,
a material adverse effect on Parent or any of its subsidiaries, has not
been corrected. Neither any of such Benefit Plans nor any of such
trusts has been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect
thereto, during the last five years.
(vi) The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any
benefits payable to or in respect of any employee or former employee of
Parent or any subsidiary of Parent or the beneficiary or dependent of
any such employee or former employee.
(vii) With respect to any of Parent's or any of its subsidiaries'
Benefit Plans that is an employee welfare benefit plan, (x) no such
Benefit Plan is funded through a "welfare benefit fund," as such term
is defined in Section 419(e) of the Code, (y) each such Benefit Plan
that is a "group health plan," as such term is defined in Section
5000(b)(1) of the Code, complies in all material respects with the
applicable requirements of Section 4980B(f) of the Code and (z) each
such Benefit Plan (including any such Benefit Plan covering retirees or
other former employees) may be amended or terminated without a material
adverse effect on Parent.
(viii) Except as would not have, in the aggregate, a material adverse
effect on Parent or any of its subsidiaries, no Commonly Controlled
Entity has incurred any material liability to a Pension Plan of Parent
or any of its subsidiaries (other than for contributions not yet due).
(k) Taxes.
(i) Each of Parent and its subsidiaries has timely filed all federal,
state, local and foreign tax returns and reports required to be filed
by it through the date hereof and shall timely file all such returns
and reports required to be filed on or before the Effective Time. All
such returns and reports are and will be true, complete and correct in
all material respects. Parent and each of its subsidiaries has paid and
discharged (or Parent has paid and discharged on such subsidiary's
behalf) all taxes due from them, other than such taxes as are being or
will be contested in good faith by appropriate proceedings and are, in
the judgment of the management of Parent, adequately reserved for on
the most recent financial statements contained in the Parent SEC
Documents filed prior to the date of this Agreement. The most recent
financial statements contained in the Parent SEC Documents filed prior
to the date of this Agreement reflect an adequate reserve in accordance
with generally accepted accounting principles for all taxes payable by
Parent and its subsidiaries for all taxable periods and portions
thereof through the date of such financial statements.
(ii) No claim or deficiency for any taxes has been proposed,
threatened, asserted or assessed by the IRS or any other taxing
authority or agency against Parent or any of its subsidiaries which, if
resolved against Parent or any of its subsidiaries, would, individually
or in the aggregate, have a material adverse effect on Parent. Except
in connection with the tax audit disclosed in SEC Documents filed prior
to the date of this Agreement, neither the Parent nor any of its
subsidiaries has waived any statute of limitations in respect of any
taxes or agreed to any extension of time with respect to a tax
assessment or deficiency. The federal income tax returns of Parent and
each of its subsidiaries consolidated in such returns have been
examined by and settled with the IRS for all years through the fiscal
year ended March 31, 1990.
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(iii) Neither Parent nor any of its subsidiaries has taken or agreed
to take any action or has any knowledge of any fact or circumstance
that is reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a)(1)(A) and (a)(2)(E)
of the Code.
(iv) Neither Parent nor any of its subsidiaries has filed a consent
under Code Section 341(f) concerning collapsible corporations. Neither
Parent nor any of its subsidiaries has been a United States real
property holding corporation within the meaning of Code Section
897(c)(2). Each of Parent and its subsidiaries has disclosed on its
federal income tax returns all positions taken therein that could give
rise to a substantial understatement of federal income tax within the
meaning of Code Section 6662. Neither Parent nor any of its
subsidiaries is a party to any tax allocation or tax sharing agreement.
Neither Parent nor any of its subsidiaries has any liability for the
taxes of any person (other than any of Parent and its subsidiaries)
under Treasury Regulation Section 1.1502-6 (or any similar provision of
state, local, or foreign law), as a transferee or successor, by
contract, or otherwise.
(v) Parent or an affiliate of Parent has been engaged in the active
conduct of a trade or business, within the meaning of Treasury
Regulation Section 1.367(a)- 2T(b)(2) and (3), that is substantial in
comparison to the trade or business of the Company, for the entire 36-
month period immediately preceding the Closing.
(l) Compliance with Applicable Laws.
(i) Each of Parent and its subsidiaries has in effect all Permits
necessary for it to own, lease or operate its properties and assets and
to carry on its business as now conducted, and there has occurred no
default under any such Permit, except for the lack of Permits and for
defaults under Permits which lack or default individually or in the
aggregate would not have a material adverse effect on Parent. The
Parent does not have any reason to believe any Governmental Entity is
considering limiting, suspending or revoking any of the Parent's or its
subsidiaries' Permits. Except as disclosed in the Parent SEC Documents
filed prior to the date of this Agreement, Parent and its subsidiaries
are in compliance with all applicable statutes, laws, ordinances,
rules, orders and regulations (including, without limitation, those
relating to safety, hiring, promotion or pay of employees) of any
Governmental Entity, except for noncompliance which individually or in
the aggregate would not have a material adverse effect on Parent.
(ii) To the knowledge of Parent, Parent and each of its subsidiaries
is, and has been, and each of Parent's former subsidiaries, while
subsidiaries of Parent, was, in compliance in all material respects
with all applicable Environmental Laws, except for noncompliance which
individually or in the aggregate would not have a material adverse
effect on Parent.
(iii) During the period of ownership or operation by Parent and its
subsidiaries of any of their respective current or previously owned or
leased properties, there have been no releases of Hazardous Material
in, on, under or affecting such properties or, to the knowledge of
Parent, any surrounding site, except in each case for those which
individually or in the aggregate are not reasonably likely to have a
material adverse effect on Parent. Prior to the period of ownership or
operation by Parent and its subsidiaries of any of their respective
current or previously owned or leased properties, to the knowledge of
Parent, no Hazardous Material was generated, treated, stored, disposed
of, used, handled or manufactured at, or transported, shipped or
disposed of from, such current or previously owned or leased
properties, and there were no releases of Hazardous Material in, on,
under or affecting any such property or any surrounding site, except in
each case for those which individually or in the aggregate are not
reasonably likely to have a material adverse effect on Parent.
(m) Brokers. Except for Hambrecht & Quist, LLC and Alex Brown & Sons
Incorporated, no broker, investment banker, financial advisor or other
person, the fees and expenses of which will be paid by Parent, is entitled
to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Parent or Sub.
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(n) Opinion of Financial Advisor. Parent has received the opinion of
Hambrecht & Quist LLC, dated the date of this Agreement, to the effect
that, as of such date, the consideration to be received in the Merger is
fair to Parent and the shareholders of Parent from a financial point of
view, and a signed copy of such opinion has been delivered to the Company.
(o) Contracts; Debt Instruments. Other than those agreements set forth on
Schedule 3.2(o)(1), which agreements are confidential and will not be made
available, Schedule 3.2(o)(2) sets forth, as of the date of this Agreement,
a true and complete list of each material agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation (collectively, "Parent
Agreements") of Parent or any of its subsidiaries (a) which would be
required by Rule 601 of SEC Regulation S-K to be filed as an exhibit to an
Annual Report on Form 10-K (including any Benefit Plan) or is a Parent
Agreement (i) with respect to the acquisition or disposition of a material
amount of Parent's assets (whether or not such Parent Agreement has been
fully performed), (ii) other than in connection with employment by Parent
or any of its subsidiaries, contains a covenant not to compete with Parent
or covenant by Parent not to compete with others, (iii) with an Affiliate
(as such term is defined in Rule 12b-2 under the Exchange Act) of Parent
(whether such Parent Agreement is oral or written), (b) with respect to
indebtedness for money borrowed (other than trade payables in the ordinary
and usual course of business), (c) pursuant to which Parent or any of its
subsidiaries is licensing its technology or intellectual property rights or
pursuant to which Parent or any of its subsidiaries is a licensee of
technology or intellectual property rights of others, (d) which constitutes
an employment or consulting agreement of Parent or any of its subsidiaries
and provides for severance payments, termination payments, change-in-
control payments or other similar payments, or (e) which constitutes any
other liability (including, without limitation, any guarantee, surety
contract or similar instrument), obligation or transaction and, in the case
of any item referred to in this clause (e), is material to Parent and its
subsidiaries or their businesses taken as a whole (the items referred to in
clauses (a) through (e) of this sentence being referred to herein as
"Parent Material Contracts"). Except as hereinabove provided, a true and
complete copy of each Parent Material Contract has been made available to
the Company or its representative. Each Parent Material Contract is a valid
and legally binding obligation of Parent or its subsidiaries, whichever is
applicable, is in full force and effect, all material obligations required
to be performed thereunder as of the date hereof by Parent or its
subsidiaries, whichever is applicable, have been performed to date, and to
the knowledge of Parent, no other party to any such Parent Material
Contract is in default in any material respect under the terms thereof
except for such failures to perform or defaults which individually and in
the aggregate would not have a material adverse effect on the Parent.
(p) Title to Properties.
(i) Parent and its subsidiaries have good and marketable title to, or
valid leasehold interests in, all their material properties and assets
except for such as are no longer used or useful in the conduct of their
businesses or as have been disposed of in the ordinary course of
business and except for defects in title, easements, restrictive
covenants and similar encumbrances or impediments that, individually or
in the aggregate, would not have a material adverse effect on Parent.
All such material properties and assets, other than properties and
assets in which Parent or any of its subsidiaries has leasehold
interests, are free and clear of all Liens, except for taxes not yet
due and Liens that, individually or in the aggregate, would not have a
material adverse effect on Parent.
(ii) Each of Parent and its subsidiaries has complied with the terms
of all material leases to which it is a party and under which it is in
occupancy, and all such leases are in full force and effect, except for
such failures to comply or to be in full force and effect which would
not, individually or in the aggregate, have a material adverse effect
on Parent. Each of Parent and its subsidiaries enjoys peaceful and
undisturbed possession under all such material leases, except for the
failures to have so which would not, individually or in the aggregate,
have a material adverse effect on Parent.
(q) Accounting Matters. Neither Parent nor, to its best knowledge, any of
its affiliates has taken or agreed to take any action or is aware of any
condition that would prevent Parent from accounting for the business
combination to be effected by the Merger as a pooling-of-interests.
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(r) Voting Requirements. Parent Shareholder Approval is the only vote of
the holders of any class or series of Parent's securities necessary to
approve this Agreement and the transactions contemplated by this Agreement.
(s) Noncompetition. Parent and its subsidiaries are not subject to any
non-competition or similar restriction on their respective businesses.
(t) Intellectual Property. Parent and each of its subsidiaries owns or
possesses adequate and enforceable licenses or other rights to use all
patents, trade secrets, trade names, trademarks, inventions and processes
used in and material to the business of Parent or such subsidiary as
currently conducted, and such licenses and rights will not be affected by
the consummation of the Merger. Except as disclosed in the Parent SEC
Documents filed prior to the date of this Agreement, neither Parent nor any
of its subsidiaries has received any notice of conflict or infringement
which asserts the rights of others with respect to such licenses and
rights. Parent owns or rightfully possesses (i) the source code, recorded
on computer magnetic media and in written form, for its information systems
programs, including both the information systems programs themselves and
the product related infrastructure (the "Parent Software") and (ii) all
commentary, explanations, specifications, documentation, proprietary
information, test programs and program specifications, compiler and
assembler descriptions of proprietary or third party system utilities, and
descriptions of system/program generation and programs not owned by Parent
but required for use or support, relating to the Parent Software that are
reasonably necessary for the Surviving Corporation to maintain and enhance
the Parent Software, and to provide a commercially standard level of
service and support to users of the Parent Software without the aid of any
other party and without use of any other material.
(u) The Parent Significant Shareholders beneficially own and have the
right to vote, in the aggregate, approximately 53% of the total issued and
outstanding shares of Parent Common Stock.
(v) Interim Operations of Sub.
(i) Sub was formed solely for the purpose of engaging in the
transactions contemplated hereby, has engaged in no other business
activities and has conducted its operations only as contemplated
hereby.
(ii) As of the date hereof and the Effective Time, except for
obligations or liabilities incurred in connection with its
incorporation or organization and the transactions contemplated by this
Agreement, Sub has not and will not have incurred, directly or
indirectly, through any subsidiary, any obligations or liabilities or
engaged in any business activities of any type or kind whatsoever or
entered into any agreements or arrangements with any person.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Conduct of Business.
(a) Conduct of Business by the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, the Company shall, and
shall cause its subsidiaries to, carry on their respective businesses in the
ordinary course and use all reasonable efforts to preserve intact their
current business organizations, keep available the services of their current
officers and employees and preserve their relationships with customers,
suppliers and others having business dealings with them. In furtherance of the
foregoing and subject to applicable law, the Company agrees to confer with
Parent, as promptly as practicable, prior to the Company taking any material
actions or making any material management decisions with respect to the
conduct of the Company's business. Without limiting the generality of the
foregoing, between the date of this Agreement and the Effective Time or until
the earlier termination of this Agreement pursuant to its terms, except (1) as
contemplated by this Agreement, (2) as set
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forth in Section 4.1(a) of the Company Disclosure Schedule, or (3) with the
prior written consent of Parent (which consent shall not be unreasonably
withheld), the Company shall not, and shall not permit any of its subsidiaries
to:
(i) (A) declare, set aside or pay (whether in cash, stock, property or
otherwise) any dividends on, or make any other distributions in respect of,
any of its capital stock, other than dividends and distributions by any
direct or indirect wholly owned subsidiary of the Company to its parent,
(B) split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or (C) purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any of its
subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) other than the issuance of the Company Common Stock upon the
exercise of Stock Options and warrants outstanding on the date of this
Agreement in accordance with their present terms or in accordance with the
present terms of any employment agreements existing on the date of this
Agreement and described in Section 4.1(a) of the Company Disclosure
Schedule or the issuance of Company Common Stock pursuant to the Company
Purchase Plan in accordance with its present terms, (A) issue, deliver,
sell, award, pledge, dispose of or otherwise encumber or authorize or
propose the issuance, delivery, grant, sale, award, pledge or other
encumbrance (including limitations in voting rights) or authorization of,
any shares of its capital stock, any voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, (B) amend or otherwise
modify the terms of any such rights, warrants or options (except as
expressly contemplated by this Agreement) or (C) accelerate the vesting of
any of the Stock Options;
(iii) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
(iv) acquire or agree to acquire (for cash or shares of stock or
otherwise) by merging or consolidating with, or by purchasing a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof;
(v) mortgage or otherwise encumber or subject to any Lien, or sell,
lease, exchange or otherwise dispose of any of, its properties or assets,
except for sales of its properties or assets in the ordinary course of
business consistent with past practice;
(vi) (A) increase the rate or terms of compensation payable or to become
payable generally to any of the Company's or any of its subsidiaries'
directors, executive officers, or employees other than usual and customary
salary increases to non-management employees, (B) pay or agree to pay any
pension, retirement allowance or other employee benefit not provided for by
any existing Pension Plan, Benefit Plan or employment agreement described
in the SEC Documents filed prior to the date of this Agreement, (C) commit
itself to any additional pension, profit sharing, bonus, incentive,
deferred compensation, stock purchase, stock option, stock appreciation
right, group insurance, severance pay, continuation pay, termination pay,
retirement or other employee benefit plan, agreement or arrangement, or
increase the rate or terms of any employee plan or benefit arrangement, (D)
enter into any employment agreement with or for the benefit of any person
or (E) increase the rate of compensation under or otherwise change the
terms of or renew any existing employment agreement; provided, however,
that nothing in this clause (vi) shall preclude payments under the terms of
the existing incentive compensation plans of the Company in accordance with
past practice;
(vii) change its fiscal year;
(viii) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or
any of its subsidiaries, guarantee any debt securities of another person,
enter into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having
the economic effect of any of the foregoing, except for the incurrence of
indebtedness
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which, in the aggregate, does not exceed $250,000, or (B) other than in the
ordinary course of business consistent with past practice, make any loans,
advances or capital contributions to, or investments in, any other person,
other than to the Company or any direct or indirect wholly owned subsidiary
of the Company;
(ix) make or agree to make any new capital expenditures which
individually exceed $50,000 or which in the aggregate exceed $500,000;
(x) make or rescind any express or deemed election relating to taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of its federal
income tax return for the taxable year ended December 31, 1995, except as
may be required by applicable law;
(xi) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) of the
Company included in the SEC Documents or incurred in the ordinary course of
business consistent with past practice;
(xii) except in the ordinary course of business consistent with past
practice, modify, amend, renew, fail to renew or terminate any material
contract or agreement to which the Company or any subsidiary is a party or
waive, release or assign any material rights or claims; or
(xiii) authorize any of, or commit or agree to take any of, the foregoing
actions.
(b) Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Parent shall, and shall
cause its subsidiaries to, carry on their respective businesses in the
ordinary course and use all reasonable efforts to preserve intact their
current business organizations, keep available the services of their current
officers and employees and preserve their relationships with customers,
suppliers and others having business dealings with them. Prior to the release
of any material press release, Parent shall give the Company reasonable
advance notice. Without limiting the generality of the foregoing, between the
date of this Agreement and the Effective Time or until the earlier termination
of this Agreement pursuant to its terms, except (1) as contemplated by this
Agreement, (2) as set forth in Section 4.1(b) of the Parent Disclosure
Schedule, or (3) with the prior written consent of the Company (which consent
shall not be unreasonably withheld), Parent shall not, and shall not permit
any of its subsidiaries to:
(i) (A) declare, set aside or pay (whether in cash, stock, property or
otherwise) any dividends on, or make any other distributions in respect of,
any of its capital stock, other than dividends and distributions by any
direct or indirect wholly owned subsidiary of Parent to its parent, (B)
split, combine or reclassify any of its capital stock or issue or authorize
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (C) purchase, redeem or
otherwise acquire any shares of capital stock of Parent or any of its
subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) other than the issuance of Parent Common Stock in connection with
the merger of VideoGuide, Inc. or, upon the exercise of stock options
outstanding under the Stock Incentive Plan outstanding on the date of this
Agreement in accordance with their present terms or in accordance with the
present terms of any employment agreements existing on the date of this
Agreement and described in Section 4.1(b) of the Parent Disclosure Schedule
or, the granting of stock options to purchase up to an aggregate of two
million shares of Parent Common Stock (at an exercise price equal to the
fair market value of the Parent Common Stock on the date of grant) pursuant
to the Stock Incentive Plan as in effect on the date of this Agreement and
the issuance of Parent Common Stock upon the exercise thereof, (A) issue,
deliver, sell, award, pledge, dispose of or otherwise encumber or authorize
or propose the issuance, delivery, grant, sale, award, pledge
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or other encumbrance (including limitations in voting rights) or
authorization of, any shares of its capital stock, any voting securities or
any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities, (B)
amend or otherwise modify the terms of any such rights, warrants or options
(except as expressly contemplated by this Agreement) or (C) accelerate the
vesting of any of the stock options outstanding under the Stock Incentive
Plan;
(iii) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents;
(iv) acquire or agree to acquire (for cash or shares of stock or
otherwise) by merging or consolidating with, or by purchasing a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof, which, in the aggregate, have a value in
excess of $10,000,000;
(v) mortgage or otherwise encumber or subject to any Lien, or sell,
lease, exchange or otherwise dispose of any of, its properties or assets,
except for sales of its properties or assets in the ordinary course of
business consistent with past practice;
(vi) change its fiscal year;
(vii) (A) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of Parent or any of
its subsidiaries, guarantee any debt securities of another person, enter
into any "keep well" or other agreement to maintain any financial statement
condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, except for the incurrence of
indebtedness which, in the aggregate, does not exceed $1,000,000, or (B)
other than in the ordinary course of business consistent with past
practice, make any loans, advances or capital contributions to, or
investments in, any other person, other than to Parent or any direct or
indirect wholly owned subsidiary of Parent;
(viii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business consistent with past practice or in accordance with their terms,
of liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto) of
Parent included in the Parent SEC Documents or incurred in the ordinary
course of business consistent with past practice; or
(ix) authorize any of, or commit or agree to take any of, the foregoing
actions.
(c) Other Actions. The Company and Parent shall not, and shall not permit
any of their respect subsidiaries to, take any action that would result in (i)
any of the representations or warranties of such party set forth in this
Agreement that are qualified as to materiality becoming untrue or (ii) any of
such representations or warranties that are not so qualified becoming untrue
in any material respect.
SECTION 4.2 No Inconsistent Company Activities.
(a) In light of the consideration given by the Board of Directors of the
Company prior to the execution of this Agreement to, among other things, the
transactions contemplated hereby and by the Company Significant Shareholder
Agreement, and to various alternatives to the transactions contemplated by
this Agreement, and in light of the Company's representations contained in
Section 3.1(o), from and after the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement in accordance with its
terms, the Company agrees that it shall not, nor shall it permit any of its
subsidiaries to, nor shall it authorize or permit any officer, director or
employee of, or any investment banker, attorney or other advisor,
representative or agent of, the Company or any of its subsidiaries to,
directly or indirectly, solicit or initiate, or knowingly encourage the
submission of, any Company Takeover Proposal (as defined below), or
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to,
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any Company Takeover Proposal. For purposes of this Agreement, "Company
Takeover Proposal" means any proposal (whether or not in writing and whether
or not delivered to the Company's shareholders generally) regarding (i) a
merger, consolidation, purchase of assets (other than purchases of assets or
inventory in the ordinary course of business), tender offer, share exchange or
other business combination or similar transaction involving the Company or any
of its subsidiaries, (ii) any proposal or offer to acquire in any manner,
directly or indirectly, any equity interest in or any voting securities of the
Company or any of its subsidiaries which constitutes 10% or more of the total
of such equity interests or voting securities, or a substantial portion of the
assets of the Company or any of its subsidiaries, (iii) the acquisition by any
person of beneficial ownership or a right to acquire beneficial ownership of,
or the formation of any "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) which beneficially
owns, or has the right to acquire beneficial ownership of 10% or more of the
then outstanding shares of capital stock of the Company or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or
any agreement to engage in any of the foregoing. Neither the Company nor any
of its subsidiaries shall, directly or indirectly, release any third party
from any confidentiality agreement. Nothing contained herein shall prohibit
the Company from disclosing to its shareholders the statement required by Rule
14e-2(a) under the Exchange Act with respect to a Company Takeover Proposal by
means of a tender offer.
(b) The restrictions set forth in Section 4.2(a) shall not prevent the
Board of Directors of the Company, in the exercise of and as required by its
fiduciary duties as determined by the Board of Directors of the Company in
good faith (after consultation with the Company's outside legal counsel) from
engaging in discussions or negotiations with, and furnishing information
concerning the Company and its business, properties and assets (but not
directly or indirectly soliciting or initiating such discussions or
negotiations or directly or indirectly encouraging inquiries or the making of
any Company Takeover Proposal) to a third party who makes a written,
unsolicited, bona fide Company Takeover Proposal that is (based on objective
criteria and not on the subjective intent of the acquiror) likely to be
consummated and is financially superior to the Merger (a "Company Superior
Proposal"), as determined in each case in good faith by the Company's Board of
Directors after consultation with, and the receipt of an opinion from, the
Company's financial advisors, which shall be of national reputation, provided
that Parent shall have been notified in writing of such Company Superior
Proposal and given a copy of such Company Superior Proposal in advance of the
taking of any such actions by the Company.
Upon compliance with the foregoing and, following receipt of the Company
Termination Fee Notice (as defined in Section 7.5(a)), payment in full by the
Company to Parent of the Company Termination Fee (as defined in Section
7.5(a)), (i) the Company's Board of Directors shall be entitled, subject to
the rights of Parent under this Agreement, to withdraw, modify or refrain from
making its recommendation referred to in Section 5.1(d) following receipt of a
Company Superior Proposal, and approve and recommend to the shareholders of
the Company such Company Superior Proposal and (ii) the Company may enter into
an agreement with such third party concerning a Company Superior Proposal.
(c) The Company shall promptly advise Parent orally and in writing of any
request for information or of any Company Takeover Proposal, or any inquiry
with respect to or which could lead to any Company Takeover Proposal, the
material terms and conditions of such request, Company Takeover Proposal or
inquiry, and the identity of the person making any such Company Takeover
Proposal or inquiry. The Company shall keep Parent informed of the status and
details of any such request, Company Takeover Proposal or inquiry.
(d) Notwithstanding Section 4.2(b), the Company shall not provide any non-
public information to a third party unless the Company provides such non-
public information pursuant to a non-disclosure agreement with terms regarding
the protection of confidential information at least as restrictive as such
terms in the Confidentiality Agreements previously entered into between Parent
and the Company. The Company shall be entitled to provide copies of this
Section 4.2 to third parties who, on an unsolicited basis after the date of
this Agreement, contact the Company regarding a Company Takeover Proposal,
provided that Parent shall concurrently be notified of such contact and
delivery of such copy.
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(e) The Company shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Parent and
Sub) conducted prior to the date of this Agreement with respect to any of the
foregoing.
SECTION 4.3 No Inconsistent Parent Activities.
(a) In light of the consideration given by the Board of Directors of Parent
prior to the execution of this Agreement to, among other things, the
transactions contemplated hereby and by the Parent Significant Shareholder
Agreement, and to various alternatives to the transactions contemplated by
this Agreement, and in light of the Company's representations contained in
Section 3.2(n), from and after the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement in accordance with its
terms, Parent agrees that it shall not, nor shall it permit any of its
subsidiaries to, nor shall it authorize or permit any officer, director or
employee of, or any investment banker, attorney or other advisor,
representative or agent of, Parent or any of its subsidiaries to, directly or
indirectly, solicit or initiate, or knowingly encourage the submission of, any
Parent Takeover Proposal (as defined below), or participate in any discussions
or negotiations regarding, or furnish to any person any information with
respect to, or take any other action to facilitate any inquiries or the making
of any proposal that constitutes, or may reasonably be expected to lead to,
any Parent Takeover Proposal. For purposes of this Agreement, "Parent Takeover
Proposal" means any proposal (whether or not in writing and whether or not
delivered to the Parent's shareholders generally) regarding (i) a merger,
consolidation, purchase of assets (other than purchases of assets or inventory
in the ordinary course of business), tender offer, share exchange or other
business combination or similar transaction involving Parent or any of its
subsidiaries, (ii) any proposal or offer to acquire in any manner, directly or
indirectly, any equity interest in or any voting securities of Parent or any
of its subsidiaries which constitutes 10% or more of the total of such equity
interests or voting securities, or a substantial portion of the assets of
Parent or any of its subsidiaries, (iii) the acquisition by any person of
beneficial ownership or a right to acquire beneficial ownership of, or the
formation of any "group" (as defined under Section 13(d) of the Exchange Act
and the rules and regulations thereunder) which beneficially owns, or has the
right to acquire beneficial ownership of 10% or more of the then outstanding
shares of capital stock of Parent, or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing of any agreement to
engage in any of the foregoing. Neither Parent nor any of its subsidiaries
shall, directly or indirectly, release any third party from any
confidentiality agreement. Nothing contained herein shall prohibit Parent from
disclosing to its shareholders the statement required by Rule 14e-2(a) under
the Exchange Act with respect to a Parent Takeover Proposal by means of a
tender offer.
(b) The restrictions set forth in Section 4.3(a) shall not prevent the Board
of Directors of Parent, in the exercise of and as required by its fiduciary
duties as determined by the Board of Directors of Parent in good faith (after
consultation with Parent's outside legal counsel) from engaging in discussions
or negotiations with, and furnishing information concerning Parent and its
business, properties and assets (but not directly or indirectly soliciting or
initiating such discussions or negotiations or directly or indirectly
encouraging inquiries or the making of any Parent Takeover Proposal) to a
third party who makes a written, unsolicited, bona fide Parent Takeover
Proposal that is likely to be consummated and is financially superior to the
Merger (a "Parent Superior Proposal"), as determined in each case in good
faith by the Parent's Board of Directors after consultation with, and the
receipt of an opinion from, the Parent's financial advisors, which shall be of
national reputation, provided that the Company shall have been notified in
writing of such Parent Superior Proposal and given a copy of such Parent
Superior Proposal in advance of the taking of any such actions by Parent.
Upon compliance with the foregoing and, following receipt of the Parent
Termination Fee Notice (as defined in Section 7.5(b)), payment in full by
Parent to the Company of the Parent Termination Fee (as defined in Section
7.5(b)), (i) Parent' Board of Directors shall be entitled, subject to the
rights of the Company under this Agreement, to withdraw, modify or refrain
from making its recommendation referred to in Section 5.1(d) following receipt
of a Parent Superior Proposal, and approve and recommend to the shareholders
of Parent such Parent Superior Proposal and (ii) Parent may enter into an
agreement with such third party concerning a Parent Superior Proposal.
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(c) Parent shall promptly advise the Company orally and in writing of any
request for information or of any Parent Takeover Proposal, or any inquiry
with respect to or which could lead to any Parent Takeover Proposal, the
material terms and conditions of such request, Parent Takeover Proposal or
inquiry, and the identity of the person making any such Parent Takeover
Proposal or inquiry. Parent shall keep the Company informed of the status and
details of any such request, Parent Takeover Proposal or inquiry.
(d) Notwithstanding Section 4.3(b), Parent shall not provide any non-public
information to a third party unless Parent provides such non-public
information pursuant to a non-disclosure agreement with terms regarding the
protection of confidential information at least as restrictive as such terms
in the Confidentiality Agreements previously entered into between Parent and
the Company. Parent shall be entitled to provide copies of this Section 4.3 to
third parties who, on an unsolicited basis after the date of this Agreement,
contact Parent regarding a Parent Takeover Proposal, provided that the Company
shall concurrently be notified of such contact and delivery of such copy.
(e) Parent shall immediately cease and cause to be terminated any existing
discussion or negotiations with any parties (other than the Company) conducted
prior to the date of this Agreement with respect to any of the foregoing.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Preparation of Form F-4 and the Proxy Statement; Shareholders'
Meetings.
(a) As promptly as reasonably practicable after the execution of this
Agreement, (i) the Company and Parent shall prepare and file with the SEC a
preliminary joint proxy statement in form and substance satisfactory to each
of the Company and Parent, relating to the meeting of the Company's
shareholders to be held to obtain the Company Shareholder Approval and the
meeting of the Parent's Shareholders to obtain the Parent Shareholder Approval
(together with any amendments thereof or supplements thereto, the "Proxy
Statement") and (ii) Parent shall prepare and file with the SEC a registration
statement on Form F-4 (together with all amendments thereto, the "Form F-4")
in which the Proxy Statement shall be included as a prospectus, in connection
with the registration under the Securities Act of the shares of Parent Common
Stock to be issued to the shareholders of the Company pursuant to the Merger.
As promptly as reasonably practicable after the date of this Agreement, Parent
and the Company shall prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal or Blue Sky Laws
relating to the Merger and the transactions contemplated by this Agreement and
the Merger Agreement, including, without limitation, under the HSR Act and
state takeover laws (the "Other Filings"). Each of Parent and the Company will
notify the other promptly of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff or any other government
officials for amendments or supplements to the Form F-4, the Proxy Statement
or any Other Filing or for additional information and will supply the other
with copies of all correspondence between such company or any of its
representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the Form F-4, the
Proxy Statement, the Merger or any Other Filing. The Proxy Statement, the Form
F-4 and the Other Filings shall comply in all material respects with all
applicable requirements of law. Each of Parent and the Company shall use all
reasonable efforts to cause the Form F-4 to become effective as promptly as
reasonably practicable, and shall take all or any action required under any
applicable federal or state securities laws in connection with the issuance of
shares of Parent Common Stock pursuant to the Merger. Except as set forth in
Sections 3.1(p) and 3.2(o), each of Parent and the Company shall furnish all
information concerning itself to the other as the other may reasonably request
in connection with such actions and the preparation of the Form F-4 and Proxy
Statement. The Company authorizes Parent to utilize in the Form F-4 and in all
such state filed materials, the information concerning the Company and its
subsidiaries provided to Parent in connection with, or contained in, the Proxy
Statement. Parent promptly will advise the Company when the Form F-4 has
become effective and of any supplements or amendments thereto, and the
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Company shall not distribute any written material that would constitute, as
advised by counsel to the Company, a "prospectus" relating to the Merger or
the Parent Common Stock within the meaning of the Securities Act or any
applicable state securities law without the prior written consent of Parent.
As promptly as reasonably practicable after the Form F-4 shall have become
effective, each of the Company and Parent shall mail the Proxy Statement to
its respective shareholders.
(b) Parent agrees promptly to advise the Company if at any time prior to the
meeting of the Parent's Shareholders or the meeting of the Company's
shareholders any information provided by it in the Proxy Statement is or
becomes incorrect or incomplete in any material respect and to provide the
Company with the information needed to correct such inaccuracy or omission.
Parent will furnish the Company with such supplemental information as may be
necessary in order to cause the Proxy Statement, insofar as it relates to
Parent and its subsidiaries, to comply with applicable law after the mailing
thereof to the Parent's Shareholders or the Company's shareholders.
(c) The Company agrees promptly to advise Parent if at any time prior to the
meeting of the Parent's Shareholders or the meeting of the Company's
shareholders any information provided by it in the Proxy Statement is or
becomes incorrect or incomplete in any material respect and to provide Parent
with the information needed to correct such inaccuracy or omission. The
Company will furnish Parent with such supplemental information as may be
necessary in order to cause the Proxy Statement, insofar as it relates to the
Company and its subsidiaries, to comply with applicable law after the mailing
thereof to the Parent's Shareholders or the Company's shareholders.
(d) As soon as practicable following the date of this Agreement, the Company
shall call and hold a meeting of its shareholders (the "Company Shareholders'
Meeting") and the Parent shall call and hold a meeting of the Parent's
Shareholders (the "Parent Shareholders' Meeting"). The purpose of such
meetings shall be to obtain the Company Shareholder Approval and the Parent
Shareholder Approval, respectively. Each of the Company and Parent shall
coordinate and cooperate with respect to the timing of the Company
Shareholders' Meeting and Parent Shareholders' Meeting and shall use
reasonable efforts to hold such meetings on the same day. Each of the Company
and Parent shall use its best efforts to solicit from its shareholders
proxies, and shall take all other action necessary or advisable to secure the
vote or consent of shareholders required by applicable law or otherwise to
obtain the Company Shareholder Approval and the Parent Shareholder Approval,
respectively, and through its respective Board of Directors, shall recommend
to its respective shareholders the obtaining of the Company Shareholder
Approval and the Parent Shareholder Approval, respectively; provided that (i)
the recommendation of the Board of Directors of the Company may not be
included or may be withdrawn or modified if previously included if, following
receipt of the Company Termination Fee Notice (as defined in Section 7.5(a)),
the Company has paid the Company Termination Fee and the Company has accepted
a Company Superior Proposal in accordance with the terms of Section 4.2 and
(ii) the recommendation of the Board of Directors of Parent may not be
included or may be withdrawn or modified if previously included if, following
receipt of the Parent Termination Fee Notice (as defined in Section 7.5(b)),
Parent has paid the Parent Termination Fee and Parent has accepted a Parent
Superior Proposal in accordance with the terms of Section 4.3.
SECTION 5.2 Access to Information; Confidentiality. Other than those
agreements set forth on Schedule 3.1(p)(1) and Schedule 3.2(o)(1), which
agreements are confidential and will not be made available, each of the
Company and Parent shall, and shall cause each of its respective subsidiaries
to, afford to the other party, and to the officers, employees, accountants,
counsel, financial advisors and other representatives of such other party,
reasonable access during normal business hours during the period prior to the
Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, each of the
Company and Parent shall, and shall cause each of its respective subsidiaries
to, furnish promptly to the other party, (a) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its business, properties and personnel as such
other party may reasonably request. Each of the Company and Parent will hold,
and will cause its respective officers, employees, accountants, counsel,
financial advisers and other representatives and affiliates to hold, any
confidential information in accordance with the Confidentiality
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Agreements dated September 11, 1996, between Parent and the Company (the
"Confidentiality Agreements"). No information or knowledge obtained in any
investigation pursuant to this Section 5.2 shall affect or otherwise obviate
or diminish any representations and warranties of any party or conditions to
the obligations of any party.
SECTION 5.3 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use reasonable best efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this
Agreement, subject to the appropriate approval of the shareholders of the
Company and Parent, including (i) the making of all necessary registrations
and filings (including filings with Governmental Entities, if any), (ii) the
obtaining of all necessary consents, approvals or waivers from Governmental
Entities and other third parties, (iii) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement, (iv) the using of
all reasonable best efforts necessary to lift, rescind or mitigate the effect
of any injunction or restraining order or other order adversely affecting the
ability of any party hereto to consummate the transactions contemplated
hereby, (v) the using of all reasonable best efforts to fulfill all conditions
applicable to Parent, Sub or the Company pursuant to this Agreement, and (vi)
the using of all reasonable best efforts to prevent, with respect to a
threatened or pending temporary, preliminary or permanent injunction or other
order, decree or ruling or statute, rule, regulation or executive order, the
entry, enactment or promulgation thereof, as the case may be.
(b) The Company shall give prompt written notice to Parent, and Parent shall
give prompt written notice to the Company, of (i) any representation or
warranty made by it contained in this Agreement that is qualified as to
materiality becoming untrue or any such representation or warranty that is not
so qualified becoming untrue in any material respect or (ii) the material
failure by it to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement; provided,
however, that no such notification shall (i) affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement or (ii) limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
SECTION 5.4 Stock Option Plans.
(a) At the Effective Time, each outstanding Company Stock Option, whether
vested or unvested, shall be assumed by Parent. Accordingly, each Company
Stock Option shall be deemed to constitute an option to acquire, on
substantially the same terms and conditions as were applicable under such
Company Stock Option, the number, rounded down to the nearest whole integer,
of full shares of Parent Common Stock the holder of such Company Stock Option
would have been entitled to receive pursuant to the Merger had such holder
exercised such Company Stock Option in full, including as to unvested shares,
immediately prior to the Effective Time, at a price per share equal to (y) the
exercise price per share for the shares of Company Common Stock otherwise
purchasable pursuant to such Company Stock Option divided by (z) the Exchange
Ratio, with such exercise price per share rounded up to the nearest whole
cent.
(b) As soon as practicable after the Effective Time, Parent shall deliver to
each holder of a Company Stock Option a document evidencing the foregoing
assumption of such Company Stock Option by Parent.
(c) As soon as practicable after the Effective Time, Parent shall file a
registration statement on Form S-8 (or any successor form), or another
appropriate form with respect to the shares of Parent Common Stock subject to
such Company Stock Options and shall use its reasonable efforts to maintain
the effectiveness of such registration statement (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as
such Company Stock Options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, Parent
shall administer the Company Stock Option Plans assumed pursuant to this
Section 5.4 in a manner that complies with Rule 16b-3 promulgated by the SEC
under the Exchange Act.
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(d) The Company agrees that it shall terminate the Company Purchase Plan by
having its Board of Directors amend the Company Purchase Plan as necessary (i)
to provide that the shares of the Company Common Stock to be purchased under
the Company Purchase Plan shall be purchased under the Company Purchase Plan
on a new "Exercise Date" (as such term is defined in the Company Purchase
Plan) set by the Board of Directors, which Exercise Date shall be on the last
trading day immediately prior to the Effective Time, or such earlier time as
the Board shall specify, (ii) to provide that any such shares purchased under
the Company Purchase Plan shall be automatically converted on the same basis
as all other shares of the Company Common Stock (other than shares canceled
pursuant to Section 2.1(b)), except that such shares shall be converted
automatically into shares of Parent Common Stock without issuance of
certificates representing issued and outstanding shares of the Company Common
Stock to Company Purchase Plan participants, and (iii) to provide that
immediately following such purchase of shares of the Company Common Stock, the
Company Purchase Plan shall terminate.
SECTION 5.5 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated hereby that are
required or permitted to be filed on or before the Effective Time. All of such
taxes and expenses shall be borne equally by Parent and the Company.
SECTION 5.6 Indemnification and Insurance.
(a) Upon the Effective Time, Parent shall assume all of the obligations of
the Company under the Company's existing indemnification agreements with each
of the directors and officers of the Company as such agreements relate to the
indemnification of such person for expenses and liabilities arising from facts
or events which occurred on or before the Effective Time or relating to the
Merger or transactions contemplated by this Agreement.
(b) The articles of incorporation and the by-laws of the Surviving
Corporation shall contain the provisions with respect to indemnification and
exculpation from liability substantially identical to those set forth in the
Company's articles of incorporation and by-laws on the date of this Agreement,
which provisions shall not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who on or prior to the Effective
Time were directors, officers, employees or agents of the Company unless such
modification is required by law.
(c) The Surviving Corporation or, at Parent's discretion, Parent shall
maintain in effect for three years from the Effective Time policies of
directors' and officers' liability insurance for the benefit of the
individuals who at the Effective Time were directors or officers of the
Company containing terms and conditions which are not materially less
advantageous than those policies maintained by the Company at the date hereof,
with respect to matters occurring prior to the Effective Time, to the extent
available, and having the maximum available coverage under the current
policies of directors' and officers' liability insurance; provided that (i) in
lieu of the purchase of such insurance by the Surviving Corporation or Parent,
the Company, with Parent's written consent, may purchase a three-year extended
reporting period endorsement ("reporting tail coverage") under its existing
Directors' and Officers' liability insurance coverage and (ii) the Surviving
Corporation and Parent shall not be obligated to make annual premium payments
for such insurance to the extent such premiums exceed 175% of the annual
premium payments paid as of the date hereof by the Company for such insurance
if the Surviving Corporation and Parent shall provide the maximum coverage
available at 175% of such premiums.
(d) If Parent, the Surviving Corporation or any of their successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then and in each such case, proper provisions shall be made so
that the successors and assigns of Parent or the Surviving Corporation, as the
case may be, shall assume the obligations set forth in this Section 5.6.
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SECTION 5.7 Letters of Accountants.
(a) The Company shall use its reasonable efforts to cause to be delivered to
Parent "comfort" letters of Deloitte & Touche LLP, the Company's independent
public accountants, dated and delivered on the date on which the Form F-4
shall become effective and dated the Closing Date, each addressed to Parent,
in form and substance reasonably satisfactory to Parent and reasonably
customary in scope and substance for letters delivered by independent public
accountants in connection with transactions such as those contemplated by this
Agreement.
(b) Parent shall use its reasonable efforts to cause to be delivered to the
Company "comfort" letters of KPMG Peat Marwick LLP, Parent's independent
public accountants, dated and delivered on the date on which the Form F-4
shall become effective and dated the Closing Date, each addressed to the
Company, in form and substance reasonably satisfactory to the Company and
reasonably customary in scope and substance for letters delivered by
independent public accountants in connection with transactions such as those
contemplated by this Agreement.
SECTION 5.8 Fees and Expenses. Except as provided in Section 7.5, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses, except that those expenses, other than
attorneys' and accountants' fees and expenses, incurred in connection with
printing the Proxy Statement and Form F-4, as well as the filing fee relating
to the Proxy Statement and Form F-4 paid to the SEC, will be shared equally by
Parent and the Company.
SECTION 5.9 Public Announcements. Parent and Sub, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press
release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement shall be in the
form attached hereto as Exhibit 5.9.
SECTION 5.10 Affiliates; Accounting and Tax Treatment.
(a) The Company and Parent shall each (i) within five days after the date of
this Agreement, deliver to each other a letter identifying all persons who may
be deemed affiliates of the Company or Parent, as the case may be, under Rule
145 of the Securities Act or otherwise under applicable SEC accounting
releases with respect to pooling-of-interests accounting treatment and (ii) no
later than five days after the date of this Agreement, obtain (if not
previously obtained) from each such affiliate a written agreement
substantially in the form of Exhibit 5.10A hereto with respect to the Company
and Exhibit 5.10B hereto with respect to Parent. The Company and Parent each
shall obtain such a written agreement as soon as practicable from any person
who may be deemed to have become an affiliate of the Company or Parent, as the
case may be, after the delivery of the letters referred to in clause (i) above
and prior to the Effective Time.
(b) Each party hereto shall use its best efforts to (i) cause the Merger to
qualify, and shall not take any actions which could prevent the Merger from
qualifying, for pooling-of-interests accounting treatment and as a
reorganization under the provisions of Section 368(a) of the Code and (ii)
obtain the letters from the accountants referred to in Sections 6.2(e) and
6.3(d) and the opinions of counsel referred to in Sections 6.2(d) and 6.3(c).
(c) Each party hereto shall (i) use its best efforts to secure the waiver of
any rights to redeem for cash options or warrants of the Company by each
holder thereof and (ii) take such other actions as are necessary to cure any
facts or circumstances that could prevent the Merger from qualifying for
pooling-of-interests accounting treatment.
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(d) Parent shall publish results covering at least 30 days of combined
operations of the Company and Parent within 45 calendar days of the end of
Parent's fiscal quarter ending immediately following the Effective Time that
includes such 30 days of combined operations; provided, however, if such
fiscal quarter is Parent's fourth fiscal quarter, then Parent shall publish
such results within 90 calendar days of the end of Parent's fiscal year.
SECTION 5.11 Repayment of Affiliate Receivables. At or prior to the Closing
Date, the Company agrees that it will use its best efforts to cause to be paid
in full (with accrued and unpaid interest) all amounts owing to the Company
and its subsidiaries by any shareholder, officer or director or affiliate of
the Company or any of its subsidiaries.
SECTION 5.12 Benefit Plans Generally. Except for the Company Purchase Plan
which shall terminate at the Effective Time, Parent agrees to honor in
accordance with their terms, all employment, severance and similar agreements
to which the Company is a party and which are listed on the Company Disclosure
Schedule and all accrued benefits that are vested as of the Effective Time
under any Company benefit program. Except for the Company Purchase Plan which
shall terminate at the Effective Time, Parent agrees to provide employees of
the Company with credit for all service with the Company for purposes of
vesting and eligibility under any employee benefit plan, program or
arrangement of Parent or its affiliates. To the extent not otherwise specified
in this Agreement, Parent agrees that Company employees who continue to be
employed by the Surviving Corporation after the Effective Time may continue to
participate in their current Company sponsored employee benefit programs
through six months following the Effective Time, except for the Company
Purchase Plan which shall terminate at the Effective Time. Subsequently to
such date, Company employees shall participate in Parent employee benefit
programs or comparable programs under substantially the same terms and
conditions as all other Parent employees. To the extent not otherwise
specified in this Agreement, all Company employee benefit programs will cease
no earlier than six months following the Effective Time, at a time to be
determined by Parent in its discretion.
SECTION 5.13 Takeover Statutes. If any "takeover" statute shall become
applicable to the transactions contemplated hereby, the Company and the
members of the Board of Directors of the Company, subject to fiduciary duties,
shall grant such approvals and take such actions as are necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize
the effects of such takeover statute on the transactions contemplated hereby.
SECTION 5.14 Nasdaq National Marketing Listing. Parent shall use its best
efforts to cause the shares of Parent Common Stock issuable to the
shareholders of the Company in the Merger, and those required to be reserved
for issuance in connection with the Merger, to be listed for trading on The
Nasdaq National Market.
SECTION 5.15 Board of Directors of Parent. The Board of Directors of Parent
will take all actions necessary to cause the Board of Directors of Parent,
immediately after the Effective Time, to consist of ten persons, seven of whom
shall have served on the Board of Directors of Parent immediately prior to the
Effective Time, and three of whom shall have served on the Board of Directors
of the Company immediately prior to the Effective Time (one of whom will be
George Smith who will serve as a Class I director of Parent, one of whom will
be James Meyer who will serve as a Class II director of Parent and one of whom
will be Ajit Dalvi who will serve as a Class III director of Parent). If,
prior to the Effective Time, any of the Parent or the Company designees shall
decline or be unable to serve as a director, Parent (if such person was
designated by Parent) or the Company (if such person was designated by the
Company) shall designate another person to serve in such person's stead, which
person shall be reasonably acceptable to the other party.
SECTION 5.16 Tax Matters.
(a) Reporting Requirements. Following the Merger, Parent agrees to cause the
Company to timely comply with the reporting requirements of Treasury
Regulation Section 1.367(a)-3T(c)(4).
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(b) Notification. Parent agrees to inform those shareholders of the Company
who file gain recognition agreements pursuant to Treasury Regulation Sections
1.367(a)-3T(c)(3) and 1.367(a)-3T(g) in relation to the Merger and continue to
hold Parent shares of any disposition of stock, securities, or assets that
would require the recognition of gain under such agreements.
SECTION 5.17 Certificates and Other Deliveries.
(a) On or prior to the Closing Date, the Company shall have delivered, or
caused to be delivered, to Parent (i) a certificate of good standing from the
Secretary of State of California and of comparable authority in other
jurisdictions in which the Company and its subsidiaries are incorporated or
qualified to do business stating that each is a validly existing corporation
in good standing; (ii) duly adopted resolutions of the Board of Directors and
shareholders of the Company approving the execution, delivery and performance
of this Agreement and the instruments contemplated hereby, certified by the
Secretary of the Company, and (iii) a true and complete copy of the articles
of incorporation or comparable governing instruments, as amended, of the
Company and its subsidiaries certified by the Secretary of State of the state
of incorporation or comparable authority in other jurisdictions, and a true
and complete copy of the Bylaws or comparable governing instruments, as
amended, of the Company and its subsidiaries certified by the Secretary of the
Company and its subsidiaries, as applicable.
(b) On or prior to the Closing Date, Parent shall have delivered to the
Company (i) the equivalent of a good standing certificate from the British
Virgin Islands (to the extent the equivalent is available) stating that Parent
is a validly existing corporation together with a certificate of good standing
from the Secretary of State of California stating that Sub is a validly
existing corporation in good standing; (ii) duly adopted resolutions of the
Board of Directors of each of Parent and Sub approving the execution, delivery
and performance of this Agreement and the instruments contemplated hereby, and
of the shareholders of Parent approving the issuance of the Parent Common
Stock pursuant to the Merger, each certified by the Secretary or the Assistant
Secretary of the Company; (iii) a true, complete and certified copy of the
memorandum of association, as amended, of Parent and a true, complete and
certified copy of the articles of incorporation of Sub; and (iv) a true and
complete copy of the articles of association, as amended, of Parent, and a
true and complete copy of the bylaws, as amended, of Sub, each certified by
the Secretary or Assistant Secretary of Parent and Sub, as applicable.
SECTION 5.18 Pending Litigation. Each of the parties covenants and agrees
that all activity (except as contemplated by this Section 5.18) with respect
to the pending litigation between and among the parties and their respective
affiliates (the "Subject Litigation") shall cease until the earlier of (i) the
termination of this Agreement pursuant to Section 7.1 hereof, and (ii) the
Effective Time. Each of the parties hereto agrees to take promptly any and all
action required and to file appropriate documents with each court (the
"Relevant Courts") in which the Subject Litigation is pending to inform the
court of this Section 5.18 and to request the stay of the Subject Litigation.
Upon any termination of this Agreement pursuant to Sections 7.1, the stay
implemented in connection with the Subject Litigation pursuant to this Section
5.18 shall be deemed automatically lifted and each of the parties hereto
agrees to take promptly any and all actions required and to file appropriate
documents with the Relevant Courts to lift the stay. The parties shall
immediately and expeditiously as possible, following the execution of this
Agreement, take all necessary steps to execute and file with the Relevant
Courts the documents contemplated by this Section 5.18.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approvals. The Company Shareholder Approval and the
Parent Shareholder Approval shall have been obtained.
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(b) Nasdaq National Market Listing. The shares of Parent Common Stock
issuable to the Company's shareholders and option and warrant holders
pursuant to this Agreement shall have been approved for inclusion on The
Nasdaq National Market, subject to official notice of issuance.
(c) No Injunctions or Restraints. No litigation or proceeding brought by
a Governmental Entity shall be pending, and no litigation shall be
threatened by any Governmental Entity, which seeks to enjoin or prohibit
the consummation of the Merger, and no temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect. For the purposes of this
Agreement, litigation shall be deemed to be "threatened" by the Federal
Trade Commission or Department of Justice only if the Federal Trade
Commission or the Department of Justice, as the case may be, shall have
publicly announced or shall have advised Parent, Sub or the Company that it
has authorized its staff to commence proceedings in federal court seeking
injunctive relief against, or to commence administrative proceedings
challenging, the transactions contemplated by this Agreement.
(d) Form F-4. The Form F-4 shall have been declared effective by the SEC
under the Securities Act. No stop order suspending the effectiveness of the
Form F-4 shall have been issued by the SEC, and no proceedings for that
purpose shall have been initiated or, to the knowledge of Parent or the
Company, threatened by the SEC.
(e) HSR Act. The applicable waiting period (and any extension thereof)
under the HSR Act shall have expired or been terminated.
(f) Approvals. Other than the filing of merger documents in accordance
with the CCC, all authorizations, consents, waivers, orders or approvals
required to be obtained, and all filings, notices or declarations required
to be made, by Parent, Sub and the Company prior to the consummation of the
Merger and the transactions contemplated hereunder shall have been obtained
from, and made with, all required Governmental Entities, except for such
authorizations, consents, waivers, orders, approvals, filings, notices or
declarations the failure to obtain or make which would not have a material
adverse effect, at or after the Effective Time, on the Company, the
Surviving Corporation or Parent.
(g) Tax Opinions. Parent and the Company shall have each received the
opinions of their respective counsel, O'Melveny & Myers LLP and Wilson
Sonsini Goodrich & Rosati, Professional Corporation, dated the date of the
Proxy Statement, 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, which opinions shall not have been withdrawn or
modified in any material respect. The issuance of such opinions shall be
conditioned on the receipt of such customary representation letters from
Parent, Sub, the Company and certain shareholders of Parent and the
Company.
(h) Pooling of Interests Accounting Treatment. Parent and the Company
shall have received from KPMG Peat Marwick LLP, as independent auditors of
Parent, and Deloitte & Touche LLP, as independent auditors of the Company,
on the Closing Date, letters, dated as of such date, in form and substance
reasonably acceptable to Parent and the Company regarding the
appropriateness of pooling-of-interests accounting treatment for the Merger
by Parent for purposes of its consolidated financial statements under
generally accepted accounting principles and applicable SEC rules an
regulations. No action shall have been taken by any Governmental Entity or
any statute, rule, regulation or order enacted, promulgated or issued by
any Government Entity, or any proposal made for any such action by any
Governmental Entity which is reasonably likely to be put into effect that
would prevent Parent from accounting for the business combination to be
effected by the Merger as a pooling-of-interests.
SECTION 6.2 Additional Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are also subject to the
following conditions, unless waived in writing by Parent:
(a) Representations and Warranties. Each of the representations and
warranties of the Company contained in this Agreement shall be true and
correct as of the Closing Date as though made on and as of
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the Closing Date (provided that those representations and warranties which
address matters only as of a particular date shall remain true and correct
as of such date), except, in all such cases, where the failure to be so
true and correct would not have a material adverse effect on the Company.
Parent shall have received a certificate of the Chief Executive Officer and
Chief Financial Officer of the Company to such effect.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date. Parent shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company to that
effect.
(c) Consents Under Agreements. The Company shall have obtained the
consent or approval of each person whose consent or approval shall be
required in connection with the Merger under all loan or credit agreements,
notes, mortgages, indentures, leases, or other agreements or instruments to
which it or any of its subsidiaries is a party, except those for which
failure to obtain such consents and approvals would not have a material
adverse effect on the Surviving Corporation or Parent after the Effective
Time.
(d) No Material Adverse Change. From and including the date hereof, there
shall not have occurred any event which has had a material adverse effect
on the Company; provided, however, that neither (i) changes or fluctuations
in the price of the Company Common Stock on The Nasdaq National Market, nor
(ii) any developments in pending litigation between the parties and their
respective affiliates, nor (iii) the failure of the Company to execute a
definitive settlement agreement with Scientific Atlanta, Inc. regarding the
receipt by the Company of the outstanding arbitration award, settlement of
pending litigation between the two companies, the terms of a multi-year
license of the Company's technology to Scientific Atlanta, Inc. and related
matters, shall be deemed to have a material adverse effect on the Company.
SECTION 6.3 Additional Conditions to Obligations of the Company. The
obligations of the Company to effect the Merger are also subject to the
following conditions, unless waived in writing by the Company:
(a) Representations and Warranties. Each of the representations and
warranties of Parent and Sub contained in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(provided that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such
date), except, in all such cases, where the failure to be so true and
correct would not have a material adverse effect on Parent and its
subsidiaries taken as a whole. The Company shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of
Parent to such effect.
(b) Agreements and Covenants. Each of Sub and Parent shall have performed
or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date. The Company shall have received a certificate of
the Chief Executive Officer and Chief Financial Officer of Parent to such
effect.
(c) Consents Under Agreements. Parent shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the Merger under all loan or credit agreements, notes,
mortgages, indentures, leases, or other agreements or instruments to which
it or any of its subsidiaries is a party, except those for which failure to
obtain such consents and approvals would not have a material adverse effect
on the Surviving Corporation or Parent after the Effective Time.
(d) No Material Adverse Change. From and including the date hereof, there
shall not have occurred any event which has had a material adverse effect
on Parent and its subsidiaries taken as a whole; provided, however, that
neither (i) changes or fluctuations in the price of the Parent Common Stock
on The Nasdaq National Market, nor (ii) any developments in pending
litigation between the parties and their respective affiliates shall be
deemed to have a material adverse effect on Parent and its subsidiaries
taken as a whole.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval by the shareholders of
the Company or of Parent:
(a) by mutual written consent of Parent and the Company, if the Board of
Directors of each so determines by the affirmative vote of a majority of
the members of its entire Board of Directors; or
(b) by either Parent or the Company, if the Merger shall not have
occurred by June 30, 1997, provided that if the Merger shall not have been
consummated due to the waiting period (or any extension thereof) under the
HSR Act not having expired or been terminated, or due to an action having
been instituted by the Department of Justice or Federal Trade Commission
challenging or seeking to enjoin the consummation of the Merger, then such
date shall be extended to August 31, 1997 (whichever date is operative
being the "Reference Date"), and provided further that the right to
terminate this Agreement under this Section 7.1(b) shall not be available
to any party whose action or failure to act has been the cause of or
resulted in the failure of the Merger to occur on or before the Reference
Date and such action or failure to act constitutes a breach of this
Agreement; or
(c) by Parent (provided that Parent is not then in material breach of any
representation, warranty, covenant or other agreement contained herein),
upon a breach of any representation, warranty, covenant or agreement on the
part of the Company set forth in this Agreement, or if any representation
or warranty of the Company shall have become untrue, in either case such
that the conditions set forth in Section 6.2(a) or Section 6.2(b), as the
case may be, would be incapable of being satisfied by the Reference Date;
provided that, in any case, a willful breach shall be deemed to cause such
conditions to be incapable of being satisfied for purposes of this Section
7.1(c); or
(d) by the Company (provided that the Company is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein), upon a breach of any representation, warranty, covenant
or agreement on the part of Parent set forth in this Agreement, or if any
representation or warranty of Parent shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section
6.3(b), as the case may be, would be incapable of being satisfied by the
Reference Date; provided that, in any case a willful breach shall be deemed
to cause such conditions to be incapable of being satisfied for purposes of
this Section 7.1(d); or
(e) by either Parent or the Company if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently enjoining, restraining or otherwise
prohibiting the consummation of the Merger and such order, decree or ruling
or other action shall have become final and nonappealable; or
(f) by either Parent or the Company if any approval of the shareholders
of the Company required for the consummation of the Merger shall not have
been obtained by reason of the failure to obtain the required vote at a
duly held meeting of the Company's shareholders or at any adjournment or
postponement thereof, provided that the right to terminate this Agreement
under this Section 7.1(f) shall not be available to the Company where the
failure to obtain shareholder approval of the Company's shareholders shall
have been caused by the action or failure to act of the Company in breach
of this Agreement; or
(g) by either Parent or the Company if any approval of the Parent's
Shareholders required for the consummation of the Merger shall not have
been obtained by reason of the failure to obtain the required vote at a
duly held meeting of Parent's Shareholders or at any adjournment or
postponement thereof, provided that the right to terminate this Agreement
under this Section 7.1(g) shall not be available to Parent where the
failure to obtain the approval of the Parent's Shareholders shall have been
caused by the action or failure to act of Parent in breach of this
Agreement; or
(h) by either Parent or the Company if, prior to the consummation of the
Merger, the Company shall have accepted or recommended to the shareholders
of the Company a Company Superior Proposal; or
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(i) by either Parent or the Company if, prior to the consummation of the
Merger, Parent shall have accepted or recommended to the shareholders of
Parent a Parent Superior Proposal; or
(j) by Parent if the Board of Directors of the Company fails to recommend
or withdraws or modifies adversely its recommendation of the Merger or the
Company fails to comply with its obligations under Section 5.1 following a
Company Takeover Proposal; or
(k) by the Company if the Board of Directors of Parent fails to recommend
or withdraws or modifies adversely its recommendation of the Merger or
Parent fails to comply with its obligations under Section 5.1 following a
Parent Takeover Proposal; or
(l) by Parent or the Company, if following a Company Takeover Proposal,
any approval of the shareholders of the Company required for the
consummation of the Merger shall not have been obtained by the Reference
Date or by reason of the failure to obtain the required vote at a duly held
meeting of the Company's shareholders or at any adjournment or postponement
thereof; or
(m) by Parent or the Company, if following a Parent Takeover Proposal,
any approval of the shareholders of Parent required for the consummation of
the Merger shall not have been obtained by the Reference Date or by reason
of the failure to obtain the required vote at a duly held meeting of
Parent's Shareholders or at any adjournment or postponement thereof.
SECTION 7.2 Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Parent, Sub or the Company or their
respective officers or directors, except (i) as set forth in Section 3.1(n),
Section 3.2(k), Section 5.8, this Section 7.2, Section 7.5 and Article VIII
(General Provisions), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any willful and material breach of this Agreement. No termination of this
Agreement shall affect the obligations of the parties contained in the
Confidentiality Agreements, all of which obligations shall survive termination
of this Agreement in accordance with their terms.
SECTION 7.3 Amendment. This Agreement may be amended prior to the Effective
Time by the parties at any time before or after approval hereof by the
shareholders of the Company and Parent; provided, however, that after such
shareholder approval there shall not be made any amendment that by law
requires further approval by the shareholders of the Company or Parent without
the further approval of such shareholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties.
SECTION 7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.3, waive compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in writing, signed on
behalf of such party. The failure of any party to this Agreement to assert any
of its rights under this Agreement or otherwise shall not constitute a waiver
of those rights.
SECTION 7.5 Termination Fee.
(a) Upon any termination of this Agreement pursuant to Section 7.1(h), (j)
or (l) or upon the failure of any of the Company Significant Shareholders to
vote in favor of the Merger at a duly held meeting of the Company's
shareholders or at any adjournment or postponement thereof and, in connection
with such vote, the Merger is not approved by the shareholders of the Company,
the Company, upon written notice from Parent at any time of Parent's election
to receive a termination fee equal to $15 million (the "Company Termination
Fee") in lieu of Parent exercising the Company Stock Option (the "Company
Termination Fee Notice"), shall immediately pay to Parent the Company
Termination Fee. Following any termination of this Agreement pursuant to
Section 7.1(h), (j) or (l), the Company shall give Parent at least 30 days'
(and not more than 45 days') prior written
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notice of the closing date of any Company Takeover Proposal, and Parent, if it
elects to receive the Company Termination Fee upon such closing, shall give
written notice to the Company (the "Company Payment Notice") at least five
days' prior to such closing (which notice shall be effective only upon such
closing), and the Company shall pay the Company Termination Fee upon such
closing. If Parent has not delivered the Company Payment Notice within such
time frame, then upon (and only upon) the closing of the Company Takeover
Proposal, Parent's right to receive the Company Termination Fee shall
terminate.
(b) Upon any termination of this Agreement pursuant to Section 7.1(i), (k)
or (m) or upon the failure of the Parent Significant Shareholder to vote in
favor of the Merger at a duly held meeting of Parent's shareholders or at any
adjournment or postponement thereof and, in connection with such vote, the
Merger is not approved by the shareholders of Parent, Parent, upon written
notice from the Company at any time of the Company's election to receive a
termination fee equal to $15 million (the "Parent Termination Fee") in lieu of
the Company exercising the Parent Stock Option (the "Parent Termination Fee
Notice"), shall immediately pay to the Company the Parent Termination Fee.
Following any termination of this Agreement pursuant to Section 7.1(i), (k) or
(m), Parent shall give the Company at least 30 days' (and not more than 45
days') prior written notice of the closing date of any Parent Takeover
Proposal, and the Company, if it elects to receive the Parent Termination Fee
upon such closing, shall give written notice to Parent (the "Parent Payment
Notice") at least five days' prior to such closing (which notice shall be
effective only upon such closing), and Parent shall pay the Parent Termination
Fee upon such closing. If the Company has not delivered the Parent Payment
Notice within such time frame, then upon (and only upon) the closing of the
Parent Takeover Proposal, the Company's right to receive the Parent
Termination Fee shall terminate.
(c) Payment of the fees described in Sections 7.5(a) and (b) above shall not
be in lieu of damages incurred in the event of breach of this Agreement.
SECTION 7.6 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to
Section 7.4 shall, in order to be effective, require in the case of Parent,
Sub or the Company, action by its Board of Directors, acting by the
affirmative vote of a majority of the members of the entire Board of
Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except that any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time of the Merger shall survive
the Merger.
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SECTION 8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied, or sent by overnight courier
(providing proof of delivery) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Facsimile: (818) 792-4051
Attention: Larry Goldberg, Esq.
with a copy to:
O'Melveny & Myers LLP
Suite 1700
610 Newport Center Drive
Newport Beach, CA 92660
Facsimile: (714) 669-6994
Attention: David A. Krinsky, Esq.
(b) if to the Company, to
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Facsimile: (510) 657-5022
Attention: Larry W. Wangberg
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Facsimile: (415) 493-6811
Attention: Robert P. Latta, Esq.
SECTION 8.3 Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "material adverse change" or "material adverse effect" means, when
used in connection with the Company, the Surviving Corporation or Parent,
any change, event or effect (or any development that insofar as can
reasonably be foreseen, is likely to result in any change or effect) that
is materially adverse to the business, assets, prospects, financial
condition or results of operations of such party and its subsidiaries taken
as a whole;
(c) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity;
and
(d) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its directors or
other governing body (or, if there are no such voting interests, more than
50% of the equity interest of which) is owned directly or indirectly by
such first person.
A-42
<PAGE>
SECTION 8.4 Interpretation. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table
of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" and "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation."
SECTION 8.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties whether by mail, overnight
courier, personal delivery or facsimile, it being understood that all parties
need not sign the same counterpart.
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement,
the Merger Agreement (and the other exhibits hereto), the Confidentiality
Agreement and the other documents referenced herein constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement and except for the provisions of Article II and Sections 5.4, 5.6
and 5.12, are not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
SECTION 8.7 Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of
California, regardless of the laws that might otherwise govern under
applicable principles of conflict of laws thereof.
SECTION 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and assigns.
SECTION 8.9 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the State of California or in California State court,
this being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto (a) consents to submit
itself to the personal jurisdiction of any federal court located in the State
of California or any California State court in the event any dispute arises
out of this Agreement or any of the transactions contemplated by this
Agreement, (b) agrees that process may be served upon it in any manner
authorized by the laws of the State of California, (c) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court and (d) agrees that it will not bring
any action relating to this Agreement in any court other than a federal or
State court sitting in the State of California.
SECTION 8.10 Severability. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the law and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, in the event that any provision of this
Agreement would be held in any such jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provisions, as to such jurisdictions, shall
be ineffective, without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in
such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn,
without invalidating the remaining provisions of this Agreement or affecting
the validity or enforceability of such provision in any other jurisdiction.
A-43
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
<TABLE>
<S> <C>
Attest: "Parent"
GEMSTAR INTERNATIONAL GROUP LIMITED, a Brit-
ish Virgin Islands corporation
By:/s/ LARRY GOLDBERG By: /s/ HENRY C. YUEN
---------------------------------------- ---------------------------------------------
Name: Larry Goldberg Name: Henry C. Yuen
Title: Secretary Title: President and Chief Executive Officer
Attest: "SUB"
G/S ACQUISITION SUBSIDIARY,
a California corporation
By:/s/ LARRY GOLDBERG By: /s/ HENRY C. YUEN
---------------------------------------- ---------------------------------------------
Name: Larry Goldberg Name: Henry C. Yuen
Title: Secretary Title: President and Chief Executive Officer
Attest: "Company"
STARSIGHT TELECAST, INC.,
a California corporation
By:/s/ MARTIN HENKEL By: /s/ LARRY W. WANGBERG
---------------------------------------- ---------------------------------------------
Name: Martin W. Henkel Name: Larry W. Wangberg
Title: Secretary Title: Chairman of the Board and
Chief Executive Officer
</TABLE>
A-44
<PAGE>
APPENDIX B
<PAGE>
December 22, 1996
Confidential
The Board of Directors
Gemstar International Group Limited
135 N. Los Robles Avenue
Suite 870
Pasadena, CA 91101
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Gemstar International Group Limited ("Gemstar" or the "Company") of
the consideration to be paid by the Company in connection with the proposed
acquisition by Gemstar of the common stock of StarSight Telecast, Inc.
("StarSight") (the "Proposed Transaction") under the terms of the Agreement
and Plan of Merger, dated as of December 23, 1996, among Gemstar, G/S
Acquisition Subsidiary and StarSight and the related Exhibits and Schedules
thereto (the "Agreement"). The Agreement provides, among other things, that at
the Effective Time (as defined in the Agreement) each share of common stock of
StarSight shall be converted into the right to receive 0.6062 shares of
Gemstar ordinary shares (the "Gemstar Common Stock"). For purposes of this
opinion, we have assumed that the Proposed Transaction will qualify as a tax-
free reorganization under Section 368 of the United States Internal Revenue
Code and shall be accounted for as a pooling-of-interests.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic
transactions, corporate restructurings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have acted as a financial
advisor to the Board of Directors of Gemstar in connection with the Proposed
Transaction, and we will receive a fee for our services, which include the
rendering of this opinion.
In the past, we have provided investment banking and other financial advisory
services to Gemstar and have received fees for rendering these services.
Hambrecht & Quist acted as a managing underwriter in the Company's initial
public offering in 1995 and its underwritten public offering in 1996. In the
ordinary course of business, Hambrecht & Quist acts as a market maker and
broker in the publicly traded securities of Gemstar and receives customary
compensation in connection therewith, and also provides research coverage for
Gemstar. In the ordinary course of business, Hambrecht & Quist actively trades
in the equity and derivative securities of Gemstar for its own account and for
the accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Hambrecht & Quist may in the future provide
additional investment banking or other financial advisory services to Gemstar.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Gemstar for recent years and interim periods to date and certain other
relevant financial and operating data of Gemstar made available to us from
published sources and from the internal records of Gemstar;
(ii) reviewed certain internal financial and operating information relating to
Gemstar provided by the management of Gemstar;
(iii) discussed the business, financial condition and prospects of Gemstar
with certain of its officers;
(iv) reviewed the publicly available financial statements of StarSight for
recent years and interim periods to date and certain other relevant financial
and operating data of StarSight made available to us from published sources
and from the internal records of StarSight;
B-1
<PAGE>
(v) reviewed certain internal financial and operating information, including
certain projections, relating to StarSight prepared by StarSight's financial
adviser based upon information provided by the management of StarSight;
(vi) discussed the business, financial condition and prospects of StarSight
with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the common
stocks of Gemstar and StarSight and compared such information and certain
financial information for Gemstar and StarSight with similar information for
certain other companies engaged in businesses we consider comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed the Agreement;
(x) discussed the accounting treatment of the Proposed Transaction with
Gemstar and Gemstar's accountants; and
(xi) performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and financial,
economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Gemstar or StarSight
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not undertaken any independent valuation or appraisal of
any of the assets or liabilities of Gemstar or StarSight, nor have we
conducted a physical inspection of the properties and facilities of either
company. Furthermore, with your permission, we have not prepared or obtained
any evaluation or appraisal of any potential or pending litigation that may
involve the Company or StarSight, including StarSight Telecast, Inc, v.
Gemstar Development Corporation and Michael R. Levine, filed October 15, 1993.
For purposes of this Opinion, we have assumed that neither Gemstar nor
StarSight is a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
Proposed Transaction, certain potential strategic partnerships disclosed to
us, and those activities undertaken in the ordinary course of conducting their
respective businesses. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the
date of this letter and any change in such conditions would require a
reevaluation of this opinion. We express no opinion as to the price at which
Gemstar Common Stock will trade subsequent to the Effective Date (as defined
in the Agreement).
It is understood that this letter is for the information of the Board of
Directors in connection with their evaluation of the Proposed Transaction and
may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the Proxy
Statement relating to the Proposed Transaction. This letter does not
constitute a recommendation to any shareholder as to how such shareholder
should vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be paid by Gemstar in the Proposed Transaction is fair to
Gemstar from a financial point of view. We express no opinion as to the
fairness of the Proposed Transaction from a financial point of view to
StarSight or any of its affiliates.
Very truly yours,
Hambrecht & Quist LLC
/s/ DAVID G. GOLDEN
By___________________________________
David G. Golden
Managing Director
B-2
<PAGE>
APPENDIX C
<PAGE>
December 23, 1996
The Board of Directors
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, CA 94538
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of StarSight Telecast, Inc., a
California corporation ("StarSight"), of the consideration to be received by
such holders pursuant to the terms and subject to the conditions set forth in
the Agreement and Plan of Merger, dated as of December 23, 1996 (the "Merger
Agreement"), by and among Gemstar International Group Limited, a British
Virgin Islands corporation ("Gemstar"), G/S Acquisition Subsidiary, a
California corporation and a direct wholly owned subsidiary of Gemstar
("Acquisition"), and StarSight. As more fully described in the Agreement, (i)
Acquisition will be merged with and into StarSight (the "Merger") and (ii)
each outstanding share of the common stock, no par value, of StarSight (the
"StarSight Common Stock") will be converted into the right to receive 0.6062
(the "Exchange Ratio") ordinary shares, $.01 par value per share, of Gemstar
(the "Gemstar Ordinary Shares").
In arriving at our opinion, we reviewed the Merger Agreement, and held
discussions with certain senior officers, directors and other representatives
and advisors of StarSight and certain senior officers and other
representatives and advisors of Gemstar concerning the businesses, operations
and prospects of StarSight and Gemstar. We examined certain publicly available
business and financial information relating to StarSight and Gemstar as well
as certain financial forecasts and other information and data for StarSight
and Gemstar which were provided to or otherwise discussed with us by the
respective managements of StarSight and Gemstar, including information
relating to certain strategic implications and operational benefits and
synergies anticipated to result from the Merger. We reviewed the financial
terms of the Merger as set forth in the Merger Agreement in relation to, among
other things: current and historical market prices and trading volumes of
StarSight Common Stock and Gemstar Ordinary Shares; the respective companies'
historical and projected earnings and operating data; and the capitalization
and financial condition of StarSight and Gemstar. We also considered, to the
extent publicly available, the financial terms of certain other similar
transactions recently effected which we considered relevant in evaluating the
Merger and analyzed certain financial, stock market and other publicly
available information relating to the businesses of other companies whose
operations we considered relevant in evaluating those of StarSight and
Gemstar. We also evaluated the potential pro forma financial impact of the
Merger on Gemstar. In connection with our engagement, we were requested to
approach and held discussions with certain third parties to solicit
indications of interest in a possible acquisition of StarSight. In addition to
the foregoing, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data furnished to or otherwise reviewed by or discussed with
us, we have been advised by the managements of StarSight and Gemstar that such
forecasts and other information and data were prepared on bases reflecting
reasonable estimates and judgments as to the future financial performance of
StarSight and Gemstar and the strategic implications and operational benefits
anticipated to result from the Merger. We have also relied upon, without
independent verification, StarSight management's assessment of the validity
of, and risks associated with, the products and technology of StarSight and
Gemstar. We have assumed, with your consent, that the Merger will be treated
as a pooling of interest in accordance with generally accepted accounting
principles and as a tax-free reorganization for federal income tax purposes.
Our opinion, as set forth herein, relates to the relative values of StarSight
and Gemstar. We are not expressing any opinion as to what the value of the
Gemstar Ordinary Shares
C-1
<PAGE>
actually will be when issued to StarSight stockholders pursuant to the Merger
or the price at which the Gemstar Ordinary Shares will trade subsequent to the
Merger. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of StarSight
or Gemstar nor have we made any physical inspection of the properties or
assets of StarSight or Gemstar. Our opinion is necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to
StarSight in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon the consummation
of the Merger. We also will receive a fee upon the delivery of this opinion.
In the ordinary course of business, we and our affiliates may actively trade
or hold the securities of StarSight and Gemstar for our own account or for the
account of our customers and, accordingly, may at any time hold a long or
short position in such securities. We have in the past provided certain
investment banking services to StarSight unrelated to the proposed Merger, for
which services we have received compensation. In addition, Smith Barney and
its affiliates (including Travelers Group Inc. and its affiliates) may
maintain relationships with StarSight and Gemstar.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of StarSight in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
the proposed Merger. Our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent; provided, that our opinion may be included in its
entirety in the Proxy Statement/Prospectus relating to the Merger.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are in the opinion that, as of the date hereof, the Exchange Ratio is fair,
from a financial point of view, to the holders of StarSight Common Stock.
Very truly yours,
/s/ SMITH BARNEY INC.
---------------------------------------
SMITH BARNEY INC.
C-2
<PAGE>
APPENDIX D
<PAGE>
COMPANY SIGNIFICANT SHAREHOLDER AGREEMENT
December 23, 1996
Gemstar International Group Limited
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
Re Agreement of Principal Shareholders Concerning Transfer and
Voting of Shares of StarSight Telecast, Inc.
We understand that Gemstar International Group Limited, a British Virgin
Islands corporation ("Gemstar"), and StarSight Telecast, Inc., a California
corporation (the "Company"), of which the undersigned are principal
shareholders, are prepared to enter into an agreement for the merger (the
"Merger") of G/S Acquisition Subsidiary, a California corporation ("Sub"),
into the Company, but that Gemstar has conditioned its willingness to proceed
with such agreement (the "Merger Agreement") upon Gemstar's receipt from us of
assurances satisfactory to Gemstar of our support of and commitment to the
Merger. We are familiar with the Merger Agreement and the terms and conditions
of the Merger. In order to evidence such commitment and to induce Gemstar to
enter into the Merger Agreement, we hereby represent and warrant to Gemstar
and agree with Gemstar as follows:
1. Voting. We will vote or cause to be voted all shares of capital stock of
the Company owned of record or beneficially owned or held in any capacity by
any of us or under any of our control in favor of the Merger and other
transactions provided for in or contemplated by the Merger Agreement and
against any inconsistent proposals or transactions.
2. Ownership. As of the date hereof, our only ownership of, or interest in,
equity securities or convertible debt securities of the Company consists
solely of the interests described in Schedule 1 hereto (collectively,
the "Shares").
3. Restriction on Transfer. During the period from the date of this Merger
Agreement and continuing until the earlier of the termination of this Merger
Agreement pursuant to its terms or the effective time of the Merger, we will
not sell, transfer, pledge or otherwise dispose of any of the Shares or any
interest therein or agree to sell, transfer, pledge or otherwise dispose of
any of the Shares or any interest therein, without your express written
consent. In addition, we hereby agree to execute and deliver to you the
affiliate letters contemplated by Section 5.10 of the Merger Agreement in the
form of Exhibit 5.10A to the Merger Agreement.
4. Termination. This letter agreement and our obligations hereunder will
terminate on June 30, 1997 unless the Merger Agreement is extended in
accordance with its terms, in which event this letter agreement and our
obligations will terminate on such extended date. Notwithstanding the
foregoing, if the Merger Agreement were to be terminated earlier in accordance
with its terms, this letter agreement and our obligations hereunder will also
terminate concurrently with the termination of the Merger Agreement.
5. Effective Date; Succession; Remedies. Upon your acceptance and execution
of the Agreement, this letter agreement shall mutually bind and benefit you
and us, any of our heirs, successors and assigns and any of your successors.
You will not assign the benefit of this letter agreement other than to a
wholly owned subsidiary. We agree that in light of the inadequacy of damages
as a remedy, specific performances shall be available to you, in addition to
any other remedies you may have for the violation of this letter agreement.
D-1
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
THOMSON MULTIMEDIA S.A.
/s/ James E. Meyer
By: _________________________________
Title: Executive Vice President
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chairman & CEO
D-2
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
PVI TRANSMISSION INC.
/s/ Edward Schor
By: _________________________________
Title: Vice President
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chief Executive Officer
D-3
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
TRIBUNE COMPANY
/s/ Donn Davis
By: _________________________________
Title: President
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chief Executive Officer
D-4
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
SPELLING ENTERTAINMENT, INC.
/s/ William P. Clark
By: _________________________________
Title: CFO
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chief Executive Officer
D-5
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
COX COMMUNICATIONS, INC.
/s/ Ajit Dalvi
By: _________________________________
Title: Sr. V. P.
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chief Executive Officer
D-6
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
PROVIDENCE JOURNAL COMPANY
/s/ Jack C. Clifford
By: _________________________________
Title: Executive V. P.
ACCEPTED:
GEMSTAR INTERNATIONAL GROUP, LTD.
/s/ Larry Goldberg
By: _________________________________
Title: Secretary
STARSIGHT TELECAST, INC.
/s/ Larry W. Wangberg
By: _________________________________
Title: Chief Executive Officer
D-7
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIAL OWNER OWNED
---------------- ------------
<S> <C>
PVI Transmission Inc. ............................................. 4,475,814
THOMSON Multimedia S.A. ........................................... 3,333,333
Cox Communications, Inc............................................ 2,166,647
Spelling Entertainment, Inc. ...................................... 1,124,176
Tribune Company.................................................... 1,122,518
Providence Journal Company......................................... 791,897
</TABLE>
D-8
<PAGE>
APPENDIX E
<PAGE>
PARENT SIGNIFICANT SHAREHOLDER AGREEMENT
December 23, 1996
StarSight Telecast, Inc.
39650 Liberty Street
Fremont, California 94538
Re Agreement of Principal Shareholders Concerning Transfer and Voting
of Shares of Gemstar International Group Limited
We understand that StarSight Telecast, Inc., a California corporation
("STARSIGHT"), and Gemstar International Group Limited, a British Virgin
Islands corporation ("GEMSTAR"), of which the undersigned are principal
shareholders, are prepared to enter into an agreement for the merger (the
"MERGER") of G/S Acquisition Subsidiary, a California corporation ("SUB"),
into StarSight, but that StarSight has conditioned its willingness to proceed
with such agreement (the "MERGER AGREEMENT") upon its receipt from us of
assurances satisfactory to StarSight of our support of and commitment to the
Merger. We are familiar with the Merger Agreement and the terms and conditions
of the Merger. In order to evidence such commitment and to induce StarSight to
enter into the Merger Agreement, we hereby represent and warrant to StarSight
and agree with StarSight as follows:
1. Voting. We will vote or cause to be voted all shares of capital stock of
Gemstar owned of record or beneficially owned or held in any capacity by any
of us or under any of our control in favor of the Merger and other
transactions provided for in or contemplated by the Merger Agreement and
against any inconsistent proposals or transactions.
2. Ownership. As of the date hereof, our only ownership of, or interest in,
equity securities or convertible debt securities of Gemstar consists solely of
the interests described in Schedule 1 hereto (collectively, the "Shares").
3. Restriction on Transfer. During the period from the date of this Merger
Agreement and continuing until the earlier of the termination of this Merger
Agreement pursuant to its terms or the effective time of the Merger, we will
not sell, transfer, pledge or otherwise dispose of any of the Shares or any
interest therein or agree to sell, transfer, pledge or otherwise dispose of
any of the Shares or any interest therein, without your express written
consent. In addition, we hereby agree to execute and deliver to you the
affiliate letters contemplated by Section 5.10 of the Merger Agreement in the
form of Exhibit 5.10B to the Merger Agreement.
4. Termination. This letter agreement and our obligations hereunder will
terminate on June 30, 1997 unless the Merger Agreement is extended in
accordance with its terms, in which event this letter agreement and our
obligations will terminate on such extended date. Notwithstanding the
foregoing, if the Merger Agreement were to be terminated earlier in accordance
with its terms, this letter agreement and our obligations hereunder will also
terminate concurrently with the termination of the Merger Agreement.
5. Effective Date; Succession; Remedies. Upon your acceptance and execution
of the Agreement, this letter agreement shall mutually bind and benefit you
and us, any of our heirs, successors and assigns and any of your successors.
You will not assign the benefit of this letter agreement other than to a
wholly owned subsidiary. We agree that in light of the inadequacy of damages
as a remedy, specific performances shall be available to you, in addition to
any other remedies you may have for the violation of this letter agreement.
E-1
<PAGE>
6. Nature of Holdings; Shares. All references herein to our holdings of the
Shares shall be deemed to include Shares held or controlled by any of us,
individually, jointly (as community property or otherwise), or in any other
capacity, and shall extend to any securities issued to any of us in respect of
the Shares.
Very truly yours,
Principal Shareholders
DYNAMIC CORE HOLDINGS LIMITED
By: /s/ THOMAS LAU
-------------------------------------
Name: Thomas Lau
Title: Director
/s/ HENRY YUEN
---------------------------------------
HENRY YUEN
CREATIVE ASSETS LIMITED
By: /s/ WILSON CHO
---------------------------------------
Name: Wilson Cho
Title: Director
ACCEPTED:
STARSIGHT TELECAST, INC.
By: /s/ LARRY W. WANGBERG
- -------------------------------------
Name: Larry W. Wangberg
Title: Chief Executive Officer
E-2
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
SHARES OF
ORDINARY
SHARES
BENEFICIAL OWNER OWNED
- ---------------- ----------
<S> <C>
Dynamic Core Holdings Limited........................................ 11,522,575
Henry Yuen........................................................... 3,061,990
Creative Assets Limited.............................................. 2,177,157
</TABLE>
(Includes shares owned by Wilson Cho)
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COMPANY OPTION AGREEMENT
This COMPANY OPTION AGREEMENT (this "Agreement") is entered into as of
December 23, 1996, by and between StarSight Telecast, Inc., a California
corporation ("Issuer"), and Gemstar International Group Limited, a British
Virgin Islands corporation ("Grantee").
BACKGROUND
8.11 Issuer, Grantee and a wholly-owned subsidiary of Grantee (the
"Purchaser"), are entering into an Agreement and Plan of Merger of even date
herewith (the "Merger Agreement") providing for, among other things, the
merger of Purchaser with and into Issuer.
8.12 To induce Grantee and Purchaser to enter into the Merger Agreement,
Issuer has agreed to grant this Option to Grantee.
AGREEMENT
In consideration of the foregoing, and of the representations, warranties,
covenants and agreements contained herein, Issuer and Grantee hereby agree as
follows:
1. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase 5,276,034 shares (the "Option Shares") of Common Stock, no par value,
of Issuer ("Issuer Common Stock") in the manner set forth below at a purchase
price of $10.46 per Option Share (the "Purchase Price").
2. EXERCISE OF OPTION.
2.1. Grantee may exercise the Option, 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 as set forth in Section 10.11.
2.2 As used herein, a "Purchase Event" means any termination of the Merger
Agreement pursuant to Section 7.1(h), (j) or (l) thereof.
2.3 If Grantee wishes to exercise the Option at such time as the Option is
exercisable, it shall send to Issuer a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
Option Shares it intends to purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 15 business
days from the Notice Date for the closing of such purchase (the "Closing
Date"); provided that if the closing of the purchase and sale pursuant to the
Option (the "Closing") cannot be consummated by reason of any applicable
judgment, decree, order, law or regulation, the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which
such restriction on consummation has expired or been terminated; and provided
further, without limiting the foregoing, that if prior notification to or
approval of any regulatory authority or shareholders of the Issuer is required
in connection with such purchase, Grantee shall promptly file the required
notice or application for approval and shall expeditiously process the same
(and Issuer shall cooperate with Grantee in the filing of any such notice or
application and the obtaining of any such approval), and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which, as the case may be, (A) any required notification period has
expired or been terminated or (B) such approval has been obtained, and in
either event, any requisite waiting period has passed.
2.4 Notwithstanding Subsection 2.3, in no event shall any Closing Date be
more than six months after the related Notice Date, and if the Closing Date
shall not have occurred within six months after the related Notice Date due to
the failure to obtain any such required approval, the exercise of the Option
effected on the Notice Date shall be deemed to have expired. In the event (i)
Grantee receives official notice that an approval of any
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regulatory authority required for the purchase of Option Shares would not be
issued or granted or (ii) a Closing Date shall not have occurred within six
months after the related Notice Date due to the failure to obtain any such
required approval, Grantee shall nevertheless be entitled to exercise its
right as set forth in Section 7 or to exercise the Option in connection with
the resale of Issuer Common Stock or other securities pursuant to a
registration statement as provided in Section 8. The provisions of this
Section 2 and Section 3 shall apply with appropriate adjustments to any such
exercise.
3. PAYMENT AND DELIVERY OF CERTIFICATES.
3.1 On each Closing Date, Grantee shall pay to Issuer in immediately
available funds by wire transfer to a bank account designated by Issuer an
amount equal to the Purchase Price multiplied by the number of Option Shares
to be purchased on such Closing Date.
3.2 At each Closing, simultaneously with the delivery of immediately
available funds as provided in Subsection 3.1, Issuer shall deliver to Grantee
a certificate or certificates representing the Option Shares to be purchased
at such Closing, which Option Shares shall be free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever, and Grantee shall
deliver to Issuer a letter making the representations set forth in Section 5.2
hereinbelow and agreeing that Grantee shall not offer to sell or otherwise
dispose of such Option Shares in violation of applicable law and shall
represent and warrant that it and/or its advisors have sufficient knowledge
and experience in business and financial matters to evaluate the Issuer, to
evaluate the risk of an investment in the Option Shares, to make an informed
investment decision with respect thereto, and to protect its interests in
connection with its investment in the Option Shares without need for the
additional information which would be required to be included in a more
complete registration statement effective under the Securities Act. The
Grantee shall further acknowledge and agree that it and/or its advisors have
had an opportunity to ask questions of and to receive answers from officers
and other representatives of the Issuer and to obtain additional information
in writing to the extent that the Issuer possesses such information or could
acquire it without unreasonable effort or expense; (i) relative to the Issuer
and the Option Shares; and (ii) necessary to verify the accuracy of any
information, documents, projections, and books and records furnished.
3.3 Certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
EITHER (I) THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR (II) ANY
APPLICABLE STATE LAW GOVERNING THE OFFER AND SALE OF SECURITIES. NO
TRANSFER OR OTHER DISPOSITION OF THESE SHARES, OR OF ANY INTEREST THEREIN,
MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND SUCH OTHER STATE LAWS OR PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THE ACT, SUCH OTHER STATE LAWS, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Grantee shall have
delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to Issuer and
its counsel, to the effect that such legend is not required for purposes of
the Securities Act.
4. REPRESENTATIONS AND WARRANTIES OF ISSUER. Except as set forth in the
Company Disclosure Letter (as defined in the Merger Agreement), Issuer hereby
represents and warrants to Grantee as follows:
4.1 DUE AUTHORIZATION. Issuer has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Issuer. This Agreement has
been duly executed and delivered by Issuer and constitutes a valid and binding
obligation of Issuer, enforceable against Issuer in accordance with its terms.
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4.2 AUTHORIZED STOCK. Issuer has taken all necessary corporate and other
action to authorize and reserve for issuance, upon exercise of the Option,
shares of Issuer Common Stock necessary for Grantee to exercise the Option,
and Issuer will take all necessary corporate action to authorize and reserve
for issuance all additional shares of Issuer Common Stock or other securities
which may be issued pursuant to Section 6 upon exercise of the Option. The
shares of Issuer Common Stock to be issued upon due exercise of the Option,
including all additional shares of Issuer Common Stock or other securities
which may be issuable pursuant to Section 6 upon issuance pursuant hereto,
shall be duly and validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever, including any preemptive rights of any shareholder
of Issuer.
4.3 NO CONFLICTS. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby will not, conflict
with or violate any provision of the Articles of Incorporation or By-laws of
Issuer or any material agreement or obligation of Issuer.
5. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents and
warrants to Issuer that:
5.1 DUE AUTHORIZATION. Grantee has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee. This
Agreement has been duly executed and delivered by Grantee and constitutes a
valid and binding obligation of Grantee, enforceable against Grantee in
accordance with its terms.
5.2 PURCHASE NOT FOR DISTRIBUTION. Any Option Shares or other securities
acquired by Grantee upon exercise of the Option will be acquired for
investment and not with a view to the public distribution thereof and will
not be transferred or otherwise disposed of except in a transaction
registered or exempt from registration under the Securities Act.
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
6.1 In the event of any change in Issuer Common Stock by reason of a stock
dividend, split-up, recapitalization, combination, exchange of shares or
similar transaction, the type and number of shares or securities subject to
the Option shall be adjusted appropriately, and proper provision shall be made
in the agreements governing such transaction, so that Grantee shall receive
upon exercise of the Option and payment of the aggregate Purchase Price
hereunder the number and class of shares or other securities or property that
Grantee would have received in respect of Issuer Common Stock if the Option
had been exercised in full immediately prior to such event, or the record date
therefor, as applicable. Whenever the number of shares of Issuer Common Stock
purchasable upon exercise of the Option is adjusted as provided in this
Section 6, the Purchase Price shall be adjusted by multiplying the Purchase
Price by a fraction, the numerator of which shall be equal to the number of
shares of Issuer Common Stock purchasable prior to the adjustment and the
denominator of which shall be equal to the number of shares of Issuer Common
Stock purchasable after the adjustment.
6.2 (a) In the event that Issuer shall enter into an agreement (other than
the Merger Agreement) (a) to consolidate with or merge into any person, other
than Purchaser or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (b) to permit any
person other than Purchaser or one of its subsidiaries, to merge into Issuer
and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Issuer Common
Stock shall be changed into or exchanged for stock or other securities of
Issuer or any other person or cash or any other property or then outstanding
shares of Issuer Common Stock shall after such merger represent less than 50%
of the outstanding shares and share equivalents of the surviving corporation
or (c) to sell or otherwise transfer all or substantially all of its assets to
any person, other than Purchaser or one of its subsidiaries, then, and in each
such case, proper provision shall be made in the agreements governing such
transaction so that Purchaser shall receive upon exercise of the Option the
number and class of shares or other securities or property that Purchaser
would
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have received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such transaction, or the record date thereof,
as applicable, and elected, to the fullest extent it would have been permitted
to elect, to receive such securities, cash or other property.
(b) The provisions of this Agreement, including, without limitation,
Sections 7 and 8, shall apply with appropriate adjustments to any securities
for which the Option becomes exercisable pursuant to Section 6.2(a).
7. REPURCHASE.
7.1 If a Purchase Event shall have occurred, Purchaser shall have the right,
upon five business days' prior written notice to Issuer (or any successor in
interest to Issuer by merger, sale of all or substantially all of the assets,
or otherwise) (the "Put Notice"), to cause Issuer (or any successor in
interest to Issuer by merger, sale of all or substantially all of the assets,
or otherwise) to have a Closing and to pay at such closing (and Issuer and
such successor, jointly and severally, shall be obligated to pay to Purchaser
in consideration for the cancellation of the Option) an aggregate cancellation
price (the "Cancellation Price") equal to the product of (x) the number of
shares of Issuer Common Stock as to which the Option remains exercisable
multiplied by (y) the excess of (i) the average per share closing price of
shares of Issuer Common Stock as quoted on NASDAQ (NMS) (or if not then quoted
thereon, on such other quotation system or exchange on which Issuer Common
Stock is quoted) for the period of five trading days ending on the trading day
immediately prior to the occurrence of the Put Notice over (ii) the Purchase
Price.
7.2 At any closing contemplated by the Put Notice, Issuer shall pay to
Purchaser the Cancellation Price for the number of shares of Issuer Common
Stock as to which the Option is to be cancelled by delivering to Purchaser a
certified or bank check payable to or on the order of Purchaser in an amount
equal to the Cancellation Price.
8. REGISTRATION RIGHTS. Issuer shall, if requested by Grantee at any time
and from time to time within three years of the first exercise of the Option,
use its reasonable best efforts to, as expeditiously as possible, prepare and
file up to two registration statements under the Securities Act if such
registration is necessary in order to permit the sale or other disposition of
any or all shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Grantee upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
Grantee, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision, and Issuer shall use its best
efforts to qualify such shares or other securities under any applicable state
securities laws. Such request shall be for a minimum of 1% of Issuer's
outstanding Common Stock. Grantee agrees to use all reasonable efforts to
cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement
to be effected on a widely distributed basis so that upon consummation thereof
no purchaser or transferee shall own beneficially more than 2% of the then
outstanding voting power of Issuer. Issuer shall use all reasonable efforts to
cause each such registration statement to become effective, to obtain all
consents or waivers of other parties which are required therefor and to keep
such registration statement effective for such period not in excess of 180
days from the day such registration statement first becomes effective as may
be reasonably necessary to effect such sale or other disposition. In the event
that Grantee requests Issuer to file a registration statement following the
failure to obtain a required approval for an exercise of the Option as
described in Subsection 2.4, the closing of the sale or other disposition of
Issuer Common Stock or other securities pursuant to such registration
statement shall occur substantially simultaneously with the exercise of the
Option. Any registration statement prepared and filed under this Section 8,
and any sale covered thereby, shall be at Issuer's expense except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto. Grantee shall provide all
information concerning itself and the proposed sale or distribution as shall
reasonably be required in order to ensure compliance with the requirements of
the Securities Act as reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If during the time periods
referred to in the first sentence of this Section 8 Issuer effects a
registration under the Securities Act of Issuer Common Stock for its own
account or for any other shareholders of Issuer (other than on Form S-4 or
Form S-8, or any successor form), it shall allow Grantee the right to
participate in such registration, and such
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participation shall not affect the obligation of Issuer to effect two
registration statements for Grantee under this Section 8; provided that, if
the managing underwriters of such offering advise Issuer in writing that in
their opinion the number of shares of Issuer Common Stock requested to be
included in such registration exceeds the number which can be sold in such
offering Grantee shall reduce the number of shares included therein down to
20% of the number of shares intended to be included therein, if necessary, and
thereafter Issuer shall reduce the number of shares included therein by any
further amount deemed necessary by the managing underwriters, if any. In
connection with any registration pursuant to this Section 8, Issuer and
Grantee shall provide each other and any underwriter of the offering with
customary representations, warranties, covenants, indemnification and
contribution and holdback agreements in connection with such registration.
9. LISTING. If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are then listed on any national securities
exchange or national market system, Issuer will promptly file an application
to list the shares of Issuer Common Stock or other securities to be acquired
upon exercise of the Option on such exchange or system and will use its
reasonable best efforts to obtain approval of such listing as soon as
practicable.
10. MISCELLANEOUS.
10.1 EXPENSES. Except as otherwise provided in Section 8, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
10.2 WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
10.3 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARY; SEVERABILITY, ETC. Except
as otherwise set forth in the Merger Agreement, this Agreement (including the
Merger Agreement and the other documents and instruments referred to herein)
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or a Federal or state regulatory agency to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court
or regulatory agency determines that the Option does not permit Grantee to
acquire, or does not require Issuer to repurchase, the full number of shares
of Issuer Common Stock as provided in Sections 2 and 7 (as adjusted pursuant
to Section 6), it is the express intention of Issuer to allow Grantee to
acquire or to require Issuer to repurchase such lesser number of shares as may
be permissible without any amendment or modification hereof.
10.4 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of California without regard to any
applicable conflicts of law rules.
10.5 DESCRIPTIVE HEADINGS. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.6 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the addresses set forth in the Merger Agreement
(or at such other address for a party as shall be specified by like notice).
10.7 COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both
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counterparts have been signed by each of the parties and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.
10.8 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by Issuer (whether
by operation of law or otherwise) without the prior written consent of
Grantee. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
10.9 FURTHER ASSURANCES. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
10.10 SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
10.11 TERMINATION. The Option shall 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) 18 months
from the date hereof, and (b) the closing date of any Company Takeover
Proposal plus 30 days, or (iii) the payment by the Company and the receipt by
Parent of the Company Termination Fee. The rights set forth in Sections 7 and
8 shall not terminate when the right to exercise the Option terminates as set
forth herein, but shall extend to such time as is provided in Sections 7 and
8, respectively. Notwithstanding the termination of the Option, Grantee shall
be entitled to purchase those Option Shares with respect to which it has
exercised the Option in accordance with the terms hereof prior to the
termination of the Option.
10.12 CERTAIN DEFINITIONS. Capitalized terms used and not defined herein
have the respective meanings ascribed to them in the Merger Agreement.
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IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
day and year first written above.
"ISSUER"
StarSight Telecast, Inc.
By: /s/ Larry W. Wangberg
-----------------------------------
Name: Larry W. Wangberg
Title: Chief Executive Officer
"GRANTEE"
Gemstar International Group Limited
By: /s/ Henry Yuen
-----------------------------------
Name: H. YUEN
Title: Chief Executive Officer
[COMPANY OPTION AGREEMENT]
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APPENDIX G
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PARENT OPTION AGREEMENT
This PARENT OPTION AGREEMENT (this "Agreement") is entered into as of
December 23, 1996, by and between StarSight Telecast, Inc., a California
corporation ("Grantee"), and Gemstar International Group Limited, a British
Virgin Islands corporation ("Issuer").
BACKGROUND
10.13 Grantee, Issuer and a wholly-owned subsidiary of Issuer (the
"Purchaser"), are entering into an Agreement and Plan of Merger of even date
herewith (the "Merger Agreement") providing for, among other things, the
merger of Purchaser with and into Grantee.
10.14 To induce Grantee to enter into the Merger Agreement, Issuer has
agreed to grant this Option to Grantee.
AGREEMENT
In consideration of the foregoing, and of the representations, warranties,
covenants and agreements contained herein, Issuer and Grantee hereby agree as
follows:
1. Grant of Option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase 6,341,824 shares (the "Option Shares") of Ordinary Shares, $.01 par
value, of Issuer ("Issuer Common Stock") in the manner set forth below at a
purchase price of $17.25 per Option Share (the "Purchase Price").
2. Exercise of Option.
2.1 Grantee may exercise the Option, 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 as set forth in Section 10.11.
2.2 As used herein, a "Purchase Event" means any termination of the Merger
Agreement pursuant to Section 7.1(i), (k) or (m) thereof.
2.3 If Grantee wishes to exercise the Option at such time as the Option is
exercisable, it shall send to Issuer a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
Option Shares it intends to purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 15 business
days from the Notice Date for the closing of such purchase (the "Closing
Date"); provided that if the closing of the purchase and sale pursuant to the
Option (the "Closing") cannot be consummated by reason of any applicable
judgment, decree, order, law or regulation, the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which
such restriction on consummation has expired or been terminated; and provided
further, without limiting the foregoing, that if prior notification to or
approval of any regulatory authority or shareholders of the Issuer is required
in connection with such purchase, Grantee shall promptly file the required
notice or application for approval and shall expeditiously process the same
(and Issuer shall cooperate with Grantee in the filing of any such notice or
application and the obtaining of any such approval), and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which, as the case may be, (A) any required notification period has
expired or been terminated or (B) such approval has been obtained, and in
either event, any requisite waiting period has passed.
2.4 Notwithstanding Subsection 2.3, in no event shall any Closing Date be
more than six months after the related Notice Date, and if the Closing Date
shall not have occurred within six months after the related Notice Date due to
the failure to obtain any such required approval, the exercise of the Option
effected on the Notice Date shall be deemed to have expired. In the event (i)
Grantee receives official notice that an approval of any regulatory authority
required for the purchase of Option Shares would not be issued or granted or
(ii) a Closing Date shall not have occurred within six months after the
related Notice Date due to the failure to obtain any such
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required approval, Grantee shall nevertheless be entitled to exercise its
right as set forth in Section 7 or to exercise the Option in connection with
the resale of Issuer Common Stock or other securities pursuant to a
registration statement as provided in Section 8. The provisions of this
Section 2 and Section 3 shall apply with appropriate adjustments to any such
exercise.
3. Payment and Delivery of Certificates.
3.1 On each Closing Date, Grantee shall pay to Issuer in immediately
available funds by wire transfer to a bank account designated by Issuer an
amount equal to the Purchase Price multiplied by the number of Option Shares
to be purchased on such Closing Date.
3.2 At each Closing, simultaneously with the delivery of immediately
available funds as provided in Subsection 3.1, Issuer shall deliver to Grantee
a certificate or certificates representing the Option Shares to be purchased
at such Closing, which Option Shares shall be free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever, and Grantee shall
deliver to Issuer a letter making the representations set forth in Section 5.2
hereinbelow and agreeing that Grantee shall not offer to sell or otherwise
dispose of such Option Shares in violation of applicable law and shall
represent and warrant that it and/or its advisors have sufficient knowledge
and experience in business and financial matters to evaluate the Issuer, to
evaluate the risk of an investment in the Option Shares, to make an informed
investment decision with respect thereto, and to protect its interests in
connection with its investment in the Option Shares without need for the
additional information which would be required to be included in a more
complete registration statement effective under the Securities Act. The
Grantee shall further acknowledge and agree that it and/or its advisors have
had an opportunity to ask questions of and to receive answers from officers
and other representatives of the Issuer and to obtain additional information
in writing to the extent that the Issuer possesses such information or could
acquire it without unreasonable effort or expense; (i) relative to the Issuer
and the Option Shares; and (ii) necessary to verify the accuracy of any
information, documents, projections, and books and records furnished.
3.3 Certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
EITHER (I) THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR (II) ANY
APPLICABLE STATE LAW GOVERNING THE OFFER AND SALE OF SECURITIES. NO
TRANSFER OR OTHER DISPOSITION OF THESE SHARES, OR OF ANY INTEREST THEREIN,
MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND SUCH OTHER STATE LAWS OR PURSUANT TO EXEMPTIONS FROM
REGISTRATION UNDER THE ACT, SUCH OTHER STATE LAWS, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER."
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if Grantee shall
have delivered to Issuer a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to Issuer and
its counsel, to the effect that such legend is not required for purposes of
the Securities Act.
4. Representations and Warranties of Issuer. Except as set forth in the
Parent Disclosure Letter (as defined in the Merger Agreement), Issuer hereby
represents and warrants to Grantee as follows:
4.1 Due Authorization. Issuer has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Issuer. This Agreement has
been duly executed and delivered by Issuer and constitutes a valid and binding
obligation of Issuer, enforceable against Issuer in accordance with its terms.
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4.2 Authorized Stock. Issuer has taken all necessary corporate and other
action to authorize and reserve for issuance, upon exercise of the Option,
shares of Issuer Common Stock necessary for Grantee to exercise the Option,
and Issuer will take all necessary corporate action to authorize and reserve
for issuance all additional shares of Issuer Common Stock or other securities
which may be issued pursuant to Section 6 upon exercise of the Option. The
shares of Issuer Common Stock to be issued upon due exercise of the Option,
including all additional shares of Issuer Common Stock or other securities
which may be issuable pursuant to Section 6 upon issuance pursuant hereto,
shall be duly and validly issued, fully paid and nonassessable, and shall be
delivered free and clear of all liens, claims, charges and encumbrances of any
kind or nature whatsoever, including any preemptive rights of any shareholder
of Issuer.
4.3 No Conflicts. The execution and delivery of this Agreement does not, and
the consummation of the transactions contemplated hereby will not, conflict
with or violate any provision of the Articles of Incorporation or By-laws of
Issuer or any material agreement or obligation of Issuer.
5. Representations and Warranties of Grantee. Grantee hereby represents and
warrants to Issuer that:
5.1 Due Authorization. Grantee has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee. This
Agreement has been duly executed and delivered by Grantee and constitutes a
valid and binding obligation of Grantee, enforceable against Grantee in
accordance with its terms.
5.2 Purchase Not for Distribution. Any Option Shares or other securities
acquired by Grantee upon exercise of the Option will be acquired for
investment and not with a view to the public distribution thereof and will
not be transferred or otherwise disposed of except in a transaction
registered or exempt from registration under the Securities Act.
6. Adjustment upon Changes in Capitalization, etc.
6.1 In the event of any change in Issuer Common Stock by reason of a stock
dividend, split-up, recapitalization, combination, exchange of shares or
similar transaction, the type and number of shares or securities subject to
the Option shall be adjusted appropriately, and proper provision shall be made
in the agreements governing such transaction, so that Grantee shall receive
upon exercise of the Option and payment of the aggregate Purchase Price
hereunder the number and class of shares or other securities or property that
Grantee would have received in respect of Issuer Common Stock if the Option
had been exercised in full immediately prior to such event, or the record date
therefor, as applicable. Whenever the number of shares of Issuer Common Stock
purchasable upon exercise of the Option is adjusted as provided in this
Section 6, the Purchase Price shall be adjusted by multiplying the Purchase
Price by a fraction, the numerator of which shall be equal to the number of
shares of Issuer Common Stock purchasable prior to the adjustment and the
denominator of which shall be equal to the number of shares of Issuer Common
Stock purchasable after the adjustment.
6.2 (a) In the event that Issuer shall enter into an agreement (other than
the Merger Agreement) (a) to consolidate with or merge into any person, other
than Purchaser or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (b) to permit any
person other than Purchaser or one of its subsidiaries, to merge into Issuer
and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Issuer Common
Stock shall be changed into or exchanged for stock or other securities of
Issuer or any other person or cash or any other property or then outstanding
shares of Issuer Common Stock shall after such merger represent less than 50%
of the outstanding shares and share equivalents of the surviving corporation
or (c) to sell or otherwise transfer all or substantially all of its assets to
any person, other than Purchaser or one of its subsidiaries, then, and in each
such case, proper provision shall be made in the agreements governing such
transaction so that Purchaser shall receive upon exercise of the Option the
number and class of shares or other securities or property that Purchaser
would have received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such
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transaction, or the record date thereof, as applicable, and elected, to the
fullest extent it would have been permitted to elect, to receive such
securities, cash or other property.
(b) The provisions of this Agreement, including, without limitation,
Sections 7 and 8, shall apply with appropriate adjustments to any securities
for which the Option becomes exercisable pursuant to Section 6.2(a).
7. Repurchase.
7.1 If a Purchase Event shall have occurred, Purchaser shall have the right,
upon five business days' prior written notice to Issuer (or any successor in
interest to Issuer by merger, sale of all or substantially all of the assets,
or otherwise) (the "Put Notice"), to cause Issuer (or any successor in
interest to Issuer by merger, sale of all or substantially all of the assets,
or otherwise) to have a Closing and to pay at such closing (and Issuer and
such successor, jointly and severally, shall be obligated to pay to Purchaser
in consideration for the cancellation of the Option) an aggregate cancellation
price (the "Cancellation Price") equal to the product of (x) the number of
shares of Issuer Common Stock as to which the Option remains exercisable
multiplied by (y) the excess of (i) the average per share closing price of
shares of Issuer Common Stock as quoted on NASDAQ (NMS) (or if not then quoted
thereon, on such other quotation system or exchange on which Issuer Common
Stock is quoted) for the period of five trading days ending on the trading day
immediately prior to the occurrence of the Put Notice over (ii) the Purchase
Price.
7.2 At any closing contemplated by the Put Notice, Issuer shall pay to
Purchaser the Cancellation Price for the number of shares of Issuer Common
Stock as to which the Option is to be cancelled by delivering to Purchaser a
certified or bank check payable to or on the order of Purchaser in an amount
equal to the Cancellation Price.
8. Registration Rights. Issuer shall, if requested by Grantee at any time
and from time to time within three years of the first exercise of the Option,
use its reasonable best efforts to, as expeditiously as possible, prepare and
file up to two registration statements under the Securities Act if such
registration is necessary in order to permit the sale or other disposition of
any or all shares of Issuer Common Stock or other securities that have been
acquired by or are issuable to Grantee upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by
Grantee, including a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision, and Issuer shall use its best
efforts to qualify such shares or other securities under any applicable state
securities laws. Such request shall be for a minimum of 1% of Issuer's
outstanding Common Stock. Grantee agrees to use all reasonable efforts to
cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement
to be effected on a widely distributed basis so that upon consummation thereof
no purchaser or transferee shall own beneficially more than 2% of the then
outstanding voting power of Issuer. Issuer shall use all reasonable efforts to
cause each such registration statement to become effective, to obtain all
consents or waivers of other parties which are required therefor and to keep
such registration statement effective for such period not in excess of 180
days from the day such registration statement first becomes effective as may
be reasonably necessary to effect such sale or other disposition. In the event
that Grantee requests Issuer to file a registration statement following the
failure to obtain a required approval for an exercise of the Option as
described in Subsection 2.4, the closing of the sale or other disposition of
Issuer Common Stock or other securities pursuant to such registration
statement shall occur substantially simultaneously with the exercise of the
Option. Any registration statement prepared and filed under this Section 8,
and any sale covered thereby, shall be at Issuer's expense except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto. Grantee shall provide all
information concerning itself and the proposed sale or distribution as shall
reasonably be required in order to ensure compliance with the requirements of
the Securities Act as reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If during the time periods
referred to in the first sentence of this Section 8 Issuer effects a
registration under the Securities Act of Issuer Common Stock for its own
account or for any other shareholders of Issuer (other than on Form S-4 or
Form S-8, or any successor form), it shall allow Grantee the right to
participate in such registration, and such participation shall not affect the
obligation of Issuer to effect two registration statements for Grantee under
this
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Section 8; provided that, if the managing underwriters of such offering advise
Issuer in writing that in their opinion the number of shares of Issuer Common
Stock requested to be included in such registration exceeds the number which
can be sold in such offering Grantee shall reduce the number of shares
included therein down to 20% of the number of shares intended to be included
therein, if necessary, and thereafter Issuer shall reduce the number of shares
included therein by any further amount deemed necessary by the managing
underwriters, if any. In connection with any registration pursuant to this
Section 8, Issuer and Grantee shall provide each other and any underwriter of
the offering with customary representations, warranties, covenants,
indemnification and contribution and holdback agreements in connection with
such registration.
9. Listing. If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are then listed on any national securities
exchange or national market system, Issuer will promptly file an application
to list the shares of Issuer Common Stock or other securities to be acquired
upon exercise of the Option on such exchange or system and will use its
reasonable best efforts to obtain approval of such listing as soon as
practicable.
10. Miscellaneous.
10.1 Expenses. Except as otherwise provided in Section 8, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
10.2 Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
10.3 Entire Agreement; No Third-Party Beneficiary; Severability, Etc. Except
as otherwise set forth in the Merger Agreement, this Agreement (including the
Merger Agreement and the other documents and instruments referred to herein)
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction or a Federal or state regulatory agency to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court
or regulatory agency determines that the Option does not permit Grantee to
acquire, or does not require Issuer to repurchase, the full number of shares
of Issuer Common Stock as provided in Sections 2 and 7 (as adjusted pursuant
to Section 6), it is the express intention of Issuer to allow Grantee to
acquire or to require Issuer to repurchase such lesser number of shares as may
be permissible without any amendment or modification hereof.
10.4 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California without regard to any
applicable conflicts of law rules.
10.5 Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.6 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the addresses set forth in the Merger Agreement
(or at such other address for a party as shall be specified by like notice).
10.7 Counterparts. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed
by each of the parties and delivered to the other party, it being understood
that both parties need not sign the same counterpart.
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10.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by Issuer (whether
by operation of law or otherwise) without the prior written consent of
Grantee. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
10.9 Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
10.10 Specific Performance. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
10.11 Termination. The Option shall 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) 18 months
from the date hereof, and (b) the closing date of any Parent Takeover Proposal
plus 30 days, or (iii) the payment by Parent and the receipt by the Company of
the Parent Termination Fee. The rights set forth in Sections 7 and 8 shall not
terminate when the right to exercise the Option terminates as set forth
herein, but shall extend to such time as is provided in Sections 7 and 8,
respectively. Notwithstanding the termination of the Option, Grantee shall be
entitled to purchase those Option Shares with respect to which it has
exercised the Option in accordance with the terms hereof prior to the
termination of the Option.
10.12 Certain Definitions. Capitalized terms used and not defined herein
have the respective meanings ascribed to them in the Merger Agreement.
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IN WITNESS WHEREOF, Issuer and Grantee have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
day and year first written above.
"GRANTEE"
StarSight Telecast, Inc.
By: /s/ Larry W. Wangberg
Name: Larry W. Wangberg
Title: Chairman of the Board and
Chief Executive Officer
"ISSUER"
Gemstar International Group Limited
By: /s/ Henry Yuen
Name: Henry C. Yuen
Title: President and Chief
Executive Officer
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APPENDIX H
<PAGE>
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
(SECTION) 1300 RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED
a. If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation is a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
b. As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
c. As used in this chapter, "dissenting shareholder" means the record holder
of dissenting shares and includes a transferee of record.
(SECTION) 1301 DEMAND FOR PURCHASE
a. If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
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b. Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
c. The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
(SECTION) 1302 ENDORSEMENT OF SHARES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(SECTION) 1303 AGREED PRICE--TIME FOR PAYMENT
a. If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
b. Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(SECTION) 1304 DISSENTER'S ACTION TO ENFORCE PAYMENT
a. If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
b. Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
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c. On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(SECTION) 1305 APPRAISER'S REPORT--PAYMENT--COSTS
a. If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
b. If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
c. Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
d. Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
e. The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(SECTION) 1306 DISSENTING SHAREHOLDER'S STATUS AS CREDITOR
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(SECTION) 1307 DIVIDENDS PAID AS CREDIT AGAINST PAYMENT
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(SECTION) 1308 CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
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(SECTION) 1309 TERMINATION OF DISSENTING SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
a. The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
b. The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
c. The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
d. The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(SECTION) 1310 SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(SECTION) 1311 EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
(SECTION) 1312 ATTACKING VALIDITY OF REORGANIZATION OR MERGER
a. No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
b. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
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c. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
organization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
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APPENDIX I
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED [LOGO ANNUAL
OF 1996
GEMSTAR] REPORT
<PAGE>
To our Members:
Fiscal 1996 was a landmark year for Gemstar International Group Limited. In
October, 1995, we completed our initial public offering of 3,450,000 Ordinary
Shares and raised approximately $36 million. In April 1996, we completed a
secondary offering and issued 345,000 additional Ordinary Shares, generating
over $7 million additional capital for the Company.
We are pleased with our performance in fiscal 1996 during which the Company
met or exceeded our objectives. The financial community has recognized the value
of the Company and its potential as evidenced by the appreciation of our stock
price since the Company's initial public offering.
We thank you, our Members, for your confidence and support and look forward
to reporting our future progress and achievements during the upcoming year.
Sincerely,
/s/ Henry C. Yuen
HENRY C. YUEN
President and Chief Executive Officer
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
Commission file number 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, par value $.01 per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
As of March 31, 1996, there were 30,461,505 shares of the Registrant's Ordinary
Shares outstanding.
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 which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
------- -------
<PAGE>
TABLE OF CONTENTS
FORM 20-F
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I
Item 1 Description of Business.................................................. 3
Item 2 Description of Property.................................................. 16
Item 3 Legal Proceedings........................................................ 16
Item 4 Control of Registrant.................................................... 17
Item 5 Nature of Trading Market................................................. 18
Item 6 Exchange Controls and Other Limitations Affecting Security Holders....... 18
Item 7 Taxation................................................................. 21
Item 8 Selected Financial Data.................................................. 26
Item 9 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 27
Item 10 Directors and Officers of Registrant..................................... 34
Item 11 Compensation of Directors and Officers................................... 34
Item 12 Options to Purchase Securities from Registrant or Subsidiaries........... 35
Item 13 Interest of Management in Certain Transactions........................... 37
PART II
Item 14 Description of Securities to be Registered............................... 39
PART III
Item 15 Defaults Upon Senior Securities.......................................... 39
Item 16 Changes in Securities and Changes in Security for Registered Securities.. 39
PART IV
Item 17 Financial Statements..................................................... 39
Item 18 Financial Statements..................................................... 39
Item 19 Financial Statements and Exhibits........................................ 40
EXHIBIT INDEX......................................................................... 41
SIGNATURE............................................................................. 42
</TABLE>
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Overview
The Company develops, markets and licenses proprietary technologies and
systems that simplify and enhance the viewing and recording of video and
television programming. The Company's first proprietary system, VCR Plus+, was
introduced in 1990, and over 40 million VCR Plus+ systems have been sold to
date. VCR Plus+ enables consumers to record a television program by simply
entering a PlusCode Number (a proprietary one to eight digit number) into a VCR,
television or handset equipped with the VCR Plus+ technology. PlusCode Numbers
are printed in television program listings in over 1,500 newspapers and
magazines worldwide, with a combined circulation of over 290 million. Gemstar
believes that the large and growing installed base of VCR Plus+ represents an
important platform from which to launch related technologies and services. The
Company also has two new technologies, Index Plus+, a proprietary technology
that simplifies the playback of videotapes, and Guide Plus+, an interactive
electronic on-screen television guide. The Company expects these new
technologies to be introduced by manufacturers in the U.S. market in mid and
late 1996, respectively. The Company's primary source of revenues to date has
been license fees paid by manufacturers and publications for the licensing of
the VCR Plus+ technology and the right to print the PlusCode Numbers,
respectively.
The Company continually evaluates media and consumer electronics
applications where its existing industry relationships, proprietary technology
and patent positions, and capability of worldwide implementation could provide
opportunities for expansion.
Products
VCR Plus+
VCR Plus+ was introduced in 1990 to simplify the programming of VCRs for
consumers. VCR Plus+ permits the user to record a program simply by entering a
proprietary one to eight digit number, called a PlusCode Number, via a handset
into a VCR or television. PlusCode Numbers are generated through a patented
process developed by the Company and are printed next to television program
listings in participating newspapers and television program guides worldwide.
Licensed manufacturers incorporate the Company's proprietary software, which
decodes PlusCode Numbers, into the microprocessors of their VCRs or televisions
(or in certain cases, remote control devices). Central to the VCR Plus+ system
are the Company's proprietary PlusCode Numbers that encode in a compressed and
encrypted form the essential elements of programming information: date, time,
channel and length of the desired program. When the user enters a PlusCode
Number, the VCR Plus+ system causes the VCR to turn on, record at the
appropriate time and on the appropriate channel, and shut off.
The VCR Plus+ technology has been widely accepted by virtually every major
VCR and television manufacturer, each of which pays the Company a license fee
based on the number of units shipped incorporating the technology. The Company
estimates that over 40 million VCR Plus+ systems have been sold to date, with
over 16.5 million sold in fiscal 1996. Magnavox, Hitachi and Sony have committed
to incorporate the VCR Plus+ feature in substantially all of their VCR models
shipped in North America beginning in mid to late 1996. Zenith has committed to
offer the VCR Plus+ feature in certain television models beginning in late 1996.
See Item 18, "Financial Statements."
The Company continues to develop and introduce additional VCR Plus+
features that manufacturers can choose to license to enhance the functionality
of VCR Plus+. Manufacturers are required to pay an
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additional license fee for each unit incorporating an enhanced feature. These
features include CallSet and V-Set, systems which automate the set up for VCR
Plus+, V-chip Plus+, which augments the V-chip system that has recently been
mandated by the Telecommunications Act of 1996, and Cable Box Changer, which
automatically changes the channel on a cable box to the appropriate channel for
recording. The Cable Box Changer feature is the subject of a lawsuit between
StarSight and the Company. See Item 3, "Legal Proceedings."
Licensing and Publishing Agreements
License agreements with manufacturers have terms which typically range from
three to seven years and require per unit royalty payments. Some agreements
require an additional one-time payment. These agreements do not require the
manufacturer to incorporate the VCR Plus+ feature into a specific number of VCR
units and may be terminated by the manufacturer without substantial financial
penalty. Certain of these agreements, however, require a minimum royalty payment
each year for the duration of the agreement in order to continue licensing the
technology.
The Company's agreements with newspapers and magazines that publish
PlusCode Numbers have terms ranging from one to seven years and provide for
modest license fees to the Company; agreements with certain publications require
the publications to provide substantial promotion of the VCR Plus+ system. There
can be no assurance that any of the Company's agreements with newspapers and
magazines will be renewed, or, if renewed, will be on terms favorable to the
Company. The Company has entered into an agency agreement with United Feature
Syndicate, Inc. to handle the licensing of PlusCode Numbers to newspapers in the
U.S. and other countries and to maintain certain ongoing relationships with
existing publishers.
Index Plus+
The Index Plus+ system is a proprietary technology that is intended to
simplify the playback and management of videotapes for consumers by automating
the recording, indexing and accessing of programs and program titles. The
Company expects manufacturers to introduce Index Plus+ in the U.S. in mid 1996
and to subsequently introduce it in Europe and Japan.
The Index Plus+ system automatically captures titles of programs as
consumers record from television broadcasts. The titles of the recorded programs
are then stored in a directory which can be displayed on-screen. In order to
play back an Index Plus+ recorded videotape, the user selects a program from the
on-screen directory, and the Index Plus+ VCR will rewind or fast forward to the
start of the program and play. The Index Plus+ system also creates a library
containing the directory of each Index Plus+ recorded videotape. The Index Plus+
system enables the user to search the library either by tape number or program
title in order to quickly view on-screen the directory of a specific tape or the
number of the tape containing a desired program. Pre-recorded tapes also can be
encoded to allow consumers to quickly view on-screen a directory of programs or
segments contained on the pre-recorded tape when the tape is inserted into an
Index Plus+ VCR. The Index Plus+ system also automatically sets and updates the
VCR's clock and provides information to the users as to whether the tape
inserted has enough space to record programs which the VCR has been programmed
to record.
Program Information
The Index Plus+ system uses the vertical blanking interval ("VBI") to
transmit textual information to VCRs incorporating the Index Plus+ system. The
VBI is the unused air time between television picture frames. Television images
are made by an electron gun behind the screen that moves a beam of electrons
rapidly back and forth from the top to the bottom of the screen. When the beam
reaches the bottom it is shut off and returns to the top of the screen to begin
again. During the VBI, or the time when the electronic beam is shut off and
returns to the top of the screen, the air time can be used by broadcasters to
send other information to the television, such as closed captions. The Index
Plus+ system accesses the VBI and automatically captures the
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titles of recorded programs for inclusion in the directory and library when such
titles are inserted into the VBI by broadcasters.
The Company has entered into an agreement to purchase programming
information in electronic form from Tribune Media Service, Inc. a subsidiary of
the Tribune Company and a leading supplier of television program information,
for the Index Plus+ and Guide Plus+ systems. Index Plus+ will utilize the VCR
Plus+ system for program identification, data encryption and data compression.
After the program information is reformatted, it is broadcast under agreements
with local television stations, cable broadcasters and national television
networks (the "Gemstar Data Delivery System"). The Gemstar Data Delivery System
presently includes over 100 local television stations, three national cable
networks (WGN Superstation, The Family Channel and A&E), the ABC Television
Network, Fox Broadcasting Co. ("Fox") and CBS, Inc. ("CBS") which combine to
cover 98% of all U.S. television households with multiple redundancy in most
areas. These television stations and cable companies broadcast the information
through the VBI, both over the air and through local cable television operators,
to their viewers. Capital Cities/ABC has entered into an agreement with the
Company to transmit program information through its VBI (the "ABC License
Agreement"). The ABC License Agreement also provides for the eight ABC-owned and
operated stations, the over 200 ABC affiliated stations and several cable
services to participate in the carrying of program information. Similar
agreements have been reached with Fox, covering 13 owned and operated stations
and over 150 affiliated stations (the "Fox License Agreement"), CBS, covering 18
owned and operated stations and over 170 affiliated stations (the "CBS License
Agreement"), the Canadian Broadcasting Corporation (the "CBC"), and RTL, a
national broadcaster in Germany ("RTL"). The Company also intends to seek
similar agreements with other broadcasters which will provide the Company with
additional redundancy of coverage and will provide broadcasters with the ability
to update their own program information. No assurances can be given, however,
that any such agreements will be entered into on terms favorable to the Company,
if at all.
In each of its agreements with broadcasters, the Company has agreed to
supply without charge the equipment required to insert data into the VBI. In
order to ensure the availability and quality of such equipment to its
broadcasters, in 1993 the Company acquired a majority ownership interest in
NORPAK Corporation ("NORPAK"), a Canadian based company and leading manufacturer
of broadcast data insertion equipment. NORPAK presently supplies major
broadcasters such as the ABC, CBS and Turner Broadcasting Systems.
Local cable operators have the technological capability to remove VBI data
transmitted through their systems. Although the Company expects the cable
operators to pass through the program data (since it is a free service to their
subscribers who have purchased Index Plus+-enabled VCRs), there can be no
assurance that cable operators will do so. If the program data is removed from
the VBI by a cable operator, it would make it less convenient or even impossible
for its subscribers to receive the program data, hence limiting the
functionality and reducing the attractiveness of the Index Plus+ system.
In addition, digital broadcast satellite technology broadcasts information
in a digital form and does not involve a VBI. If digital broadcast satellite
technology increases in popularity as a method of communicating program
information, the Company's Index Plus+ system would have to be modified to
permit it to receive program data in digital form. There can be no assurances,
however, that Index Plus+ could be modified in a commercially acceptable manner.
Licensing Agreements
The Company has developed its Index Plus+ system in cooperation with
Hitachi, JVC and Matsushita, with whom the Company has cross-licensing
arrangements. The Company also has licensed Index Plus+ to LG Electronics,
Mitsubishi, Orion, Philips, Sanyo, Sharp, Sony, Thomson, and Zenith. The Company
is currently in negotiations with other major television and VCR manufacturers
to license the Index Plus+ system. There can be no assurances, however, that any
other television or VCR manufacturers will license the Index Plus+ system.
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As a result of lower licensing revenues resulting from cross-licenses and the
time lag between the licensing of the technology and the receipt of licensing
revenues, licensing revenues from Index Plus+ are not expected to be a
significant portion of the Company's overall revenues during the next three
years.
Licensed manufacturers incorporate Index Plus+ into their VCRs through
microprocessors that have been programmed with the Company's proprietary
software. License agreements with manufacturers have terms that typically range
from three to seven years and require a per unit royalty payment. Some
agreements require an additional one-time payment. These agreements do not
require the manufacturer to incorporate the Index Plus+ feature into a specific
number of VCR units. However, some of these agreements require a minimum royalty
payment each year for the duration of the agreement.
In order to obtain access to VBI lines for the Gemstar Data Delivery
System, the Company has recently entered into lease agreements with
approximately 40 broadcasting companies that give the Company access to over 100
local television stations and several national cable networks. The lease
agreements typically have a term of three years and require the Company to pay
an annual rental fee based upon the number of stations covered by the agreement.
In addition, the Company has obtained access to VBI lines under the ABC License
Agreement, the Fox License Agreement and the CBS License Agreement, which
require the Company to provide data insertion equipment to ABC, Fox and CBS
networks in exchange for the participation of their network-owned and operated
stations and network-affiliated stations in the carrying of Index Plus+ and
Guide Plus+ data.
Guide Plus+
Guide Plus+ is an interactive, electronic on-screen television guide
designed to simplify consumer access to broadcast and cable programming
schedules without interrupting viewing of the program currently being aired.
Guide Plus+ is expected to be introduced in the U.S. in late 1996 and to be
introduced subsequently in Europe and Japan.
The Guide Plus+ on-screen television guide can be accessed by viewers free
of charge through color-coded function keys incorporated into a manufacturer's
remote control. Guide Plus+ users are initially presented with the SURF guide, a
screen which provides information on all programs currently being aired. The
design of the SURF screen includes not only channel listings and textual
descriptions of each program, but also picture-in-guide technology that allows a
user to view the actual program with its textual description. Using the channel
up/down key on a remote control, a viewer can move a highlight cursor to review
any program currently being aired. As each channel is highlighted, the picture
window will be tuned to that channel and the textual description will change
accordingly to correspond to the window. An additional remote control function
key allows the user to view additional textual data, if available.
Other features of Guide Plus+ include the NEXT guide, which provides
programming information for a specific channel. Using the channel up/down key,
the viewer can scan information on programs scheduled within a 24 hour to 48
hour time period. The SCAN guide, another Guide Plus+ feature, provides
descriptions of programs scheduled to be aired at a specific future time on all
channels. The SORT feature allows the user to select a category, such as sports,
movies or specials, and view a list of all programs within that category. When
using the NEXT, SCAN and SORT features, the original program which was being
watched by the user prior to accessing Guide Plus+ remains visible without
interruption using picture-in-guide technology. This picture-in-guide feature is
designed to appeal not only to consumers, but also to broadcasters and
advertisers who desire uninterrupted consumer viewing of both programming and
advertising content. While using any of the foregoing Guide Plus+ features, the
user can record a program at any time by selecting it and choosing once, daily
or weekly recording options.
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The Company believes that Guide Plus+ has a number of unique features that
distinguish it from other existing or announced interactive guides. First, Guide
Plus+ integrates the television picture into the guide screen using picture-in-
guide technology so that television viewing is not interrupted. Second, Guide
Plus+ will provide broadcasters with a continuous updating capability so that
program descriptions and related information can be kept current. Third, Guide
Plus+ adopts a user-friendly TV-like operation, using the channel up/down keys
and color-coded remote control function keys for selection rather than using a
more cumbersome computer-like grid design. Fourth, the cost effective design of
Guide Plus+ facilitates its incorporation into popularly priced television and
VCR models with large sales volumes. Finally, Guide Plus+ will not require
consumers to pay any connection or subscription fee for an on-screen guide. In
November 1995, the Company entered into an agreement with News Corp., publisher
of TV Guide, to market and promote the Guide Plus+ feature in the U.S. under the
name TV Guide Plus+ using the familiar TV Guide logo. The Company intends to
leverage the TV Guide brand name to market its TV Guide Plus+ features. In
addition, the Company intends to offer to viewers of TV Guide Plus+ value-added
features based on the information found in the TV Guide print magazine.
Program Information
As with Index Plus+, Guide Plus+ program information will be transmitted in
the VBI through the Gemstar Data Delivery System. Guide Plus+ utilizes the VCR
Plus+ system for program identification, data encryption and data compression.
As with Index Plus+, local cable operators will have the technological
capability to remove any VBI data transmitted through their systems. In
addition, increased demand by consumers for direct broadcast satellite
technology, which does not involve a VBI, would require the Guide Plus+ system
to be modified to allow receipt of program data in digital form, and there can
be no assurances that Guide Plus+ could be so modified in a commercially
acceptable manner. See "Index Plus+ - Program Information" in Item 1.
Licensing Relationships
For Guide Plus+, the Company intends to pursue a licensing strategy similar
to VCR Plus+ with license fees based on units shipped that incorporate the Guide
Plus+ technology. The Company has entered into license agreements relating to
the Guide Plus+ technology with Hitachi, JVC, LG Electronics, Matsushita,
Mitsubishi, Philips, Sanyo, Sharp, Sony and Zenith. The license agreements have
terms which range from three to seven years and require a per unit royalty
payment. Some agreements require an additional one-time payment. These
agreements do not require the manufacturer to incorporate the Guide Plus+
feature into a specific number of televisions. Some of the agreements, however,
require a minimum royalty payment each year for the duration of the agreement.
Philips has announced that it will include the TV Guide Plus+ system in its
televisions, VCRs and TV/VCR combinations sold in the U.S. under the Magnavox
brand, beginning in late 1996.
Related Applications and Services
The Company is seeking to extend its technologies into new markets and
introduce new applications that build on the Company's VCR Plus+ installed base,
technologies, brand name recognition, and relationships with publishers,
broadcasters and manufacturers. For example, the Company's iPlus+ service draws
on the strengths of the Company's established VCR Plus+ system and worldwide
customer base. iPlus+ is a unique interactive advertising service that utilizes
the VCR Plus+ system to assign PlusCode Numbers to advertisers and sponsors to
deliver long-form information videos ("information videos"). Advertisers use a
broad-reach advertisement through television, newspaper or other media as a
"lead" in which a PlusCode Number is made available. An interested consumer
enters this PlusCode Number and an information video containing additional
information on the product or service is automatically recorded when aired and
is ready for viewing as early as the next day. The information videos are
expected to be recorded by the user's VCR within 24 hours of the PlusCode Number
entry. The information videos are expected to be aired late at night to take
advantage of
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lower programming rates. In exchange for providing PlusCode Numbers for the
information videos, the Company intends to charge a license fee that captures a
percentage of the cost of the advertising campaign.
In 1994, the Company entered into a five-year joint-marketing agreement
with CBS to offer SpotPlus, an iPlus+ package for linking prime-time advertising
spots on CBS with long-form video brochures aired at off-peak hours using
PlusCode Numbers. Under the terms of the non-exclusive arrangement, CBS will
provide non-preemptable time blocks in all of its owned-and-operated stations
(including New York, Los Angeles and Chicago) to advertisers for linking with
prime-time commercials. CBS also has agreed to actively market the iPlus+
concept. The Company has agreed to share a portion of its licensing revenues
generated by SpotPlus with CBS. As part of its effort to market and promote the
iPlus+ concept, the Company has provided promotional and publicity support to
the iPlus+ campaigns. To date, the Company has not derived significant revenues
from iPlus+.
In addition to iPlus+, the Company believes its technologies may enable it
to create additional value added services for broadcasters and consumers. For
example, the Company has created Instant Info, a service that builds on Index
Plus+ and Guide Plus+ technologies and the Gemstar Data Delivery System to
enable broadcasters or advertisers to transmit in encrypted form selected
textual data on VBI lines. Through Instant Info, consumers can view on-screen
textual information related to a program or commercial. Such information may
include, for example, statistics for a baseball game, stock quotations for a
financial program, or the recipes used in a cooking show. Advertisers also will
be able to utilize the feature to provide product and service purchase
information, telephone numbers, retailer addresses or other textual information.
In addition to extending its technologies into new markets and introducing
new applications, from time to time, the Company evaluates business
opportunities and potential strategic relationships. In this regard, in February
1996, the Company entered into an agreement with VideoGuide, Inc., maker of the
VideoGuide on-screen television guide presently marketed as a stand alone unit.
Under the agreement, the Company is VideoGuide, Inc.'s exclusive agent for
technology licensing, placement of advertisements and promotion, and
international sales and marketing. The Company concurrently purchased $3 million
of VideoGuide, Inc. Preferred Stock.
Research and Development
The Company's research and development is conducted by in-house engineers
and contract engineers. The outside engineering firms with which the Company has
contracted to provide such services include Hilite, Inc. ("Hilite"), a firm
owned by a non-executive employee of the Company. Hilite provides engineering
services to the Company pursuant to arrangements under which Hilite retains no
intellectual property rights to the products and concepts that Hilite helps to
develop. The Company incurred approximately $4.7 million, $7.1 million and $8.4
million on engineering, research and development for continuing operations in
fiscal years 1994, 1995 and 1996, respectively. See Item 9, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The market for VCR- and television-related services and products is subject
to rapid and significant changes in technology and frequent new service and
product introductions. The Company believes that its future success will depend
on its ability to enhance its existing technologies and to introduce new
technologies on a competitive basis. Accordingly, the Company will continue to
engage in significant research and development activities. There can be no
assurance, however, that the Company will successfully complete the development
of any future technology or that such technology will be compatible with,
accepted by or incorporated in the technology or products of third parties. Any
significant delay or failure to develop new or enhanced technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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The Reorganization
The Company was organized in April 1992 as a British Virgin Islands
corporation. Initially, the Company engaged in the sale and distribution of
handsets incorporating the VCR Plus+ technology, which allowed consumers to use
VCR Plus+ with their existing VCRs. Later, the Company began licensing the VCR
Plus+ technology to manufacturers for incorporation into their VCRs and
televisions. From fiscal 1992 to fiscal 1995, the Company conducted both VCR
Plus+ handset manufacturing and distribution operations (the "Handset Business")
and licensing operations through its various subsidiaries, which were organized
under the jurisdictions of several different countries. In early fiscal 1995,
the Company elected to discontinue its Handset Business and to limit its
operations solely to licensing activities. In connection with this decision, the
Company transferred all of its Handset Business to Gemstar Manufacturing Holding
Limited ("Holdings"), its then wholly-owned subsidiary, and distributed the
shares of Holdings to the Company's shareholders (the "Spin-Off"). See
"Products-VCR Plus+" in Item 1 and Item 13, "Interest of Management in Certain
Transactions."
Historically, the Company's licensing operations in the U.S. were conducted
through Gemstar Development Corporation ("GDC"), the shareholders of which were
the same as the Company's shareholders, and the Company operated internationally
through its various subsidiaries incorporated outside of the U.S. In June 1995,
the Company consolidated its domestic and international licensing operations by
exchanging 3,518,501 Ordinary Shares of the Company for all of the outstanding
stock of GDC (the "GDC Exchange"). As a result of the GDC Exchange, GDC became a
wholly-owned subsidiary of the Company. See Item 13, "Interest of Management in
Certain Transactions."
In August 1995, the Company also effected an exchange (the "E Guide
Exchange") of 3,511,494 Ordinary Shares for all of the outstanding stock of E
Guide, Inc. ("E Guide"). E Guide owns certain intellectual property rights
connected with the Company's Guide Plus+ technology, as well as other rights
associated with the Company's Guide Plus+ and Index Plus+ technologies. The
Company acquired such rights by effecting the E Guide Exchange. In connection
with the E Guide Exchange, the E Guide shareholders were granted registration
rights by the Company with respect to the Ordinary Shares received by them in
the E Guide Exchange. The Spin-Off, the GDC Exchange and the E Guide Exchange
are collectively referred to as the "Reorganization." See Item 13, "Interest of
Management in Certain Transactions."
Subsequent to fiscal 1995, the Company's Board of Directors approved a one-
for-two reverse stock split of all of the Company's outstanding Ordinary Shares.
The one-for-two reverse stock split was effected in September 1995 under British
Virgin Islands law through a pro rata redemption, for no value, of one-half of
all outstanding Ordinary Shares.
CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
This Annual Report contains forward-looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed below.
Such factors, together with the other information in this Annual Report, should
be considered carefully in evaluating an investment in the Ordinary Shares.
Seasonality and Variability of Results
The Company experiences variability in its revenues and operating results
on a quarterly basis as a result of many factors. Most importantly, as
manufacturers have incorporated VCR Plus+ technology into an increasing number
of models, the Company's license revenues have displayed a seasonality typical
of those of consumer electronics products manufacturers. Shipments by
manufacturers of VCRs and televisions in general,
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and therefore VCRs and televisions incorporating the VCR Plus+ technology, tend
to be higher in the third and fourth calendar quarters, or the Company's second
and third fiscal quarters. However, because the Company generally receives
license revenues within 90 days after the end of the quarter in which the VCR or
television incorporating its technology is shipped, licensing revenues are
typically higher during the Company's third and fourth quarters. In addition,
manufacturers' shipments vary from quarter to quarter depending on a number of
factors, including retail inventory levels and retail promotional activities. As
a result, the Company may experience variability in its quarterly license
revenues affecting period to period comparability and performance. The Company's
license revenues are also affected by the volume of shipments by manufacturers.
The Company's license agreements provide for volume discounts based on the
shipment volume in each calendar year by a given manufacturer, which can lower
the average per unit license fee for a manufacturer over the course of a year.
The Company has experienced declining average per unit VCR Plus+ license fees
and expects this trend to continue. The Company anticipates that its revenues
and operating results will also be affected by the timing of market
introductions and market acceptance of new systems such as Index Plus+ and Guide
Plus+. There can be no assurance that Index Plus+, Guide Plus+ or other future
systems developed by the Company will ever result in significant revenues or
profits. Further, if these new systems achieve market acceptance, the timing of
manufacturers' implementation and shipments is uncertain and may result in
greater variability of the Company's quarterly and annual operating results.
Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's third
fiscal quarter during the fall holiday season. The Company's planned operating
expenditures each quarter are based, in part, on the Company's expectation as to
future revenues in the quarter. In addition, many of the Company's expenditures
are fixed costs. If revenues do not meet expectations in any given quarter,
operating results for the quarter may be materially adversely affected. In
addition, the Company's annual and quarterly results may be affected by
competition, general economic downturns and the mix of licensing revenues. As a
result, the Company believes that period to period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company's
historic revenue growth or its profitability will continue on a quarterly or
annual basis. See Item 9, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Single Product Category
The Company's historical revenues are almost entirely derived from the VCR
Plus+ technology, consisting of license fees from VCR and television
manufacturers, newspapers and other publications. The life cycle of VCR Plus+ is
difficult to estimate due in large measure to uncertainties regarding the effect
of new products, applications or product enhancements, technological changes and
the emergence of new industry standards and future competition. Growth in VCR
Plus+ license revenues will come primarily from further penetration of existing
markets because virtually all major VCR and television manufacturers have
licensed the VCR Plus+ technology, and the Company has expanded into most major
markets worldwide. With increasing penetration of the VCR Plus+ technology among
major VCR and television manufacturers, volume discounts relating to the VCR
Plus+ license fees take effect. As a result, the Company has experienced
declining average per unit VCR Plus+ license fees and expects this trend to
continue. The Company is introducing new systems (e.g., Index Plus+ and Guide
Plus+) and is incurring, and will continue to incur, significant research and
development, sales and marketing and general and administrative expenses
relating to these new technologies and systems. There can be no assurance,
however, that Index Plus+, Guide Plus+ or any other new system will be
successful or result in revenues. As a result, the Company remains dependent on
revenues from the VCR Plus+ technology, and a decline in revenues from licensing
the VCR Plus+ technology would have a material adverse effect on the Company's
business, operating results and financial condition.
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New Products; Rapid Technological Change
The market for the Company's products is characterized by rapidly changing
technologies, short product life cycles, the frequent introduction of new
products and evolving industry standards. Accordingly, the Company's future
performance will be dependent on its ability to (i) identify emerging
technological trends in its market, (ii) identify changing consumer needs, (iii)
develop and maintain competitive technology, (iv) enhance its technology by
adding innovative features that differentiate its technology from that of its
competitors and (v) bring technology to market quickly at cost-effective prices.
The Company has developed two systems, Index Plus+ and Guide Plus+, and entered
into license agreements with manufacturers to permit incorporation of those two
systems into VCRs and televisions. Although the Company currently expects
manufacturers to introduce Index Plus+ and Guide Plus+ in mid and late 1996,
respectively, there can be no assurance that such systems will be introduced on
a timely basis or that, once introduced, either system will gain market
acceptance. In addition, the Company has entered into cross license agreements
with the co-developers of the Index Plus+ technology and will not receive any
net revenues as a result of the co-developers' incorporation of the technology
into their VCRs and televisions. If the introductions of the Index Plus+ and
Guide Plus+ systems are delayed or do not achieve consumer acceptance, the
Company's business, operating results and financial condition could be
materially adversely affected. In addition to the risks inherent in the launch
of Index Plus+ and Guide Plus+, there can be no assurance that the Company will
successfully complete the development of any future technology or that such
technology will be compatible with or incorporated into the technology or
products of third parties. Any significant delay or failure to develop new or
enhanced technology could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the level of consumer interest in or demand for VCRs and
televisions will continue or that other forms of entertainment delivery systems
that decrease the demand for VCRs and televisions will not be introduced. The
reduction in the demand for VCRs or televisions could also adversely affect the
Company's business, operating results and financial condition.
Reliance on Third Parties
The Company's business relies, and will continue to rely in the future, on
third-party manufacturers, publications and media services. Revenues from the
Company's VCR Plus+ system are derived from license revenues received from
manufacturers and publications. The Company has executed VCR Plus+ licensing
agreements with virtually every major television and VCR manufacturer. None of
these agreements requires the inclusion of the VCR Plus+ system into VCRs
manufactured by the licensees, and only a few of these agreements guarantee a
minimum licensing fee to the Company over their term. All of these agreements
may be terminated by the manufacturer without substantial financial penalty. The
Company's Index Plus+ and Guide Plus+ licensing agreements with television and
VCR manufacturers are structured similarly to the Company's VCR Plus+ licensing
agreements and are generally subject to the conditions and qualifications
described above.
The Company's VCR Plus+ system relies on consumer access to PlusCode
Numbers through licensed publications that carry the PlusCode Numbers. The
Company presently licenses the PlusCode Numbers to newspapers and major
television guides in VCR Plus+ markets worldwide. The license agreements call
for royalty payments to the Company and have initial terms ranging from one to
seven years. There is no assurance that these agreements will be renewed upon
expiration or, if renewed, that they will be on terms as favorable to the
Company as existing license agreements. In addition, the Company will be
dependent on the cooperation and support of publications in countries in which
it is not presently doing business in order to continue to expand the
international availability of the VCR Plus+ system. See "Description of
Business-Products" in Item 1.
Consumer acceptance of the Index Plus+ and Guide Plus+ systems depends on
the cooperation of both cable and television broadcasters. The Company has
entered into agreements with cable and television broadcasters, independent
television stations, Capital Cities/ABC, Fox, CBS, CBC and RTL to broadcast the
information used in Index Plus+ and Guide Plus+ through the vertical blanking
interval and is in negotiations with other cable and television broadcasters to
support the Index Plus+ and Guide Plus+ systems. There can be
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<PAGE>
no assurance, however, that local cable operators will not "strip" information
required by Index Plus+ and Guide Plus+ from the vertical blanking interval, so
that such information would not be available to some consumers. In such a case,
additional hardware would have to be purchased by the consumer to receive the
data required for the Index Plus+ and Guide Plus+ systems, thereby decreasing
the attractiveness of these systems, or the Company would have to enter into
agreements with local cable operators to ensure retransmission of required
information. There can be no assurance that such agreements could be reached or
that, if reached, they would be on terms acceptable to the Company. In addition,
increased use of digital broadcast satellite technology, which does not involve
a vertical blanking interval, would require the Company's Index Plus+ and Guide
Plus+ systems to be modified to allow receipt of program data in digital form,
and there can be no assurances that such systems could be so modified in a
commercially acceptable manner. See "Description of Business-Products" in Item
1.
The Company has no control over the number of VCRs and televisions that
will be manufactured incorporating the Company's systems, and there can be no
assurances with respect to the quantity of VCRs and televisions that will
include the Company's systems or the amount of licensing revenues the Company
will receive as a result of inclusion by manufacturers of the Company's systems.
Competition
The Company's systems compete with systems offered by other companies. Many
of the Company's present and potential competitors have, or may have,
substantially greater resources than the Company to devote to further
technological and new product developments. The Company believes that it will
compete based primarily on the speed of its technological developments,
uniqueness of its designs, ease of use, system features and price, proprietary
technology, quality of marketing and ability to identify and meet consumer
needs. There can be no assurance that based on these factors the Company will be
competitive with the existing or future products or services of its competitors.
Several products on the market that compete with VCR Plus+ offer point-and-
click VCR programming functions that enable a subscriber to select a program
from the screen and instruct the unit (a special VCR, television or a decoder
box) to record. For example, in mid 1994, StarSight Telecast, Inc. ("StarSight")
introduced an on-screen electronic guide with point-and-click recording
capability and a set top box with similar features was introduced in late 1995
by VideoGuide, Inc. ("VideoGuide"). The Company has entered into an agreement
giving the Company certain exclusive rights to market and promote the VideoGuide
product and service. See "Business-Related Applications and Services" for a
discussion of the Company's equity investment in VideoGuide. In addition, there
have been several announcements of planned interactive electronic television
guide services (including News Corp.'s TV Guide On-Screen and United Video's
Prevue Express), some of which contain a point-and-click recording feature.
Indexing systems currently built into VCRs that require the user to
manually enter program stops and titles will compete with the Index Plus+
technology. Many companies, including some of the major VCR manufacturers, have
introduced or are developing new indexing systems. In the area of pre-recorded
video materials, digital video disc players with random access capabilities may
also compete with Index Plus+ in the future.
The interactive electronic television guides that may compete with VCR
Plus+, whether existing now or developed in the future, may also compete with
the Company's Guide Plus+ system. Digital satellite system products either being
offered or expected to be offered by a number of manufacturers, including
Thomson, Sony, Panasonic and others include an on-screen electronic guide of
programming offered by such systems. Scientific Atlanta, Inc. also has developed
a program guide for use in its cable boxes, and the Company expects that other
cable box and satellite receiver manufacturers may develop program guides that
would compete with
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<PAGE>
the Company's Guide Plus+ system. Guide Plus+ will also face competition from
traditional published television guides and from non-interactive, or passive,
on-screen electronic guides.
Dependence on Key Employees
The Company is dependent on certain key members of its management,
operations and development staff, including Henry C Yuen, its Chief Executive
Officer, the loss of whose services could have a material adverse effect on the
Company. Furthermore, recruiting and retaining additional qualified engineering,
marketing, and operations personnel will be critical to the Company's success.
There can be no assurance that the Company will be able to recruit or retain
such personnel on acceptable terms. Failure to attract and retain key personnel
could have a material adverse effect on the Company's business, operating
results and financial condition. See Item 10, "Directors and Officers of
Registrant."
Patent and Proprietary Information; Litigation
The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are important
for success. The Company relies on a variety of intellectual property
protections for its products and services, including patent, copyright,
trademark and trade secret laws, and contractual obligations, and pursues a
policy of vigorously enforcing such rights. In addition, because much of the
Company's technology relies on complex encryption methods, the technology is
inherently difficult for unauthorized persons to penetrate. There can be no
assurance, however, that the Company's intellectual property rights will be
adequate to ensure the Company's competitive position, or that competitors will
not be able to produce a non-infringing competitive product or service. In
addition, there can be no assurances that in the future third parties will not
assert patent infringement claims against the Company, or that if required to
obtain any third party licenses as a result of an infringement dispute, the
Company will be able to obtain such licenses.
The following is a summary of the intellectual property protection afforded
to each of the Company's major technologies:
VCR Plus+ System
In the U.S., the Company currently has five issued patents and 21 pending
patent applications, representing more than 700 claims relating to the
technology underlying the VCR Plus+ system. The patents and patent applications
generally cover the use of compressed programming numbers for the programming of
VCRs and other electronic equipment and also include other novel features such
as the VCR Plus+ Cable Channel Changer and CallSet remote initialization. The
Company's issued U.S. patents have 217 claims. In addition, the Company has been
notified by the U.S. Patent and Trademark Office that three of its pending
applications are allowable. The Company also has four issued foreign patents and
multiple foreign patent applications pending for the VCR Plus+ technology. The
Company holds seven issued U.S. and 23 issued foreign design patents covering
various designs of products which contain or are used with VCR Plus+ technology.
The Company has U.S. copyright registrations for the encoding and decoding
computer programs at the heart of the VCR Plus+ compression and encryption
technology. The Company considers portions of the VCR Plus+ encryption
technology to be a protectable trade secret and has undertaken considerable
efforts to maintain its secrecy.
With respect to the VCR Plus+ system, the Company holds extensive trademark
registrations throughout the world and has multiple trademark applications
pending for a variety of marks. Marks for which the Company has registrations or
applications to register in the U.S. or foreign countries include VCR Plus+,
PlusCode, CallSet, iPlus+, SpotPlus, Video Plus+, ShowView, G-Code, Instant
Programmer, Control Tower and
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<PAGE>
C/3/. Video Plus+, ShowView and G-Code are marks used in place of the mark VCR
Plus+ in certain countries to avoid or minimize conflicts in those countries.
Index Plus+ System
The Company currently has one issued U.S. patent and ten pending U.S.
patent applications, representing more than 200 claims on the technology related
to the Index Plus+ system. The Company has been notified by the U.S. Patent and
Trademark Office that two of its pending patent applications are allowable. In
general, the patent and patent applications cover the method and apparatus used
to create a directory of the taped segments of a videotape and to effect the
rapid and accurate retrieval of those segments, as well as certain other novel
features. The Company has cross licensing agreements with Matsushita, JVC and
Hitachi. The Company also has two issued foreign patents and multiple foreign
patent applications pending for the Index Plus+ technology in those countries
where the system is expected to be launched. The Company has several trademark
applications pending for marks related to the Index Plus+ system, including the
mark Index Plus+.
Guide Plus+ System
The Company has expended significant efforts to strengthen its intellectual
property rights in the electronic television guide area. The Company has eight
U.S. patent applications pending with over 150 claims, relating to Guide Plus+-
related technology. The Company has also been notified by the U.S. Patent and
Trademark Office that two of its pending patent applications are allowable. The
Company has also acquired exclusive licensing rights to three fundamental issued
patents in the area of electronic television guides: the relevant portion of
U.S. Patent No. 4,908,713, filed in 1981 and issued with 18 guide related claims
in 1990 ("Levine patent"); U.S. Patent No. 5,038,211, filed in 1989 and issued
with 34 claims in 1991 ("Hallenbeck patent"); and U.S. Patent No. 4,751,578,
filed in 1985 and issued with 19 claims in 1988 ("Reiter patent"). The Company
believes that these issued patents, the continuation claims in process, and the
patent applications filed by the Company provide it with a competitive
advantage.
The Company intends to protect vigorously its intellectual property rights.
The Company believes that certain claims of the Levine patent, if upheld to be
valid, cover the operation of on-screen television guides utilizing local
storage and retrieval of electronic television guide data, as used by StarSight
and other existing and announced interactive on-screen guides. The Company
believes that certain claims of the Hallenbeck patent, if upheld to be valid,
cover a means of data delivery and selective retrieval that significantly
decrease the cost of an interactive television guide system. The Company also
believes that certain claims of the Reiter patent, which cover the concept of
sorting television programs by theme (such as sports, movies, specials, etc.),
if upheld to be valid, represent a valuable user-interface feature without
which an electronic guide's utility and ease-of-use would be greatly reduced.
The Company is presently suing StarSight for patent infringement of claims in
all of these three patents. The Company believes that if it is successful in
these legal proceedings, the Company will be able not only to prevent StarSight
from infringing on the Company's intellectual property rights by further
distributing or servicing its StarSight system, but also to establish the
validity and coverage of these patents by passing a critical legal test.
However, there is no assurance that the Company will prevail in any or all of
these patent infringement claims. See Item 3, "Legal Proceedings."
The Company's policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of the Company's proprietary
information is disclosed. These agreements prohibit the disclosure of
confidential information to anyone outside the Company, both during and
subsequent to employment or the duration of the working relationship. There can
be no assurance, however, that these agreements will not be breached, that the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors.
Other Related Applications
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<PAGE>
Because the iPlus+ service relies on PlusCode Numbers and the VCR Plus+
system, intellectual property protection of the iPlus+ service relies primarily
on the rights obtained with respect to the VCR Plus+ system. In addition,
trademark registrations have been obtained or applications made in the U.S. and
foreign countries for the mark iPlus+.
The Company's continuing success depends in part on its ability to protect
and maintain the proprietary nature of its technology through a combination of
patents, trade secrets, trademarks, copyrights, licenses and other intellectual
property arrangements. Company currently has a number of issued U.S. and foreign
patents. The Company also has numerous pending U.S. and foreign patent
applications, issued and pending trademark registrations (some of which have
been opposed by third parties) and computer program copyrights in the U.S. and
other countries. The Company has also acquired the exclusive right to three
patents broadly covering various aspects of interactive, electronic on-screen
television guides. The Company intends to vigorously protect its intellectual
property rights. There can be no assurance, however, that the Company's pending
patent applications will issue or that a third party will not violate, or
attempt to invalidate, the Company's intellectual property rights, possibly
forcing the Company to expend substantial legal fees. Successful challenges to
certain of the Company's patents would materially adversely affect the Company's
business, operating results and financial condition.
There can be no assurance that certain aspects of the Company's technology
will not be reverse-engineered by third parties without violating the Company's
proprietary rights. The Company's existing protections also may not preclude
competitors from developing products with features and prices similar to or
better than those of the Company.
The Company has from time to time received communications from third
parties asserting that features of certain of the Company's technologies may
infringe upon intellectual property rights of such parties. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future. An adverse determination in any such dispute could result
in the loss of the Company's proprietary rights, subject the Company to
significant liabilities and litigation costs or prevent the Company from
licensing its technologies, any of which could have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
if any of the Company's licensees determine that any additional third party
licenses are required as a result of any such dispute, there can be no assurance
that any such licenses would be available on terms acceptable to the Company, if
at all.
The Company is currently engaged in a lawsuit with StarSight in which the
Company has alleged that StarSight has infringed three patents covering various
aspects of the interactive, electronic on-screen television guide to which the
Company has certain exclusive rights. The Company is also seeking a declaration
that certain of StarSight's patents are unenforceable and that StarSight's
actions violate federal and state antitrust laws. StarSight has alleged that the
VCR Plus+ handset's Cable Box Changer feature has infringed one of StarSight's
patents. StarSight has also filed a counterclaim seeking, among other things,
determinations that it does not infringe certain patents of the Company and that
such patents are invalid and unenforceable. See Item 3, "Legal Proceedings."
Risks Associated With International Operations
The Company operates on a multinational basis, and, as a result, the
Company is subject to various risks, including a greater difficulty of
administering business globally, regulatory requirements such as tariff
regulations, export control restrictions, overlapping or differing tax
structures, differences in intellectual property protections, political and
economic instability or general trade restrictions. If any of these risks
materialize, it could have a material adverse effect on the Company's business,
operating results and financial condition. The Company generates a substantial
amount of its income outside the United States, and the
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<PAGE>
Company and its subsidiaries generally are taxed at rates substantially lower
than U.S. tax rates. If the Company or its subsidiaries were no longer able to
qualify for such tax rates or if the tax laws were rescinded or changed, the
Company's operating results could be materially adversely affected. See Item 9,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Item 7, "Taxation" and Note 4 of the Notes to Consolidated
Financial Statements in Item 18.
Holding Company Structure; Restrictions on Subsidiary Dividends
The Company conducts all of its operations through subsidiaries.
Accordingly, the primary source of the Company's income is dividends and other
distributions from its subsidiaries. Some of the Company's subsidiaries were
formed under and have operations in countries other than the British Virgin
Islands, the jurisdiction of the Company's organization. In addition, each of
the Company's subsidiaries receives its revenues in either U.S. dollars or the
local currency of the jurisdictions in which it operates. As a consequence, the
Company's ability to obtain dividends or other distributions is subject to,
among other things, possible restrictions on dividends under applicable local
laws and foreign currency exchange regulations of the jurisdictions in which its
subsidiaries operate. In addition, dividends or distributions from the Company's
U.S. subsidiary are subject to a 30% withholding tax, which makes such dividends
and distributions unattractive. The subsidiaries' ability to pay dividends or
make other distributions to the Company is also subject to the subsidiaries
having sufficient funds from their operations legally available for the payment
of dividends or other distributions which are not needed to fund their
operations, obligations or other business plans. Because the Company is a
shareholder of its subsidiaries, the Company's right to the assets of such
subsidiaries will be subordinated to the rights of all creditors and claimants
against its subsidiaries. See Item 7, "Taxation" for a discussion of certain tax
issues resulting from the ownership structure of the Company that may affect the
Company or its shareholders.
Control by Management
Thomas Lau, Henry Yuen, Daniel Kwoh, Wilson Cho, Elsie Leung and Roy
Mankovitz, each members of the Company's management, collectively owned 70.2% of
the outstanding Ordinary Shares and voting power of the Company. In addition,
Mary Lau, Thomas Lau's sister, and Thomas Lau together own 45.6%. Accordingly,
the Company's management is able to control the election of the Board of
Directors of the Company, and thus the direction and future operations of the
Company, including decisions regarding acquisitions and other business
opportunities and the declaration of dividends and the issuance of additional
Ordinary Shares and other securities, in each case without the supporting vote
of any other shareholder of the Company. See Item 6, "Exchange Controls and
Other Limitations Affecting Security Holders."
ITEM 2 - DESCRIPTION OF PROPERTY
The Company leases office facilities in Pasadena, California covering in
excess of 15,000 square feet. The Company's leases expire in the year 2000. The
Company believes that its facilities are adequate to meet the Company's needs
for the foreseeable future. Should the Company need additional space, management
believes that the Company will be able to secure additional space at reasonable
rates.
ITEM 3 - LEGAL PROCEEDINGS
The Company is currently a party in a consolidated lawsuit in which the
adverse party is StarSight. In this case, StarSight Telecast, Inc. v. Gemstar
Development Corporation and Michael R. Levine, filed October 15, 1993 in the
Northern District of California, StarSight is seeking, among other relief, a
determination that the VCR Plus+ handset's Cable Box Changer feature infringes a
patent issued to StarSight. StarSight also seeks a determination that it has not
infringed the Levine patent, that the patent is invalid and that the Company
violated federal antitrust laws. As a result of a motion by the Company, the
court dismissed the antitrust claim
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with prejudice. The Company has counterclaimed against StarSight for
infringement of the Levine patent. In successive lawsuits coordinated with this
case, the Company has also charged StarSight with infringement of the Hallenbeck
and Reiter patents and has sought injunctions restraining StarSight from
infringing these patents. The Company is also seeking a declaration that certain
of StarSight's patents are unenforceable and that StarSight's actions violate
federal and state antitrust laws. StarSight filed a counterclaim seeking, among
other things, determinations that its technologies do not infringe the
Hallenbeck and Reiter patents and that such patents are invalid and
unenforceable. See "Patent and Proprietary Information; Litigation" in Item 1.
The Company plans to vigorously pursue its claims against StarSight in
order to protect and enhance the Company's intellectual property rights. The
Company does not believe that the ultimate outcome of the lawsuit involving
StarSight will have a material adverse effect on the financial condition or
results of operations of the Company.
The Company and its subsidiaries are from time to time also involved in
routine legal matters incidental to their businesses. In the opinion of the
Company, the resolution of such matters will not have a material effect on its
financial condition or results of operations.
ITEM 4 - CONTROL OF REGISTRANT
(a) As far as known to the Company, it is not directly or indirectly owned
or controlled by any other corporation or by any foreign government.
(b)(1) To the knowledge of the Company, the following persons beneficially own
more than 10% of the Company's outstanding Ordinary Shares as of May 31,
1996:
<TABLE>
<CAPTION>
Number of % of Shares
Identity of Persons Shares Outstanding
------------------- --------- -----------
<S> <C> <C>
Dynamic Core Holdings Limited (1) 11,522,575 37.4%
Henry Yuen (2) 4,176,276 13.1%
</TABLE>
(1) The sole shareholder of Dynamic Core Holdings Limited is Thomas Lau,
who is the brother of Mary Lau. Mary Lau beneficially owns 1,516,751
Ordinary Shares or 4.9%.
(2) Includes 1,114,285 shares issuable upon exercise of currently
exercisable options.
(b)(2) The total number of shares of the Company's Ordinary Shares beneficially
owned by the officers and directors as a group as of May 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Number of % of Shares
Identity of Group Shares Outstanding
----------------- --------- -----------
<S> <C> <C>
Officers and directors as a group
(9 persons) (1) 22,491,289 70.2%
</TABLE>
(1) Includes 1,564,285 shares issuable upon exercise of currently
exercisable options.
(c) As far as is known to the Company, there is no arrangement, the operation
of which, may at a subsequent date result in a change in control of the
Company.
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<PAGE>
ITEM 5 - NATURE OF TRADING MARKET
Since the initial public offering of the Company's Ordinary Shares at
$12.00 per share on October 11, 1995, the Ordinary Shares have been traded on
the Nasdaq National Market (the "Nasdaq Stock Market") under the symbol GMSTF.
Prior to that time there was no public trading market for the Ordinary Shares.
The sole market for the Company's Ordinary Shares is the Nasdaq National
Market in the United States. The Ordinary Shares of the Company are not
currently traded on any non-United States trading market.
The following table sets forth for the periods indicated the high and low
closing price per share of Ordinary Shares on the Nasdaq National Market as
reported by Nasdaq:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1995
4th Quarter (from October 11, 1995).. 38 1/4 13 1/2
1996
1st Quarter.......................... 37 3/4 21 1/4
</TABLE>
At March 31, 1996, there were 30,461,505 Ordinary Shares outstanding and
approximately 40.0% of the outstanding shares were held by record by holders
with listed mailing addresses in the United States. The Company believes that
the number of record holders with addresses in the United States may not be
indicative of the portion of the outstanding Ordinary Shares held in the United
States.
ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no exchange control restrictions on remittances of
dividends on the Ordinary Shares or on the conduct of the Company's operations
in the British Virgin Islands, where it is incorporated.
The following is a brief description of the rights of holders of fully paid
Ordinary Shares and the authorized but unissued preference shares, par value
$0.01 per share, of the Company (the "Preference Shares"). This description does
not purport to be complete and is qualified in its entirety by reference to the
Memorandum of Association and Articles of Association of the Company and to the
relevant provisions of the British Virgin Islands International Business
Companies Ordinance (Cap. 291), as amended.
Ordinary Shares
The Company's Memorandum of Association authorizes the issuance of an
aggregate of 500,000,000 Ordinary Shares. All of the issued Ordinary Shares are,
for purposes of the issue, credited as fully paid and nonassessable (except that
in the case of Ordinary Shares issued for a promissory note or other written
obligation for payment of a debt, the holder of such Ordinary Shares is liable
for the amount unpaid on the promissory note, and such Ordinary Shares may be
subject to forfeiture), and accordingly no further contribution of capital may
be required by the Company from holders of Ordinary Shares. Under British Virgin
Islands law, nonresidents of British Virgin Islands may freely hold, vote and
transfer Ordinary Shares in the same manner as British Virgin Islands residents.
The shareholders of E Guide, who received an aggregate of 3,511,494
Ordinary Shares of the Company in the E Guide Exchange (see "The
Reorganization"), were also granted certain registration rights, including
demand registration rights and piggyback registration rights, with respect to
the Ordinary Shares they received in the E Guide Exchange.
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<PAGE>
Preference Shares
The Company's Memorandum of Association authorizes the issuance of an
aggregate of 50,000,000 Preference Shares. The Board of Directors has the
authority, without shareholder action, to establish or increase the number of
shares of any series of Preference Shares, and to establish the dividend rights
and rates, voting rights, redemption provisions and liquidation preference with
respect to any such Preference Shares, all of which may take precedence over
comparable rights of the existing Ordinary Shares. Any variance in the terms of
Preference Shares after initial issuance thereof which affects the holders of
Ordinary Shares must be approved by a majority of the holders of Ordinary
Shares.
Rights of Shareholders under British Virgin Islands Law May Be Less than in U.S.
Jurisdictions
The Company is incorporated under the laws of the British Virgin Islands,
and its corporate affairs are governed by its Memorandum of Association and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of the Company's
management, directors and controlling shareholders and the rights of the
Company's shareholders differ from those that would apply if the Company were
incorporated in a jurisdiction within the U.S. Further, the rights of
shareholders under British Virgin Islands law are not as clearly established as
the rights of shareholders under legislation or judicial precedent in existence
in most U.S. jurisdictions. Thus, the public shareholders of the Company may
have more difficulty in protecting their interests in the face of actions by the
management, directors or controlling shareholders than they might have as
shareholders of a corporation incorporated in a U.S. jurisdiction. In addition,
there is doubt that the courts of the British Virgin Islands would enforce,
either in an original action or in an action for enforcement of judgments of
U.S. courts, liabilities that are predicated upon the securities laws of the
U.S.
Dividends
Holders of Ordinary Shares are entitled to participate in the payment of
dividends in proportion to their holdings. The Board of Directors may declare
and pay dividends in respect of any accounting period out of the surplus of the
Company legally available for distribution. Cash dividends, if any, will be paid
in U.S. Dollars. The Company's Board of Directors has no current plans to pay
dividends. Future dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Company's Board of Directors. For a discussion of taxation of dividends
for shareholders. See Item 7, "Taxation".
Voting Rights
Every shareholder who is present in person or by proxy at a meeting of the
Company shall have one vote for each Ordinary Share held by such shareholder. In
addition, holders of Preference Shares shall have such voting rights, if any, as
determined by the Board of Directors. The Articles of Association of the Company
make no provision for cumulative voting.
Directors
Under the Company's Articles of Association, the number of directors of the
Company may not be less than three nor more than fifteen, and are divided into
three classes. Directors may be appointed by the shareholders or by the
directors to fill a vacancy or as an addition to the existing directors.
Directors may be removed, with cause, by a resolution of the shareholders of the
Company or by a resolution of the other directors.
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<PAGE>
Quorum
The quorum required to constitute a valid general meeting of shareholders
consists of shareholders present in person or by proxy together holding not less
than 50% of all shares entitled to vote at the meeting. If a meeting is
adjourned for lack of a quorum, it will stand adjourned to the next business day
at the same time and place or to such other day at such other time and place as
the directors may determine, and if at the adjourned meeting there are present
in person or by proxy within one hour from the time appointed for the meeting at
least one-third of the shares entitled to vote at the meeting, the shareholder
or shareholders present shall be a quorum. Meetings may also be called upon the
written request of shareholders holding more than 50% of the outstanding voting
shares of the Company. A meeting convened upon the written request of
shareholders shall be dissolved if a quorum is not present at the first meeting.
Resolutions
Resolutions may be adopted at shareholders' meetings by the affirmative
vote of a simple majority of the shares entitled to vote thereon that are
represented at the meeting and voted. In addition, shareholders may act by
written consent without a meeting by the consent of the holders of an absolute
majority of the outstanding shares entitled to vote on such matters, provided
that notice of any such actions is subsequently furnished to all shareholders.
Certain actions may be taken by a resolution of the directors. Such actions
include amendments of the Company's Memorandum of Association and certain
amendments of its Articles of Association, an increase or reduction in the
Company's authorized capital and a change in the Company's name.
Rights in a Winding-Up
Holders of Ordinary Shares are entitled to participate in proportion to
their holdings in any distribution of assets in a winding-up after satisfaction
of liabilities to creditors and holders of Preference Shares, if any.
Additional Issuances of Ordinary Shares
As of March 31, 1996 there were 469,238,495 authorized but unissued
Ordinary Shares, including 5,600,000 Ordinary Shares reserved for issuance under
the 1994 Stock Incentive Plan, as amended. See Item 12, "Options to Purchase
Securities From Registrant or Subsidiaries". Additional authorized but unissued
Ordinary Shares may be utilized for a variety of corporate purposes, including
future public or private offerings to raise additional capital. Subject to the
Company's Articles of Association and any resolution of shareholders, the Board
of Directors is authorized to exercise the power of the Company to offer, allot,
grant options over or otherwise dispose of all of the remaining unissued
Ordinary Shares of the Company. The Company does not currently have any plans to
issue additional Ordinary Shares, except in connection with the 1994 Stock
Incentive Plan. The Board of Directors may, without shareholder action, increase
the number of authorized Ordinary Shares.
Transfers of Ordinary Shares
The Company's Memorandum of Association and Articles of Association do not
include any restrictions on the transferability of Ordinary Shares other than
those restrictions set forth in the 1994 Stock Incentive Plan and the lock-up
arrangements entered into in connection with the Company's public offering on
April 16, 1996.
20
<PAGE>
Merger; Dissenters' Rights
British Virgin Islands law provides for mergers whereby either one company
absorbs another company and the absorbed company simultaneously dissolves, or a
new company is formed and absorbs the two merging companies, which automatically
dissolve. British Virgin Islands law provides for compulsory acquisition (if the
holders of 90% or more of the company's voting shares instruct the company to do
so) or appraisal of the interests of a shareholder who objects to the transfer
of the ownership or assets of a company. A shareholder objecting to a merger is
not, however, entitled to appraisal of his shares if the company is the
surviving corporation in the merger and the shareholder continues to hold the
same or similar shares following consummation of the merger.
Transfer Agent and Registrar
First Interstate Bank of California serves as the Transfer Agent and
Registrar for the Ordinary Shares.
ITEM 7 - TAXATION
The following discussion is a summary of certain anticipated U.S. federal
income tax consequences and British Virgin Islands tax consequences of an
investment in the Ordinary Shares under current law and is based on the advice
of O'Melveny & Myers with respect to U.S. federal income taxes and Harney,
Westwood & Riegels with respect to British Virgin Islands taxes. This discussion
does not deal with all possible tax consequences relating to an investment in
the Ordinary Shares and does not purport to deal with the tax consequences
applicable to all categories of investors, some of which (such as dealers in
securities, insurance companies, individual retirement and other tax deferred
accounts and other tax-exempt entities) may be subject to special rules. In
particular, the discussion does not address the tax consequences under state,
local and other national (i.e., non-U.S. and non-British Virgin Islands) tax
laws. The laws discussed below may change at any time and such changes may be
retroactive to a date preceding the date of this Annual Report. Accordingly,
each prospective investor should consult its own tax advisor regarding the
particular tax consequences to it of an investment in the Ordinary Shares. The
following discussion is based upon laws and relevant interpretations thereof in
effect as of May 31, 1996, all of which are subject to change.
U.S. Federal Income Taxation
The following discussion only addresses the U.S. federal income taxation of
a U.S. Investor (as defined below) making an investment in the Ordinary Shares.
It does not address the tax consequences to any person, whether a U.S. resident
or not, who holds (or will hold), directly or indirectly, 10% or more of the
Ordinary Shares (a "10% Shareholder"). Non-U.S. Investors and 10% Shareholders
are advised to consult their own tax advisors regarding the tax considerations
incident to an investment in the Ordinary Shares.
For purposes of this discussion, the term "U.S. Investor" means a holder of
Ordinary Shares who is a citizen or resident of the U.S., a U.S. corporation or
partnership (including an entity treated as a corporation or partnership for
U.S. tax purposes) or other entity created or organized under the laws of the
U.S. or any political subdivision thereof, an estate or trust the income of
which is subject to U.S. federal income taxation regardless of its source, and
any other holder whose ownership of Ordinary Shares is effectively connected
with the conduct of a trade or business in the U.S.
A U.S. Investor receiving a distribution with respect to the Ordinary
Shares will be required to include such distribution in gross income as a
taxable dividend to the extent such distribution is paid from earnings and
profits of the Company as determined under U.S. federal income tax principles.
Any distributions in excess of the earnings and profits of the Company will
first be treated, for U.S. federal income tax purposes, as a nontaxable return
of capital to the extent of the U.S. Investor's basis in the Ordinary Shares,
and then as gain
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<PAGE>
from the sale or exchange of a capital asset, provided that the Ordinary Shares
constitute capital assets in the hands of the U.S. Investor. U.S. corporate
shareholders will not be entitled to any deduction for distributions received as
dividends on the Ordinary Shares.
Gain or loss on the sale or exchange of Ordinary Shares will be treated as
capital gain or loss if the Ordinary Shares are held as a capital asset by the
U.S. Investor. Such capital gain or loss will be long-term capital gain or loss
if the U.S. Investor has held the Ordinary Shares for more than one year at the
time of the sale or exchange.
Various provisions contained in the Code impose special taxes in certain
circumstances on non-U.S. corporations and their shareholders. The following is
a summary of certain provisions which could have an adverse impact on the
Company and the U.S. Investors.
Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of
certain companies (including foreign corporations) as personal holding companies
("PHCs") and the consequent taxation of such corporations on their undistributed
personal holding company income to the extent amounts at least equal to such
income are not distributed to their shareholders. A PHC is a corporation (i)
more than 50% of the stock of which is owned, directly or indirectly, by five or
fewer individuals (without regard to their citizenship or residence) at any time
during the last half of the taxable year, and (ii) which receives 60% or more of
gross income, as specifically adjusted, from certain passive sources, such as
dividends, interest and royalties. (In determining whether a foreign corporation
satisfies the gross income test, only its U.S. source income is taken into
account.) A PHC does not include a corporation that is a foreign personal
holding company or a passive foreign investment company, as described below. If
the Company or Gemstar Development Corporation, its U.S. subsidiary, were
classified as a PHC, a tax would be imposed at the rate of 39.6% on such
corporation's undistributed personal holding company income.
More than 50% of the Company's Ordinary Shares are likely to be owned,
directly or indirectly, by five or fewer individuals after the Offering. In
addition, through application of constructive stock ownership rules, the
subsidiaries of the Company are also likely to be owned, indirectly by five or
fewer individuals after the Offering. Therefore, the Company and Gemstar
Development Corporation will be classified as PHCs if they satisfy the 60% gross
income test. The Company, however, does not expect Gemstar Development
Corporation to have personal holding company income in any of its tax years
through the period ending March 31, 1998. If Gemstar Development Corporation
were classified as a PHC it would be subject to the PHC tax unless it pays a
dividend to the Company in an amount sufficient to eliminate its undistributed
personal holding company income. In that event, the Company would have to pay a
dividend to its shareholders in the same amount as the dividend it received from
Gemstar Development Corporation to eliminate undistributed personal holding
company income at the Company level. Any such dividend would be subject to a 30%
U.S. withholding tax to the extent paid out of current or accumulated earnings
and profits of Gemstar Development Corporation. If the Company receives a
dividend from Gemstar Development Corporation, the dividend would constitute
U.S. source passive income, and the Company would be a PHC and would be subject
to the PHC tax unless such amounts were paid out to its shareholders. The
Company intends to manage the affairs of Gemstar Development Corporation (which
may include making dividend distributions) so as to minimize the imposition of
such tax on Gemstar Development Corporation, to the extent consistent with its
other business goals. The Company should be able to avoid taxation as a PHC if
dividends received from Gemstar Development Corporation are distributed to the
Company's shareholders.
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<PAGE>
Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to U.S. persons who are shareholders of such corporations. The
Company will be classified as a FPHC if (i) at any time during the taxable year,
five or fewer individuals, who are U.S. citizens or residents, directly or
indirectly own more than 50% of the Company's Ordinary Shares (measured either
by voting power or value) (the "shareholder test") and (ii) the Company receives
at least 60% (50% if it was a FPHC in a prior year) of its gross income
(regardless of source), as specially adjusted, from certain passive sources such
as dividends, interest and royalties (the "income test").
The Company does not believe that it or any of its foreign subsidiaries
would satisfy the shareholder test immediately after the Offering so as to be
classified as FPHC. It is possible, however, that subsequent events may cause
the Company to satisfy the shareholder test in future years. In addition, since
the Company will derive most of its income from dividends paid by its
subsidiaries, the Company believes that it meets, and expects that it will
continue to meet, the income test.
If the Company or any of its foreign subsidiaries were classified as a
FPHC, a portion of its undistributed income would be imputed to those
shareholders who are U.S. Investors (including U.S. corporations) who held the
Company's stock on the last day of its taxable year, which is March 31. Such
income would be taxable to such persons as a dividend, even if no cash dividend
is actually paid. U.S. Investors who dispose of their Ordinary Shares prior to
such date would not be subject to a tax under these rules. If the Company
becomes a FPHC, U.S. persons who acquire Ordinary Shares from decedents would be
denied the step-up of the income tax basis for such Ordinary Shares to fair
market value at the date of death which would otherwise have been available and
instead would have a tax basis equal to the lower of fair market value or the
decedent's basis. If the Company concludes that it or any of its subsidiaries is
a FPHC, it intends to manage its affairs (which may include making dividend
distributions) so as to avoid or minimize having income that would be imputed to
its U.S. Investors under these rules, to the extent consistent with its other
business goals.
Passive Foreign Investment Companies
A foreign corporation is classified as a "passive foreign investment
company" ("PFIC") if (1) 75% or more of its gross income (including the pro rata
gross income of any subsidiary of which the corporation owns 25% or more of the
stock by value) in a taxable year is passive income or (2) the average
percentage of its assets by value (including the pro rata value of the assets of
any subsidiary of which the corporation owns 25% or more of the stock by value)
which produce or are held for the production of passive income is at least 50%
in a taxable year. (For purposes of these tests, stock of a 25% or more owned
U.S. subsidiary is a non-passive asset and income from such stock is non-passive
income.) Passive income includes dividends, interest and royalties but excludes
royalties that are derived in the active conduct of a trade or business (as
defined for U.S. federal income tax purposes) and that are received from an
unrelated person. Passive income also includes interest income derived from
funds raised in the Company's public offerings.
The Company does not believe that it is currently a PFIC or will be PFIC
for the 1995 and 1996 calendar years, because, based on the substantial
management and operational functions of its subsidiaries in connection with the
creation and development of its proprietary products, the royalty income of
these subsidiaries is derived from the active conduct of a trade or business and
because the average value of assets producing passive income is less than 50% of
aggregate asset value. Characterization of royalty income as active business
income is based on the treatment of the Company's operating subsidiaries,
collectively, as the developer and licensor of the proprietary products for
purposes of this test. However, there is little authority on which to rely in
this area, and there can be no assurance that the Internal Revenue Service will
agree with this position. For purposes of the assets test, the Company values
its tangible and intangible assets on a fair market basis. If, in the future,
the Company is a CFC, as described below, it would be required to value its
assets at their
23
<PAGE>
adjusted tax basis for purposes of the assets test, which could increase the
risk of the Company becoming a PFIC. If the Company were a PFIC, a U.S. Investor
would be subject to increased tax liability upon the sale of Ordinary Shares at
a gain or upon the receipt of certain dividends, unless such U.S. Investor makes
an election (a "qualifying electing fund election") to be taxed currently on his
pro rata portion of the Company's income, whether or not such income is
distributed in the form of dividends or otherwise.
A U.S. Investor making a qualifying electing fund election is required for
each taxable year to include in income a pro rata share of the ordinary earnings
of the qualifying electing fund as ordinary income and a pro rata share of the
net capital gain of the qualifying electing fund as long-term capital gain. The
Company will, at the request of a shareholder making a "qualifying electing fund
election," comply with the applicable information reporting requirements. U.S.
Investors should consult their tax advisors regarding the consequences of PFIC
status, including certain reporting requirements applicable to U.S. shareholders
of a PFIC, and the election to treat the Company as a qualifying electing fund.
Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and require that certain U.S. shareholders include
in gross income certain income of a CFC regardless of whether the CFC has
actually distributed such income. The CFC provisions only apply if U.S.
Investors who own at least 10% of the voting stock of the Company, own, in the
aggregate, more than 50% (measured by vote or value) of the shares of a foreign
corporation. The Company does not believe that it is currently a CFC or that it
will be treated as a CFC immediately after the Offering. It is possible,
however, that subsequent events may cause the Company to satisfy the shareholder
test in future years. If the Company were ever to become classified as a CFC,
the income imputation rules referred to for CFCs above would only apply with
respect to such 10% U.S. Investors.
U.S. Backup Withholding
Treasury regulations currently in effect do not require backup withholding
with respect to dividends paid by a foreign corporation such as the Company.
However, the U.S. Treasury Department is considering whether to extend the
backup withholding rules to dividends from certain foreign corporations.
The payment of proceeds from the disposition of Ordinary Shares by a holder
to or through the U.S. office of a broker generally will be subject to
information reporting and backup withholding at a rate of 31%, unless the holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption. The payment of proceeds from the disposition
by a holder of Ordinary Shares to or through a non-U.S. office of a broker will
generally not be subject to backup withholding and information reporting.
However, information reporting (but not backup withholding) may apply to such a
holder who sells a beneficial interest in Ordinary Shares through a non-U.S.
branch of a U.S. broker, or through a non-U.S. office of a U.S. Controlled
Person, in either case unless the holder establishes an exemption or the broker
has documentary evidence in its files of the holder's status as a non-U.S.
person.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that the required information is furnished to
the U.S. Internal Revenue Service.
Changes in Law
The United States Congress is considering several proposals for changing
U.S. tax laws. These changes, if enacted, may affect the rules and rates of tax
described above, and some or all of the changes may be retroactive to a date
preceding the date of this Annual Report.
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<PAGE>
British Virgin Islands Taxation
Under the laws of the British Virgin Islands as currently in effect, a
holder of Ordinary Shares who is not a resident of the British Virgin Islands is
(i) exempt from British Virgin Islands income tax on dividends paid with respect
to the Ordinary Shares and (ii) is not liable for British Virgin Islands income
tax on gains realized on sale or disposition of such Ordinary Shares. In
addition, the British Virgin Islands does not impose a withholding tax on
dividends paid by the Company. A company incorporated under the International
Business Companies Act is deemed not to be a resident for this purpose.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer
taxes, stamp duties or similar charges. In addition, there is no income tax
treaty or convention currently in effect between the U.S. and the British Virgin
Islands.
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<PAGE>
ITEM 8 - SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at March 31, 1995 and
1996 and for the years ended March 31, 1994, 1995 and 1996 have been derived
from the Company's audited Consolidated Financial Statements included in Item
18. The selected consolidated financial data at March 31, 1992, 1993 and 1994
and for the years ended March 31, 1992 and 1993 have been derived from audited
consolidated financial statements not included herein. The information should be
read in conjunction with Item 18, "Financial Statements" and related Notes
thereto, and Item 9, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statements of Earnings Data:
Revenues......................................................... $ 677 $ 9,189 $27,025 $41,744 $53,436
Operating costs and expenses:
Selling and marketing........................................... 770 3,112 9,308 11,003 15,496
Research and development........................................ 605 1,968 4,694 7,104 8,428
General and administrative...................................... 2,224 4,035 6,609 10,182 9,957
Nonrecurring expenses (1)....................................... -- -- -- 1,710 --
------- ------- ------- ------- -------
Total operating expenses........................................ 3,599 9,115 20,611 29,999 33,881
Earnings (loss) from operations.................................. (2,922) 74 6,414 11,745 19,555
Other income, net................................................ 69 82 786 755 2,025
------- ------- ------- ------- -------
Earnings (loss) from continuing
operations before income tax expense............................ (2,853) 156 7,200 12,500 21,580
Income tax expense............................................... 42 419 2,238 3,681 5,497
------- ------- ------- ------- -------
Earnings (loss) from continuing operations....................... (2,895) (263) 4,962 8,819 16,083
Earnings from discontinued operations (2)........................ 11,821 9,977 6,726 5,197 --
------- ------- ------- ------- -------
Net earnings.................................................... $ 8,926 $ 9,714 $11,688 $14,016 $16,083
======= ======= ======= ======= =======
Per Share Data:
Earnings (loss) from continuing operations....................... $(0.10) $(0.01) $0.18 $0.32 $0.52
Earnings from discontinued operations............................ 0.42 0.36 0.24 0.19 --
------- ------- ------- ------- -------
Net earnings.................................................... $0.32 $0.35 $0.42 $0.51 $0.52
======= ======= ======= ======= =======
Weighted average shares outstanding (3).......................... 27,684 27,684 27,684 27,684 30,983
======= ======= ======= ======= =======
March 31,
---------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital.................................................. $15,927 $22,654 $20,373 $ 5,185 $54,534
Total assets..................................................... 20,092 27,612 41,355 23,189 78,440
Debt (4)......................................................... -- -- 9,812 -- --
Shareholders' equity (5)......................................... 12,113 19,137 22,895 8,904 61,223
- ------------
</TABLE>
(1) Nonrecurring expenses consist of professional fees and related costs
associated with the Company's initial public offering that were incurred
prior to the October 1994 postponement of the offering.
(2) Fiscal 1995 discontinued operations included a nonrecurring tax benefit of
$8.1 million. See "The Reorganization" and Note 3 of the Notes to
Consolidated Financial Statements for a discussion of discontinued
operations.
(3) See Note 2 of the Notes to Consolidated Financial Statements for a
description of the calculation of the weighted average shares outstanding.
(4) Amounts are included in current net assets and non-current net liabilities
related to discontinued operations in the consolidated balance sheets of
the Consolidated Financial Statements.
(5) Cash dividends of $0.11, $0.29 and $0.18 per Ordinary Share were declared
in the fiscal years ended March 31, 1993, 1994 and 1995, respectively.
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ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Item 8, "Selected Consolidated Financial Data" and Item 18, "Financial
Statements." This Annual Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Certain Factors Affecting Business, Operating Results and
Financial Condition" in Item 1.
Overview
The Company's historical financial statements reflect revenues derived
primarily from the VCR Plus+ system. Revenues from the VCR Plus+ system are
derived through licensing fees paid by manufacturers to the Company for
incorporation of the technology into VCRs and televisions, and, to a lesser
extent, by publications printing the PlusCode Numbers. The Company has two new
technologies, Index Plus+, a proprietary technology that simplifies the playback
of videotapes, and Guide Plus+, an interactive, electronic on-screen television
guide, which have not yet been commercially introduced and have not generated
significant revenues.
The Company's launch of VCR Plus+ in 1990 involved securing widespread
publication of the PlusCode Numbers, without which the VCR Plus+ system would
not be useful. In order to support publications when they first started
publishing the PlusCode Numbers in a market, the Company engaged in the
manufacture, sale and distribution of handsets incorporating the VCR Plus+
system for use with VCRs that had no VCR Plus+ capability.
Consistent with the Company's strategy to focus on the licensing of its
proprietary technologies and systems, as VCR Plus+ became more widely adopted by
VCR manufacturers, the Company discontinued its Handset Business effective
January 1, 1995 by spinning it off to its shareholders. See "The Reorganization"
in Item 1 and Note 3 of the Notes to Consolidated Financial Statements in Item
18.
Worldwide Tax Expense
The Company operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot be used to offset the taxable
income of subsidiaries in other jurisdictions, the Company's consolidated
effective tax rate may increase to the extent the Company reports tax losses in
some subsidiaries and taxable income in others. The Company receives revenues
from licensees in various countries, net of foreign withholding taxes.
Accordingly, the Company's annual tax expense varies considerably from period to
period based upon the source of revenues subject to foreign withholding taxes.
Additionally, under the current British Virgin Island law, income generated by
the Company and its subsidiaries incorporated under the International Business
Companies Act in the British Virgin Islands are not subject to taxation.
Although certain subsidiaries are subject to taxation in countries where they
operate, such operations generally are taxed at rates substantially lower than
U.S. tax rates. If the Company or its subsidiaries were no longer able to
qualify for such tax rates or if the tax laws were rescinded or changed, the
Company's operating results could be materially adversely affected. See Item 7,
"Taxation" and Note 4 of the Notes to Consolidated Financial Statements in Item
18.
The overall effective tax rate reported by the Company in any single period
is therefore impacted by, among other things, the country in which earnings or
losses arise, applicable statutory tax rates and withholding tax requirements
for particular countries, and the availability of tax credits for taxes paid in
certain jurisdictions. Because of these factors, it is expected that the
Company's future tax expense as a percentage of earnings before
27
<PAGE>
income taxes may vary from year to year. See Note 4 of the Notes to Consolidated
Financial Statements in Item 18.
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto that appear
elsewhere in this Annual Report. The Company spun-off its Handset Business
effective January 1, 1995. The following table sets forth for the periods
indicated the percentage of revenues represented by certain line items in the
Company's statements of earnings related to continuing operations only.
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statements of Earnings Data:
Revenues.............................................. 100% 100% 100%
Operating costs and expenses:
Selling and marketing............................... 34 27 29
Research and development............................ 17 17 16
General and administrative.......................... 25 24 19
Nonrecurring expenses (1)........................... -- 4 --
---- ---- ----
Total operating costs and expenses.................. 76 72 64
---- ---- ----
Earnings from operations.............................. 24 28 36
Other income, net................................... 3 2 4
---- ---- ----
Earnings from continuing operations
before income tax expense............................ 27 30 40
Income tax expense.................................. 9 9 10
---- ---- ----
Earnings from continuing operations................... 18% 21% 30%
==== ==== ====
- -------
</TABLE>
(1) Nonrecurring expenses consist of professional fees and related costs
associated with the Company's initial public offering that were incurred
prior to the October 1994 postponement of the offering.
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues in fiscal 1996 were $53.4 million compared to $41.7
million in fiscal 1995, an increase of 28%. License revenues from manufacturers
were $48.1 million of total revenues in fiscal 1996 compared to $37.7 million in
fiscal 1995, an increase of 28%. This increase was due primarily to increased
shipments of units incorporating the VCR Plus+ technology as a result of the
increased rates of incorporation of the VCR Plus+ feature by manufacturers. The
number of such units for which the Company received license revenues was 16.4
million units in fiscal 1996 compared to 11.7 million units in fiscal 1995, an
increase of 40%. License revenues from publications were $5.3 million in fiscal
1996 compared to $4.0 million in fiscal 1995, an increase of 33%. The increase
was due to a combination of launching new markets and increased publication of
PlusCode Numbers in existing markets. However, the Company does not expect
significant increases in licensing revenues from publications in the future.
Selling and Marketing Expenses. Selling and marketing expenses consist of
advertising and marketing program costs, contracted services and salaries of
marketing personnel. Selling and marketing expenses were $15.5 million in fiscal
1996 compared to $11.0 million in fiscal 1995, an increase of 41%. This increase
is attributable to an increase in marketing and promotional activities aimed at
establishing VCR Plus+ as an international standard. As a percentage of total
revenues, however, selling and marketing expenses increased to 29% in fiscal
1996 from 27% in fiscal 1995, primarily as a result of a national advertising
campaign. In the future the Company expects to incur significant marketing
expenditures to launch new systems (e.g., Guide
28
<PAGE>
Plus+ and Index Plus+) and to market new services, which may lead to an
increase in selling and marketing expenses as a percentage of total revenues.
Research and Development Expenses. Research and development expenses were
$8.4 million in fiscal 1996 compared to $7.1 million in fiscal 1995, an increase
of 18%. This increase resulted primarily from increased activities associated
with the development and testing of the Index Plus+ and Guide Plus+ systems. The
Company anticipates that research and development expenses will continue to
increase in the future. As a percentage of total revenues, research and
development expenses decreased to 16% in fiscal 1996 from 17% in fiscal 1995.
The Company expects research and development expenses to decrease as a
percentage of total revenues in the future.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for administration, finance, information
systems, human resources and general management, as well as professional fees.
General and administrative expenses were $10.0 million in fiscal 1996 compared
to $10.2 million in fiscal 1995. The slight decrease is due primarily to a
decrease in legal expenses, offset in part by some increase in other areas. See
"Business-Intellectual Property Rights and Proprietary Information" and "Legal
Proceedings." As a percentage of total revenues, general and administrative
expenses decreased to 19% in fiscal 1996 from 24% in fiscal 1995.
Income Tax Expense. Income tax expense was $5.5 million in fiscal 1996
compared to $3.7 million in fiscal 1995. The effective tax rate decreased to 25%
for fiscal 1996 from 29% for fiscal 1995. This decrease in the effective tax
rate was primarily attributable to the mix of license revenues subject to
foreign withholding taxes. There can be no assurances that the current mix of
license revenue will not change, causing an increase in the Company's effective
tax rate. The Company expects the effective tax rate to increase slightly in the
future. Foreign withholding taxes are based on license revenues from certain tax
jurisdictions and, accordingly, do not vary based on the level of pretax income.
See Note 4 of the Notes to Consolidated Financial Statements.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues in fiscal 1995 were $41.7 million compared to $27.0
million in fiscal 1994, an increase of 54%. License revenues from manufacturers
were $37.7 million of total revenues in fiscal 1995 compared to $23.3 million in
fiscal 1994, an increase of 62%. This increase was primarily due to license
revenues received on increased shipments of units incorporating the VCR Plus+
technology in existing markets and the launch of the VCR Plus+ system in new
markets. The number of units incorporating the VCR Plus+ technology for which
the Company received license revenues was 11.7 million in fiscal 1995 compared
to 6.4 million in fiscal 1994, an increase of 83%. License revenues from
publications were $4.0 million in fiscal 1995 compared to $3.7 million in fiscal
1994, an increase of 8%. The increase was due to a combination of launching new
markets and increased publication of PlusCode Numbers in existing markets.
Selling and Marketing Expenses. Selling and marketing expenses were $11.0
million in fiscal 1995 compared to $9.3 million in fiscal 1994, an increase of
18%. This increase was primarily attributable to increased marketing and
advertising activities aimed at establishing the VCR Plus+ system and the
PlusCode Numbers as an international standard. As a percentage of total
revenues, selling and marketing expenses decreased to 27% in fiscal 1995 from
34% in fiscal 1994.
Research and Development Expenses. Research and development expenses were
$7.1 million in fiscal 1995 compared to $4.7 million in fiscal 1994, an increase
of 51%. This increase resulted primarily from engineering and personnel costs
relating to the development and testing of the Guide Plus+ and Index Plus+
systems, and feature enhancements to the VCR Plus+ system. As a percentage of
revenues, research and development expenses were 17% in both fiscal 1995 and
1994.
29
<PAGE>
General and Administrative Expenses. General and administrative expenses
were $10.2 million in fiscal 1995 compared to $6.6 million in fiscal 1994, an
increase of 55%. This increase resulted primarily from increases in professional
and consulting fees associated with the strengthening, protection, enforcement
and defense of the Company's intellectual property, and, to a lesser extent,
from increases in human resources and general management expenses for the
support of the expansion in VCR Plus+ licensing activities and new business
development. As a percentage of total revenues, general and administrative
expenses decreased to 24% in fiscal 1995 from 25% in fiscal 1994. If
circumstances warrant, legal costs that strengthen the Company's position with
respect to its intellectual properties may be capitalized as part of the
Company's patent and trademark assets in the future.
Nonrecurring Expenses. In accordance with the Securities and Exchange
Commission accounting requirements, the Company expensed professional fees and
related costs associated with the Company's initial public offering that were
incurred prior to the October 1994 postponement of the offering.
Income Tax Expense. Income tax expense was $3.7 million in fiscal 1995
compared to $2.2 million in fiscal 1994, an increase of $1.5 million. The
effective tax rate in fiscal 1995 and 1994 was 29% and 31%, respectively. The
Company's effective tax rate varies depending on, among other factors, the
source of license revenues received from licensees that are subject to foreign
withholding taxes.
Income from Discontinued Operation. In fiscal 1995, consistent with the
Company's strategy to focus on the licensing of its technologies and systems,
the Company discontinued the Handset Business, effective January 1, 1995. See
"The Reorganization." Income from discontinued operations reflects the results
of operations from the Handset Business for the period from April 1, 1994
through the effective date of the Spin-Off (January 1, 1995). For such period,
the Handset Business had a loss of $2.9 million, which was offset by a one time
tax credit of approximately $8.1 million arising from the final settlement of
previously assessed and accrued taxes with the Hong Kong Inland Revenue
Department. See Note 3 of the Notes to Consolidated Financial Statements.
30
<PAGE>
Quarterly Comparisons; Seasonality and Variability of Results
The following table sets forth certain quarterly consolidated financial
data for the eight quarters ended March 31, 1996 and as a percentage of total
revenues. This quarterly information is unaudited, has been prepared on the same
basis as the annual consolidated financial statements and, in management's
opinion, reflects all adjustments consisting only of normal recurring
adjustments necessary to present fairly the information set forth therein. The
operating results for any quarter are not necessarily indicative of results for
any future period. The Company spun-off its Handset Business effective January
1, 1995. See Note 3 of the Notes to Consolidated Financial Statements for a
discussion of the discontinued operations. Accordingly, all amounts and
percentages set forth below relate to continuing operations only.
<TABLE>
<CAPTION>
Quarter Ended
-------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Earnings Data:
Revenues (1)............................ $7,814 $8,824 $11,383 $13,723 $11,119 $11,190 $14,024 $17,103
Operating costs and expenses:
Selling and marketing.................. 2,326 2,763 3,467 2,447 2,652 3,792 5,162 3,890
Research and development............... 1,504 1,514 1,905 2,181 1,885 1,897 2,153 2,493
General and administrative............. 2,416 2,672 2,503 2,591 2,583 2,586 2,359 2,429
Nonrecurring expenses (2).............. -- -- 1,710 -- -- -- -- --
------ ------ ------- ------- ------- ------- ------- -------
Total operating costs and expenses 6,246 6,949 9,585 7,219 7,120 8,275 9,674 8,812
------ ------ ------- ------- ------- ------- ------- -------
Earnings from operations................ 1,568 1,875 1,798 6,504 3,999 2,915 4,350 8,291
Other income, net....................... 224 126 236 169 180 311 781 753
------ ------ ------- ------- ------- ------- ------- -------
Earnings from continuing operations
before income tax expense.............. 1,792 2,001 2,034 6,673 4,179 3,226 5,131 9,044
Income tax expense...................... 500 571 580 2,030 1,045 817 1,334 2,301
------ ------ ------- ------- ------- ------- ------- -------
Earnings from continuing operations..... $1,292 $1,430 $ 1,454 $ 4,643 $ 3,134 $ 2,409 $ 3,797 $ 6,743
====== ====== ======= ======= ======= ======= ======= =======
Earnings per share from continuing
operations............................. $ 0.05 $ 0.05 $ 0.05 $ 0.17 $ 0.11 $ 0.09 $ 0.12 $ 0.20
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
- -----------
(1) The Company records revenues from licensing fees during interim periods
based on unit shipments reported by manufacturers and the estimated annual
royalty rate for the year. The Company's licensing contracts with
manufacturers generally provide for royalty rates which decline on a per-
unit basis as shipment volumes increase.
(2) Nonrecurring expenses consist of professional fees and related costs
associated with the Company's initial public offering that were incurred
prior to the October 1994 postponement of the offering.
The following table sets forth, as a percentage of revenues, certain line
items in the Company's statements of earnings for the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended
---------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of Revenues:
Revenues................................ 100% 100% 100% 100% 100% 100% 100% 100%
Operating costs and expenses:
Selling and marketing.................. 30 31 30 18 24 34 37 23
Research and development............... 19 18 17 16 17 17 15 15
General and administrative............. 31 30 22 19 23 23 17 14
Nonrecurring expenses.................. -- -- 15 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating costs and expenses 80 79 84 53 64 74 69 52
---- ---- ---- ---- ---- ---- ---- ----
Earnings from operations................ 20 21 16 47 36 26 31 48
Other income, net....................... 3 1 2 2 2 3 6 4
---- ---- ---- ---- ---- ---- ---- ----
Earnings from continuing operations
before income tax expense.............. 23 22 18 49 38 29 37 52
Income tax expense...................... 6 6 5 15 10 7 10 13
---- ---- ---- ---- ---- ---- ---- ----
Earnings from continuing operations..... 17% 16% 13% 34% 28% 22% 27% 39%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
31
<PAGE>
The Company experiences variability in its revenues and operating results
on a quarterly basis as a result of many factors. Most importantly, as
manufacturers have incorporated VCR Plus+ technology into an increasing number
of models, the Company's license revenues have displayed a seasonality typical
of those of consumer electronics products manufacturers. Shipments by
manufacturers of VCRs and televisions in general, and therefore VCRs and
televisions incorporating the VCR Plus+ technology, tend to be higher in the
third and fourth calendar quarters, or the Company's second and third fiscal
quarters. However, because the Company generally receives license revenues
within 90 days after the end of the quarter in which the VCR or television
incorporating its technology is shipped, licensing revenues are typically higher
during the Company's third and fourth quarters. In addition, manufacturers'
shipments vary from quarter to quarter depending on a number of factors,
including retail inventory levels and retail promotional activities. As a
result, the Company may experience variability in its quarterly license revenues
affecting period to period comparability and performance. The Company's license
revenues are also affected by the volume of shipments by manufacturers. The
Company's license agreements provide for volume discounts based on the shipment
volume in each year by a given manufacturer, which can lower the average per
unit license fee for a manufacturer over the course of a year. The Company has
experienced declining average per unit VCR Plus+ license fees and expects this
trend to continue. The Company anticipates that its revenues will also be
affected by the timing of market introductions and market acceptance of new
systems such as Index Plus+ and Guide Plus+. There can be no assurance that
Index Plus+, Guide Plus+ or other future systems developed by the Company will
ever result in significant revenues or profits. Further, if these new systems
achieve market acceptance, the timing of manufacturers' implementation and
shipments is uncertain and may result in greater variability of the Company's
quarterly and annual operating results.
Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's third
fiscal quarter during the fall holiday season. The Company's planned operating
expenditures each quarter are based, in part, on the Company's expectation as to
future revenues in the quarter. In addition, many of the Company's expenditures
are fixed costs. If revenues do not meet expectations in any given quarter,
operating results for the quarter may be materially adversely affected. In
addition, the Company's annual and quarterly results may be affected by
competition, general economic downturn and the mix of licensing revenues. As a
result, the Company believes that period to period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company's
historic revenue growth or its profitability will continue on a quarterly or
annual basis.
Liquidity and Capital Resources
In October 1995, the Company received proceeds of $36.2 million, net of
related expenses, in its initial public offering of 3,450,000 Ordinary Shares.
At March 31, 1996, the Company had cash and cash equivalents totaling $63.1
million and working capital of $54.5 million. The increase in cash and cash
equivalents and working capital is due primarily to the net proceeds received
from the Company's sale of Ordinary Shares in October 1995 and positive cash
flow from operations.
Net cash provided by continuing operations amounted to $23.1 million for
fiscal 1996, as compared to $11.5 million in fiscal 1995 and $10.7 million in
fiscal 1994, and the increase in net cash provided by continuing operations was
primarily the result of increased license revenues.
The Company's investing activities from continuing operations in fiscal
1996 primarily consisted of property and equipment expenditures of $2.1 million
and capitalized patent and trademark costs of $800,000. Such expenditures were
financed by existing cash and cash equivalents. Investing activities from
continuing operations for fiscal 1995 amounted to $900,000 for property and
equipment expenditures and $1 million for capitalized patent and trademark
costs.
32
<PAGE>
In February 1996, the Company invested $3 million in Preferred Stock of
VideoGuide, Inc. See "Business-Related Applications and Services."
The Company does not have any material commitments for capital
expenditures. However, the Company expects to incur significant marketing
expenditures to launch new systems and to market new services and expects to
incur significant research and development, and general and administrative
expenses relating to these new systems and services over the next two to three
years.
Cash used in financing activities from continuing operations, exclusive of
net proceeds of $36.2 million received from the Company's initial public
offering, was $5.0 million for fiscal 1996, as compared to $8.0 million for
fiscal 1995. Cash used in financing activities was attributed to the payment of
dividends to shareholders. There was no cash used or provided by financing
activities from continuing operations for fiscal 1994.
In connection with the Spin-Off, the Company distributed to shareholders
$7.1 million in cash included in the net assets of the companies engaged in the
Handset Business during fiscal 1995. During fiscal 1995, the Company also repaid
amounts due to companies engaged in the Handset Business totaling $6.8 million.
See Note 3 of the Notes to Consolidated Financial Statements.
In August 1995, the Company effected the E Guide Exchange, consisting of
the issuance of 3,511,494 Ordinary Shares for all of the outstanding stock of E
Guide. E Guide owns certain intellectual property rights connected with the
Company's Guide Plus+ technology, as well as other rights associated with the
Company's Guide Plus+ and Index Plus+ technologies (collectively, the "Assets").
The Company believes that the fair value of the Ordinary Shares issued for E
Guide equals the fair value of the Assets, however, the Assets have not
generated any revenues to date, and as a result, the fair value of the Assets is
difficult to determine. See Note 9 of the Notes to Consolidated Financial
Statements.
The Company believes that the anticipated cash flow from operations, and
existing cash and cash equivalent balances, will be sufficient to meet cash
requirements at least through fiscal 1997.
Currency Fluctuation and Exchange Rates
The Consolidated Financial Statements of the Company are prepared in U.S.
dollars in accordance with U.S. generally accepted accounting principles. The
Company's transactions predominately occur in U.S. dollars. Gains and losses on
currency transactions were immaterial for all periods presented.
33
<PAGE>
ITEM 10-DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth certain information regarding the Company's
directors and executive officers as of April 1, 1996:
<TABLE>
<CAPTION>
Executive Officer
-----------------
Name Age Position and Office Director Since Since
- ---- --- ------------------- -------------- -----
<S> <C> <C> <C> <C>
Thomas L. H. Lau 41 Chairman of the Board and Director April, 1992 --
Henry C. Yuen 47 Chief Executive Officer and Director April, 1992 August, 1994
Daniel S. W. Kwoh 47 Senior Vice President-Technology -- August, 1994
Wilson K. C. Cho 46 Senior Vice President-Engineering and Operations -- August, 1994
Elsie Ma Leung 49 Chief Financial Officer and Director April, 1994 August, 1994
Roy J. Mankovitz 55 Assistant Secretary, Corporate Counsel-Intellectual
Property and Director August, 1994 August, 1994
Larry Goldberg 48 Secretary, Corporate Counsel and Director August, 1994 August, 1994
George F. Carrier 77 Director August, 1994 --
Teruyuki Toyama 65 Director August, 1994 --
</TABLE>
The Board of Directors is divided into three classes: Class I, Class II,
and Class III. The Class I directors consist of Messrs. Mankovitz and Goldberg;
the Class II directors consist of Dr. Carrier and Mr. Toyama; and the Class III
directors consist of Mr. Lau, Dr. Yuen and Ms. Leung. Each director serves for a
term ending following the third annual meeting following the annual meeting at
which such director was elected. The terms of office of directors in Class I,
Class II and Class III end following the annual meetings in 1996, 1997 and 1998,
respectively. The appointment of all officers is subject to the discretion of
the Board of Directors.
ITEM 11-COMPENSATION OF DIRECTORS AND OFFICERS
Each of the Company's executive officers entered into multiple year
employment agreements with the Company effective April 1, 1994. Each agreement
provides for successive renewal terms unless notice of termination is given six
months prior to the end of a term. Such agreements provide for increases in base
salary as well as formula bonuses. For fiscal 1996, the aggregate remuneration
paid or accrued by the Company and its subsidiaries to all directors and
officers of the Company as a group (9 persons) for services in all capacities
was approximately $4.0 million, including approximately $1.5 million in accrued
formula bonuses under the terms of the employment agreements.
The Company will pay each director who is not an employee of the Company
$25,000 per year for services as a director of the Company and $1,000 per Board
or Committee meeting attended. All directors are reimbursed for their out-of-
pocket expenses incurred in connection with attendance at meetings of, and other
activities relating to service on, the Board of Directors or any Board
Committee. In addition, directors who are not full-time employees are eligible
to participate in, and each director has received awards pursuant to, the
Company's 1994 Stock Incentive Plan. See Item 12, "Options to Purchase
Securities from Registrant or Subsidiaries."
34
<PAGE>
ITEM 12-OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
1994 Stock Incentive Plan
The Company and its subsidiaries have established the 1994 Stock Incentive
Plan (as amended, the "1994 Plan") to attract, reward and retain personnel and
to provide long-term incentives to those key employees (including executive
officers and directors of the Company and its subsidiaries) and certain other
eligible persons, including non-employee directors, certain consultants,
advisors and agents who render or have rendered bona fide services to the
Company or a subsidiary (collectively, "Eligible Persons"). The 1994 Plan is
administered by the Company's Compensation Committee. The Compensation Committee
is empowered to grant options to purchase Ordinary Shares ("Options") to any
Eligible Person, interpret the 1994 Plan and make other determinations
thereunder.
An Option is the right to purchase Ordinary Shares at a future date at a
specified price ("Option Price") equal to the fair market value on the date of
the grant as determined by the Compensation Committee. With reference to Options
granted after the Offering, the Option Price will generally be the closing price
for one Ordinary Share reported on the Nasdaq National Market ("fair market
value") on the date of grant or such lesser amount as may be determined by the
Compensation Committee. Typically, the only consideration received by the
Company for the grant of an Option under the 1994 Plan will be the rendering of
services by the optionee to or for the benefit of the Company.
Ordinary Shares Issuable Upon the Exercise of Options Granted Under the
1994 Plan
A maximum of 5,600,000 Ordinary Shares may be issued upon the exercise of
Options. Shares relating to Options which are not exercised or which expire or
are canceled will again become available for grant purposes under the 1994 Plan
to the extent permitted by law. The maximum number of Ordinary Shares that may
be delivered pursuant to Options granted during any one-year term to any
individual Eligible Person under the 1994 Plan shall not exceed 3,000,000
shares, subject to certain adjustments.
Grants of Options
On August 16, 1995, the Board of Directors of the Company granted 10-year
Options relating to 4,485,500 Ordinary Shares to 12 eligible persons under the
1994 Plan. The table below sets forth, with respect to the Company's directors
and executive officers, the dollar value of the Options granted under the 1994
Plan in August 1995 and the number of Ordinary Shares subject to such Options.
The exercise price per share for Options granted under the 1994 Plan in August
1995 is $11.90 per Ordinary Share. Upon expiration of the 90 day lock-up in
connection with the Company's public offering on April 16, l996, 1,564,285
Ordinary Shares acquirable upon exercise of options that are currently
exercisable will be available for sale subject to compliance with Rule 701 of
the Securities Act.
35
<PAGE>
<TABLE>
PLAN BENEFITS (1)
Value of Unexercised
Options at Number of Ordinary
May 31, 1996 (2) Shares Underlying
-------------------- Options
Name and Position ------------------
- -----------------
Thomas L. H. Lau
<S> <C> <C>
Chairman............................................. $ 5,025,500 230,000
Henry C. Yuen
Chief Executive Officer.............................. 56,810,000 2,600,000
Daniel S. W. Kwoh
Senior Vice President -Technology.................... 2,512,750 115,000
Wilson K. C. Cho
Senior Vice President -Engineering and Operations.... 2,512,750 115,000
Elsie Ma Leung
Chief Financial Officer.............................. 8,958,500 410,000
Roy J. Mankovitz
Assistant Secretary, Corporate Counsel
- Intellectual Property............................. 8,139,125 372,500
Larry Goldberg
Secretary and Corporate Counsel...................... 8,139,125 372,500
George F. Carrier
Director............................................. 131,100 6,000
Teruyuki Toyama
Director............................................. 131,100 6,000
Executive Group
(6 persons).......................................... 87,072,250 3,985,000
Non-Executive Director Group
(3 persons).......................................... 5,287,700 242,000
Non-Executive Officer Employee Group
(3 persons).......................................... 5,648,225 258,500
- --------------
</TABLE>
(1) The initial Options granted under the 1994 Plan in August 1995 expire on
the tenth anniversary of their award date. The option agreements pursuant
to which the initial Options were granted each include different vesting
schedules.
(2) The reported value of each Option is based solely on the difference between
the price of each Ordinary Share at the close of market on May 31, 1996
($33.75) and the exercise price per share for each such Option ($11.90).
The value of the Options, as such, and benefits or amounts that will
ultimately be realized by such persons are not readily determinable. The
holders of the initial Options are eligible for additional grants under the
1994 Plan.
Subject to early termination or acceleration provisions (which are
summarized below), an Option generally will be exercisable, in whole or in part,
from the date specified in the related award agreement until the expiration date
determined by the Compensation Committee. In no event, however, is an Option
exercisable prior to six months, or after ten years, from its date of grant. The
initial Options granted in August 1995 vest according to the following schedule:
36
<PAGE>
<TABLE>
<CAPTION>
Number of Ordinary
Shares as to Which
Options are
Exercisable
------------------
Date on Which Options May be Exercised
- ---------------------------------------
<S> <C>
Six months after the award date.................... 1,564,285
First anniversary of the award date................ 1,459,048
Second anniversary of the award date............... 1,209,334
Third anniversary of the award date................ 252,833
</TABLE>
On January 22, 1996, the Compensation Committee granted additional Options
under the 1994 Plan to one non-executive employee to acquire 10,000 Ordinary
Shares. The Options expire on the tenth anniversary of their award date, vest in
three years but are not exercisable until five years after their award date at a
price of $19.98 per Ordinary Share.
ITEM 13-INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
As part of the Reorganization that was effected in 1995, the former
shareholders of Gemstar Development Corporation, who included Dynamic Core
Holdings Limited (the sole shareholder of which is Thomas Lau), Henry Yuen and
Daniel Kwoh, entered into a Subscription and Exchange Agreement with the Company
pursuant to which the GDC shareholders received 3,518,501 Ordinary Shares of the
Company in exchange for all of their shares of GDC. In connection with the GDC
Exchange, Dynamic Core Holdings Limited and Drs. Yuen and Kwoh received
1,840,601, 355,917 and 252,914 Ordinary Shares of the Company, respectively. See
"The Reorganization."
Also as part of the Reorganization, all of the former shareholders of E
Guide, who included Drs. Yuen, Kwoh and Cho, Messrs. Mankovitz and Goldberg and
Ms. Leung, entered into an Acquisition and Exchange Agreement with the Company
pursuant to which the E Guide shareholders received 3,511,494 Ordinary Shares of
the Company in exchange for all of their shares of E Guide. E Guide owns certain
intellectual property rights connected with the Company's Guide Plus+
technology, as well as other rights associated with the Company's Guide Plus+
and Index Plus+ technologies. The E Guide shareholders also entered into a
Registration Rights Agreement with the Company pursuant to which the E Guide
shareholders received certain demand and piggyback registration rights in
connection with the Ordinary Shares of the Company issued in the E Guide
Exchange. In connection with the E Guide Exchange, Drs. Yuen, Kwoh and Cho,
Messrs. Mankovitz and Goldberg and Ms. Leung received 872,151, 716,151, 967,454,
271,551, 69,879 and 69,879 Ordinary Shares of the Company, respectively. See
"The Reorganization."
In addition to the GDC Exchange and the E Guide Exchange, the
Reorganization also included the transfer by the Company of all the Handset
Business to Holdings. Following the transfer of these operations to Holdings,
the Company effected the Spin-Off, which consisted of distributing all of the
shares of Holdings to the Company's existing shareholders on a pro rata basis.
In connection with the Spin-Off, the Company, Holdings and its subsidiaries
involved in the Handset Business entered into an Indemnification Agreement.
Pursuant to the Indemnification Agreement, the Company will indemnify Holdings
and its subsidiaries against any liabilities arising out of the conduct of the
Company's operations or businesses, and Holdings and its subsidiaries will
indemnify the Company against any liabilities arising out of the conduct of
their respective operations or businesses. In each case, the indemnifying party
will undertake its obligations regardless of whether the event giving rise to
the indemnifiable liability occurred prior to, subsequent to, or in connection
with the Spin-Off. See "The Reorganization."
The Company continues to maintain a license agreement with a Holdings
subsidiary that allows for the incorporation of the VCR Plus+ technology in the
manufacture and distribution of handsets. Pursuant to the
37
<PAGE>
license agreement, the Holdings subsidiary pays the Company a per unit royalty
fee based on unit shipments. Royalty fees earned aggregated $136,000 for the
three months ended March 31, 1995 and $112,000 for the year ended March 31,
1996.
In the future, the Company or its subsidiaries may enter into agreements
with certain related parties pursuant to which such related parties would
purchase microprocessors containing the Company's proprietary technology from
the manufacturers of such microprocessors. It is anticipated that the related
parties would then distribute the microprocessors to the manufacturers of
televisions and VCRs that incorporate the VCR Plus+ technology. Pursuant to any
such agreement, the Company or its subsidiary, as the case may be, is expected
to receive a license fee equal to one hundred percent of the related party's
revenues from such distribution, less the related party's costs plus seven
percent.
In 1991 and 1992, the Company entered into Services Agreements with five
companies that were, at the time, either wholly-owned or partially-owned
subsidiaries of the Company: Gemstar Marketing Limited (U.K.), Gemstar Asia
Limited (Hong Kong), Gemstar Japan Co. Ltd., Gemstar Korea Co., Ltd. and Gemstar
Taiwan Limited. Pursuant to the Services Agreements, each of which has a five-
year term, the former subsidiaries agreed to provide certain management services
in their respective territories to the Company in connection with the VCR Plus+
system. These services include promoting the VCR Plus+ system, monitoring and
servicing existing VCR Plus+ license agreements and promoting and monitoring the
publication of the PlusCode Numbers. Although each of the five former
subsidiaries was consolidated into Holdings, the stock of which was distributed
to the Company's existing shareholders as part of the Spin-Off, the Company
continues to maintain service relationships with each company pursuant to the
Services Agreements. In addition, the Company has recently renegotiated the
compensation provisions under the Services Agreements. For its services, each
former subsidiary now receives quarterly payments from the Company calculated on
a "costs plus 7%" basis. Service fees paid to these companies totaled $1,458,000
for the three months ended March 31, 1995 and $7,100,000 for the year ended
March 31, 1996. In the future, certain of the Company's current foreign
subsidiaries may enter into similar services agreements with the subsidiaries of
Holdings to promote and maintain the Index Plus+ and Guide Plus+ systems
overseas. Compensation under any such agreement is expected to be calculated on
a "costs plus 7%" basis.
The Company has from time to time loaned money to various shareholders and
directors. Most of such loans were unsecured and generally bore interest at the
prime rate as in effect from time to time. At March 31, 1995, and 1996, there
was one loan of $185,000 outstanding to Roy Mankovitz. The loan to Mr. Mankovitz
bears interest at 8% per annum, is secured by a second trust deed on Mr.
Mankovitz's personal residence and is due on June 30, 1996.
The employment agreements between the Company and certain of its executive
officers and key management personnel (including Henry Yuen, Daniel Kwoh and Roy
Mankovitz) will generally give the Company ownership of inventions or
discoveries (i) that are developed during the term of the agreements while the
inventor was performing duties for the Company or using the Company's facilities
or trade secret information (unless such usage is not substantial), (ii) that
relate at the time of conception or reduction to practice to the Company's
business or research and development or (iii) that result from any work
performed by the inventor for the Company. The Company's business or research
and development refers to itemized current activities of the Company that may be
modified or augmented from time to time; provided, however, that any changes to
such definition in Dr. Yuen's agreement must be approved by the non-management
directors of the Company. To the extent the Company wishes to utilize these
excluded inventions or intellectual property rights in future technologies or
systems, it would be required to negotiate with the inventor to obtain rights
thereto on a case by case basis. There can be no assurance that the Company
would be able to reach agreement with the inventor concerning any such
inventions or intellectual property rights.
38
<PAGE>
Larry Goldberg remains of counsel to the law firm of Schneider, Goldberg,
Rohatiner and Yuen, a firm in which he was previously a partner. Schneider,
Goldberg has provided, and may continue to provide, legal services for the
Company from time to time. Mr. Goldberg continues to receive compensation from
Schneider, Goldberg, but no part of such compensation relates, directly or
indirectly, to services rendered by such firm for the Company. Henry Yuen was
formerly a partner of Schneider, Goldberg, but Dr. Yuen no longer has any
affiliation with the firm.
The Company expects that all future transactions between the Company and
any affiliates will be subject to prior approval by the Audit Committee of the
Board of Directors and on terms no less favorable to the Company than could
otherwise be obtained from unaffiliated third parties.
PART II
ITEM 14-DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15-DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16-CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable.
PART IV
ITEM 17-FINANCIAL STATEMENTS
Not applicable.
ITEM 18-FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's
Consolidated Financial Statements and related Notes herein are as follows:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1995 and 1996
Consolidated Statements of Earnings for each of the years in the three-year
period ended March 31, 1996
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended March 31, 1996
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended March 31, 1996
Notes to Consolidated Financial Statements
39
<PAGE>
ITEM 19-FINANCIAL STATEMENTS AND EXHIBITS
Financial statements filed as part of this report:
The list of financial statements required by this item is set forth in Item
18, "Financial Statements".
Exhibits filed as part of this report:
See the exhibits listed in the Exhibit Index.
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
3.1(a)* Amended and Restated Memorandum of Association of the Company.
3.1(b)* Amended and Restated Articles of Association of the Company.
10.1* Patent Assignment Agreement, dated as of March 15, 1994, between
Gemstar Development Corporation and Roy Mankovitz. (Confidential
treatment requested).
10.2* Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Development Corporation. (Confidential treatment
required).
10.3* Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Holdings Limited. (Confidential treatment requested).
10.4* Contract Engineering Agreement (undated) between Hilite, Inc. and
Index Systems, Inc. (Confidential treatment requested).
10.5* Form of Option Exercise and Assignment Agreement, dated March 16,
1994, between Gemstar Development Corporation and each of Henry
Yuen, Wilson Cho and Daniel Kwoh.
10.6(a)* Exclusive Representation Agreement, dated July 30, 1990, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).
10.6(b)* Exclusive Representation Agreement, dated May 20, 1991, between
Gemstar Development Corporation and United Feature Syndicate,
Inc., together with First Amendment to Exclusive Representation
Agreement, dated March 4, 1994. (Confidential treatment
requested).
10.6(c)* Exclusive Representation Agreement, dated March 21, 1994 between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).
10.7* Registration Rights Agreement, dated August 16, 1995, between
Gemstar International Group Limited and the Shareholders of E
Guide, Inc.
21** Material Subsidiaries of the Company.
99.1* 1994 Stock Incentive Plan, as amended.
99.2* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Henry Yuen, as amended. (Confidential
treatment requested).
99.3* Employment Agreement, dated August 1995, between Gemstar
International Group Limited and Thomas Lau.
99.4* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Daniel Kwoh, as amended. (Confidential
treatment requested).
99.5* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Roy Mankovitz, as amended.
(Confidential treatment requested).
99.6* Employment Agreement, dated August 16, 1995, between Pros
Technology Limited and Wilson Cho. (Confidential treatment
requested).
99.7* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Elsie Leung, as amended.
99.8* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Larry Goldberg, as amended.
</TABLE>
- --------
*Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016) which was declared effective on October 10, 1995, and
incorporated herein by reference.
**Previously filed as part of Form F-1 Registration Statement of the Company
(333-2512) which was declared effective on April 15, 1996, and incorporated
herein by reference.
41
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
By: /s/ HENRY C. YUEN
-----------------
Henry C. Yuen
Chief Executive Officer
Dated: June 7, 1996
42
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.................................... F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996....... F-3
Consolidated Statements of Earnings for each of the years in
the three-year period ended March 31, 1996..................... F-4
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended March 31, 1996............ F-5
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended March 31, 1996..................... F-6
Notes to Consolidated Financial Statements...................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gemstar International Group Limited:
We have audited the accompanying consolidated balance sheets of Gemstar
International Group Limited and subsidiaries as of March 31, 1995 and 1996, and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements referred to above present fairly, in
all material respects, the financial position of Gemstar International Group
Limited and subsidiaries as of March 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
April 5, 1996
F-2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
-----------------
1995 1996
----- -----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $12,735 $63,079
Due from related parties........................................................ 2,414 --
Prepaid expenses and other current assets....................................... 1,036 3,734
------- -------
Total current assets......................................................... 16,185 66,813
Property and equipment, net........................................................ 1,524 3,040
Intangible assets, net............................................................. 4,482 4,227
Investment, at cost................................................................ -- 3,000
Other assets....................................................................... 998 1,360
------- -------
$23,189 $78,440
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................... $ 3,899 $ 9,205
Current portion of deferred revenue............................................. 2,101 3,074
Dividend payable................................................................ 5,000 --
------- -------
Total current liabilities.................................................... 11,000 12,279
Deferred revenue, less current portion............................................. 2,475 2,546
Other liabilities.................................................................. 810 2,392
Shareholders' equity:
Preference shares, par value $.01 per share. Authorized 50,000,000 shares;
none issued................................................................... -- --
Ordinary shares, par value $.01 per share. Authorized 500,000,000 shares;
issued and outstanding 23,500,011 shares at March 31, 1995 and
30,461,505 shares at March 31, 1996............................................ 235 305
Additional paid-in capital...................................................... 2,829 38,961
Retained earnings............................................................... 5,929 22,012
Cumulative translation adjustments.............................................. (89) (55)
------- -------
Net shareholders' equity..................................................... 8,904 61,223
Commitments and contingencies (note 8)
------- -------
$23,189 $78,440
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues........................................... $27,025 $41,744 $53,436
Operating costs and expenses:
Selling and marketing........................... 9,308 11,003 15,496
Research and development........................ 4,694 7,104 8,428
General and administrative...................... 6,609 10,182 9,957
Nonrecurring expenses........................... -- 1,710 --
------- ------- -------
Earnings from operations.................... 6,414 11,745 19,555
Other income, net.................................. 786 755 2,025
------- ------- -------
Earnings from continuing operations before
income tax expense........................ 7,200 12,500 21,580
Income tax expense................................. 2,238 3,681 5,497
------- ------- -------
Earnings from continuing operations................ 4,962 8,819 16,083
------- ------- -------
Earnings from discontinued operations, net of tax.. 6,726 5,197 --
------- ------- -------
Net earnings................................ $11,688 $14,016 $16,083
======= ======= =======
Per share data:
Earnings from continuing operations............. $ 0.18 $ 0.32 $ 0.52
Earnings from discontinued operations........... 0.24 0.19 --
------- ------- -------
Net earnings................................ $ 0.42 $ 0.51 $ 0.52
======= ======= =======
Weighted average shares outstanding................ 27,684 27,684 30,983
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Ordinary Shares Additional Cumulative Net
--------------- paid-in Retained translation shareholders'
Shares Amount capital earnings adjustments equity
------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1993.................... 23,500 $235 $ 2,829 $15,770 $ 303 $ 19,137
Net earnings............................... -- -- -- 11,688 -- 11,688
Dividend................................... -- -- -- (8,000) -- (8,000)
Equity adjustment from foreign currency
translation.............................. -- -- -- -- 70 70
------ ---- ------- ------- ----- --------
Balances at March 31, 1994.................... 23,500 235 2,829 19,458 373 22,895
Net earnings............................... -- -- -- 14,016 -- 14,016
Dividend................................... -- -- -- (5,000) -- (5,000)
Distribution to shareholders............... -- -- -- (22,545) -- (22,545)
Equity adjustment from foreign currency
translation.............................. -- -- -- -- (462) (462)
------ ---- ------- ------- ----- --------
Balances at March 31, 1995.................... 23,500 235 2,829 5,929 (89) 8,904
Net earnings............................... -- -- -- 16,083 -- 16,083
Initial public offering.................... 3,450 35 36,124 -- -- 36,159
Acquisition of common stock of
E Guide, Inc............................. 3,512 35 8 -- -- 43
Equity adjustment from foreign currency
translation.............................. -- -- -- -- 34 34
------ ---- ------- ------- ----- --------
Balances at March 31, 1996.................... 30,462 $305 $38,961 $22,012 $ (55) $ 61,223
====== ==== ======= ======= ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Continuing operations:
Earnings from continuing operations........... $ 4,962 $ 8,819 $16,083
Adjustments to reconcile earnings to net cash
provided by continuing operations:
Depreciation and amortization............... 777 1,371 1,694
Deferred income taxes....................... 330 117 1,547
Changes in assets and liabilities:
Prepaid expenses and other assets......... (281) 807 (2,657)
Accounts payable and accrued expenses..... 2,601 287 5,306
Deferred revenue.......................... 1,622 22 1,044
Other liabilities......................... 688 122 37
-------- -------- -------
Net cash provided by continuing
operations............................. 10,699 11,545 23,054
-------- -------- -------
Discontinued operations:
Earnings from discontinued operations, net of
tax.......................................... 6,726 5,197 --
Adjustments to reconcile earnings to net cash
provided by discontinued operations:
Depreciation and amortization............... 339 659 --
Decrease in receivable and revenue
allowances................................. (456) (374) --
Deferred income taxes....................... 2,318 (8,100) --
Changes in working capital and other, net of
spin-off of subsidiaries................... 2,361 11,549 --
-------- -------- -------
Net cash provided by discontinued
operations............................. 11,288 8,931 --
-------- -------- -------
Net cash provided by operating
activities............................. 21,987 20,476 23,054
-------- -------- -------
Cash flows from investing activities:
Continuing operations:
Cash payments of amounts due to related
parties (note 3)............................. -- (6,759) --
Decrease (increase) in due from related
parties...................................... -- (2,414) 2,414
Cash payments received under short-term loans
and advances................................. 3,880 -- --
Additions to property and equipment........... (700) (940) (2,129)
Purchase of investment........................ -- -- (3,000)
Increase in intangible assets................. (3,480) (1,007) (826)
Decrease (increase) in other assets........... (1,218) 788 (362)
Discontinued operations:
Cash advanced under loans and advances to
related parties.............................. (1,126) (2,093) --
Cash received under short-term loans and
advances..................................... 2,587 -- --
Additions to property and equipment........... (11,061) (472) --
Increase in other assets...................... (468) (66) --
-------- -------- -------
Net cash used in investing activities... (11,586) (12,963) (3,903)
-------- -------- -------
Cash flows from financing activities:
Continuing operations:
Dividends paid................................ -- (8,000) (5,000)
Proceeds from initial public offering of
Ordinary Shares.............................. -- -- 36,159
Discontinued operations:
Net borrowings (repayments) under notes
payable to banks............................. 1,077 (217) --
Proceeds from issuance of long-term debt...... 9,059 -- --
Payments of long-term debt.................... (324) (980) --
Cash included in net assets distributed to
shareholders related to spin-off (note 3).... -- (7,095) --
-------- -------- -------
Net cash provided by (used in) financing
activities............................. 9,812 (16,292) 31,159
-------- -------- -------
Equity adjustment from foreign currency
translation...................................... 70 (462) 34
-------- -------- -------
Net increase (decrease) in cash and
cash equivalents....................... 20,283 (9,241) 50,344
Cash and cash equivalents at beginning of period.. 1,693 21,976 12,735
-------- -------- -------
Cash and cash equivalents at end of period........ $ 21,976 $ 12,735 $63,079
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................... $ 310 $ 573 $ --
Income taxes.................................. 2,285 4,653 3,807
======== ======== =======
</TABLE>
Noncash investing and financing activities:
During the year ended March 31, 1995, the Company spun off Gemstar
Manufacturing Holding Limited and its wholly owned subsidiaries to its
shareholders. The book value of the net noncash assets of these companies was
$15,450 (note 3).
During the year ended March 31, 1996, the Company exchanged 3,511,494 Ordinary
Shares for all of the outstanding common stock of E Guide, Inc. (note 9).
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1994, 1995 and 1996
(1) Principles of Consolidation
The consolidated financial statements include the accounts of Gemstar
International Group Limited ("Gemstar International Group") and its wholly and
majority-owned subsidiaries (collectively, the "Company"). In June 1995, the
Company acquired Gemstar Development Corporation ("GDC") by exchanging 3,518,501
Ordinary Shares for all of the outstanding shares of GDC. The acquisition was
accounted for in a manner similar to a pooling of interests because Gemstar
International Group and GDC were under common control and stock ownership.
Accordingly, the assets and liabilities of GDC have been recorded at historical
(predecessor) cost and the Company's consolidated financial statements include
the results of operations of GDC for all periods presented.
For all periods presented, the minority interest in majority-owned
subsidiaries was immaterial. All significant intercompany transactions and
balances have been eliminated in the accompanying consolidated financial
statements.
As more fully discussed in note 3, effective January 1, 1995, the Company
spun off to its shareholders Gemstar Manufacturing Holding Limited ("Holdings")
and its subsidiaries.
As more fully discussed in note 9, in August 1995, the Company exchanged
3,511,494 Ordinary Shares for all of the outstanding capital stock of E Guide,
Inc. ("E Guide") from certain related parties.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, such as
certificates of deposit and commercial paper with an original maturity of three
months or less. Also included within cash and cash equivalents are investments
in corporate bonds with original maturities greater than three months that are
not material to the overall portfolio. Cash equivalents include commercial
paper and corporate bonds with a cost and current market value of $37,862,000 at
March 31, 1996. There were no unrealized gains or losses at March 31, 1996.
The Company accounts for its investments in commercial paper and corporate
bonds under provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("Statement No.
115"). Under Statement No. 115, the Company must classify its marketable
investment securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the intent and ability to hold until
maturity. All other securities not included in trading or held-to-maturity
categories are classified as available-for-sale. The Company has classified all
its investments in commercial paper and corporate bonds as held-to-maturity
securities.
Investments
Investments with ownership interests of less than 20% are accounted for
under the cost method of accounting. Investments in joint ventures with
ownership interests between 20% and 50% are accounted for under the equity
method of accounting. Investments with ownership interests in excess of 50% are
consolidated with the accounts of the Company.
In February 1996, the Company acquired $3,000,000 in preferred stock of
VideoGuide, Inc. which has been accounted for under the cost method.
Effective November 1, 1993, the Company acquired a majority interest in
NORPAK Corporation ("NORPAK") which develops and markets insertion equipment for
use by broadcasters. The excess of
F-7
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(2) Summary of Significant Accounting Policies (Continued)
cost over the company's share of net assets (goodwill) of $1,025,000 is included
in intangible assets. The accounts of NORPAK have been included in the
consolidated accounts of the Company since the date of acquisition. This
acquisition was not material to the consolidated accounts of the Company.
Property and Equipment
Property and equipment are recorded at cost and depreciated using
straight-line and accelerated methods over the estimated useful lives of the
assets. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment.................... 3 to 8 years
Office furniture and equipment............. 5 to 8 years
Property and leasehold improvements........ Shorter of estimated
useful life or
lease term
</TABLE>
Intangible Assets
Intangible assets consist of capitalized patent and trademark costs and
goodwill. Capitalized patent and trademark costs consist of direct costs
associated with obtaining patents and trademarks. Patent and trademark costs are
amortized on a straight line basis over seven years, which is the expected
useful life. Goodwill, which represents the excess of cost over net assets
acquired, is amortized on a straight line basis over five years. The Company
regularly assesses the recoverability of these intangible assets by determining
whether the amortization of the balance over their remaining life can be
recovered through undiscounted further cash flows of the assets. In March 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be disposed of ("Statement No. 121"). This
statement provides guidelines for recognition of impairment losses related to
long-term assets and certain intangibles and related goodwill for (i) assets to
be held and used and (ii) assets to be disposed of Statement No. 121 is
effective for fiscal years beginning after December 15, 1995. Company management
does not believe that the adoption of the new standard will have a material
effect on the consolidated financial statements of the Company.
Amortization expense charged to continuing operations for each of the years
in the three-year period ended March 31, 1996 was $506,000, $950,000, $1,081,000
respectively.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Patents and trademarks..................... $ 5,272 $ 6,098
Goodwill................................... 1,025 1,025
------- -------
6,297 7,123
Less accumulated amortization.............. (1,815) (2,896)
------- -------
Net intangible assets.................. $ 4,482 $ 4,227
======= =======
</TABLE>
Accounting for Stock Options
In October 1995, the Financial Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123") which encourages, but does not require, a
fair value based method of accounting for employee stock options. Statement No.
123 will be effective for fiscal years beginning after December 15, 1995. While
the
F-8
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(2) Summary of Significant Accounting Policies (Continued)
Company is still evaluating Statement No. 123, it currently expects to elect to
continue to measure compensation cost under APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Company management does not believe that the
adoption of this new standard will have a material effect on the consolidated
financial statements of the Company.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Foreign Currency Translation
The consolidated financial statements of foreign subsidiaries are
translated into U.S. dollars. Gains and losses resulting from translation are
accumulated in a separate component of shareholders' equity until the investment
in the foreign entity is sold or liquidated. The Company's transactions
predominately occur in U.S. dollars. Gains and losses on currency transactions
were immaterial for all periods presented.
Revenue Recognition
Revenues from nonrefundable initial sign-up fees collected upon signing of
multiyear licensing contracts are deferred and recognized over the term of the
agreement. Revenues under continuing license arrangements are recognized when
license payments are due, generally when paid by the licensee.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense as
incurred.
Nonrecurring Expenses
Nonrecurring expenses consist of professional fees and related costs
associated with the Company's initial public offering that were incurred prior
to the October 1994 postponement of the offering.
Interest Income, Net
Net interest income, included in other income, totaled $712,000, $623,000
and $1,969,000 for each of the years in the three-year period ended March 31,
1996.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement No. 109") for all periods
presented. Statement No. 109 requires that deferred income taxes be recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. Changes in tax rates and laws are reflected in earnings in the
period such changes are enacted.
Earnings per Share
Earnings per share are based on the weighted average number of Ordinary
Share outstanding, as adjusted for the reverse stock split (note 5) for all
periods presented. The difference between primary and fully diluted earnings per
share is immaterial for all periods presented.
F-9
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995, and 1996
(2) Summary of Significant Accounting Policies (Continued)
Pursuant to the requirements of the Securities and Exchange Commission,
Ordinary Shares and stock options issued by the Company during the twelve months
immediately preceding the Company's initial public offering date have been
included in the calculation of the weighted average shares outstanding as if
they were outstanding for all periods presented using the treasury stock method.
(3) Discontinued Operations
Effective January 1, 1995, the Company elected to discontinue the marketing
and distribution of the VCR Plus+ technology through the sale of handsets (the
"Handset Business") and to limit its operations solely to licensing activities.
In connection with this decision the Company transferred all of its handset
operations to Gemstar Manufacturing Holding Limited ("Holdings"), its then
wholly owned subsidiary, and then distributed the shares of Holdings to the
Company's shareholders (the "Spin-Off").
In light of the independence of the Handset Business and its dissimilarity
to the Company's continuing licensing business, the operations of the Handset
Business have been reported as discontinued operations in the consolidated
statements of earnings for all periods presented.
Net assets of Holdings and its subsidiaries distributed to the shareholders
as a result of the Spin-Off were as follows (in thousands):
Cash and cash equivalents................................. $ 7,095
Noncash current assets.................................... 11,866
Due from Gemstar International Group Limited and its
subsidiaries............................................. 6,759
Long term assets.......................................... 15,520
Total liabilities......................................... (18,695)
--------
Net assets distributed to the shareholders............ $ 22,545
========
In connection with the Spin-Off, the Company and Holdings and its
subsidiaries entered into an Indemnification Agreement. Pursuant to the
Indemnification Agreement, the Company will indemnify Holdings and its
subsidiaries against any liabilities arising out of the conduct of the Company's
operations or businesses, and Holdings and its subsidiaries will indemnify the
Company against any liabilities arising out of the conduct of their respective
operations or businesses. In each case, the indemnifying party will undertake
its obligations regardless of whether the event giving rise to the indemnifiable
liability occurred prior to, subsequent to, or in connection with the Spin-Off.
The Company continues to maintain a license agreement with a Holdings
subsidiary that allows for the incorporation of the VCR Plus+ technology in
the manufacture and distribution of handsets. Pursuant to the license agreement,
the Holdings subsidiary pays the Company a per unit royalty fee based on unit
shipments. Royalty fees totaled $136,000 for the period from January 1, 1995 to
March 31, 1995 and $112,000 for the year ended March 31, 1996.
The Company continues to maintain service relationships with certain
Holdings subsidiaries. Pursuant to Services Agreements, the Holdings
subsidiaries provide marketing and promotional services for the Company in their
respective territories in connection with the Company's systems, maintain
relationships with licensees and promote and monitor the publication of the
PlusCode Numbers. The Company renegotiated the compensation provisions of the
Service Agreements to provide for quarterly payments
F-10
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(3) Discontinued Operations (Continued)
for services rendered based on a "cost plus 7%" basis. Service fees paid to
these companies totaled $1,458,000 for the three months ended March 31, 1995 and
$7,100,000 for the year ended March 31, 1996.
The results of the Handset Business have been reported separately as a
component of discontinued operations on the accompanying consolidated statements
of earnings. Summarized results of the Handset Business to the Spin-Off
effective date, January 1, 1995, included in the consolidated statements of
earnings are as follows (in thousands):
Year ended
March 31,
-----------------
1994 1995
------- -------
Net sales..................................... $39,379 $13,124
======= =======
Earnings (loss) before income taxes........... $ 9,528 $(2,903)
Income tax expense (benefit).................. 2,802 (8,100)
------- -------
Earnings, net of tax....................... $ 6,726 $ 5,197
======= =======
A subsidiary of Holdings has a General Terms Agreement with an entity whose
shareholders are also shareholders of the Company. For the year ended March 31,
1994 and for the period from April 1, 1994 to January 1, 1995, the effective
date of the Spin-Off, purchases of inventory from such entity were $7,232,000
and $6,311,000, respectively, and sales of raw material inventory to such entity
were $6,843,000 and $6,881,000, respectively.
During 1995, the Company reached a final settlement of certain taxes
previously assessed by the Hong Kong Inland Revenue Department (IRD). The taxes
assessed by the IRD relate to the discontinued operations of a company included
in the Spin-Off for fiscal years 1991 through 1994. The amount of the final
settlement with the IRD was substantially less than both the amount previously
assessed by the IRD and accrued by the Company. Accordingly, the Company
recognized a tax benefit of approximately $8,100,000 in the discontinued
operations of the Handset Business for 1995.
(4) Income Tax Expense
Under the current British Virgin Islands law, income generated by entities
incorporated under the International Business Companies Act in the British
Virgin Islands is not subject to taxation. However, certain subsidiaries are
subject to taxation in countries where they operate. Additionally, license
income payments received from licensees in certain tax jurisdictions are subject
to foreign withholding taxes.
The provision for income tax expense for continuing operations consists of
the following (in thousands):
Year ended March 31,
-----------------------
1994 1995 1996
------ ------ ------
Current....................... $1,908 $3,564 $3,950
Deferred...................... 330 117 1,547
------ ------ ------
Total..................... $2,238 $3,681 $5,497
====== ====== ======
F-11
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(4) Income Tax Expense (Continued)
The significant components of deferred income taxes attributable to
earnings from continuing operations before income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax expense (benefit).......................... $(355) $(1,777) $ (90)
Change in valuation allowance for deferred tax assets... 685 1,894 1,637
--- ----- -----
Total........................................ $ 330 $ 117 $1,547
=== ===== =====
</TABLE>
A reconciliation of the expected statutory tax rates to the effective tax
rate for continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended
March 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Expected statutory tax rates.............................. 34% 34% 34%
Foreign withholding taxes................................. 26 28 18
Foreign earnings not subject to taxation.................. (38) (49) (35)
Change in the valuation allowance......................... 9 18 8
Other..................................................... - (2) -
-- -- --
Actual effective tax rate............................. 31% 29% 25%
== == ==
</TABLE>
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Tax losses available for carryforward to future periods...................... $ 2,992 $ 3,239
Deferred revenue............................................................. 544 652
Tax credits available for carryforward to future periods..................... 2,250 3,635
Accrued expenses............................................................. 476 628
----- -----
Gross deferred tax assets.............................................. 6,262 8,154
Valuation allowance............................................................... (4,349) (5,986)
----- -----
Deferred tax assets, net of valuation allowance........................ 1,913 2,168
Deferred tax liability--taxes provided on intercompany income..................... (1,911) (3,713)
----- -----
Net deferred tax assets (liability).................................... $ 2 $(1,545)
===== =====
</TABLE>
Net deferred tax assets are included in other assets and net deferred tax
liability is included in other liabilities in the accompanying consolidated
balance sheets. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the
F-12
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(4) Income Tax Expense (Continued)
generation of future taxable earnings in specific tax jurisdictions during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable earnings and tax planning strategies in making this assessment.
In order to fully realize gross deferred tax assets, the Company will need
to generate future taxable earnings in certain tax jurisdictions, principally in
the United States of approximately $20,000,000 prior to expiration of its
operating loss and foreign tax credit carryforwards. At March 31, 1996, the
Company had operating loss carryforwards totaling approximately $9,000,000
principally in the United States, expiring through 2010. In addition, the
Company had available foreign tax credit carryforwards aggregating $3,635,000 to
offset future United States income taxes, expiring through 2001. The net
operating loss and foreign tax credit carryforwards are subject to certain
limitations under United States tax laws with respect to the annual use of such
carryforwards which include, among other things, certain changes in stock
ownership.
Based upon the level of historical taxable earnings and projections of
future taxable earnings over the periods which the deferred tax assets are
deductible, management has concluded that it is more likely than not the Company
will realize the benefits of these deductible differences at March 31, 1996, net
of reserves established.
The United States Internal Revenue Service is currently examining the
Company's Federal income tax returns for the years ended March 31, 1991, 1992
and 1993. While the ultimate outcome of the examination cannot be determined
with assurance at the present time, the Company believes that tax liabilities
have been adequately accrued in the accompanying consolidated financial
statements and that the impact of audit assessments, if any, will not have a
significant impact upon the Company's financial position or results of
operations.
(5) Shareholders' Equity and Stock Incentive Plan
Gemstar International Group Limited, a British Virgin Islands corporation,
was incorporated on April 3, 1992 under the name Gemstar Holdings Limited
("GHL"). On August 19, 1994, GHL changed its name to Gemstar International Group
Limited ("Gemstar International Group"), authorized 50,000,000 Preferences
Shares, par value $.01 per share, increased the authorized number of Ordinary
Shares to 500,000,000 by amending and restating its Memorandum of Association
and Articles of Association and declared a stock dividend which increased the
number of Ordinary Shares outstanding from 51,900 to 19,981,510.
In August 1995, the Company's Board of Directors authorized a one-for-two
reverse stock split of all the Company's outstanding Ordinary Shares. The
reverse stock split was effected in September 1995 under British Virgin Islands
law through a pro rata redemption, for no value, of one-half of all outstanding
Ordinary Shares.
For financial statement purposes, all references to share information for
all periods presented have been adjusted to give effect to the aforementioned
stock dividend and reverse stock split.
During 1994, the Company's Board of Directors declared a $8,000,000 cash
dividend which was paid on June 1, 1994. During 1995, the Company's Board of
Directors declared a $5,000,000 cash dividend which was paid on April 7, 1995.
In August 1994, the Company established the 1994 Stock Incentive Plan, as
amended on August 16, 1995 (the "Plan"). Pursuant to the Plan, the Board of
Directors may grant options to purchase Ordinary
F-13
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(5) Shareholders' Equity and Stock Incentive Plan (Continued)
Shares of the Company to employees of the Company (including executive officers)
and certain other persons (including directors and consultants) who are eligible
to participate in the Plan. A maximum of 5,600,000 Ordinary Shares may be issued
upon the exercise of options.
On August 16, 1995, the Board of Directors granted 4,485,500 options at an
exercise price of $11.90 per Ordinary Share. The options vest over 3 years from
the date of grant and expire in 10 years.
On January 22, 1996, the Board of Directors granted 10,000 options at an
exercise price of $19.98 per Ordinary Share. The options vest over 3 years from
the date of grant and expire in 10 years.
(6) Related Party Transactions
The Company acquired certain intellectual property rights, including patent
applications, relating to the "CallSet" technology from a director of the
Company. Pursuant to the terms of the agreement, the Company must pay the
director royalties. No royalties have been incurred to date.
In March 1994, the Company exercised its option to acquire certain patent
rights associated with the VCR Plus+ technology from certain shareholders/
directors for $1,000,000. These patent rights have been capitalized as
intangible assets.
At March 31, 1995, the amount due from related party, aggregating
$2,414,000, represents net amounts due from Holdings and its subsidiaries. The
amount was repaid to the Company subsequent to March 31, 1995.
For disclosures of related party transactions associated with the spun off
discontinued operations, see note 3.
For disclosures of the acquisition of the common stock of E Guide from
certain related parties, see note 9.
(7) Selected Balance Sheet Accounts
Property and equipment, at cost, consists of the following (in thousands):
March 31,
------------------
1995 1996
------- -------
Machinery and equipment.......................... $ 829 $ 2,167
Office furniture and equipment................... 1,661 1,871
Property and leasehold improvements.............. 106 687
------- -------
2,596 4,725
Less accumulated depreciation and amortization... (1,072) (1,685)
------- -------
Net property and equipment.................. $ 1,524 $ 3,040
======= =======
Accounts payable and accrued expenses consists of the following (in
thousands):
March 31,
------------------
1995 1996
------ ------
Accounts payable and accrued expenses............ $2,538 $7,170
Accrued payroll and related benefits............. 1,361 2,035
------ ------
Total....................................... $3,899 $9,205
====== ======
F-14
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(8) Commitments and Contingencies
The Company leases various facilities under long-term noncancelable
operating leases. Future minimum lease payments are as follows (in thousands):
Fiscal year ended March 31:
1997.................................... $ 765
1998.................................... 413
1999.................................... 413
2000.................................... 413
2001.................................... 228
------
$2,232
======
Rent expense related to continuing operations under operating leases for
each of the years in the three-year period ended March 31, 1996 was $547,000,
$835,000 and $843,000, respectively.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company, the
resolution of such matters will not have a material effect on its financial
condition or results of operations.
(9) Acquisition of E Guide
In August 1995, the Company issued 3,511,494 Ordinary Shares to the
shareholders of E Guide, Inc. ("E Guide") in exchange for all of the outstanding
capital stock of E Guide (the "E Guide Exchange"). E Guide owns certain
intellectual property rights connected with the Company's Guide Plus+
technology as well as other rights associated with the Company's Guide Plus+ and
Index Plus+ technologies (collectively, the "Assets"). The Company believes that
the fair value of the Ordinary Shares issued for E Guide equals the fair value
of the Assets, however, the Assets have not generated any revenues to date, and
as a result, the fair value of the Assets is difficult to determine. The Assets
will be recorded by the Company at E Guide's historical (predecessor) cost basis
because (i) E Guide has had no ongoing operations to date, (ii) the outstanding
shares of E Guide were owned by persons who are shareholders and/or officers of
the Company and (iii) the E Guide Exchange represents an exchange of the
Company's Ordinary Shares for the Assets, which are nonmonetary assets. Separate
financial statements of E Guide have not been presented because the financial
statements contain no material information that would be relevant to the
understanding of the future operations of the Company.
(10) Business Segment Reporting
Customers constituting 10% or more of revenues are as follows:
Year ended
March 31,
----------------
1994 1995 1996
----------------
Customer A..................................... 10% -- --
Customer B..................................... -- 10% 10%
F-15
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended March 31, 1994, 1995 and 1996
(10) Business Segment Reporting (Continued)
A summary of the Company's revenues and earnings from continuing operations
before taxes by geographic area is as follows (in thousands):
Year ended March 31,
------------------------------
1994 1995 1996
-------- -------- --------
Revenues (1):
United States........................ $ 3,757 $ 4,457 $ 4,961
Foreign.............................. 23,268 37,287 48,475
------- ------- -------
Total........................... $27,025 $41,744 $53,436
======= ======= =======
Year ended March 31,
-----------------------------
1994 1995 1996
--------- --------- ---------
Earnings (loss) from operations (2):
United States........................ $(10,095) $(16,286) $(13,192)
Foreign.............................. 16,509 28,031 32,747
-------- -------- --------
Total........................... $ 6,414 $ 11,745 $ 19,555
======== ======== ========
- -------------
(1) Revenues from license fees are presented based on the location of the
licensee which does not necessarily correspond to the place of sale of the
licensed products.
(2) Earnings (loss) from operations consists of total revenues less operation
expenses and does not include other income.
A summary of the Company's identifiable assets by geographic area which
represents those assets used in the Company's operations in each area as follows
(in thousands):
March 31,
------------------
1995 1996
------------------
Identifiable assets:
United States........................ $ 6,283 $ 9,687
Foreign.............................. 16,906 68,753
------- -------
Total........................... $23,189 $78,440
======= =======
(11) Unaudited Quarterly Financial Data (in thousands, except per share data)
The following unaudited quarterly financial data reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results on a quarterly
basis.
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended March 31, 1996 Quarter Quarter Quarter Quarter Total
- ------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (1)................................ $11,119 $11,190 $14,024 $17,103 $53,436
Earnings from continuing operations before
income tax expense........................ 4,179 3,226 5,131 9,044 21,580
Net earnings................................ 3,134 2,409 3,797 6,743 16,083
Net earnings per share....................... $ 0.11 $ 0.09 $ 0.12 $ 0.20 $ 0.52
======= ======= ======= ======= =======
</TABLE>
- ----------------
(1) The Company records revenues from licensing fees when paid during interim
periods based on unit shipments reported by the manufactures and the
estimated annual royalty rate for the year. The Company's licensing
contracts with manufacturers generally provide for royalty rates which
decline on a per-unit basis as shipment volumes increase.
F-16
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS
Thomas L. H. Lau
Chairman of the Board of Directors
Executive Director of Evergo International Holdings Co. Ltd.
Henry C. Yuen
President, Chief Executive Officer and Director
Elsie Ma Leung
Chief Operating Officer, Chief Financial Officer and Director
Roy J. Mankovitz
Assistant Secretary, Corporate Counsel-Intellectual Property and Director
Larry Goldberg
Secretary, Corporate Counsel and Director
George F. Carrier
Director
Teruyuki Toyama
Director
President and Chief Executive Officer of Overseas Courier Services Co., Ltd.
EXECUTIVE OFFICERS
Henry C. Yuen
President and Chief Executive Officer
Daniel S. W. Kwoh
Senior Vice President-Technology
Wilson K. C. Cho
Senior Vice President-Engineering and Operations
Elsie Ma Leung
Chief Operating Officer and Chief Financial Officer
Larry Goldberg
Secretary and Corporate Counsel
Roy J. Mankovitz
Assistant Secretary and Corporate Counsel-Intellectual Property
<PAGE>
CORPORATE INFORMATION
U.S. Executive Offices
135 North Los Robles, Suite 800
Pasadena, California 91101
International Office
Craigmuir Chambers
Road Town, Tortola
British Virgin Islands
Transfer Agent and Registrar
First Interstate Bank of California
Legal Counsel
O'Melveny & Myers
Newport Beach, CA
Independent Auditors
KPMG Peat Marwick LLP
Long Beach, CA
Price Range of Ordinary Shares
The Company's common stock is traded on the Nasdaq National Market under the
symbol "GMSTF." Public trading of the Company's common stock commenced on
October 11, 1995. Prior to that date, there was no public market for the
Company's common stock. The following table sets forth for the periods indicated
the high and low price per share of the Company's common stock on the Nasdaq
National Market as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995-4th Quarter (from 10/11/95) 38 1/4 13 1/2
1996-1st Quarter 37 3/4 21 1/4
</TABLE>
Notice of Annual Meeting
The Annual Meeting of Members of Gemstar International Group Limited will be
held on June 19, 1996 at 9:00 a.m. at 2-29-18 Nishi-Ikebukuro, Toshima-Ku, Tokyo
171 Japan.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
GEMSTAR
135 N. LOS ROBLES SUITE 800 PASADENA, CALIFORNIA 91101 (818)792-5700
<PAGE>
APPENDIX J
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of October 1996
GEMSTAR INTERNATIONAL GROUP LIMITED
(Translation of registrant's name into English)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
--- ---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
--- ---
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $77,484 $63,079
Prepaid expenses and other current assets 4,081 3,743
------- -------
Total current assets 81,565 66,813
Property and equipment, net 3,323 3,040
Other assets 8,376 8,587
------- -------
$93,264 $78,440
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,369 $ 9,205
Current portion of deferred revenue 6,448 3,074
------- -------
Total current liabilities 14,817 12,279
Deferred revenue, less current portion 2,312 2,546
Other liabilities 2,793 2,392
Shareholders' equity:
Ordinary shares 308 305
Additional paid-in capital 46,877 38,961
Retained earnings 26,218 22,012
Cumulative translation adjustments (61) (55)
------- -------
Net shareholders' equity 73,342 61,223
------- -------
$93,264 $78,440
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands, except per share data)
Three months ended
June 30
---------------------
1996 1995
------- -------
Revenues $13,079 $11,119
Operating costs and expenses:
Selling and marketing 3,041 2,652
Research and development 2,486 1,885
General and administrative 2,704 2,583
------- -------
Operating income 4,848 3,999
Other income, net 913 180
------- -------
Income before income tax expense 5,761 4,179
Income tax expense 1,555 1,045
------- -------
Net income $ 4,206 $ 3,134
======= =======
Earnings per share $ 0.13 $ 0.11
======= =======
Weighted average shares outstanding 33,541 27,684
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996
1. Basis of Presentation
The interim condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report (Form 20-F) for the year ended March 31,
1996. The results of operations for the three months ended June 30, 1996 are not
necessarily indicative of the results for the entire year ending March 31, 1997.
2. Earnings Per Share
Earnings per share is based on the weighted average number of Ordinary Shares
and dilutive common stock equivalents outstanding for the period.
4
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report (Form 20-F) for the year ended March 31,
1996. This analysis is not intended to serve as a basis for projections of
future events.
Overview
The Company develops, markets and licenses proprietary technologies and systems
aimed at making technology user-friendly for consumers. The Company's VCR
Plus+(R) instant programming system is now a world standard for VCR programming.
VCR Plus+ allows a user to record a television show simply by entering a
number -the PlusCode(R) number - printed in television program guides. The
PlusCode numbers are published by over 1,500 newspapers and television guides
worldwide, with a combined circulation of over 290 million. The VCR Plus+ system
has been licensed to virtually every major television and VCR manufacturer and
is available in over 30 countries. Since inception, there have been more than 45
million VCR Plus+ systems sold worldwide.
The Company is introducing two new technologies this year, Index Plus+(R), a
video tape indexing system built into new VCRs which features an on-screen
directory of video tape content by titles automatically captured from the
broadcast; and TV Guide Plus+(TM), a subscription-free on-screen interactive
television guide to be built into new televisions.
On April 16, 1996, the Company raised approximately $8 million, net of expenses,
through the issuance of 345,000 new shares as part of a public offering which
also included 2,645,000 shares of secondary stock.
The Company entered into an agreement, dated July 18, 1996 and amended as of
October 24, 1996, for the acquisition of all of the outstanding capital stock of
VideoGuide, Inc. The proposed acquisition is subject to certain conditions and
is expected to be consummated in December 1996. If completed, the acquisition
will be accounted for using the pooling-of-interests method.
5
<PAGE>
Results of Operations
Revenues for the first quarter increased 18% to $13.1 million, compared to $11.1
million for the same quarter last year. The increase in revenues resulted
primarily from continued increases in the incorporation of the Company's VCR
Plus+ system by manufacturers of VCRs and televisions worldwide.
Selling and marketing expenses for the first quarter were $3.0 million compared
to $2.7 million for the same quarter last year, an increase of 11%. This
increase is attributable to an increase in marketing and promotional activities
aimed at establishing VCR Plus+ as an international standard.
Research and development expenses for the first quarter were $2.5 million
compared to $1.9 million for the same quarter last year, an increase of 32%.
This increase resulted primarily from increased activities associated with the
development and testing of the Index Plus+ and TV Guide Plus+ systems.
General and administrative expenses for the first quarter were $2.7 million
compared to $2.6 million for the same quarter last year.
The effective tax rate for the first quarter was 27% compared to 25% for the
same quarter last year. This increase in the effective tax rate was primarily
attributable to the mix of license revenues subject to foreign withholding
taxes. Foreign withholding taxes are based on license revenues from certain tax
jurisdictions and, accordingly, do not vary based on the level of pretax income.
Liquidity and Capital Resources
Cash and cash equivalents increased $14.4 million during the first quarter from
$63.1 million at March 31, 1996. The Company's working capital increased $12.2
million during the quarter. The increase was primarily attributable to the
proceeds from the sale of new shares completed in April 1996. The Company uses
its working capital to finance ongoing operations and to fund expansion and
development of new technologies.
Management believes the existing cash balances and cash generated from
operations will be sufficient to meet Gemstar's liquidity and capital needs for
the next twelve months.
6
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
By: /s/ ELSIE LEUNG
-----------------------
Elsie Leung
Chief Financial Officer
Date: October 29, 1996
7
<PAGE>
APPENDIX K
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of January 1997
GEMSTAR INTERNATIONAL GROUP LIMITED
(Translation of registrant's name into English)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
--- ---
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
--- ---
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $57,313 $63,079
Short-term investments 15,164 -
Prepaid expenses and other current assets 2,686 3,734
------- -------
Total current assets 75,163 66,813
Property and equipment, net 3,198 3,040
Investments in marketable securities 7,039 -
Other assets 14,492 8,587
------- -------
$99,892 $78,440
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,129 $ 9,205
Current portion of deferred revenue 8,546 3,074
------- -------
Total current liabilities 17,675 12,279
Deferred revenue, less current portion 2,042 2,546
Other liabilities 2,522 2,392
Shareholders' equity:
Ordinary shares 308 305
Additional paid-in capital 46,877 38,961
Retained earnings 30,529 22,012
Cumulative translation adjustments (61) (55)
------- -------
Net shareholders' equity 77,653 61,223
------- -------
$99,892 $78,440
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
--------------------- --------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $13,120 $11,190 $26,199 $22,309
Operating costs and expenses:
Selling and marketing 3,107 3,792 6,148 6,444
Research and development 2,473 1,897 4,959 3,782
General and administrative 2,797 2,586 5,501 5,169
------- ------- ------- -------
Earnings from operations 4,743 2,915 9,591 6,914
Other income, net 1,158 311 2,071 491
------- ------- ------- -------
Earnings before income tax expense 5,901 3,226 11,662 7,405
Income tax expense 1,590 817 3,145 1,862
------- ------- ------- -------
Net earnings $ 4,311 $ 2,409 $ 8,517 $ 5,543
======= ======= ======= =======
Earnings per share $0.13 $0.09 $0.25 $0.20
======= ======= ======= =======
Weighted average shares outstanding 33,506 27,684 33,524 27,684
======= ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
1. Basis of Presentation
The interim condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report (Form 20-F) for the year ended March 31,
1996. The interim results of operations are not necessarily indicative of the
results for the entire year ending March 31, 1997.
2. Earnings Per Share
Earnings per share is based on the weighted average number of Ordinary Shares
and dilutive common stock equivalents outstanding for the period.
4
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report (Form 20-F) for the year ended March 31,
1996. This analysis is not intended to serve as a basis for projections of
future events.
Overview
- --------
The Company develops, markets and licenses proprietary technologies and systems
aimed at making technology user-friendly for consumers. The Company's VCR
Plus+(R) instant programming system was introduced in 1990 and to date there
have been more than 50 million VCR Plus+ systems sold worldwide. VCR Plus+
allows a user to record a television show simply by entering a number - the
PlusCode(R) number - printed in television program guides. The PlusCode numbers
are published in more than 1,500 newspapers and television guides worldwide,
with a combined circulation of over 300 million. The VCR Plus+ system has been
licensed to virtually every major television and VCR manufacturer and is
available in over 30 countries.
The Company has introduced two new technologies this year, INDEX Plus+(R), a
video tape indexing system built into new VCRs which features an on-screen
directory of video tape content by titles automatically captured from the
broadcast; and TV GUIDE Plus+(TM), a subscription-free on-screen interactive
television guide to be built into new televisions.
On April 16, 1996, the Company raised approximately $8 million, net of expenses,
through the issuance of 345,000 new shares as part of a public offering which
also included 2,645,000 shares of secondary stock.
On December 12, 1996, the Company completed its merger of VideoGuide, Inc.
(VideoGuide) by acquiring all of the outstanding capital stock of VideoGuide.
The merger will be accounted for using the pooling-of-interests method.
VideoGuide developed and introduced the VideoGuide Information System which
includes both a consumer electronics product sold through retail stores and an
information service that provides users with an interactive television program
schedule.
On December 23, 1996, the Company announced that it signed a definitive merger
agreement with StarSight Telecast, Inc., a company that designs an easy to use
and
5
<PAGE>
accurate method of identifying, selecting and recording television programming.
Closing of the transaction is subject to customary conditions, including
approval by shareholders of each company and the satisfaction of regulatory
requirements. If completed, the merger will be accounted for on a pooling-of-
interests method.
Quarterly operating results are affected by changes in the market acceptance of
existing products sold by licensees incorporating the Company's proprietary
technologies in their products. There can be no assurance that new products will
be introduced by licensees in a timely manner, will achieve any significant
degree of market acceptance, or that such acceptance will be sustained for any
significant period. The operating results for any quarter are not necessarily
indicative of results for any future period.
Results of Operations
- ---------------------
Revenues for the second quarter increased 17% to $13.1 million, compared to
$11.2 million for the same quarter last year. For the six months ended September
30, 1996, revenues were $26.2 million compared to $22.3 million for the same
period last year, an increase of 17%. The increase in revenues resulted
primarily from continued increases in the incorporation of the Company's VCR
Plus+ system by manufacturers of VCRs and televisions worldwide.
Selling and marketing expenses for the second quarter were $3.1 million compared
to $3.8 million for the same quarter last year, a decrease of 18%. For the six
months ended September 30, 1996, selling and marketing expenses were $6.1
million compared to $6.4 million for the same period last year, a decrease of
5%. This decrease is attributable to the timing of the Company's marketing and
promotional activities.
Research and development expenses for the second quarter were $2.5 million
compared to $1.9 million for the same quarter last year, an increase of 32%. For
the six months ended September 30, 1996, research and development expenses were
$5.0 million compared to $3.8 million for the same period last year, an increase
of 32%. This increase resulted primarily from increased activities associated
with the development and testing of the INDEX Plus+ and TV GUIDE Plus+ systems.
General and administrative expenses for the second quarter were $2.8 million
compared to $2.6 million for the same quarter last year. For the six months
ended September 30, 1996, general and administrative expenses were $5.5 million
compared to $5.2 million for the same period last year.
The effective tax rate for the second quarter and for the six months ended
September 30, 1996 was 27% compared to 25% for the same periods last year. This
increase in the effective tax rate was primarily attributable to the mix of
license revenues subject to foreign withholding taxes. Foreign withholding taxes
are based on license revenues from certain tax jurisdictions and, accordingly,
do not vary based on the level of pretax income.
6
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents, short-term investments, and investments in marketable
securities totaled $79.5 million at September 30, 1996 compared to cash and cash
equivalents of $63.1 million at March 31, 1996. This increase was due primarily
to the net proceeds from the sale of new shares in April 1996 and positive cash
flow from operations. The Company uses its working capital ($57.5 million at
September 30, 1996) to finance ongoing operations and to fund expansion and
development of new technologies.
Management believes the existing cash balances and cash generated from
operations will be sufficient to meet the Company's liquidity and capital needs
for the next twelve months.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
By: /s/ ELSIE LEUNG
-----------------------
Elsie Leung
Chief Financial Officer
Date: January 16, 1997
8
<PAGE>
APPENDIX L
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of January 1997
GEMSTAR INTERNATIONAL GROUP LIMITED
(Translation of registrant's name into English)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
------- -------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
------- -------
-more-
<PAGE>
FOR IMMEDIATE RELEASE
GEMSTAR INTERNATIONAL GROUP LIMITED AND STARSIGHT
TELECAST, INC. ANNOUNCE MERGER AGREEMENT
PASADENA, Calif. (December 23, 1996) -- Gemstar International Group Limited
[Nasdaq:GMSTF], and StarSight Telecast, Inc. [Nasdaq:SGHT] announced today that
they have entered into an agreement under which StarSight will become a wholly-
owned subsidiary of Gemstar.
Under the merger agreement, StarSight Telecast shareholders will receive
0.6062 shares of Gemstar common stock for each share of StarSight Telecast
common stock. StarSight Telecast shareholders will, in the aggregate, receive
approximately 33 percent of the outstanding shares of the combined company. The
transaction value is approximately $273 million based on Gemstar's closing stock
price today of $16.88. In addition, Gemstar has the option under certain
circumstances to purchase newly-issued shares of StarSight Telecast common stock
at an exercise price of $10.46 per share, equal to 15% of StarSight Telecast
shares on a fully diluted basis.
The transaction has the strong support of the boards of directors and
management of both companies. Voting agreements involving approximately 52
percent of StarSight Telecast outstanding shares and 53 percent of Gemstar
outstanding shares have been entered into by the principal shareholders of each
company. Closing of the transaction is subject to customary conditions,
including approval by shareholders of each company and the satisfaction of
regulatory requirements.
-- more --
<PAGE>
Gemstar and StarSight Announce Merger Agreement
The Board of Directors of Gemstar would be expanded to include StarSight
Telecast board representatives George Smith, chief financial officer of Viacom
International; James E. Meyer, executive vice president of Thomson Consumer
Electronics; and Ajit M. Dalvi, senior vice president of Cox Communications.
They will join Dr. George Carrier, former Dean of the School of Engineering of
Harvard University and Teriyuki Toyama, former chief operating officer of The
Asahi Shimbun, as outside directors of the new ten-member board. Gemstar has
also reached agreement with senior members of StarSight Telecast management to
continue to serve in the combined company.
Henry C. Yuen, chief executive officer of Gemstar, said the strengths of
Gemstar and StarSight Telecast are "complementary and synergistic." The combined
company would have significantly enhanced marketing capabilities, a richer
technology portfolio, and a broader presence in key industry sectors, Yuen said.
He noted that StarSight Telecast's extensive relationships with cable, telco,
satellite and personal computer industries are a perfect complement to Gemstar's
worldwide association with publications, broadcasters and consumer electronics
manufacturers. The combination would create "an international company that is
highly capable and balanced, both in terms of product mix and distribution
channels, and well-positioned to take advantage of the increasing convergence of
technologies and globalization of markets. Most important, the combined company
will be in an even better position to provide innovative solutions to make life
easier for consumers." Yuen said.
-- more --
<PAGE>
Gemstar and StarSight Announce Merger Agreement
Larry W. Wangberg, chairman and chief executive officer of StarSight
Telecast, said that the combined entity would be in a strengthened position to
address the growing market opportunity for navigational products and services.
StarSight systems have been incorporated into a wide variety of platforms,
including cable set-top boxes, DSS receivers, televisions and VCRs, Wangberg
said. He cited a number of significant recent achievements in the licensing of
StarSight technologies to the cable, satellite and personal computer industries,
including an arbitration award in the amount of $17.7 million in its dispute
with Scientific Atlanta regarding a technology licensing agreement, and an
agreement with Microsoft Corp. under which StarSight Telecast has been paid $20
million pursuant to a cross-licensing agreement. The aggregate $37.7 million
represented by these developments is expected to be recognized in the coming
quarters.
Mr. Wangberg stated that StarSight Telecast is "delighted to be part of the
Gemstar family. This agreement will be beneficial to shareholders of both
companies, consumers and the market segments the combined entity would serve,"
said Mr. Wangberg. "We have great admiration for Gemstar's business strategy and
its powerful and profitable operating model. We have the utmost respect for the
relationships Gemstar has established with publications, consumer electronics
manufacturers and broadcasters in both the domestic and international
marketplace. We believe that this combination will be beneficial to both
companies and their respective business partners," he said.
After the merger, Mr. Wangberg will serve as an advisor to the combined
company on strategic matters with focus on the cable industry. Brian L.
Klosterman, president of StarSight Telecast, will continue to run the StarSight
subsidiary.
-- more --
<PAGE>
Gemstar and StarSight Announce Merger Agreement
Gemstar and StarSight are currently in litigation over certain intellectual
property issues. The two companies have agreed to stay the proceedings with the
aim of dismissing all claims upon completion of the merger.
Gemstar develops, markets and licenses proprietary technologies and systems
aimed at making technology user-friendly for consumers. Gemstar's VCR Plus+(R)
Instant Programming System is now a world standard for VCR programming. VCR
Plus+ allows a user to record a television program simply by entering a
number -- the PlusCode(R) number -- printed in television program guides. The
PlusCode numbers are published in more than 1500 newspapers and television
guides worldwide, with a combined circulation of over 300 million. The VCR Plus+
system has been licensed to virtually every major TV and VCR manufacturer and is
available in over 30 countries including the U.S., Canada, U.K., Europe, Japan,
Southeast Asia, Australia and New Zealand. The Company has introduced two new
technologies this year, Index Plus+(TM), a videotape indexing system built into
new VCRs which features an on-screen directory of videotape content by titles
automatically captured from the broadcast; and TV Guide Plus+(TM), a
subscription-free on-screen interactive television guide to be built into new
televisions.
StarSight Telecast develops and markets StarSight, a patented on-screen
interactive TV program guide with one-button VCR recording. StarSight offers
viewers a simple and easy way to find, select and record TV programs. StarSight
is available throughout the United States by subscription, for less than $4 per
month retail on an annual basis.
-- more --
<PAGE>
Gemstar and StarSight Announce Merger Agreement
StarSight Telecast has partnerships with 11 leading consumer electronics
manufacturers that produce more than three-quarters of all TVs, VCRs and TVCRs
in the U.S. These companies include Zenith Electronics Corp., Mitsubishi
Electronics America Inc., Philips Consumer Electronics Co. (Magnavox), Samsung
Electronics America Inc., Thomson Consumer Electronics (RCA), Sony Corp.,
Matsushita Television Co. (Panasonic), Daewoo Electronics Co. Ltd., Sharp
Electronics Corp. and Toshiba America Consumer Products Inc., and Hughes Network
Systems.
StarSight Telecast has agreements with several major service providers
including Time Warner, Continental Cablevision, Southern New England Telephone,
Bell South, GTE and the leading advanced analog set-top box manufacturers
including General Instruments Corp., Scientific Atlanta and Zenith.
StarSight Telecast is backed by strategic partners Viacom Inc., THOMSON
Multimedia S.A., Cox Communications, Inc., Tribune Company, Providence Journal
Company and Time Warner, Inc.
In this transaction, Gemstar is advised by Hambrecht & Quist and Alex.
Brown and Sons, and StarSight is advised by Smith Barney, Inc. and ICON Venture
Advisors.
Except for the historical information contained herein, the matters
discussed in this news release are forward-looking statements that involve risks
and uncertainties, including the timely availability and acceptance of new
products, the impact of competitive products and pricing, the management of
growth, and the other risks detailed from time to time in the SEC reports of
--more--
<PAGE>
Gemstar and StarSight Telecast, including Gemstar's Form 20-F for the year ended
March 31, 1996 and Form 6-K for the quarter ended June 30, 1996 and StarSight
Telecast's Form 10-K for the year ended December 31, 1995 and Form 10-Q for the
quarter ended September 30, 1996.
Gemstar and StarSight Telecast will hold a teleconference for financial
analysts and press at 5:30 a.m. PST on Wednesday, December 24, 1996.
Participants should call:
CONTACT: Gemstar International Group Limited
Larry Goldberg, 818/792-5700 ext. 261
For StarSight Telecast, Inc.:
Renee Dorrell, 415/354-4485
The Market Relations Group,
A Regis McKenna Company
--more--
<PAGE>
FOR IMMEDIATE RELEASE Contact: Lisa Ruben
Hill and Knowlton, Inc.
213/966-5732
--or--
Martha Fleck
Hitachi
770-279-5600
HITACHI & GEMSTAR ANNOUNCE
FULL LINE OF PROJECTION TELEVISIONS
WITH VCR PLUS+ TECHNOLOGY
-- Gemstar's VCR Plus+ Technology Increases User-Friendliness of TVs --
PASADENA, Calif., (January 9, 1997) -- Gemstar International Group Limited
[Nasdaq:GMSTF], developer of the VCR Plus+(R) Instant Programming System, and
Hitachi Home Electronics (America) announced today that Hitachi will introduce a
full line of projection televisions in 1997 with Gemstar's VCR Plus+ Instant
Programming technology built-in. Hitachi plans to incorporate the user-friendly
VCR Plus+ system in its FX Series projection TV line.
The convenience of time-shift VCR recording with VCR Plus+ will now be
available to television buyers in models from two major consumer electronics
manufacturers, Hitachi and Zenith. VCR Plus+ simplifies the process of recording
TV shows to a single, error-free step: users simply enter the PlusCode(R) number
printed next to each show in television guides.
"We are pleased that Hitachi, a long-standing supporter of Gemstar's
innovative technologies, has decided to offer the user-friendly VCR Plus+ system
to its large base of television customers in the United States," said Andrew
Duncan, Gemstar's vice president of consumer electronics. "With VCR Plus+ built-
in, the consumer can record any program without
--more--
<PAGE>
HITACHI INCORPORATES VCR PLUS+ INTO FX TELEVISION LINE
having to locate another remote control and without interrupting his or her
television viewing."
The VCR Plus+ technology in televisions allows users to take advantage of
all the benefits of the system. With VCR Plus+ in TV, users can easily pre-set
their existing VCR for recording a show using the convenience of PlusCode
numbers. The system's once, daily or weekly recording options gives users one-
button access to the most frequently used recording choices. And, the system can
also be used to set up schedules to record multiple programs.
A major benefit of incorporating the VCR Plus+ system into TVs is that
viewers never have to leave the show they are watching in order to program their
VCR. The system allows the PlusCode numbers to be entered using the TV's
specially designed remote control unit. The entry is then confirmed on the
remote's LCD panel without interrupting the television picture. Another benefit
of VCR Plus+ built into TVs is that the technology allows users with virtually
any VCR to tape shows easily, without hassles.
"By incorporating the VCR Plus+ system into our FX Series projection TV
line, Hitachi continues its tradition of leadership in introducing useful,
innovative features to our customers," said Scott Ramirez, product manager,
CTV/PTV of Hitachi Home Electronics (America), Inc. The VCR Plus+ Instant
Programming System has a proven track record with consumers, so it makes sense
to expand its availability by introducing it in Hitachi TV sets. By doing so, we
are providing our customers with one more reason to buy a Hitachi TV, and we are
giving them a convenient feature that maintains the television as the focal
point of video entertainment in their home."
--more--
<PAGE>
HITACHI INCORPORATES VCR PLUS+ INTO FX TELEVISION LINE
Hitachi Home Electronics (America) develops and markets a variety of
consumer electronics and commercial multimedia products. Hitachi America, Ltd.,
a wholly owned subsidiary of Hitachi, Ltd., Japan, markets and manufactures
electrical and electronic goods and provides industrial equipment and services
throughout the United States. Hitachi, Ltd., headquartered in Tokyo, Japan, is
the world's leading global electronics company, with fiscal 1995 consolidated
sales (ending March 31, 1996) of $76.6 billion. The company markets and
manufactures a wide range of products, including computers, semiconductors,
consumer products and power and industrial equipment.
Gemstar develops, markets and licenses proprietary technologies and systems
aimed at making technology user-friendly for consumers. Gemstar's VCR Plus+
Instant Programming System is now a world standard for VCR programming. VCR
Plus+ allows a user to record a television show simply by entering a number--
the PlusCode number -- printed in television program guides. The PlusCode
numbers are published by more than 1500 newspapers and television program guides
worldwide, with a combined circulation of over 300 million. The VCR Plus+ system
has been licensed to virtually every major television and VCR manufacturer and
introduced in more than 30 countries, including the U.S., Canada, Latin America,
U.K., Europe, Japan, China, Southeast Asia, Australia and New Zealand. Since its
inception, there have been more than 50 million VCR Plus+ systems sold
worldwide, and that number continues to increase as manufacturers incorporate
the feature throughout their VCR and TV product lines. The Company also recently
introduced Index Plus+(TM), an automatic videotape playback and
--more--
<PAGE>
cataloguing system, and TV Guide Plus+(TM), a subscription-free, on-screen
electronic TV listings guide built into new televisions.
Note: This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results in the future may differ
significantly from those discussed in the forward-looking statements.
# # #
--more--
<PAGE>
FOR IMMEDIATE RELEASE CONTACT: Lisa Ruben
Hill and Knowlton, Inc.
213/966-5732
Daniel Villa
Mitsubishi
770/734-5431
GEMSTAR AND MITSUBISHI LAUNCH
VCR PLUS+ GOLD FEATURE PACKAGE IN VCRS
- -- Setting up and Recording with VCRs is Now Even Easier with VCR Plus+ Gold --
PASADENA, Calif., (January 9, 1997) -- Gemstar International Group Limited
[Nasdaq: GMSTF], developer of the VCR Plus+ Instant Programming System, and
Mitsubishi Consumer Electronics America (MCEA) announced today the introduction
of a new line of premium VCRs equipped with Gemstar's VCR Plus+ GOLD package of
features. The GOLD package includes the VCR Plus+ Instant Programming System
with C3(R) and Gemstar's new AllSet(TM) technology for automatic initial set-up.
The new AllSet technology will simplify the process of setting up the VCR, and
the VCR Plus+ C3 feature offers the convenience of one-step taping with
PlusCode(R) numbers and cable box control.
Mitsubishi VCRs with the VCR Plus+ GOLD package will be available in retail
stores later this year in a wide range of VCR models, including the HS-U580,
- -U680, -U780, and -U790.
"Mitsubishi's focus has always been on creating the highest quality
consumer electronics products available," said Max Wasinger, vice president,
National Sales of MCEA. "We are pleased to be able to include the new VCR Plus+
GOLD group of features from Gemstar in our
--more--
<PAGE>
Gemstar and Mitsubishi Launch VCR Plus+ GOLD Feature Package in VCRs
VCR line because they meet our rigorous standards of delivering truly innovative
features that help enhance the quality and consumer appeal of our products."
"With VCR Plus+ GOLD, Gemstar is taking user-friendliness to a new level,
said Andrew Duncan, Gemstar's vice president of consumer electronics. "Once the
system is plugged in and a few basic items are entered, like the user's zip code
and whether or not he has cable service and a cable box, the GOLD package
completes all the clock and channel set-up steps for you. VCR Plus+ GOLD is an
exceptional package of features. It creates the ultimate user-friendly VCR."
Introduced in 1990, Gemstar's VCR Plus+Instant Programming System allows
users to record TV shows in one easy step: users simply enter the PlusCode
number printed next to each show in television listings. The C/3/ feature in VCR
Plus+ automatically changes channels on cable boxes, thus enabling consumers to
record shows from different cable channels without being home.
The VCR Plus+ GOLD package includes VCR Plus+ C/3/ and Gemstar's newest VCR
feature, AllSet. AllSet makes setting up the VCR a completely painless process
by setting the VCR's clock and the cable channel line-up virtually
automatically. Users simply enter their zip code and select whether or not they
have cable service and a cable box. AllSet then completes the clock and cable
channel line-up set-up, using information provided by Gemstar and included in
television broadcast signals of major national networks such as ABC, CBS, FOX
and others. The information is updated and transmitted regularly throughout
North America so that any U.S. or Canadian consumer can enjoy the benefits of
the VCR Plus+ GOLD package of features.
--more--
<PAGE>
Gemstar and Mitsubishi Launch VCR Plus+ GOLD Feature Package in VCRs
AllSet automatically sets the VCR's clock, eliminating the notorious
blinking "12:00" problem traditionally associated with VCRs. AllSet also
completes the channel set-up procedure for the user. AllSet will automatically
match the channels received in the home with the VCR Plus+ channels used in
Gemstar's PlusCode numbering system.
Gemstar's VCR Plus+ GOLD package makes the initial clock and channel set-up
process a breeze, allowing consumers to enjoy their VCRs without the hassles and
frustrations normally associated with thumbing through operating manuals.
The audio/video division of MCEA manufactures and markets a comprehensive
line of premium quality direct-view and projection televisions, VCRs and audio
products for complete home theater systems. Recognized as the innovator of big
screen technology, Mitsubishi develops video products that lead the industry in
performance, ease-of-use and system integration. MCEA is headquartered at 6100
Atlantic Blvd., Norcross, Ga., 30071, and has manufacturing facilities in
Braselton, Ga., and Santa Ana, California.
Gemstar develops, markets and licenses proprietary technologies and
systems aimed at making technology user-friendly for consumers. Gemstar's VCR
Plus+ Instant Programming System is now a world standard for VCR programming.
VCR Plus+ allows a user to record a television show simply by entering a
number --the PlusCode number -- printed in television program guides. The
PlusCode numbers are published by more than 1500 newspapers and television
program guides worldwide, with a combined circulation of over 300 million. The
VCR Plus+ system has been licensed to virtually every major television and VCR
manufacturer and introduced in more than 30 countries, including the U.S.,
Canada, Latin America, U.K.,
--more--
<PAGE>
Europe, Japan, China, Southeast Asia, Australia and New Zealand. Since its
inception, there have been more than 50 million VCR Plus+ systems sold
worldwide, and that number continues to increase as manufacturers incorporate
the feature throughout their VCR and TV product lines. The Company also recently
introduced Index Plus+(TM), an automatic videotape playback and cataloguing
system, and TV Guide Plus+(TM), a subscription-free, on-screen electronic TV
listings guide built into new televisions.
Note: This document contains forward-looking statements which involve risks and
uncertainties. The company's actual results in the future may differ
significantly from those discussed in the forward-looking statements.
# # #
--more--
<PAGE>
FOR IMMEDIATE RELEASE Contact: Lisa Ruben
Hill and Knowlton, Inc.
213-966-5732
-or-
Danny Villa
Mitsubishi
770-734-5431
MITSUBISHI INTRODUCES GEMSTAR'S TV GUIDE PLUS+
IN FULL LINE OF 1997 TV MODELS
PASADENA, Calif., (January 9, 1997) -- Gemstar International Group Limited
[Nasdaq:GMSTF], the innovator of the VCR Plus+(R) Instant Programming System,
and Mitsubishi Consumer Electronics America (MCEA) announced today that
Gemstar's TV Guide Plus+(TM) system, an on-screen TV program guide, will be
available in a full line of Mitsubishi TVs in 1997. TV Guide Plus+ is the first
subscription-free, interactive on-screen television guide built into TVs, VCRs
and TV/VCR combination units. It provides users with information about current
and future TV programs without charging the user any set-up charges or
subscription fees.
Mitsubishi, the world's leading brand in large screen, direct-view and
projection televisions, will incorporate Gemstar's TV Guide Plus+ system into a
total of twelve (12) new models, including five (5) CTVs and seven (7) PTVs in
1997. Mitsubishi TVs equipped with the TV Guide Plus+ feature will be available
in a variety of screen sizes, including 27-, 32-, and 36-inch color TV models
and 50-, 55-, 60-, and 70-inch projection TV models.
--more--
<PAGE>
MITSUBISHI INTRODUCES GEMSTAR'S TV GUIDE PLUS+ IN 1997 TV MODELS
2-2-2-2-2
"Mitsubishi has worked steadfastly over the years to establish and maintain
its reputation as the premier brand in top-quality televisions," said Max
Wasinger, vice president, National Sales of MCEA. "Any feature we include in our
TVs must support this reputation. TV Guide Plus+ does that. It is a wonderfully
easy-to-use feature that adds tremendous value to our product line because it
provides an innovative solution to a real consumer need."
"Gemstar's TV Guide Plus+ system is unique because the service is
subscription-free;" said Andrew Duncan, vice president, consumer electronics for
Gemstar. "Combine this huge consumer benefit with the outstanding quality of
Mitsubishi TVs and we will have, I believe, a new standard-bearer in the
industry."
With Mitsubishi adding its strength to the number of TV and VCR
manufacturers selling TV Guide Plus+-equipped models, consumers will have a wide
range of home video products to choose from that incorporate the TV Guide Plus+
system. Last quarter, Magnavox and JVC introduced a combined total of 10 TV and
VCR models equipped with the TV Guide Plus+ feature, offering consumers a
significant array of price points and screen sizes from which to choose.
In addition to being free to viewers, TV Guide Plus+ has several unique
features. The video broadcast is visible at all times in a "video window" which
is fully integrated into the text portion of the guide. The operation of the
guide has been carefully designed to be intuitive and user-friendly, with the
selection of features and programs accomplished easily by using the cursor keys.
The four basic TV Guide Plus+ features are color-coded for easy recognition.
--more--
<PAGE>
MITSUBISHI INTRODUCES GEMSTAR'S TV GUIDE PLUS+ IN 1997 TV MODELS
3-3-3-3-3
The system also has the unique capability of enabling participating broadcasters
to update program information in real time as events occur.
In addition, TV Guide Plus+ has the convenient feature of one-touch
recording. Gemstar's VCR Plus+ Instant Programming System, which is included
with the TV Guide Plus+ system, enables one-button recording of any television
program listed in the guide. Viewers simply highlight the desired program and
press the "Record" button to access the VCR Plus+ feature. The system will
automatically enter the PlusCode(R) number for taping the program.
Up-to-date TV Guide Plus+ program information will be automatically sent to
TVs or VCRs equipped with the TV Guide Plus+ feature regularly. The ABC
Television Network, the FOX Broadcasting Company, and the CBS Network will
support the TV Guide Plus+ system by broadcasting TV Guide Plus+ information in
the vertical blanking intervals of their television signals.
The audio/video division of MCEA manufactures and markets a comprehensive
line of premium quality direct-view and projection televisions, VCRs and audio
products for complete home theater systems. Recognized as the innovator of big
screen technology, Mitsubishi develops video products that lead the industry in
performance, ease-of-use and system integration. MCEA is headquartered at 6100
Atlantic Blvd., Norcross, Ga., 30071, and has manufacturing facilities in
Braselton, Ga., and Santa Ana, California.
Gemstar develops, markets and licenses proprietary technologies and systems
aimed at
--more--
<PAGE>
FOR IMMEDIATE RELEASE Contact: Lisa Ruben
Hill & Knowlton
213-966-5732
making technology user-friendly for consumers. Gemstar's VCR Plus+ Instant
Programming System is now a world standard for VCR programming. VCR Plus+ allows
a user to record a television show simply by entering a number -- the PlusCode
number -- printed in television program guides. The PlusCode numbers are
published by more than 1500 newspapers and television program guides worldwide,
with a combined circulation of over 300 million. The VCR Plus+ system has been
licensed to virtually every major television and VCR manufacturer and introduced
in more than 30 countries, including the U.S., Canada, Latin America, U.K.,
Europe, Japan, China, Southeast Asia, Australia and New Zealand. Since its
inception, there have been more than 50 million VCR Plus+ systems sold
worldwide, and that number continues to increase as manufacturers incorporate
the feature throughout their VCR and TV product lines. The Company also recently
introduced Index Plus+(TM), a videotape indexing system for VCRs which features
an on-screen directory of videotape content displaying titles automatically
captured from the broadcast.
Note: This document contains forward-looking statements which involve risks and
uncertainties. The company's actual results in the future may differ
significantly from those discussed in the forward-looking statements.
# # #
---more---
<PAGE>
FOR IMMEDIATE RELEASE Contact: Lisa Ruben
Hill and Knowlton, Inc.
213-966-5732
THOMSON CONSUMER ELECTRONICS ADOPTS GEMSTAR'S
TV GUIDE PLUS+ SYSTEM
-- Thomson Announces Plan to Incorporate TV Guide Plus+
Into Thomson Products Beginning Spring '97 --
PASADENA, Calif., (January 9, 1997) -- Gemstar International Group Limited
[Nasdaq: GMSTF], developer of the VCR Plus+/R/ Instant Programming System,
announced today that Thomson Consumer Electronics - Americas, manufacturer of
the RCA, Proscan, and GE brands of televisions and VCRs, plans to incorporate
Gemstar's TV Guide Plus+(TM) system, a subscription-free on-screen electronic
program guide, into a range of its TV product line in 1997 in the United States.
In a press conference at WCES `97 last night, Jim Meyer, executive vice
president of Thomson Consumer Electronics, said, "It is our intention to
incorporate the TV Guide Plus+ feature into over 5 million color TVs by the end
of 1999."
Thomson becomes the third major manufacturer to adopt the TV Guide Plus+
system into its product line. The TV Guide Plus+ system was introduced in the
fourth quarter of 1996 in JVC TVs and Magnavox TVs and VCRs.
TV Guide Plus+ has several unique features. It is the only subscription-
free electronic television guide built into TVs and VCRs. The video broadcast is
visible at all times in a video window which is fully integrated into the text
portion of the guide. The operation of the guide
-- more --
<PAGE>
THOMSON ADOPTS TV GUIDE PLUS+
Page 2
has been carefully designed to be intuitive and user-friendly, with the
selection of features and programs accomplished by four color-coded buttons and
the up-down channel key. The system also has the unique capability of enabling
participating broadcasters to update changes in program information in real
time. In addition, viewers can search for something to watch by theme, channel
or time period.
TV Guide Plus+ also offers one-button recording through Gemstar's VCR Plus+
Instant Programming System, which is included with the TV Guide Plus+ system.
This feature provides one-step, "point-and-click" recording of any television
program listed in the guide. Viewers simply highlight the desired program and
press the VCR Plus+ button. The PlusCode(R) number for taping the program is
automatically entered. The system is supported by major broadcasters including
ABC, FOX, CBS and UPN in the U.S., and the CBC Network, CBC Newsworld, RDI and
CTV in Canada, all of whom carry TV Guide Plus+ data in the vertical blanking
portion of their video signals.
"Gemstar is very pleased with Thomson's decision to incorporate TV Guide
Plus+ into its television product line in 1997," said Henry Yuen, chief
executive officer of Gemstar. "Thomson's position as the U.S. television sales
leader will help increase the availability of the user-friendly TV Guide Plus+
system to consumers."
Gemstar develops, markets and licenses proprietary technologies and systems
aimed at making technology user-friendly for consumers. Gemstar's VCR Plus+
Instant
-- more --
<PAGE>
THOMAS ADOPTS TV GUIDE PLUS+
Page 3
Programming System is now a world standard for VCR programming. VCR Plus+ allows
a user to record a television show simply by entering a number -- the PlusCode
number -- printed in television program guides. The PlusCode numbers are
published by more than 1500 newspapers and television program guides worldwide,
with a combined circulation of over 300 million. The VCR Plus+ system has been
licensed to virtually every major television and VCR manufacturer and introduced
in more than 30 countries, including the U.S., Canada, Latin America, U.K.,
Europe, Japan, China, Southeast Asia, Australia and New Zealand. Since its
inception, there have been more than 50 million VCR Plus+ systems sold
worldwide, and that number continues to increase as manufacturers incorporate
the feature throughout their VCR and TV product lines. The Company also recently
introduced Index Plus+(TM), an automatic videotape playback and cataloguing
system, and TV Guide Plus+(TM), a subscription-free, on-screen electronic TV
listings guide built into new televisions.
Note: This document contains forward-looking statements which involve risks and
uncertainties. The company's actual results in the future may differ
significantly from those discussed in the forward-looking statements.
# # #
-- more --
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
By: /s/ ELSIE LEUNG
---------------------
Elsie Leung
Chief Financial Officer
Date: January 16, 1997
-- more --
<PAGE>
APPENDIX M
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF MARCH 1997
GEMSTAR INTERNATIONAL GROUP LIMITED
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
135 NORTH LOS ROBLES AVENUE, SUITE 800, PASADENA, CALIFORNIA 91101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [_] No [X]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX TO FORM 6-K
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
GEMSTAR INTERNATIONAL GROUP LIMITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1996 and December
31, 1996.............................................................. F-1
Condensed Consolidated Statements of Earnings for the three and nine
month periods ended December 31, 1995 and 1996........................ F-2
Notes to Condensed Consolidated Financial Statements................... F-3
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... F-4
GEMSTAR INTERNATIONAL GROUP LIMITED SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditors' Report........................................... F-6
Supplemental Consolidated Balance Sheets as of March 31, 1996 and 1995. F-7
Supplemental Consolidated Statements of Earnings for each of the years
in the three year period ended March 31, 1996......................... F-8
Supplemental Consolidated Statements of Shareholders' Equity for each
of the years in the three year period ended March 31, 1996............ F-9
Supplemental Consolidated Statements of Cash Flows for each of the
years in the three year period ended March 31, 1996................... F-10
Notes to Supplemental Consolidated Financial Statements................ F-11
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... F-23
VIDEOGUIDE, INC. FINANCIAL STATEMENTS
Independent Auditors' Report........................................... F-28
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996...... F-29
Statements of Operations for the period from September 8, 1993 (date of
inception) through December 31, 1993, the years ended December 31,
1994 and 1995 and the six month period ended June 30, 1996............ F-30
Statements of Stockholders' Deficiency for the period from September 8,
1993 (date of inception) through December 31, 1993, the years ended
December 31, 1994 and 1995 and the six month period ended June 30,
1996.................................................................. F-31
Statements of Cash Flows for the period from September 8, 1993 (date of
inception) through December 31, 1993, the years ended December 31,
1994 and 1995 and the six month period ended June 30, 1996............ F-32
Notes to Financial Statements.......................................... F-33
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... F-42
</TABLE>
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
1996 31, 1996
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 42,742 $ 64,097
Short-term investments................................. 22,516 --
Prepaid expenses and other current assets.............. 4,352 6,865
-------- --------
Total current assets................................. 69,610 70,962
Property and equipment, net.............................. 4,639 4,042
Investments in marketable securities..................... 6,528 --
Other assets............................................. 6,418 5,593
-------- --------
$ 87,195 $ 80,597
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................. $ 31,541 $ 44,769
Current portion of deferred revenue.................... 6,970 4,213
-------- --------
Total current liabilities............................ 38,511 48,982
Deferred revenue, less current portion................... 1,772 2,860
Other liabilities........................................ 3,389 2,435
Shareholders' equity:
Ordinary shares........................................ 313 310
Additional paid-in capital............................. 60,536 52,619
Accumulated deficit.................................... (17,256) (26,554)
Cumulative translation adjustments..................... (70) (55)
-------- --------
Net shareholders' equity............................. 43,523 26,320
-------- --------
$ 87,195 $ 80,597
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-1
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED DECEMBER ENDED DECEMBER
31 31
---------------- ----------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues: $19,119 $ 14,070 $46,072 $ 36,379
Operating costs and expenses:
Selling and marketing..................... 7,027 15,382 15,270 24,591
Research and development.................. 2,675 3,530 9,418 10,597
General and administrative................ 3,269 3,059 10,111 9,378
Nonrecurring expense...................... -- 19,526 -- 19,526
------- -------- ------- --------
Earnings (loss) from operations 6,148 (27,427) 11,273 (27,713)
Other income, net........................... 1,163 807 3,145 1,317
------- -------- ------- --------
Earnings (loss) before income tax expense... 7,311 (26,620) 14,418 (26,396)
Income tax expense.......................... 1,975 1,334 5,120 3,196
------- -------- ------- --------
Net earnings (loss) $ 5,336 $(27,954) $ 9,298 $(29,592)
======= ======== ======= ========
Earnings (loss) per share................... $ 0.16 $ (0.84) $ 0.28 $ (0.95)
======= ======== ======= ========
Weighted average shares outstanding......... 33,217 33,127 33,738 31,106
======= ======== ======= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim periods. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report (Form 20-F) for the year ended
March 31, 1996 and the supplemental consolidated financial statements included
in the Form 6-K herein. The interim results of operations are not necessarily
indicative of the results for the entire year ending March 31, 1997.
In December 1996, the Company completed its acquisition of VideoGuide, Inc.
which has been accounted for under the pooling of interests method, and
accordingly, all historical financial information has been restated to include
VideoGuide, Inc. for all periods presented.
2. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based on the weighted average number of
Ordinary Shares and dilutive common stock equivalents outstanding for the
period.
F-3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report (Form 20-F) and
supplemental consolidated financial statements included in this Form 6-K
herein for the year ended March 31, 1996. This analysis is not intended to
serve as a basis for projections of future events.
OVERVIEW
The Company develops, markets and licenses proprietary technologies and
systems aimed at making technology user-friendly for consumers. The Company's
VCR Plus+(R) instant programming system was introduced in 1990 and to date
there have been more than 50 million VCR Plus+ systems sold worldwide.
VCR Plus+ allows a user to record a television show simply by entering a
number--the PlusCode(R) number--printed in television program guides. The
PlusCode numbers are published in more than 1,500 newspapers and television
guides worldwide, with a combined circulation of over 300 million. The VCR
Plus+ system has been licensed to virtually every major television and VCR
manufacturer and is available in over 30 countries.
The Company introduced two new technologies this fiscal year, Index
Plus+(TM), a video tape indexing system built into new VCRs which features an
on-screen directory of video tape content by titles automatically captured
from the broadcast; and TV Guide Plus+(TM), a subscription-free on-screen
interactive television guide to be built into new televisions.
On April 16, 1996, the Company raised approximately $8 million, net of
expenses, through the issuance of 345,000 new shares as part of a public
offering which also included 2,645,000 shares of secondary stock.
On December 12, 1996, the Company completed its acquisition of VideoGuide,
Inc. (VideoGuide) by acquiring all of the outstanding capital stock of
VideoGuide. The merger has been accounted for under the pooling of interests
method, and accordingly, all historical financial information has been
restated to include VideoGuide for all periods presented. VideoGuide developed
and introduced the VideoGuide Information System which includes both a
consumer electronics product sold through retail stores and an information
service that provides users with an interactive television program schedule.
On December 23, 1996, the Company announced that it signed a definitive
merger agreement with StarSight Telecast, Inc., a company that designs an easy
to use and accurate method of identifying, selecting and recording television
programming. Closing of the transaction is subject to customary conditions,
including approval by shareholders of each company and the satisfaction of
regulatory requirements. If completed, the merger will be accounted for under
the pooling of interests method.
Quarterly operating results are affected by, among other matters, changes in
the market acceptance of existing products sold by licensees incorporating the
Company's proprietary technologies. In addition, there can be no assurance
that new products incorporating the Company's proprietary technologies will be
introduced by licensees or introduced in a timely manner, will achieve any
significant degree of market acceptance or that any acceptance will be
sustained for any significant period, or result in significant revenues or
profits. The operating results for any quarter are not necessarily indicative
of results for any future period.
F-4
<PAGE>
RESULTS OF OPERATIONS
Revenues for the third quarter increased 35% to $19.1 million, compared to
$14.1 million for the same quarter last year. For the nine months ended
December 31, 1996, revenues were $46.1 million compared to $36.4 million for
the same period last year, an increase of 27%. The increase in revenues
resulted primarily from the continued increase in the incorporation of the
Company's VCR Plus+ system by manufacturers of VCRs and televisions worldwide.
The contribution to revenues by VideoGuide's operations was not significant.
Selling and marketing expenses for the third quarter were $7.0 million
compared to $15.4 million for the same quarter last year, a decrease of 55%.
For the nine months ended December 31, 1996, selling and marketing expenses
were $15.3 million compared to $24.6 million for the same period last year, a
decrease of 38%. This decrease is attributable mainly to VideoGuide's
marketing, promotional and product launch activities during the third quarter
of last year.
Research and development expenses for the third quarter were $2.7 million
compared to $3.5 million for the same quarter last year, a decrease of 23%.
For the nine months ended December 31, 1996, research and development expenses
were $9.4 million compared to $10.6 million for the same period last year, a
decrease of 11%. This decrease resulted primarily from the completion of
certain stages in the development of the Index Plus+ and TV Guide Plus+
systems during this year.
General and administrative expenses for the third quarter were $3.3 million
compared to $3.1 million for the same quarter last year. For the nine months
ended December 31, 1996, general and administrative expenses were $10.1
million compared to $9.4 million for the same period last year.
During the third quarter of last year, VideoGuide recorded $19.5 million
nonrecurring expense for inventory related losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, short-term investments, and investments in
marketable securities totaled $71.8 million at December 31, 1996 compared to
cash and cash equivalents of $64.1 million at March 31, 1996. This increase
was due primarily to the net proceeds from the sale of new shares in April
1996. The Company uses its working capital ($31.1 million at December 31,
1996) to finance ongoing operations and to fund the development, launch and
expansion of new technologies and potential services.
Management believes the existing cash balances and cash generated from
operations will be sufficient to meet the Company's liquidity and capital
needs for the next twelve months.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gemstar International Group Limited:
We have audited the accompanying supplemental consolidated balance sheets of
Gemstar International Group Limited and subsidiaries as of March 31, 1996 and
1995, and the related supplemental consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1996. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Gemstar International Group Limited and VideoGuide, Inc. on
December 12, 1996, which has been accounted for as a pooling-of-interests as
described in Note 1 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Gemstar International Group Limited and subsidiaries after financial
statements covering the date of consummation of the business combinations are
issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Gemstar International Group Limited and subsidiaries as of March 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1996, in conformity with
generally accepted accounting principles applicable after financial statements
are issued for a period which includes the date of consummation of the
business combination.
KPMG Peat Marwick LLP
Los Angeles, California
March 10, 1997
F-6
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $12,740 $64,097
Due from related parties................................... 2,414 --
Prepaid expenses and other current assets.................. 1,207 6,865
------- -------
Total current assets..................................... 16,361 70,962
Property and equipment, net.................................. 1,785 4,042
Intangible assets, net....................................... 4,482 4,227
Other assets................................................. 998 1,366
------- -------
$23,626 $80,597
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................... $ 7,499 $44,769
Current portion of deferred revenue........................ 2,101 4,213
Dividend payable........................................... 5,000 --
------- -------
Total current liabilities................................ 14,600 48,982
Deferred revenue, less current portion....................... 2,475 2,860
Other liabilities............................................ 814 2,435
Shareholders' equity:
Preference shares, par value $.01 per share. Authorized
50,000,000 shares, none issued............................ -- --
Ordinary shares, par value $.01 per share. Authorized
500,000,000 shares; issued and outstanding 23,818,191
shares at March 31, 1995 and 30,928,285 shares at
March 31, 1996............................................ 238 310
Additional paid-in capital................................. 4,219 52,619
Retained earnings (accumulated deficit).................... 1,369 (26,554)
Cumulative translation adjustments......................... (89) (55)
------- -------
Net shareholders' equity................................. 5,737 26,320
Commitments and contingencies (note 9)
Subsequent event (note 12)
------- -------
$23,626 $80,597
======= =======
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
F-7
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Revenues............................................. $27,025 $41,744 $ 53,869
Operating costs and expenses:
Selling and marketing.............................. 9,308 11,598 31,397
Research and development........................... 5,023 9,769 13,923
General and administrative......................... 6,711 10,992 12,434
Nonrecurring expenses.............................. -- 1,710 19,526
------- ------- --------
Earnings (loss) from operations.................. 5,983 7,675 (23,411)
Other income, net.................................... 786 696 2,076
------- ------- --------
Earnings (loss) from continuing operations before
income tax expense.............................. 6,769 8,371 (21,335)
Income tax expense................................... 2,238 3,681 5,497
------- ------- --------
Earnings (loss) from continuing operations........... 4,531 4,690 (26,832)
------- ------- --------
Earnings from discontinued operations, net of tax.... 6,726 5,197 --
------- ------- --------
Net earnings (loss).............................. $11,257 $ 9,887 $(26,832)
======= ======= ========
Per share data:
Earnings (loss) from continuing operations......... $ 0.16 $ 0.17 $ (0.85)
Earnings from discontinued operations.............. 0.24 0.18 --
------- ------- --------
Net earnings (loss).............................. $ 0.40 $ 0.35 $ (0.85)
======= ======= ========
Weighted average shares outstanding.................. 28,159 28,159 31,458
======= ======= ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
F-8
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORDINARY RETAINED
SHARES ADDITIONAL EARNINGS CUMULATIVE NET
------------- PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1993 23,500 $235 $ 2,829 $ 15,770 $ 303 $ 19,137
Net earnings.......... -- -- -- 11,257 -- 11,257
Dividend.............. -- -- -- (8,000) -- (8,000)
Issuance of ordinary
shares............... 236 2 1,000 -- -- 1,002
Equity adjustment from
foreign currency
translation.......... -- -- -- -- 70 70
------ ---- ------- -------- ----- --------
Balances at March 31,
1994................... 23,736 237 3,829 19,027 373 23,466
Net earnings.......... -- -- -- 9,887 -- 9,887
Dividend.............. -- -- -- (5,000) -- (5,000)
Distribution to
shareholders......... -- -- -- (22,545) -- (22,545)
Issuance of ordinary
shares............... 82 1 390 -- -- 391
Equity adjustment from
foreign currency
translation.......... -- -- -- -- (462) (462)
------ ---- ------- -------- ----- --------
Balances at March 31,
1995................... 23,818 238 4,219 1,369 (89) 5,737
Net loss.............. (26,832) (26,832)
Initial public
offering............. 3,450 35 36,124 -- -- 36,159
Acquisition of common
stock of E Guide,
Inc.................. 3,511 35 8 -- -- 43
Issuance of ordinary
shares............... 149 2 12,268 -- -- 12,270
Adjustment for change
in VideoGuide year
end.................. -- -- -- (1,091) -- (1,091)
Equity adjustment from
foreign currency
translation.......... -- -- -- -- 34 34
------ ---- ------- -------- ----- --------
Balances at March 31,
1996................... 30,928 310 52,619 (26,554) (55) 26,320
====== ==== ======= ======== ===== ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
F-9
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Continuing operations:
Earnings (loss) from continuing operations..... $ 4,531 $ 4,690 $(26,832)
Adjustments to reconcile earnings to net cash
provided by continuing operations:
Depreciation and amortization................ 795 1,418 1,932
Deferred income taxes........................ 330 117 1,547
Changes in assets and liabilities:
Prepaid expenses and other assets.......... (281) 636 (5,617)
Accounts payable and accrued expenses...... 2,832 3,656 37,270
Deferred revenue........................... 1,622 22 2,497
Other liabilities.......................... 688 126 76
------- ------- --------
Net cash provided by continuing operations. 10,517 10,665 10,873
------- ------- --------
Discontinued operations:
Earnings from discontinued operations, net of
tax........................................... 6,726 5,197 --
Adjustments to reconcile earnings to net cash
provided by discontinued operations:
Depreciation and amortization................ 339 659 --
Decrease in receivable and revenue
allowances.................................. (456) (374) --
Deferred income taxes........................ 2,318 (8,100) --
Changes in working capital and other, net of
spin-off of subsidiaries.................... 2,361 11,549 --
------- ------- --------
Net cash provided by discontinued
operations................................ 11,288 8,931 --
------- ------- --------
Net cash provided by operating activities.. 21,805 19,596 10,873
------- ------- --------
Cash flows from investing activities:
Continuing operations:
Cash payments of amounts due to related parties
(note 4)...................................... -- (6,759) --
Decrease (increase) in due from related
parties....................................... -- (2,414) 2,414
Cash payments received under short-term loans
and advances.................................. 3,880 -- --
Additions to property and equipment............ (809) (1,157) (3,108)
Increase in intangible assets.................. (3,480) (1,007) (826)
Decrease (increase) in other assets............ (1,237) 807 (368)
Discontinued operations:
Cash advanced under loans and advances to
related parties............................... (1,126) (2,093) --
Cash received under short-term loans and
advances...................................... 2,587 -- --
Additions to property and equipment............ (11,061) (472) --
Increase in other assets....................... (468) (66) --
------- ------- --------
Net cash used in investing activities...... (11,714) (13,161) (1,888)
------- ------- --------
Cash flows from financing activities:
Continuing operations:
Dividends paid................................. -- (8,000) (5,000)
Proceeds from issuance of Ordinary Shares...... 327 1,066 12,270
Proceeds from initial public offering of
Ordinary Shares............................... -- -- 36,159
Discontinued operations:
Net borrowings (repayments) under notes payable
to banks...................................... 1,077 (217) --
Proceeds from issuance of long-term debt....... 9,059 -- --
Payments of long-term debt..................... (324) (980) --
Cash included in net assets distributed to
shareholders related to spin-off (note 4)..... -- (7,095) --
------- ------- --------
Net cash provided by (used in) financing
activities................................ 10,139 (15,226) 43,429
------- ------- --------
Effect of exchange rate changes on cash............ 70 (462) 34
------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................... 20,300 (9,253) 52,448
Cash and cash equivalents at beginning of year..... 1,693 21,993 12,740
Adjustment for change in VideoGuide, Inc. year end. -- -- (1,091)
------- ------- --------
Cash and cash equivalents at end of year........... $21,993 $12,740 $ 64,097
======= ======= ========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest....................................... $ 310 $ 605 $ --
Income taxes................................... 2,285 4,653 3,807
======= ======= ========
Noncash investing and financing activities:
</TABLE>
During the year ended March 31, 1995, the Company spun off Gemstar
Manufacturing Holding Limited and its wholly owned subsidiaries to its
shareholders. The book value of the net noncash assets of these companies
was $15,450 (note 4).
During the year ended March 31, 1996, the Company exchanged 3,511,494
Ordinary Shares for all of the outstanding common stock of E Guide, Inc.
(note 10).
See accompanying Notes to Supplemental Consolidated Financial Statements.
F-10
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(1) PRINCIPLES OF CONSOLIDATION
The supplemental consolidated financial statements include the accounts of
Gemstar International Group Limited ("Gemstar International Group") and its
wholly and majority-owned subsidiaries (collectively, the "Company") and have
been prepared to include the accounts of VideoGuide, Inc. ("VideoGuide") for
all periods presented as a result of the Company's acquisition of VideoGuide
which has been accounted for under the pooling of interests method on December
12, 1996 (note 3).
In June 1995, the Company acquired Gemstar Development Corporation ("GDC")
by exchanging 3,518,501 Ordinary Shares for all of the outstanding shares of
GDC. The acquisition was accounted for in a manner similar to a pooling of
interests because Gemstar International Group and GDC were under common
control and stock ownership. Accordingly, the assets and liabilities of GDC
have been recorded at historical (predecessor) cost and the Company's
consolidated financial statements include the results of operations of GDC for
all periods presented.
For all periods presented, the minority interest in majority-owned
subsidiaries was immaterial. All significant intercompany transactions and
balances have been eliminated in the accompanying supplemental consolidated
financial statements.
As more fully discussed in note 4, effective January 1, 1995, the Company
spun off to its shareholders Gemstar Manufacturing Holding Limited
("Holdings") and its subsidiaries.
As more fully discussed in note 10, in August 1995, the Company exchanged
3,511,494 Ordinary Shares for all of the outstanding capital stock of E Guide,
Inc. ("E Guide") from certain related parties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, such as certificates
of deposit and commercial paper with an original maturity of three months or
less. Also included within cash and cash equivalents are investments in
corporate bonds with original maturities greater than three months that are
not material to the overall portfolio. Cash equivalents include commercial
paper and corporate bonds with a cost and current market value of $37,862,000
at March 31, 1996. There were no unrealized gains or losses at March 31, 1996.
The Company accounts for its investments in commercial paper and corporate
bonds under provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("Statement
No. 115"). Under Statement No. 115, the Company must classify its marketable
investment securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held principally for
the purpose of selling them in the near term. Held-to-maturity securities are
those securities in which the Company has the intent and ability to hold until
maturity. All other securities not included in trading or held-to-maturity
categories are classified as available-for-sale. The Company has classified
all its investments in commercial paper and corporate bonds as held-to-
maturity securities.
Inventories
Inventories included in prepaid expenses and other current assets consist of
finished goods only. Inventories are stated at the lower of cost or market.
Cost is determined on a first-in, first-out "FIFO" basis. The Company revalued
its inventories to net realizable value. See note herein regarding
Nonrecurring Expenses.
F-11
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
Investments with ownership interests of less than 20% are accounted for
under the cost method of accounting. Investments in joint ventures with
ownership interests between 20% and 50% are accounted for under the equity
method of accounting. Investments with ownership interests in excess of 50%
are consolidated with the accounts of the Company.
Effective November 1, 1993, the Company acquired a majority interest in
NORPAK Corporation ("NORPAK") which develops and markets insertion equipment
for use by broadcasters. The excess of cost over the Company's share of net
assets (goodwill) of $1,025,000 is included in intangible assets. The accounts
of NORPAK have been included in the consolidated accounts of the Company since
the date of acquisition. This acquisition was not material to the consolidated
accounts of the Company.
Property and Equipment
Property and equipment are recorded at cost and depreciated using straight-
line and accelerated methods over the estimated useful lives of the assets.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment... 3 to 8 years
Office furniture and
equipment................ 5 to 8 years
Property and leasehold
improvements............. Shorter of estimated useful life or lease term
</TABLE>
Intangible Assets
Intangible assets consist of capitalized patent and trademark costs and
goodwill. Capitalized patent and trademark costs consist of direct costs
associated with obtaining patents and trademarks. Patent and trademark costs
are amortized on a straight line basis over seven years, which is the expected
useful life. Goodwill, which represents the excess of cost over net assets
acquired, is amortized on a straight line basis over five years. The Company
regularly assesses the recoverability of these intangible assets by
determining whether the amortization of the balance over their remaining life
can be recovered through undiscounted future cash flows of the assets. In
March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be disposed of ("Statement No.
121"). This statement provides guidelines for recognition of impairment losses
related to long-term assets and certain intangibles and related goodwill for
(i) assets to be held and used and (ii) assets to be disposed of. Statement
No. 121 is effective for fiscal years beginning after December 15, 1995.
Company management does not believe that the adoption of the new standard will
have a material effect on the consolidated financial statements of the
Company.
Amortization expense charged to continuing operations for each of the years
in the three-year period ended March 31, 1996 was $506,000, $950,000 and
$1,081,000, respectively.
F-12
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Patents and trademarks.................................. $ 5,272 $ 6,098
Goodwill................................................ 1,025 1,025
------- -------
6,297 7,123
Less accumulated amortization........................... (1,815) (2,896)
------- -------
Net intangible assets............................... $ 4,482 $ 4,227
======= =======
</TABLE>
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123") which encourages, but does not require, a
fair value based method of accounting for employee stock options. Statement
No. 123 will be effective for fiscal years beginning after December 15, 1995.
While the Company is still evaluating Statement No. 123, it currently expects
to elect to continue to measure compensation cost under APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Company management does not
believe that the adoption of this new standard will have a material effect on
the consolidated financial statements of the Company.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
Foreign Currency Translation
The consolidated financial statements of foreign subsidiaries are translated
into U.S. dollars. Gains and losses resulting from translation are accumulated
in a separate component of shareholders' equity until the investment in the
foreign entity is sold or liquidated. The Company's transactions predominately
occur in U.S. dollars. Gains and losses on currency transactions were
immaterial for all periods presented.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts payable and accrued expenses. The carrying value of these financial
instruments approximate their fair value because of the short maturity of
these instruments.
Revenue Recognition
Revenues from nonrefundable initial sign-up fees collected upon signing of
multiyear licensing contracts are deferred and recognized over the term of the
agreement. Revenues under continuing license arrangements are recognized when
license payments are due, generally when paid by the licensee.
F-13
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from the sale of VideoGuide receivers is recognized upon shipment.
Subscription revenue related to the VideoGuide Information System is deferred
and recognized pro rata on a monthly basis over the life of the subscriptions.
Costs incurred with the procurement of subscriptions are charged to expense as
incurred.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense
as incurred.
Nonrecurring Expenses
In December 1995, the Company revised its previous estimate of the net
realizable value of inventory based on year-to-date shipments and negotiations
with its largest distributor and other distribution channels. As a result, the
Company recorded a $7,064,000 charge to nonrecurring expenses to value the
inventory on hand at March 31, 1996. In addition, the Company recorded a
$12,462,000 charge to nonrecurring expenses to reserve for units on order with
the manufacturer under a fixed purchase commitment.
Nonrecurring expenses in fiscal 1995 consist of professional fees and
related costs associated with the Company's initial public offering that were
incurred prior to the October 1994 postponement of the offering.
Interest Income, Net
Net interest income, included in other income, totaled $712,000, $627,000
and $2,027,000 for each of the years in the three-year period ended March 31,
1996.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement No. 109") for all periods presented.
Statement No. 109 requires that deferred income taxes be recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Changes in tax rates and laws are reflected in earnings in the
period such changes are enacted.
Earnings (loss) per Share
Earnings (loss) per share are based on the weighted average number of
Ordinary Shares outstanding as adjusted for the reverse stock split (note 6)
for all periods presented. The difference between primary and fully diluted
earnings per share is immaterial for all periods presented.
Pursuant to the requirements of the Securities and Exchange Commission,
Ordinary Shares and stock options issued by the Company during the twelve
months immediately preceding the Company's initial public offering date have
been included in the calculation of the weighted average shares outstanding as
if they were outstanding for all periods presented using the treasury stock
method.
(3)MERGER WITH VIDEOGUIDE, INC.
Effective December 12, 1996, the Company acquired all of the outstanding
capital stock of VideoGuide, for 475,000 ordinary shares of the Company.
VideoGuide produces and markets the VideoGuide Information System, a consumer
electronics product which delivers an interactive television schedule, as well
as optional news, a sports ticker and other informational services. The system
also provides one touch VCR programming. In addition the Company assumed stock
options which converted into options to purchase 16,617 shares of ordinary
shares.
F-14
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(3)MERGER WITH THE VIDEOGUIDE, INC. (CONTINUED)
The merger was accounted for as a pooling of interests and, accordingly, the
Company's supplemental consolidated financial statements have been prepared to
include VideoGuide for all periods presented.
The following information shows total revenues and net loss of VideoGuide
during the three year period ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- --------
<S> <C> <C> <C>
Revenues........................................ $ -- $ -- $ 433
Net loss........................................ (431) (4,129) (42,915)
</TABLE>
The supplemental consolidated financial statements for the year ended March
31, 1996 reflects the impact of certain operating results also included in the
year ended March 31, 1995 financial statements due to the differences in
reporting periods of VideoGuide relative to that of the Company. Prior to the
combination, VideoGuide's fiscal year ended on December 31. In recording the
business combination, VideoGuide's financial statements for the year ended
December 31, 1995 were conformed to the Company's fiscal year ended March 31,
1996. The charge to retained earnings to include VideoGuide's quarter ended
March 31, 1995 was a net loss of $1,091,000. VideoGuide had no revenues during
the quarter ended March 31, 1995.
There were no significant transactions between the Company and VideoGuide
prior to the combination, which required elimination, and no adjustments were
required to conform to accounting policies.
(4)DISCONTINUED OPERATIONS
Effective January 1, 1995, the Company elected to discontinue the marketing
and distribution of the VCR Plus+ technology through the sale of handsets (the
"Handset Business") and to limit its operations solely to licensing
activities. In connection with this decision the Company transferred all of
its handset operations to Gemstar, Manufacturing Holding Limited ("Holdings"),
its then wholly owned subsidiary, and then distributed the shares of Holdings
to the Company's shareholders (the "Spin-Off").
In light of the independence of the Handset Business and its dissimilarity
to the Company's continuing licensing business, the operations of the Handset
Business have been reported as discontinued operations in the consolidated
statements of earnings for all periods presented.
Net assets of Holdings and its subsidiaries distributed to the shareholders
as a result of the Spin-Off were as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents....................................... $ 7,095
Noncash current assets.......................................... 11,866
Due from Gemstar International Group Limited and its
subsidiaries................................................... 6,759
Long term assets................................................ 15,520
Total liabilities............................................... (18,695)
-------
Net assets distributed to the shareholders...................... $22,545
=======
</TABLE>
In connection with the Spin-Off, the Company and Holdings and its
subsidiaries entered into an Indemnification Agreement. Pursuant to the
Indemnification Agreement, the Company will indemnify Holdings
F-15
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(4)DISCONTINUED OPERATIONS (CONTINUED)
and its subsidiaries against any liabilities arising out of the conduct of the
Company's operations or businesses, and Holdings and its subsidiaries will
indemnify the Company against any liabilities arising out of the conduct of
their respective operations or businesses. In each case, the indemnifying
party will undertake its obligations regardless of whether the event giving
rise to the indemnifiable liability occurred prior to, subsequent to, or in
connection with the Spin-Off.
The Company continues to maintain a license agreement with a Holdings
subsidiary that allows for the incorporation of the VCR Plus+ technology in
the manufacture and distribution of handsets. Pursuant to the license
agreement, the Holdings subsidiary pays the Company a per unit royalty fee
based on unit shipments. Royalty fees totaled $136,000 for the period from
January 1, 1995 to March 31, 1995 and $112,000 for the year ended March 31,
1996.
The Company continues to maintain service relationships with certain
Holdings subsidiaries. Pursuant to Services Agreements, the Holdings
subsidiaries provide marketing and promotion services for the Company in their
respective territories in connection with the Company's systems, maintain
relationships with licensees and promote and monitor the publication of the
PlusCode Numbers. The Company renegotiated the compensation provisions of the
Service Agreements to provide for quarterly payments for services rendered
based on a "cost plus 7%" basis. Service fees paid to these companies totaled
$1,458,000 for the three months ended March 31, 1995 and $7,100,000 for the
year ended March 31, 1996.
The results of the Handset Business have been reported separately as a
component of discontinued operations on the accompanying consolidated
statements of earnings. Summarized results of the Handset Business to the
Spin-Off effective date, January 1, 1995, included in the consolidated
statements of earnings are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
---------------
1994 1995
------- -------
<S> <C> <C>
Net sales............................................... $39,379 $13,124
======= =======
Earnings (loss) before income taxes..................... $ 9,528 $(2,903)
Income tax expense (benefit)............................ 2,802 (8,100)
------- -------
Earnings, net of tax.................................. $ 6,726 $ 5,197
======= =======
</TABLE>
A subsidiary of Holdings has a General Terms Agreement with an entity whose
shareholders are also shareholders of the Company. For the year ended March
31, 1994 and the period from April 1, 1994 to January 1, 1995, the effective
date of the Spin-Off, purchases of inventory from such entity were $7,232,000
and $6,311,000, respectively, and sales of raw material inventory to such
entity were $6,843,000 and $6,881,000, respectively.
During 1995, the Company reached a final settlement of certain taxes
previously assessed by the Hong Kong Inland Revenue Department (IRD). The
taxes assessed by the IRD relate to the discontinued operations of a company
included in the Spin-Off for fiscal years 1991 through 1994. The amount of the
final settlement with the IRD was substantially less than both the amount
previously assessed by the IRD and accrued by the Company. Accordingly, the
Company recognized a tax benefit of approximately $8,100,000 in the
discontinued operations of the Handset Business for 1995.
F-16
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(5) INCOME TAX EXPENSE
Under the current British Virgin Islands law, income generated by entities
incorporated under the International Business Companies Act in the British
Virgin islands is not subject to taxation. However, certain subsidiaries are
subject to taxation in countries where they operate. Additionally, license
income payments received from licensees in certain tax jurisdictions are
subject to foreign withholding taxes.
(5) INCOME TAX EXPENSE (CONTINUED)
The provision for income tax expense for continuing operations consists of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current.............................................. $1,908 $3,564 $3,950
Deferred............................................. 330 117 1,547
------ ------ ------
Total.............................................. $2,238 $3,681 $5,497
====== ====== ======
</TABLE>
The significant components of deferred income taxes attributable to earnings
from continuing operations before income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1994 1995 1996
----- ------- --------
<S> <C> <C> <C>
Deferred tax benefit........................... $(355) $(3,810) $(16,165)
Change in valuation allowance for deferred tax
assets........................................ 685 3,927 17,712
----- ------- --------
Total........................................ $ 330 $ 117 $ 1,547
===== ======= ========
</TABLE>
A reconciliation of the expected U.S. Federal tax rate to the effective tax
rate for continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Expected U.S. Federal tax rate.......................... 35% 35% 35%
Foreign withholding taxes............................... 26 28 18
Foreign earnings not subject to taxation................ (38) (49) (35)
Change in the valuation allowance....................... 10 32 52
Other................................................... -- (2) --
--- --- ---
Actual effective tax rate............................. 33% 44% -- %
=== === ===
</TABLE>
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the supplemental
consolidated financial statements.
F-17
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(5) INCOME TAX EXPENSE (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1995 1996
------ -------
<S> <C> <C>
Deferred tax assets:
Tax losses available for carryforward to future periods.. $4,175 $11,394
Inventories.............................................. -- 7,863
Deferred revenue......................................... 544 652
Tax credits available for carryforward to future periods. 2,450 3,983
Accrued expenses......................................... 476 728
Start-ups costs.......................................... 650 1,578
------ -------
Gross deferred tax assets.............................. 8,295 26,262
Valuation allowance........................................ (6,382) (24,094)
------ -------
Deferred tax assets, net of valuation allowance........ 1,913 2,168
Deferred tax liability--taxes provided on intercompany
income.................................................... (1,911) (3,713)
------ -------
Net deferred tax assets (liability).................... $ 2 $(1,545)
====== =======
</TABLE>
Net deferred tax assets are included in other assets and net deferred tax
liability is included in other liabilities in the accompanying supplemental
consolidated balance sheets. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable earnings in specific tax jurisdictions during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
earnings and tax planning strategies in making this assessment.
In order to fully realize gross deferred tax assets, the Company will need
to generate future taxable earnings in certain tax jurisdictions, principally
in the United States of approximately $40,000,000 prior to expiration of its
operating loss and foreign tax credit carryforwards. At March 31, 1996, the
Company had operating loss carryforwards totaling approximately $29,800,000
principally in the United States, expiring through 2011. In addition, the
Company had available foreign tax credit and research and development tax
credit carryforwards aggregating $4,017,000 to offset future United States
income taxes, expiring through 2001. A portion or all of the $20,800,000 net
operating loss carryforwards related to VideoGuide operations may be limited
due to the change in ownership of VideoGuide pursuant to Section 382 of the
Internal Revenue Code. The other net operating loss and foreign tax credit
carryforwards are also subject to certain limitations under United States tax
laws with respect to the annual use of such carryforwards which include, among
other things, certain changes in stock ownership.
Based upon the level of historical taxable earnings and projections of
future taxable earnings over the periods which the deferred tax assets are
deductible, management has concluded that it is more likely than not that the
Company will realize the benefits of these deductible differences at March 31,
1996, net of reserves established.
F-18
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(5) INCOME TAX EXPENSE (CONTINUED)
The United States Internal Revenue Service is currently examining the
Company's Federal income tax returns for the years ended March 31, 1991, 1992
and 1993. While the ultimate outcome of the examination cannot be determined
with assurance at the present time, the Company believes that tax liabilities
have been adequately accrued in the accompanying consolidated financial
statements and that the impact of audit assessments, if any, will not have a
significant impact upon the Company's financial position or results of
operations.
(6) SHAREHOLDERS' EQUITY AND STOCK INCENTIVE PLAN
Gemstar International Group Limited, a British Virgin Islands corporation,
was incorporated on April 3, 1992 under the name Gemstar Holdings Limited
("GHL"). On August 19, 1994, GHL changed its name to Gemstar International
Group Limited ("Gemstar International Group"), authorized 50,000,000
Preference Shares, par value $.01 per share, increased the authorized number
of Ordinary Shares to 500,000,000 by amending and restating its Memorandum of
Association and Articles of Association and declared a stock dividend which
increased the number of Ordinary Shares outstanding from 51,900 to 19,981,510.
In August 1995, the Company's Board of Directors authorized a one-for-two
reverse stock split of all the Company's outstanding Ordinary Shares. The
reverse stock split was effected in September 1995 under British Virgin
Islands law through a pro rata redemption, for no value, of one-half of all
outstanding Ordinary Shares.
For financial statement purposes, all references to share information for
all periods presented have been adjusted to give effect to the aforementioned
stock dividend and reverse stock split.
During 1994, the Company's Board of Directors declared a $8,000,000 cash
dividend which was paid on June 1, 1994. During 1995, the Company's Board of
Directors declared a $5,000,000 cash dividend which was paid on April 7, 1995.
In August 1994, the Company established the 1994 Stock Incentive Plan, as
amended on August 16, 1995 (the "Plan"). Pursuant to the Plan, the Board of
Directors may grant options to purchase Ordinary
Shares of the Company to employees of the Company (including executive
officers) and certain other persons (including directors and consultants) who
are eligible to participate in the Plan. A maximum of 5,600,000 Ordinary
Shares may be issued upon the exercise of options.
On August 16, 1995, the Board of Directors granted 4,485,500 options at an
exercise price of $11.90 per Ordinary Share. The options vest over 3 years
from the date of grant and expire in 10 years.
On January 22, 1996, the Board of Directors granted 10,000 options at an
exercise price of $19.98 per Ordinary Share. The options vest over 3 years
from the date of grant and expire in 10 years.
During the three year-period ended March 31, 1996, the Company received
proceeds of $327,000, $1,066,000 and $12,270,000 for the issuance of ordinary
shares.
F-19
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(7) RELATED PARTY TRANSACTIONS
The Company acquired certain intellectual property rights, including patent
applications, relating to the "CallSet" technology from a director of the
Company. Pursuant to the terms of the agreement, the Company must pay the
director royalties. No royalties have been incurred to date.
In March 1994, the Company exercised its option to acquire certain patent
rights associated with the VCR Plus+ technology from certain
shareholders/directors for $1,000,000. These patent rights have been
capitalized as intangible assets.
At March 31, 1995, the amount due from related party, aggregating
$2,414,000, represents net amounts due from Holdings and its subsidiaries. The
amount was repaid to the Company subsequent to March 31, 1995.
For disclosures of related party transactions associated with the spun-off
discontinued operations, see note 4.
For disclosure of the acquisition of the common stock of E Guide from
certain related parties, see note 10.
(8) SELECTED BALANCE SHEET ACCOUNTS
Property and equipment, at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Machinery and equipment................................... $1,135 $3,418
Office furniture and equipment............................ 1,673 1,905
Property and leasehold improvements....................... 114 707
------ ------
2,922 6,030
Less accumulated depreciation and amortization............ (1,137) (1,988)
------ ------
Net property and equipment.............................. 1,785 4,042
====== ======
</TABLE>
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1995 1996
------ -------
<S> <C> <C>
Accounts payable and accrued expenses..................... $5,972 $42,494
Accrued payroll and related benefits...................... 1,527 2,275
------ -------
Total................................................... $7,499 $44,769
====== =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under long-term noncancelable
operating leases. Future minimum lease payments are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ended March 31:
1997........................................................... $ 956
1998........................................................... 673
1999........................................................... 654
2000........................................................... 413
2001........................................................... 228
------
$2,924
======
</TABLE>
F-20
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense related to continuing operations under operating leases for
each of the years in the three-year period ended March 31, 1996 was $547,000,
$993,000 and $1,077,000, respectively.
The Company has various agreements to purchase information access and
transmission services. These agreements are cancelable without material
financial penalty, however, if the agreements are canceled, the Company would
have to find alternative providers for such services. Future minimum payments
under such agreements are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ended March 31:
1997.......................................................... $ 1,798
1998.......................................................... 3,467
1999.......................................................... 2,952
2000.......................................................... 2,867
2001.......................................................... 1,856
-------
$12,940
=======
</TABLE>
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company,
the resolution of such matters will not have a material effect on its
financial condition or results of operations.
(10) ACQUISITION OF E GUIDE
In August 1995, the Company issued 3,511,494 Ordinary Shares to the
shareholders of E Guide, Inc. ("E Guide") in exchange for all of the
outstanding capital stock of E Guide (the "E Guide Exchange"). E Guide owns
certain intellectual property rights connected with the Company's Guide Plus+
technology as well as other rights associated with the Company's Guide Plus+
and Index Plus+ technologies (collectively, the "Assets"). The Company
believes that the fair value of the Ordinary Shares issued for E Guide equals
the fair value of the Assets, however, the Assets have not generated any
revenues to date, and as a result, the fair value of the Assets is difficult
to determine. The Assets will be recorded by the Company at E Guide's
historical (predecessor) cost basis because (i) E Guide has had no ongoing
operations to date, (ii) the outstanding shares of E Guide were owned by
persons who are shareholders and/or officers of the Company and (iii) the E
Guide Exchange represents an exchange of the Company's Ordinary Shares for the
Assets, which are nonmonetary assets. Separate financial statements of E Guide
have not been presented because the financial statements contain no material
information that would be relevant to the understanding of the future
operations of the Company.
(11) BUSINESS SEGMENT REPORTING
Customers constituting 10% or more of revenues are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. 10% -- --
Customer B................................................. -- 10% 10%
</TABLE>
F-21
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(11) BUSINESS SEGMENT REPORTING (CONTINUED)
A summary of the Company's revenues and earnings (loss) from continuing
operations before taxes by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
United States...................................... $10,061 $15,267 $19,990
Foreign (1)........................................ 16,964 26,477 33,879
------- ------- -------
Total............................................ $27,025 $41,744 $53,869
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Earnings (loss) from operations (2):
United States................................. $(4,222) $(9,546) $(41,562)
Foreign....................................... 10,205 17,221 18,151
------- ------- --------
Total....................................... $ 5,983 $ 7,675 $(23,411)
======= ======= ========
</TABLE>
- --------
(1) Revenues from license fees included in foreign are principally earned by
entities in the British Virgin Islands.
(2) Earnings (loss) from operations consists of total revenues less operating
expenses and does not include other income.
A summary of the Company's identifiable assets by geographic area which
represents those assets used in the Company's operations in each area are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Identifiable assets:
United States.............................................. $ 6,720 $14,844
Foreign.................................................... 16,906 65,753
------- -------
Total.................................................... $23,626 $80,597
======= =======
</TABLE>
(12) SUBSEQUENT EVENT
On December 23, 1996, the Company announced that it signed a definitive
merger agreement with StarSight Telecast, Inc, a company that designs an easy
to use and accurate method of identifying, selecting and recording television
programming. Closing of the transaction is subject to customary conditions,
including approval by shareholders of each company and the satisfaction of
regulatory requirements.
F-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's historical supplemental consolidated financial statements
reflect revenues derived primarily from the VCR Plus+ system. Revenues from
the VCR Plus+ system are derived through licensing fees paid by manufacturers
to the Company for incorporation of the technology into VCRs and televisions,
and, to a lesser extent, by publications printing the PlusCode Numbers. The
Company has two new technologies, Index Plus+, a proprietary technology that
simplifies the playback of videotapes, and Guide Plus+, an interactive,
electronic on-screen television guide, which have not yet been commercially
introduced and have not generated significant revenues.
The Company's launch of VCR Plus+ in 1990 involved securing widespread
publication of the PlusCode Numbers, without which the VCR Plus+ system would
not be useful. In order to support publications when they first started
publishing the PlusCode Numbers in a market, the Company engaged in the
manufacture, sale and distribution of handsets incorporating the VCR Plus+
system for use with VCRs that had no VCR Plus+ capability.
Consistent with the Company's strategy to focus on the licensing of its
proprietary technologies and systems, as VCR Plus+ became more widely adopted
by VCR manufacturers, the Company discontinued its Handset Business effective
January 1, 1995 by spinning it off to its shareholders.
On December 12, 1996, the Company completed its acquisition of VideoGuide,
Inc. (VideoGuide) by acquiring all of the outstanding capital stock of
VideoGuide. The merger has been accounted for under the pooling of interests
method, and accordingly, the Company's supplemental consolidated financial
statements have been restated to include VideoGuide for all periods presented.
VideoGuide developed and introduced the VideoGuide Information System which
includes both a consumer electronics product sold through retail stores and an
information service that provides users with an interactive television program
schedule.
Worldwide Tax Expense
The Company operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the
subsidiary level, and one subsidiary's tax losses cannot be used to offset the
taxable income of subsidiaries in other jurisdictions, the Company's
consolidated effective tax rate may increase to the extent the Company reports
tax losses in some subsidiaries and taxable income in others. The Company
receives revenues from licenses in various countries, net of foreign
withholding taxes. Accordingly, the Company's annual tax expense varies
considerably from period to period based upon the source of revenues subject
to foreign withholding taxes. Additionally, under the current British Virgin
Island law, income generated by the Company and its subsidiaries incorporated
under the International Business Companies Act in the British Virgin Island
are not subject to taxation. Although certain subsidiaries are subject to
taxation in countries where they operate, such operations generally are taxed
at rates substantially lower than U.S. tax rates. If the Company or its
subsidiaries were no longer able to qualify for such tax rates or if the tax
laws were rescinded or changed, the Company's operating results could be
materially adversely affected.
The overall effective tax rate reported by the Company in any single period
is therefore impacted by, among other things, the country in which earnings or
losses arise, applicable statutory tax rates and withholding tax requirements
for particular countries, and the availability of tax credits for taxes paid
in certain jurisdictions. Because of these factors, it is expected that the
Company's future tax expense as a percentage of earnings before income taxes
may vary from year to year. See Note 5 of the Notes to Supplemental
Consolidated Financial Statements.
F-23
<PAGE>
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Supplemental
Consolidated Financial Statements and related Notes thereto. The Company spun-
off its Handset Business effective January 1, 1995. The following table sets
forth for the periods indicated the percentage of revenues represented by
certain line items in the Company's supplemental statements of earnings
related to continuing operations only.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Revenues................................................. 100% 100% 100%
Operating costs and expenses:
Selling and marketing................................... 34 27 58
Research and development................................ 19 23 26
General and administrative.............................. 25 26 23
Nonrecurring expenses................................... -- 4 36
----- ----- -----
Total operating costs and expenses...................... 78 82 143
----- ----- -----
Earnings (loss) from operations.......................... 22 18 (43)
Other income, net....................................... 3 2 4
----- ----- -----
Earnings (loss) from continuing operations before income
tax expense............................................. 25 20 (39)
Income tax expense...................................... 8 9 (10)
----- ----- -----
Earnings (loss) from continuing operations............... 17% 11% (49)%
===== ===== =====
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues in fiscal 1996 were $53.9 million compared to $41.7
million in fiscal 1995, an increase of 28%. License revenues from
manufacturers were $48.1 million of total revenues in fiscal 1996 compared to
$37.7 million in fiscal 1995, an increase of 28%. This increase was due
primarily to increased shipments of units incorporating the VCR Plus+
technology as a result of the increased rates of incorporation of the VCR
Plus+ feature by manufacturers. The number of such units for which the Company
received license revenues was 16.4 million units in fiscal 1996 compared to
11.7 million units in fiscal 1995, an increase of 40%. License revenues from
publications were $5.3 million in fiscal 1996 compared to $4.0 million in
fiscal 1995, an increase of 33%. The increase was due to a combination of
launching new markets and increased publication of PlusCode Numbers in
existing markets. However, the Company does not expect significant increases
in licensing revenues from publications in the future. The contribution to
revenue by VideoGuide operations was not significant.
Selling and Marketing Expenses. Selling and marketing expenses consist of
advertising and marketing program costs, contracted services and salaries of
marketing personnel. Selling and marketing expenses were $31.4 million in
fiscal 1996 compared to $11.6 million in fiscal 1995, an increase of 171%.
This increase is attributable to an (i) increase in marketing and promotional
activities aimed at establishing VCR Plus+ as an international standard and
(ii) marketing costs associated with a promotional campaign commensurate with
the introduction of the VideoGuide Information System. As a percentage of
total revenues, selling and marketing expenses increased to 58% in fiscal 1996
from 27% in fiscal 1995, primarily as a result of a national advertising and
promotional campaigns. In the future the Company expects to incur significant
marketing expenditures to launch new systems (e.g., Guide Plus+ and Index
Plus+) and to market new services, which may lead to an increase in selling
and marketing expenses as a percentage of total revenues.
Research and Development Expenses. Research and development expenses were
$13.9 million in fiscal 1996 compared to $9.8 million in fiscal 1995, an
increase of 43%. This increase resulted primarily from: (i) increased
activities associated with the development and testing of the Index Plus+ and
Guide Plus+ systems and (ii) development and testing of the VideoGuide
Information System. The Company anticipates that research and development
expenses will continue to increase in the future. As a percentage of total
revenues, research and development expenses increased to 26% in fiscal 1996
from 23% in fiscal 1995. The Company expects research and development expenses
to decrease as a percentage of total revenues in the future.
F-24
<PAGE>
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel costs for administration, finance, information
systems, human resources and general management, as well as professional fees.
General and administrative expenses were $12.4 million in fiscal 1996 compared
to $11 million in fiscal 1995. The increase is due primarily to increased
indirect costs associated with VideoGuide operations as offset by a decrease
in legal expenses. As a percentage of total revenues, general and
administrative expenses decreased to 23% in fiscal 1996 from 26% in fiscal
1995.
Nonrecurring Expenses. At December 31, 1995, VideoGuide revalued its
inventory of VideoGuide receivers on-hand to reflect more accurately the net
realizable value of its inventory based on lower prices offered to its
customers. Accordingly, VideoGuide recorded a charge to non-recurring expenses
of approximately $7.0 million. In addition, VideoGuide recorded a $12.5
million charge to reserve for units on order with the manufacturer under a
fixed purchase commitment.
Income Tax Expense. Income tax expense was $5.5 million in fiscal 1996
compared to $3.7 million in fiscal 1995, an increase of $1.8 million. Income
tax expense varies from year to year principally attributed to the mix of
license revenues subject to withholding taxes. The expected tax benefit for
fiscal 1996 was limited due to uncertainty regarding realization of net
operating loss carryforwards, tax credit carryforwards, and temporary
differences between the tax bases of assets and liabilities and their reported
amounts. This is due primarily to VideoGuide's losses and certain limitations
under United States tax laws with respect to the annual use of such
carryforwards. There can be no assurance that VideoGuide will be able to
generate sufficient level of taxable earnings to fully utilize these net
operating loss and tax credit carryforwards. See Note 5 of the Notes to
Supplemental Consolidated Financial Statements.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues in fiscal 1995 were $41.7 million compared to $27.0
million in fiscal 1994, an increase of 54%. License revenues from
manufacturers were $37.7 million of total revenues in fiscal 1995 compared to
$23.3 million in fiscal 1994, an increase of 62%. This increase was primarily
due to license revenues received on increased shipments of units incorporating
the VCR Plus+ technology in existing markets and the launch of the VCR Plus+
system in new markets. The number of units incorporating the VCR Plus+
technology for which the Company received license revenues was 11.7 million in
fiscal 1995 compared to 6.4 million in fiscal 1994, an increase of 83%.
License revenues from publications were $4.0 million in fiscal 1995 compared
to $3.7 million in fiscal 1994, an increase of 8%. The increase was due to a
combination of launching new markets and increased publication of PlusCode
Numbers in existing markets. VideoGuide operated in the development stage
until March 31, 1995 and accordingly, no revenues were earned during fiscal
1995 and 1994.
Selling and Marketing Expenses. Selling and marketing expenses were $11.6
million in fiscal 1995 compared to $9.3 million in fiscal 1994, an increase of
25%. This increase was primarily attributable to increased marketing and
advertising activities aimed at establishing the VCR Plus+ system and the
PlusCode Numbers as an international standard. As a percentage of total
revenues, selling and marketing expenses decreased to 27% in fiscal 1995 from
34% in fiscal 1994.
Research and Development Expenses. Research and development expenses were
$9.8 million in fiscal 1995 compared to $5.0 million in fiscal 1994, an
increase of 94%. This increase resulted primarily from engineering and
personnel costs relating to the development and testing of the Guide Plus+ and
Index Plus+ systems, feature enhancements to the VCR Plus+ system development
and testing of the VideoGuide Information System. As a percentage of revenues,
research and development expenses were 23% in fiscal 1995 and 19% in fiscal
1994.
General and Administrative Expenses. General and administrative expenses
were $11.0 million in fiscal 1995 compared to $6.7 million in fiscal 1994, an
increase of 63%. This increase resulted primarily from increased in
professional and consulting fees associated with the strengthening,
protection, enforcement and defense of the Company's intellectual property,
and, to a lesser extent, from increase in human resources and general
management expenses for the support of the expansion in VCR Plus+ licensing
activities and new business development. As a percentage of total revenues,
general and administrative expenses increased to 26% in fiscal 1995 from 25%
in fiscal 1994. If circumstances warrant, legal costs that strengthen the
Company's position with respect to its intellectual properties may be
capitalized as part of the Company's patent and trademark assets in the
future.
F-25
<PAGE>
Nonrecurring Expenses. In accordance with the Securities and Exchange
Commission accounting requirements, the Company expensed professional fees and
related costs associated with the Company's initial public offering that were
incurred prior to the October 1994 postponement of the offering.
Income Tax Expense. Income tax expense was $3.7 million in fiscal 1995
compared to $2.2 million in fiscal 1994, an increase of $1.5 million. The
effective tax rate increased from 33% for fiscal 1994 to 44% for fiscal 1995
due primarily to limitation of VideoGuide's net operating loss and tax credit
carryforwards.
Income from Discontinued Operation. In fiscal 1995, consistent with the
Company's strategy to focus on the licensing of its technologies and systems,
the Company discontinued the Handset Business, effective January 1, 1995. See
"The Reorganization." Income from discontinued operations reflects the results
of operations from the Handset Business for the period from April 1, 1994
through the effective date of the Spin-Off (January 1, 1995). For such period,
the Handset Business has a loss of $2.9 million, which was offset by a one
time tax credit of approximately $8.1 million arising from the final
settlement of previously assessed and accrued taxes with the Hong Kong Inland
Revenue Department. See Note 4 of the Notes to Supplemental Consolidated
Financial Statements.
The Company experiences variability in its revenues and operating results on
a quarterly basis as a result of many factors. Most importantly, as
manufacturers have incorporated VCR Plus+ technology into an increasing number
of models, the Company's license revenues have displayed a seasonality typical
of those of consumer electronics products manufacturers. Shipments by
manufacturers of VCRs and televisions in general, and therefore VCRs and
televisions incorporating the VCR Plus+ technology, tend to be higher in the
third and fourth calendar quarters, or the Company's second and third fiscal
quarters. However, because the Company generally receives license revenues
within 90 days after the end of the quarter in which the VCR or television
incorporating its technology is shipped, licensing revenues are typically
higher during the Company's third and fourth quarters. In addition,
manufacturers' shipments vary from quarter to quarter depending on a number of
factors, including retail inventory levels and retail promotional activities.
As a result, the Company may experience variability in its quarterly license
revenues affecting period to period comparability and performance. The
Company's license revenues are also affected by the volume of shipments by
manufacturers. The Company's license agreements provide for volume discounts
based on the shipment volume in each year by a given manufacturer, which can
lower the average per unit license fee for a manufacturer over the course of a
year. The Company has experienced declining average per unit VCR Plus+ license
fees and expects this trend to continue. The Company anticipates that its
revenues will also be affected by the timing of market introductions and
market acceptance of new systems such as Index Plus+ and Guide Plus+. There
can be no assurance that Index Plus+, Guide Plus+ or other future systems
developed by the Company will ever result in significant revenues or profits.
Further, if these new systems achieve market acceptance, the timing of
manufacturers' implementation and shipments is uncertain and may result in
greater variability of the Company's quarterly and annual operating results.
Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's
third fiscal quarter during the fall holiday season. The Company's planned
operating expenditures each quarter are based, in part, on the Company's
expectation as to further revenues in the quarter. In addition, many of the
Company's expenditures are fixed costs. If revenues do not meet expectations
in any given quarter, operating results for the quarter may be materially
adversely affected. In addition, the Company's annual and quarterly results
may be affected by competition, general economic downtown and the mix of
licensing revenues. As a result, the Company believes that period to period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indication of future performance. There can be no
assurance that the Company's historic revenue growth or its profitability will
continue on a quarterly or annual basis.
LIQUIDITY AND CAPITAL RESOURCES
In October 1995, the Company received proceeds of $36.2 million, net of
related expenses, in its initial public offering of 3,450,000 Ordinary Shares.
At March 31, 1996, the Company had cash and cash equivalents
F-26
<PAGE>
totaling $64.1 million and working capital of $21.9 million. The increase in
cash and cash equivalents and working capital is due primarily to the net
proceeds received from the Company's sale of Ordinary Shares in October 1995
and positive cash flow from operations.
Net cash provided by continuing operations amounted to $9.8 million for
fiscal 1996, as compared to $10.7 million fiscal 1995 and $10.5 million in
fiscal 1994, and the increase in net cash provided by continuing operations
was primarily the result of increased license revenues.
The Company's investing activities from continuing operations in fiscal 1996
primarily consisted of property and equipment expenditures of $3.1 million,
capitalized patent and trademark cost of $0.8 million and $2.4 million
repayments from related parties. Such expenditures were financed by existing
cash and cash equivalents. Investing activities for continuing operations for
fiscal 1995 amounted to $1.1 million loaned to related parties for property
and equipment expenditures, $1.0 million for capitalized patent and trademark
costs, and $2.4 million loaned to related parties.
The Company does not have any material commitments for capital expenditures.
However, the Company expects to incur significant marketing expenditures to
launch new systems and to market new services and expects to incur significant
research and development, and general and administrative expenses relating to
these new systems and services over the next two to three years.
Cash provided by financing activities from continuing operations, consisted
of net proceeds of $36.2 million received from the Company's initial public
offering, $12.3 million in proceeds received from sale of its Ordinary Shares
as offset by $5.0 million payment of dividends to shareholders.
In connection with the Spin-Off, the Company distributed to shareholders
$7.1 million in cash included in the net assets of the companies engaged in
the Handset Business during fiscal 1995. During fiscal 1995, the Company also
repaid amounts due to companies engaged in the Handset Business totaling $6.8
million. See Note 4 of the Notes to Consolidated Financial Statements.
In August 1995, the Company effected the E Guide Exchange, consisting of the
issuance of 3,511,494 Ordinary Shares for all of the outstanding stock of E
Guide. E Guide owns certain intellectual property rights connected with the
Company's Guide Plus+ technology, as well as other rights associated with the
Company's Guide Plus+ and Index Plus+ technologies (collectively, the
"Assets"). The Company believes that the fair value of the Ordinary Shares
issued for E Guide equals the fair value of the Assets, however, the Assets
have not generated any revenues to date, and as a result, the fair value of
the Assets is difficult to determine. See Note 10 of the Notes to Consolidated
Financial Statements.
On December 12, 1996, the Company acquired all of the capital stock of
VideoGuide for 475,000 ordinary shares of the Company. The merger was
accounted for as a pooling of interests. The Company did not incur any
material amount of costs associated with the merger.
The Company believes that the anticipated cash flow from operations, and
existing cash and cash equivalent balances, will be sufficient to meet cash
requirements at least through fiscal 1997.
CURRENCY FLUCTUATION AND EXCHANGE RATES
The Consolidated Financial Statements of the Company are prepared in U.S.
dollars in accordance with U.S. generally accepted accounting principles. The
Company's transactions predominately occur in U.S. dollars. Gains and losses
on currency transactions were immaterial for all periods presented.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
VideoGuide, Inc.:
We have audited the accompanying balance sheets of VideoGuide, Inc. as of
December 31, 1994 and 1995 and June 30, 1996, and the related statements of
operations, stockholders' deficiency, and cash flows for the period from
September 8, 1993 (date of inception) through December 31, 1993, the years
ended December 31, 1994 and 1995 and the six month period ended June 30, 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VideoGuide, Inc. as of
December 31, 1994 and 1995 and June 30, 1996, and the related statements of
operations, stockholders' deficiency, and cash flows for the period from
September 8, 1993 (date of inception) through December 31, 1993, the years
ended December 31, 1994 and 1995 and the six month period ended June 30, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from
operations, and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 1 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
September 6, 1996
F-28
<PAGE>
VIDEOGUIDE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 5 $ 195 $ --
Accounts receivable less allowances for
doubtful accounts of $123 at June 30,
1996 and $168 at December 31, 1995....... -- 502 78
Inventories (note 3)...................... -- 3,106 1,789
Prepaid expenses and other current assets. 171 55 3
------ ------- -------
Total current assets.................. 176 3,858 1,870
------ ------- -------
Property and equipment (note 4 and 7)....... 326 1,287 1,046
Less accumulated depreciation and
amortization............................. (65) (238) (328)
------ ------- -------
Property and equipment, net............. 261 1,049 718
Other assets................................ -- 6 6
------ ------- -------
Total assets.......................... $ 437 $ 4,913 $ 2,594
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 574 $21,476 $22,946
Notes payable (note 5).................... 472 -- 150
Current portion of capital lease
obligations (note 7)..................... 92 23 23
Bank overdraft............................ -- -- 112
Accrued expenses (notes 6 and 8).......... 489 850 2,144
Factoring liability (note 9).............. -- 266 43
Current portion of deferred subscription
revenue.................................. -- 397 1,097
Due to stockholders (note 6).............. 1,973 254 304
Reserve for losses on inventory purchase
commitments (note 3)..................... -- 12,462 14,436
------ ------- -------
Total current liabilities............. 3,600 35,728 41,255
------ ------- -------
Deferred subscription revenue, less current
portion.................................... -- 62 195
Capital lease obligations, less current
portion (note 7)........................... 4 43 37
Commitments and contingencies (notes 3, 6,
7, 10 and 14)
Stockholders' deficiency:
Series A convertible preferred stock,
$.001 par value (liquidation preference,
$1,350). Authorized, issued and
outstanding 236,520 shares at June 30,
1996 and December 31, 1995 and 1994...... -- -- --
Series B convertible preferred stock,
$.001 par value (liquidation preference,
$15,250). Authorized 22,000,000 shares;
issued and outstanding 14,854,396 shares
at June 30, 1996 and 11,932,271 shares at
December 31, 1995........................ -- 12 15
Common stock, $.001 par value. Authorized
75,000,000 shares; issued 2,277,500
shares at June 30, 1996 and 2,245,000 and
2,040,000 shares at December 31, 1995 and
1994, respectively....................... 2 2 2
Additional paid-in capital................ 1,391 13,649 16,650
Accumulated deficit....................... (4,560) (44,583) (55,557)
Treasury stock, 263,332 shares at June 30,
1996 and 229,999 and 62,500 shares at
December 31, 1995 and 1994, respectively,
at cost.................................. -- -- (3)
------ ------- -------
Net stockholders' deficiency............ (3,167) 30,920) (38,893)
------ ------- -------
Total liabilities and stockholders'
deficiency............................. $ 437 $ 4,913 $ 2,594
====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
VIDEOGUIDE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1993 YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
THROUGH -------------------------- ---------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- ------------ ------------ ---------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net:
VideoGuide receivers... $ -- $ -- $ 2,954 $ -- $ 217
Subscriptions.......... -- -- 46 -- 681
------- ------------ ------------ ------------ ------------
-- -- 3,000 -- 898
------- ------------ ------------ ------------ ------------
Operating costs and
expenses:
Cost of revenues (note
3).................... -- -- 26,225 104 5,367
Research and
development........... 329 2,665 4,986 917 1,748
Selling, general and
administrative........ 102 1,405 11,846 2,177 4,830
------- ------------ ------------ ------------ ------------
431 4,070 43,057 3,198 11,945
------- ------------ ------------ ------------ ------------
Operating loss........ 431 4,070 40,057 3,198 11,047
------- ------------ ------------ ------------ ------------
Other income (expense):
Income................. -- 4 58 80 104
Expense................ -- (63) (24) (4) (31)
------- ------------ ------------ ------------ ------------
-- (59) 34 76 73
------- ------------ ------------ ------------ ------------
Net loss.............. $ 431 $ 4,129 $ 40,023 $ 3,122 $ 10,974
======= ============ ============ ============ ============
Net loss per common
share.................. $ (.46) $ (2.14) $ (19.12) $ (1.47) $ (5.44)
======= ============ ============ ============ ============
Weighted average common
shares outstanding..... 941,250 1,933,333 2,092,500 2,114,167 2,014,723
======= ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
VIDEOGUIDE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE SERIES B
PREFERRED CONVERTIBLE
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK NET
-------------- ----------------- ---------------- PAID-IN ACCUMULATED ---------------- STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT DEFICIENCY
------- ------ ---------- ------ --------- ------ ---------- ----------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 8,
1993............. -- $ -- -- $-- -- $-- $ -- $ -- -- $-- $ --
Issuance of
common stock.... -- -- -- -- 1,525,000 2 -- -- -- -- 2
Issuance of
preferred A
stock........... 175,200 -- -- -- -- -- 1,000 -- -- -- 1,000
Net loss........ -- -- -- -- -- -- -- (431) -- -- (431)
------- ---- ---------- --- --------- --- ------- -------- -------- --- --------
Balance, December
31, 1993......... 175,200 -- -- -- 1,525,000 2 1,000 (431) -- -- 571
Issuance of
common stock.... -- -- -- -- 515,000 -- 41 -- -- -- 41
Issuance of
preferred A
stock........... 61,320 -- -- -- -- -- 350 -- -- -- 350
Purchase of
treasury stock.. -- -- -- -- -- -- -- -- (62,500) -- --
Net loss........ -- -- -- -- -- -- -- (4,129) -- -- (4,129)
------- ---- ---------- --- --------- --- ------- -------- -------- --- --------
Balance, December
31, 1994......... 236,520 -- -- -- 2,040,000 2 1,391 (4,560) (62,500) -- (3,167)
Issuance of
preferred B
stock........... -- -- 11,932,271 12 -- -- 12,238 -- -- -- 12,250
Issuance of
common stock.... -- -- -- -- 205,000 -- 20 -- -- -- 20
Purchase of
treasury stock.. -- -- -- -- -- -- -- -- (167,499) -- --
Net loss........ -- -- -- -- -- -- -- (40,023) -- -- (40,023)
------- ---- ---------- --- --------- --- ------- -------- -------- --- --------
Balance, December
31, 1995......... 236,520 -- 11,932,271 12 2,245,000 2 13,649 (44,583) (229,999) -- (30,920)
Issuance of
preferred B
stock........... -- -- 2,922,125 3 -- -- 2,997 -- -- -- 3,000
Issuance of
common stock.... -- -- -- -- 32,500 -- 4 -- -- -- 4
Purchase of
treasury stock.. -- -- -- -- -- -- -- -- (33,333) (3) (3)
Net loss........ -- -- -- -- -- -- -- (10,974) -- -- (10,974)
------- ---- ---------- --- --------- --- ------- -------- -------- --- --------
Balance, June 30,
1996............. 236,520 $ -- 14,854,396 $15 2,277,500 $ 2 $16,650 $(55,557) (263,332) $(3) $(38,893)
======= ==== ========== === ========= === ======= ======== ======== === ========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
VIDEOGUIDE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
PERIOD FROM YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 8, 1993 DECEMBER 31, JUNE 30,
THROUGH ----------------- -----------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- ------- -------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(431) $(4,129) $(40,023) $(3,122) $(10,974)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Depreciation and
amortization....... 18 47 173 34 90
Changes in assets
and liabilities:
Receivables....... -- -- (502) (388) 424
Inventories....... -- -- (3,106) -- 1,317
Prepaids and other
current assets... (19) (171) 116 149 52
Other assets...... -- 19 (6) -- --
Bank overdraft.... -- -- -- -- 112
Accounts payable.. 166 408 20,885 (812) 1,470
Accrued expenses.. -- 489 361 (400) 1,294
Deferred
subscription
revenue.......... -- -- 459 -- 833
Reserve for loss
on inventory
purchase
commitments...... -- -- 12,462 -- 1,974
----- ------- -------- ------- --------
Net cash used by
operating
activities....... (266) (3,337) (9,181) (4,539) (3,408)
----- ------- -------- ------- --------
Cash flows from
investing activities:
Proceeds from sale of
equipment............ -- -- -- -- 241
Purchase of property
and equipment........ (44) (153) (881) (239) --
----- ------- -------- ------- --------
Net cash (used by)
provided by
investing
activities....... (44) (153) (881) (239) 241
----- ------- -------- ------- --------
Cash flows from
financing activities:
Proceeds from issuance
of stock, net........ 327 1,066 12,270 8,620 3,001
Borrowings from
(repayments to)
stockholders......... -- 1,973 (1,719) -- 50
Invoice factoring..... -- -- 266 -- (223)
Principal payments of
capital lease
obligation........... -- (33) (93) (79) (6)
Borrowings
(repayments) of notes
payable.............. -- 472 (472) (402) 150
----- ------- -------- ------- --------
Net cash provided
by financing
activities....... 327 3,478 10,252 8,139 2,972
----- ------- -------- ------- --------
Increase (decrease) in
cash and cash
equivalents............ 17 (12) 190 3,361 (195)
Cash and cash
equivalents, beginning
of period.............. -- 17 5 5 195
----- ------- -------- ------- --------
Cash and cash
equivalents, end of
period.................. $ 17 $ 5 $ 195 $ 3,366 $ --
===== ======= ======== ======= ========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for:
Interest............ $ -- $ 32 $ -- $ -- $ --
===== ======= ======== ======= ========
</TABLE>
Supplementary disclosures of noncash financing activities:
In 1995, 1994, and 1993, the Company acquired assets totaling $64, $48, and
$65, respectively, net of down payments, under capital lease arrangements.
See accompanying notes to financial statements.
F-32
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(1) NATURE OF OPERATIONS
VideoGuide, Inc. (the "Company") was incorporated on September 8, 1993 as a
Delaware corporation. The Company produces and markets the VideoGuide
Information System. The VideoGuide Information System is a consumer
electronics product which delivers an interactive television schedule, as well
as optional news, a sports ticker and other informational services. The system
also provides one touch VCR programming.
Up to August 28, 1995, the Company was in the development stage as it had
generated no significant revenue and had been engaged primarily in research
and development activities.
The Company has incurred substantial losses from operations since August 29,
1995, and previously as a development stage enterprise, and at June 30, 1996
and December 31, 1995, its accumulated deficit is in excess of invested
capital. Also at June 30, 1996 and December 31, 1995, the Company has negative
net worth, and over this period has experienced difficulty in meeting its
obligations as they have become due. Management has taken measures to improve
the operations of the business in an effort to achieve profitable operations.
However, the ability of the Company to continue operating as a going concern
is dependent on the consummation of the proposed merger as discussed in note
15. Management anticipates the consummation of the proposed merger and
accordingly believes that the presumption of going concern reflected in the
preparation of the accompanying financial statements is appropriate.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
(b) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over a
five-year life using the straight-line method. Purchased software is
depreciated over three years.
(c) Software Development Costs
The Company's policy is to expense as incurred all software development
costs.
(d)Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(e) Inventories
Inventory consists of finished goods only. Inventory is stated at the lower
of cost or market. Cost is determined on a first-in, first-out "FIFO" basis.
F-33
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Revenue Recognition
Revenue from the sale of VideoGuide receivers is recognized upon shipment.
Subscription revenue is deferred and recognized pro rata on a monthly basis
over the life of the subscriptions. Costs incurred with the procurement of
subscriptions are charged to expense as incurred.
(g) Advertising and Promotion Expense
Advertising and promotion costs are expensed when incurred. Co-operative
advertising, performed in conjunction with retail customers, is provided for
when the agreement is signed, and the related reserve is reduced as credits
are claimed.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Fair Value of Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, notes payable, due to stockholder, capital lease
obligations, accounts payable, accrued expenses, and factoring liability. The
carrying value of these financial instruments approximate their fair value
because of the short maturity of these instruments.
(j) Stock Based Compensation
The Company is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation" in fiscal 1996.
SFAS No. 123 establishes accounting and disclosure requirements using a fair
value based method of accounting for stock based employee compensation plans.
Under SFAS No. 123, the Company may either adopt the new fair value based
accounting method or continue to apply the existing accounting rules under
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees" but with additional financial statement disclosure. The Company
plans to continue to account for stock based compensation arrangements under
APB No. 25 with additional disclosures required under SFAS No. 123 and
therefore does not anticipate SFAS No. 123 will have a material impact on its
financial condition or results of operations.
(k) Impairment of Long-Lived Assets
The Company is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" in fiscal 1996. SFAS No. 121 requires
recognition of impairment of long-lived assets when events and circumstances
indicate that the carrying amount of those assets will not be recovered in the
future. The Company does not anticipate that any such impairment on its long-
lived assets would have a material impact on the financial condition or
results of operations.
F-34
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) Loss per Common Share
Loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period.
(3)INVENTORY VALUATION
In September 1996, the Company revised its previous estimate of the net
realizable value of inventory based on year-to-date shipments and negotiations
with its largest distributor and other distribution channels. As a result, the
Company for the six month period ended June 30, 1996 recorded a $1,006,146
charge to cost of goods sold to value the inventory on hand at $16.00 a unit.
The Company also recorded a $1,973,925 charge to cost of goods sold to reserve
for units on order with the manufacturer. In addition, the Company for the six
month period ended June 30, 1996 recorded a $757,268 charge to selling expense
for units at retailers who will be provided price protection.
As of December 31, 1995, the Company revalued its inventory to more
accurately reflect the net realizable value of its inventory based on lower
prices offered to its customers to reduce the level of inventory on hand. As a
result, the Company for the year ended December 31, 1995 recorded a $7,063,795
charge to cost of goods sold to value the inventory on hand as of December 31,
1995 at $25.00 a unit. In addition, the Company recorded a $12,462,047 charge
to cost of goods sold to reserve for units on order with the manufacturer
under a fixed purchase commitment. Based on the most recent cost of the units,
this purchase commitment is $17,945,172 as of June 30, 1996.
(4)PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1996 and December 31, 1995 and 1994
consisted of (in thousands):
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Machinery and equipment....................... $292 $ 793 $ 808
Furniture and fixtures........................ 12 34 34
Leasehold improvements........................ 8 20 20
Communications equipment...................... 14 440 184
---- ------ ------
$326 $1,287 $1,046
==== ====== ======
</TABLE>
(5)NOTES PAYABLE
On May 22, 1996, the Company borrowed $150,000 from a vendor under a
promissory note. The balance is payable upon demand by the vendor.
At December 31, 1994, the Company had $472,463 outstanding on a $1,000,000
line-of-credit with a bank at the bank's prime lending rate plus .5%. On March
1, 1995, this line-of-credit was closed.
F-35
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(6)RELATED PARTY TRANSACTIONS
(a) Due to GCC Technologies, Inc.
Certain stockholders, officers and directors of the Company are also
stockholders, officers and directors of GCC Technologies, Inc. ("GCC"). The
amount due to GCC, which is included in accrued expenses reflects charges to
the Company for the use of the telephone system and access to computers and
other equipment.
(b) Advances from Stockholders
During 1996, 1995 and 1994, certain stockholders of the Company made certain
advances to the Company. Amounts due to stockholders are repayable on demand.
(c) Related Party Lease
The Company occupies general offices and engineering space in a facility
owned in trust by certain officers and stockholders of the Company. The space
is under lease for a five year term commencing January 1, 1994. The Company is
also obligated to pay a proportionate share of real estate and building
operating costs and tenant improvements. Rent expense for the six-month period
ended June 30, 1996 and years ended December 31, 1995 and 1994 were $133,321,
$233,678 and $158,485 respectively.
(7)COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company has entered into leases of certain property and equipment under
agreements which are accounted for as capital leases. Leased capital assets
included in property and equipment at June 30, 1996 and December 31, 1995 and
1994 are as follows (in thousands):
<TABLE>
<CAPTION>
DEC. 31, 1994 DEC. 31, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Machinery and equipment......... $164 $228 $228
Accumulated depreciation........ (45) (80) (106)
---- ---- ----
$119 $148 $122
==== ==== ====
</TABLE>
Future minimum lease payments under capital leases at June 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1996................................................................ $23
1997................................................................ 26
1998................................................................ 23
---
72
Less amounts representing interest.................................. 12
---
Present value of minimum future lease payments...................... 60
Less current portion................................................ (23)
---
Capital lease obligation, net of current portion.................... $37
===
</TABLE>
F-36
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(7)COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under operating leases at June 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1996................................................................. $191
1997................................................................. 260
1998................................................................. 241
----
$692
====
</TABLE>
(b) Information Access and Transmission Agreements
The Company has various agreements to purchase information access and
transmission services. These agreements are cancelable without material
financial penalty, however, if the agreements are canceled, the Company would
have to find alternative providers for such services. Future minimum payments
at June 30, 1996 under such agreements are as follows (in thousands):
<TABLE>
<S> <C>
1996.............................................................. $ 1,798
1997.............................................................. 3,467
1998.............................................................. 2,952
1999.............................................................. 2,867
2000.............................................................. 1,856
-------
$12,940
=======
</TABLE>
In addition to the minimum payments noted above, these agreements provide
for additional payments based on various measures of usage, obligate the
Company to pay certain ancillary costs. These costs are not reflected in the
amounts presented above or in the Company's financial statements.
(8) ACCRUED EXPENSES
At June 30, 1996 and December 31, 1995 and 1994, accrued expenses were
comprised of the following (in thousands):
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Payroll....................................... $ 83 $165 $ 149
Vacation...................................... 83 138 200
Rent.......................................... 158 146 59
Due to related parties........................ 120 157 94
Taxes......................................... -- 101 101
Professional fees............................. 25 100 150
Co-operative advertising...................... -- -- 129
Price protection.............................. -- -- 757
Other......................................... $ 20 $ 43 $ 505
----- ---- ------
$ 489 $850 $2,144
===== ==== ======
</TABLE>
F-37
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(9) FACTORING LIABILITY
Operations have been financed partly through the sale of receivables related
to the Company's box unit. The sale transaction occurred under a receivables
purchase agreement with an independent issuer of receivables backed commercial
paper, pursuant to which the Company agreed to sell with recourse, an
undivided percentage ownership interest in designated pools of accounts
receivable. Receivables which have been sold but which have not yet been
collected amounted to $43,378 and $265,880 at June 30, 1996 and December 31,
1995, respectively. The agreement is due to expire in September 1996.
(10) STOCKHOLDERS' DEFICIENCY
On February 24, 1995, the Company's stockholders and board of directors
voted to amend the Company's certificate of incorporation to reflect the
authorization to issue 75,000,000 shares of common stock, and 30,000,000
shares of preferred stock, of which 236,520 shares had previously been issued
as Series A preferred stock, 22,000,000 has been designated as Series B
preferred stock and the remaining 7,763,480 shares are available for future
designation.
(a) Series A Convertible Preferred Stock
On September 8, 1993, the Company offered and sold 175,200 shares of Series
A convertible preferred stock, $.001 par value, ("Series A stock") at $5.70776
per share in a private placement. Each share of Series A stock is convertible
into 100 shares of the Company's common stock subject to certain anti-dilution
adjustments. The purchase price for the Series A stock was payable in three
installments due between issuance and January 1, 1994. Full capitalization of
the Company was reflected at December 31, 1993, through the recording of a
receivable from stockholders. All proceeds due at December 31, 1993, were
received on January 13, 1994.
In July 1994, the Company offered and sold an additional 61,320 shares of
Series A stock at $5.70776 per share in a private placement.
(b) Series B Convertible Preferred Stock
On February 24, 1995, the Company offered and sold 11,932,271 shares of
Series B convertible stock, $.001 par value ("Series B stock") at $1.02665 per
share in a private placement.
On February 14, 1996, the Company offered and sold 2,922,125 shares of
Series B stock at $1.02665 per share in a private placement.
Each share of Series B stock is convertible into one share of common stock.
Holders of the Series B stock are entitled to annual cumulative dividends of
$.082132 per share which are payable when and if declared by the Board of
Directors or upon a voluntary or involuntary liquidation, dissolution or
winding up of the Company, or upon the redemption of the Series B stock.
Cumulative dividends in arrears as of June 30, 1996 and December 31, 1995 were
$1,386,695 and $816,684, respectively.
(c) Common Stock
Certain shares of the Company's common stock were issued under Stock
Restriction Agreements (the "Agreements") providing that the shares vest
ratably over periods varying from two to three years and provide that if the
holder leaves the Company prior to full vesting the Company will have the
option to repurchase the unvested shares at the original purchase price.
F-38
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(10) STOCKHOLDERS' DEFICIENCY (CONTINUED)
At June 30, 1996 and December 31, 1995, the Company has reserved 38,506,396
and 35,584,271 shares of common stock for issuance upon the conversion of
outstanding shares of Series A and Series B stock, respectively. The Company
has also reserved 2,000,000 shares of common stock for issuance under the
Company's 1994 Stock Incentive Plan.
(d) 1994 Stock Incentive Plan
On April 25, 1994, the Company's stockholders and board of directors voted
to create the 1994 Stock Incentive Plan (the "Plan") which provides for the
issuance of up to 740,000 shares of the Company's common stock. The Plan
provides for grants to eligible participants of options to purchase common
stock that qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, and options to purchase
common stock that do not qualify as incentive stock options. The Plan also
permits awards of restricted and unrestricted stock, performance stock,
phantom stock and stock appreciation rights. The Company's employees,
directors and consultants are eligible to participate in the Plan, except that
only employees may receive incentive stock options. The Plan is administered
by the board of directors, which determines, subject to applicable legal
restrictions, the persons who receive stock awards and the number of shares
subject to each award, the exercise or purchase price and the vesting
provisions.
On July 6, 1994, the Company's stockholders and board of directors voted to
increase the number of shares of common stock issuable under the Plan to
2,000,000.
Stock option activity in the Plan for the six month period ended June 30,
1996 and year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Outstanding at beginning of period........ -- 1,187,800
Granted................................... 1,397,800 230,000
Exercised................................. -- --
Cancelled................................. (210,000) (26,500)
--------- ---------
Outstanding at end of period.............. 1,187,800 1,391,300
========= =========
Exercisable at end of period.............. -- 349,867
========= =========
Available for grant at end of period...... 812,200 608,700
========= =========
Option exercise price..................... $ .20 $ .20
========= =========
</TABLE>
The stock options vest over a three-year perod and expire five yeras from
the date of grant.
(e) Preferred Stock Warrants
On February 28, 1995, the Company issued warrants for the purchase of
533,090 and 1,053,721 shares of Series B convertible preferred stock, $.001
par value, to an officer of the Company and an individual related to the
officer at an exercise price of $2.00 per share. The warrants are fully vested
and expire on October 25, 1999.
F-39
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(11) INCOME TAXES
The following is a reconciliation between the statutory federal income tax
rate and the Company's effective rate for the six month period ended June 30,
1996 and years ended December 31, 1995 and 1994, and the period from September
8, 1993 through December 31, 1993:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 31, JUNE 30,
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal income tax benefit at statutory
rate................................... 34.0% 34.0% 34.0% 34.0%
Tax effect of:
State tax benefit, net of federal
effect.............................. 6.3 6.3 6.3 6.3
Benefit of research and development
costs............................... -- 3.2 0.3 1.0
Increase in valuation allowance...... (40.3) (43.5) (40.6) (41.3)
----- ----- ----- -----
--% --% --% --%
===== ===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at June 30, 1996 and December
31, 1995 and 1994, are presented below (in thousands):
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Start-up costs............................... $ 650 $ 1,578 $ 1,396
Reserves for uncollectible accounts.......... -- 67 49
Reserves for inventories..................... -- 7,863 9,063
Accrued vacation............................. -- 57 70
Other accruals............................... -- 40 40
Net operating loss carryforwards............. 1,183 8,155 8,395
Credit carryforwards......................... 200 348 382
------- -------- --------
Total gross deferred tax assets............ 2,033 18,108 19,395
Less valuation allowance..................... (2,033) (18,108) (19,395)
------- -------- --------
Net deferred tax assets.................... $ -- $ -- $ --
======= ======== ========
</TABLE>
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The valuation allowance for deferred tax
assets as of January 1, 1996 was $18,107,549. The net increase in the
valuation allowance for the six month period ended June 30, 1996 and years
ended December 31, 1995 and 1994 were $1,287,899 $16,075,029 and $1,858,912,
respectively.
At June 30, 1996 and December 31, 1995, the Company has net operating loss
carryforwards for federal and state income tax purposes of $20,800,000 and
$20,200,000, respectively, which are available to offset future taxable
income. These carryforwards expire for federal income tax purposes in the
years 2009 to 2011, and for state income tax purposes in the years 1999 to
2001. The Company also has research and development tax credit carryforwards
for federal and state income tax purposes of $382,000 which expire in the
years 2009 to 2011. A portion or all of net operating loss carryforwards and
credit carry forwards which can be utilized in any future year may be limited
by significant changes in ownership of the Company pursuant to Section 382 of
the Internal Revenue Code.
F-40
<PAGE>
VIDEOGUIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1996 AND DECEMBER 31, 1995 AND 1994
(12) MAJOR CUSTOMERS
One customer accounted for approximately 31% and 82% of VideoGuide receiver
sales for the six month period ended June 30, 1996 and year ended December 31,
1995, respectively.
(13) 401(K) PLAN
The Company adopted a 401(k) plan (the "Plan") through GCC Technologies,
Inc., a related party, in January 1994 for the benefit of its employees. The
Plan does not require the Company to match employee contributions or make
contributions, but contributions may be made at the discretion of the board of
directors. The Company has not made any matching contributions to the Plan to
date.
(14) LITIGATION
The Company is a defendant against several claims related to slow payments
of invoices. The amounts in question are included in the Company's accounts
payable.
For the six month period ended June 30, 1996, the Company reached and paid
settlements with several vendors which resulted in a gain of $100,000.
(15) SUBSEQUENT EVENTS
The Company entered into an agreement, dated July 18, 1996 and amended as of
October 24, 1996 for the acquisition of the Company by Gemstar International
Group, Ltd. ("Gemstar") in exchange for 475,000 shares of Gemstar's common
stock. The proposed acquisition is subject to certain conditions and is
expected to be consummated on or before December 31, 1996. If completed, the
acquisition will be accounted for using the pooling-of-interests method.
Subsequent to June 30, 1996, the Company reached and paid settlements with
additional vendors which resulted in a gain of approximately $1,900,000, which
will be recognized subsequent to the date of the accompanying financial
statements.
F-41
<PAGE>
VIDEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Video was incorporated in September 1993. Since its inception, Video has
devoted substantially all of its resources toward the development and
commercial introduction of the VideoGuide Information System which includes
both a consumer electronics product and an information service.
In August 1995, Video launched the VideoGuide Information System. Video
generates revenue from sales of the consumer electronics product and
subscription sales of the VideoGuide information service to customers. Video
has incurred substantial losses since its inception, and expects to incur
losses for the foreseeable future. As of June 30, 1996, Video had an
accumulated deficit of $55,557,000. Prior to August 1995, Video was considered
a development stage enterprise.
RESULTS OF OPERATIONS
Revenues. Revenues for the year ended December 31, 1995 and the six months
ended June 30, 1996 were $3,000,000 and $898,000, respectively. Revenues
consist of sales of VideoGuide receivers and subscription revenues. Sales of
VideoGuide receivers and subscription revenues approximated 98% and 2% and 24%
and 76% of total revenues for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively. The change in revenue mix between
the two periods primarily resulted from a decline in sales of VideoGuide
receivers and growth in the subscription base. Video's management believes
that this decline resulted from a lack of financial resources to promote
consumer awareness about the VideoGuide Information System. Revenues were not
earned during 1994 and 1993 as Video was in the development stage and had no
products.
Cost of revenues. At December 31, 1995, Video revalued its inventory of
VideoGuide receivers on-hand to reflect more accurately the net realizable
value of its inventory based on lower prices offered to its customers.
Accordingly, Video recorded a charge to cost of revenues of approximately
$7,064,000. In addition, Video recorded a $12,462,000 charge to cost of
revenues to reserve for units on order with the manufacturer under a fixed
purchase commitment.
Video revised its estimate of the net realizable value of inventory on hand
at June 30, 1996 based on year-to-date sell-through information and
negotiations with its largest distributor. Accordingly, Video recorded a
charge to cost of revenues of $1,006,000 during the six month period ended
June 30, 1996. In addition, Video recorded a $1,974,000 charge to cost of
revenues to reserve for units on order with the manufacturer under a fixed
purchase commitment.
Video management cannot guarantee that prices of VideoGuide receivers will
not continue to decline in the future.
Research and Development. Research and development costs for the periods
ended December 31, 1993, 1994 and 1995 were $329,000, $2,665,000, and
$4,986,000, respectively. The increase from 1993 through 1995 resulted from
activities associated with the development and testing of the VideoGuide
Information System. Research and development costs for the six month period
ended June 30, 1996 were $1,748,000. The decrease in rate of spending resulted
from the successful introduction of the VideoGuide Information System.
Selling, General and Administrative. Selling, general and administrative
costs for the periods ended December 31, 1993, 1994 and 1995 were $102,000,
$1,405,000, and $11,846,000, respectively. During 1993 and 1994, these costs
consisted of general corporate and management overhead. During the year ended
December 31, 1995, selling, general and administrative costs increased
significantly as a result of marketing costs associated with a promotional
campaign commensurate with the product introduction during August 1995. During
the six month period ended June 30, 1996, Video charged $757,000 of costs to
selling expense for price protection associated with VideoGuide receivers held
by retailers as of June 30, 1996.
F-42
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Video has financed its operations through the issuance
of equity securities, notes to related parties and short-term borrowings.
Video has not been able to generate sufficient cash from operations and, as a
consequence, additional financing has been required to fund ongoing
operations. Cash used in operations for the six months ended June 30, 1996 was
$3,404,000 as compared to cash used in operations of $4,539,000 for the six
months ended June 30, 1995.
In order to fund ongoing operations, Video has borrowed from related parties
and raised cash from the sale of its common stock. Net cash provided by
financing activities for the six months ended June 30, 1996 was $2,968,000
which was comprised of short-term loans from related parties and sales of
preferred stock. Gemstar and Video have entered into a Loan and Security
Agreement, effective as of July 18, 1996 as amended as of October 29, 1996,
pursuant to which Gemstar, in its sole discretion, may make loans to Video
from time to time in an aggregate amount not to exceed $7 million. Any such
loans will bear interest at a rate of prime plus 5% per annum and will become
due and payable on December 31, 1996. As of October 29, 1996, loans in the
principal amount of $6,912,000 were due and payable by Video under this Loan
and Security Agreement.
Video expects that its cash used in operating activities and investing
activities will increase in the remainder of 1996 and 1997. Video believes
that additional funding from sale of equity securities or borrowing from loans
will be required to meet Video's operations and capital requirements for the
next 12 months. Video's capital requirements depend on numerous factors but
principally on the market's acceptance of Video's products.
The timing of such capital requirements cannot accurately be predicted. If
capital requirements vary materially from those currently planned, Video may
require additional financing. Video has no commitments for any additional
financing, and there can be no assurance that any such commitments can be
obtained on favorable term, if at all. Any additional equity financing may be
dilutive to Video's stockholders, and debt financing, if available, may
involve restrictive covenants with respect to dividends, raising future
capital and other financial and operational matters. If Video is unable to
obtain additional financing as needed, Video may be required to reduce the
scope of its operations or its anticipated expansion, which could have a
material adverse effect on Video's business, financial condition and results
of operations. If the Merger Agreement is not approved and adopted by the
Video stockholders or if the Merger is not otherwise consummated, there can be
no assurance that Video could obtain replacement debt or equity capital or
that, if obtainable, such debt or equity capital could be obtained in
sufficient time to avoid material disruption in its business.
ACCOUNTING STANDARDS
Stock Based Compensation. Video is required to adopt Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation"
in fiscal 1996. SFAS No. 123 establishes accounting and disclosure
requirements using a fair value based method of accounting for stock based
employee compensation plans. Under SFAS No. 123, Video may either adopt the
new fair value based accounting method or continue to apply the existing
accounting rules under Accounting Principles Board (APB) No. 25, "Accounting
for Stock Issued to Employees" but with additional financial statement
disclosure. Video plans to continue to account for Stock Based Compensation
arrangements under APB No. 25 with additional disclosures required under SFAS
No. 123 and therefore does not anticipate SFAS No. 123 will have a material
impact on its financial condition or results of operations.
Impairment of Long-Lived Assets. Video is required to adopt Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of in fiscal
1996. SFAS No. 121 requires recognition of impairment of long-lived assets
when events and circumstances indicate that the carrying amount of those
assets will not be recovered in the future. Video does not anticipate that any
such impairment on its long-lived assets would have a material impact on the
financial condition or results of operations.
F-43
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
By: /s/ Elsie Leung
-----------------------------------
Elsie Leung
Chief Financial Officer
Date:March 11, 1997
F-44
<PAGE>
APPENDIX N
<PAGE>
[The total number of sequentially numbered pages in this manually signed
original is 22.]
As filed with the Securities and Exchange Commission on July 19, 1996.
Registration No. 333-5304
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
British Virgin Islands 3651 N/A
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
(818) 792-5700
(Address of principal executive offices)
1994 Stock Incentive Plan, as Amended
(Full title of the plan)
Larry Goldberg
Corporate Counsel
Gemstar Development Corporation
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
(Name and address of agent for service)
___________________
Telephone number, including area code, of agent for service: (818) 792-5700
___________________
Copy to:
David A. Krinsky
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================
Proposed Proposed
maximum maximum
Title of Amount offering aggregate Amount of
securities to be price offering registration
to be registered registered per unit price fee
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary Shares, 5,600,000/(1)/ $14.77/(2)/ $82,713,960/(3)/ $28,522/(3)/
par value $.01 shares
per share
======================================================================================
</TABLE>
(1) This Registration Statement covers, in addition to the number of Ordinary
Shares stated above, options and other rights to purchase or acquire the
Ordinary Shares covered by the Prospectus and, pursuant to Rule 416, an
additional indeterminate number of Ordinary Shares which by reason of
certain events specified in the Plan may become subject to the Plan.
(2) Pursuant to Rule 457(h), the maximum offering price, per share and in the
aggregate, and the registration fee were calculated in part based upon the
average of the high and low prices of the Common Stock reported in The Wall
Street Journal as of July 16, 1996 and in part based upon the exercise
price of outstanding options.
(3) The Exhibit Index included in this Registration Statement is at page 15.
================================================================================
1
<PAGE>
PART I
INFORMATION REQUIRED IN THE
SECTION 10(a) PROSPECTUS
Item 1. Plan Information.*
Item 2. Registrant Information and Employee Plan Annual Information.*
- -----------------
* Information required by Part I to be contained in the Section 10(a)
prospectus is omitted from the registration statement in accordance with Rule
428 under the Securities Act of 1933 and the Note to Part I of Form S-8.
2
<PAGE>
PART II
INFORMATION REQUIRED IN THE
REGISTRATION STATEMENT
Item 3. Incorporation of Certain Documents by Reference
The following documents of Gemstar International Group Limited
(the "Company") filed with the Securities and Exchange Commission are
incorporated herein by reference:
(a) Annual Report on Form 20-F for the Company's fiscal year ended
March 31, 1996.
(b) None.
(c) The description of the Company's Ordinary Shares contained in
its Registration Statement on Form F-1 dated April 15, 1996.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the filing of a
post-effective amendment which indicates that all securities offered
hereby have been sold or which deregisters all securities then remaining
unsold shall be deemed to be incorporated by reference into the prospectus
and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of this Registration
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so
modified or amended, to constitute a part of this Registration Statement.
Item 4. Description of Securities
The Company's Ordinary Shares, par value $.01 per share (the
"Common Stock") is registered pursuant to Section 12 of the Exchange Act,
and, therefore, the description of securities is omitted.
Item 5. Interests of Named Experts and Counsel
Not applicable.
3
<PAGE>
Item 6. Indemnification of Directors and Officers
Each of Henry Yuen, Thomas Lau, Daniel Kwoh, Wilson Cho, Elsie
Leung, Roy Mankovitz, Larry Goldberg, Mary Lau and Kazuo Nagasaka have
entered into employment agreements with the Company which obligate the
Company, to the maximum extent permitted by applicable law and the charter
documents of the Company, to indemnify the employee and hold the employee
harmless for any acts or decisions made by the employee in good faith
while performing services for the Company. To the same extent, the
agreements require the Company to pay all expenses, including reasonable
attorneys' fees, judgments, fines, settlements and other amounts actually
incurred by the employee in connection with the defense of any action,
suit or proceeding, and in connection with any appeal thereon, which had
been or may be brought against the employee by reason of the employee's
services as an officer or agent of the Company or of an affiliate of the
Company. The Company must also advance to the employee any expense
incurred in defending any such proceeding to the maximum extent permitted
by applicable law.
The Memorandum and Articles of Association of the Company also
include provisions for the protection of directors and officers.
Regulations 93 through 98 of the Articles of Incorporation provide:
Subject to the limitations hereinafter provided, the Company may
indemnify against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with legal, administrative or investigative proceedings any
Person who:
(a) is or was a party or is threatened to be made a party to any
threatened, pending or completed proceedings, whether civil, criminal,
administrative or investigative, by reason of the fact that the Person is
or was a director, an officer or a liquidator of the Company; or
(b) is or was, at the request of the Company, serving as a
director, officer of liquidator of, or in any other capacity is or was
acting for, another company or partnership, joint venture, trust or other
enterprise.
Regulation 93 applies only to a Person referred to in such
Regulation if the Person acted honestly and in good faith with a view to
the best interests of the Company and, in the case of criminal
proceedings, the Person had no reasonable cause to believe that his
conduct was unlawful.
The decision of the directors as to whether the Person acted
honestly and in good faith and with a view to the best interests of the
Company and as to whether the Person had no reasonable cause to believe
that his conduct was unlawful, is in the absence of fraud, sufficient for
the purposes of these Articles, unless a question of law is involved.
The termination of any proceedings by any judgment, order,
settlement or conviction, or upon a plea of nolle prosequi, does not, by
itself, create a presumption that the Person did not act honestly and in
good faith and with a view to the best interests of the Company or that
the Person had reasonable cause to believe that his conduct was unlawful.
4
<PAGE>
If a Person referred to in Regulation 93 has been successful in
defense of any proceedings referred to in such Regulation the Person is
entitled to be indemnified against all expenses, including legal fees, and
against all judgments, fines and amounts paid in settlement and reasonably
incurred by the Person in connection with the proceedings.
The Company may purchase and maintain insurance in relation to
any Person who is or was a director, an officer or a liquidator of the
Company, or who at the request of the Company is or was serving as a
director, an officer or a liquidator of, or in any other capacity is or
was acting for, another company or a partnership, joint venture, trust or
other enterprise, against any liability asserted against the Person and
incurred by the Person in that capacity, whether or not the Company has
or would have had the power to indemnify the Person against liability
under Regulation 93.
Section 57 of the British Virgin Islands International Business
Companies Ordinance provides:
(1) Subject to subsection (2) and any limitations in its
Memorandum or Articles, a company incorporated under this Ordinance may
indemnify against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with legal, administrative or investigative proceedings any
person who:
(a) is or was a party or is threatened to be made a party to
any threatened, pending or completed proceedings, whether civil, criminal
administrative or investigative, by reason of the fact that the person is
or was a director, an officer or a liquidator of the company; or
(b) is or was, at the request of the company, serving as a
director, an officer or a liquidator of, or in any other capacity is or
was acting for, another company or a partnership, joint venture, trust or
other enterprise.
(2) Subsection (1) only applies to a person referred to in that
subsection if the person acted honestly and in good faith with a view to
the best interests of the company and, in the case of criminal
proceedings, the person had no reasonable cause to believe that his
conduct was unlawful.
(3) The decision of the directors as to whether the person acted
honestly and in good faith and with a view to the best interests of the
company and as to whether the person had no reasonable cause to believe
that his conduct was unlawful is in the absence of fraud, sufficient for
the purposes of this section, unless a question of law is involved.
(4) The termination of any proceedings by any judgment, order,
settlement, conviction or the entering of a nolle prosequi does not, by
itself, create a presumption that the person did not act honestly and in
good faith and with a view to the best interests of the company or that
the person had reasonable cause to believe that his conduct was unlawful.
(5) If a person referred to in subsection (1) has been
successful in defense of any proceedings referred to in subsection (1),
the person is entitled to be indemnified against all expenses, including
legal fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred by the person in connection with the
proceedings.
5
<PAGE>
In addition, Section 58 of the British Virgin Islands
International Business Companies Ordinance provides:
A company incorporated under this Ordinance may purchase and
maintain insurance in relation to any person who is or was a director, an
officer or a liquidator of the company, or who at the request of the
company is or was serving as a director, an officer or a liquidator of,
or in any other capacity is or was acting for, another company or a
partnership, joint venture, trust or other enterprise, against any
liability asserted against the person and incurred by the person in that
capacity, whether or not the company has or would have had the power to
indemnify the person against liability under subsection (1) of section 57.
Item 7. Exemption from Registration Claimed
Not applicable.
Item 8. Exhibits
See the attached Exhibit Index.
Item 9. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Securities
Act");
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the Registration Statement or any material
change to such information in the Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii)
do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")
that are incorporated by reference in the Registration Statement;
6
<PAGE>
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of deter mining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 6
above, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pasadena, State of California, on July 10, 1996.
By: /s/ Larry Goldberg
------------------------------
Its: Secretary
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Henry C. Yuen, Elsie Ma Leung, and Larry Goldberg his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to 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, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Henry C. Yuen Principal Executive Officer July 15, 1996
- --------------------------- and Director
HENRY C. YUEN
/s/ Elsie Ma Leung Principal Operating, July 15, 1996
- --------------------------- Financial Officer and Director
ELSIE MA LEUNG
/s/ Thomas Lau Director July 15, 1996
- ---------------------------
THOMAS LAU
/s/ Roy J. Mankovitz Director July 15, 1996
- ---------------------------
ROY J. MANKOVITZ
Director July 15, 1996
- ---------------------------
LARRY GOLDBERG
/s/ Teruyuki Toyama Director July 15, 1996
- ---------------------------
TERUYUKI TOYAMA
/s/ George Carrier Director July 15, 1996
- ---------------------------
GEORGE CARRIER
9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<C> <S> <C>
3.1(a) Amended and Restated Memorandum of Association
of the Company previously filed as Exhibit 3.1(a) to
Amendment No. 7 to the Company's Registration
Statement on Form F-1 (Registration No. 33-79016),
which Amendment No. 7 was filed on October 6, 1995.
3.1(b) Articles of Association of the Company, previously
filed as Exhibit 3.1(b) to Amendment No. 1 to the
Company's Registration Statement on Form F-1
(Registration No. 33-79016), which Amendment
No. 1 was filed on August 24, 1994.
4.1 1994 Stock Incentive Plan, as amended, previously
filed as Exhibit 99.1 to Amendment No. 6 to the
Company's Registration Statement on Form F-1
(Registration No. 33-79016), which Amendment
No. 6 was filed on September 19, 1995.
4.2 Form of Option-Nonqualified Stock Option Award
Agreement, previously included as part of Exhibit
99.1 to Amendment No. 6 to the Company's
Registration Statement on Form F-1 (Registration
No. 33-79016), which Amendment No. 6 was filed
on September 19, 1995.
4.3 Form of Option-Nonqualified Stock Option Award 16
Agreement (Alternative Form of Vesting for an
Optionee)
5. Opinion of Harney, Westwood & Reigels 20
23.1 Consent of KPMG Peat Marwick LLP 22
23.2 Consent of Harney, Westwood & Reigels (included 20
in their opinion filed as Exhibit 5)
25. Power of Attorney (included in this 008
Registration Statement under "Signatures")
</TABLE>
10
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
THIS AGREEMENT dated as of the _____ day of __________, 199_ between
Gemstar International Group Limited, a British Virgin Islands corporation (the
"Corporation"), and _______________________ (the "Optionee").
W I T N E S S E T H
-------------------
WHEREAS, pursuant to the Gemstar International Group Limited 1994
Stock Incentive Plan, as amended (the "Plan"), the Corporation has granted to
the Optionee effective as of the _____ day of __________, 199_ (the "Award
Date") a nonqualified stock option to purchase all or any part of _______
authorized but unissued or treasury shares of the Corporation's Ordinary Shares,
$.01 par value (the "Common Stock") of the Corporation upon and subject to the
terms and conditions set forth herein and in the Plan.
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties agree as
follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned to such terms in the Plan.
2. Grant of Option. This Agreement evidences the Corporation's
grant to the Optionee of the right and option to purchase, on the terms and
conditions set forth herein and in the Plan, all or any part of an aggregate of
______ shares of the Common Stock at a per share price of $_______ (the
"Option"), exercisable from time to time only to the extent provided below and
prior to the close of business on the day before the tenth anniversary of the
Award Date (the "Expiration Date"), subject to the provisions of this Agreement
and the Plan. The Option is intended to be a Non-Qualified Stock Option and not
an incentive stock option under Section 422 of the Code.
3. Exercisability of Option. The Option shall first become
exercisable (subject to adjustment) as follows:
1
<PAGE>
Date on or Number of Shares (subject
after which Option to adjustment) as to which
may be exercised Option is exercisable
- ------------------ --------------------------
Provided that Optionee's ____________________
employment and services by the Corporation
or any Subsidiary have not terminated
for any reason prior to the Third Anniversary of the
Award Date the Option shall be exercisable on
or after the Fifth Anniversary of the Award Date
(and not earlier under any circumstances);
provided, however, that in no event may Optionee
exercise the Option after the Expiration Date.
To the extent the Optionee does not purchase all or any part of the
shares as to which the Option is exercisable and to which the Optionee is
entitled, the Optionee has the right cumulatively thereafter to purchase any
shares not so purchased and such right shall continue until the Option
terminates or expires. Fractional share interests shall be disregarded, but may
be cumulated. No fewer than 50 shares may be purchased at any one time, unless
the number purchased is the total number at the time available for purchase
under the Option.
4. Method of Exercise of Option. The Option shall be exercisable by
the delivery to each Corporation of a written notice stating the number of
shares to be purchased pursuant to the Option and accompanied by payment in
money in accordance with Section 2.2 of the Plan of the full purchase price of
the shares to be purchased (unless the Committee hereafter authorizes and
approves a non-cash payment consistent with Section 2.2 and 3.4 of the Plan) and
for the amount of any tax withholding obligation under Section 3.5 of the Plan.
In addition, the Optionee shall furnish any written statements required pursuant
to Section 3.4 of the Plan.
Effect of Termination of Employment or Services or Death: Change in
Subsidiary Status. The Option and all other rights hereunder, to the extent not
exercised, shall terminate and become null and void at such time as the Optionee
ceases to be employed by or otherwise provide services to either the Corporation
or any Subsidiary, except that if the Optionee's employment or services
terminate other than because of death, Total Disability or for cause (as
determined by the Committee in its sole discretion) after the Third Anniversary
of the Award Date the Optionee may at any time up to the Tenth Anniversary of
the Award Date exercise the Option to the extent the Option was exercisable at
the date of such termination; provided, however, that in no event may the Option
be exercised by anyone under this Section or otherwise after the Expiration
Date.
If the Optionee is employed by or provides services to an entity which
ceases to be a Subsidiary, such event shall be deemed for purposes of this
Section 5 to be a termination of employment or services described in subsection
(a) in respect of the Optionee, unless after giving effect thereto, the Optionee
remains an Eligible Person under the Plan.
2
<PAGE>
If the Optionee remains an Eligible Person following a change of
position, such change shall not be deemed a termination of services unless the
Committee otherwise determines. A determination evidenced by a notice of
termination executed by or on behalf of the Corporation and delivered to the
Optionee shall be conclusive evidence of a termination of services and/or
employment, as the case may be, for these purposes.
5. Consideration to Corporation. In consideration of the granting of
this Option by the Corporation, Optionee agrees to render faithful and efficient
services to the entities on which the Optionee's continuing eligibility under
the Plan is based and to perform such duties and assume such responsibilities as
the applicable entity(ies) shall from time to time prescribe, or, in the case of
services as a consultant or agent, upon the terms and conditions set forth in
any agreement governing the terms and conditions of service, or in the absence
of an agreement, for the period during which this Option continues to vest. The
termination of employment or services after any vesting date and prior to the
Expiration Date shall not affect the vested rights under an Option, except to
the extent expressly set forth in Section 5 above or in the Plan.
6. Termination of Option Under Certain Events. As contemplated by
Sections 3.2, 3.3 and 3.4 of the Plan, this Option may be terminated or rendered
non exercisable (to the extent it was not previously exercised) in certain
circumstances, as described therein.
7. Non-Transferability of Option. This Option and any other rights
of the Optionee under this Agreement or the Plan are nontransferable and subject
to extensive restrictions under Section 1.9 of the Plan. The shares issuable on
exercise of this Option are also subject to restrictions on transfer under
Section 1.10 of the Plan and to any and all repurchase or redemption rights of
the Corporation that may be provided under its Memorandum of Association and
Articles of Association, as amended from time to time.
8. Notices. Any notice to be given under the terms of this Agreement
shall be in writing and addressed to the Corporation at its principal office and
to the Optionee at the addresses given beneath their respective signatures
hereon, or at such other address as either party may hereafter designate in
writing to the other.
9. Plan. The Option and all rights of the Optionee thereunder are
subject to, and the Optionee agrees to be bound by, all of the terms and
conditions of the provisions of the Plan, incorporated herein by this reference.
The Optionee acknowledges receipt of a copy of the Plan, which is made a part
hereof by this reference, and agrees to be bound by the terms thereof. Unless
otherwise expressly provided in other Sections of this Agreement, provisions of
the Plan that confer discretionary authority on the Committee do not (and shall
not be deemed to) create any rights in the Optionee, unless such rights are
expressly set forth herein or are otherwise in the sole discretion of the
Committee so conferred by appropriate action of the Committee under the Plan
after the date hereof.
3
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed on its behalf by a duly authorized officer and the Optionee has
hereunto set his or her hand.
GEMSTAR INTERNATIONAL GROUP
LIMITED
By:
-------------------------------
Title:
---------------------------
OPTIONEE
----------------------------------
(Signature)
----------------------------------
(Address)
----------------------------------
(City, State, Zip Code)
4
<PAGE>
Harney, Westwood & Riegels
Barristers, Solicitors, Notaries, Patent and Trade Mark Agents
Michael D. Riegels, M.A. (Oxon)
Richard A. Peters, MA. (Cantab) Craigmuir Chambers
Richard Parsons, M.A. (Cantab) P.O. Box 71,
Lewis S. Hunte Road Town,
Hazel-Dawn Hewlett, LL.B. (U.W.I.) Tortola, British Virgin Islands
Timothy C. Richards, LL.B. (London)
<TABLE>
<CAPTION>
<S> <C> <C>
Associates:
Fiona A. Bada, LL.B. (U.W.I.) Telephone: (809) 494-2233
Leonard A. Birmingham, LL.B. (U.W.I.) Facsimile General: (809) 494-3547
Sally M.A. Cox, LL.B. (U.W.I.) (809) 494-4885
Ricardo B. Escalanta, LL.B. (U.W.I.)
Sheila C. George, LL.B. (U.W.I.) Facsimile Corporations: (809) 494-6291
Sally E. Hall, LL.B. (U.W.I.)
Helene Anne Lewis, LL.B. (Buckingham) Facsimile Litigation: (809) 494-3398
Kieron J. O'Rourke, LL.B. (Lancs)
Fred E. A. Phillips, LL.B. (U.W.I.) E-mail: [email protected]
</TABLE>
Your Ref:
Our Ref: LAB/wjm/009-0244.003 July 18, 1996
Gemstar International Group Limited
135 North Los Robles Avenue
Pasadena, California
91101 U.S.A.
Dear Sirs,
Gemstar International Group Limited (the "Company")
We are lawyers qualified to practise in the British Virgin Islands and have been
asked to provide this legal opinion with respect to the Company, a British
Virgin Islands company, in connection with the filing by the Company of a
Registration Statement on Form S-8 (the "Registration Statement") under the
Securities Act of 1933, as amended, covering 5,600,000 Ordinary Shares, US$0.01
par value, of the Company (the "Shares") to be issued by the Company pursuant to
the Company's 1994 Stock Incentive Plan (as amended, the "Plan").
For the purpose of this opinion, we have examined originals or copies of the
Plan, the Amended and Restated Memorandum and Articles of Association of the
Company, and such corporate documents and records of the Company as we have
deemed relevant and necessary as a basis for this opinion.
For purposes of this opinion, we have assumed the genuineness of all signatures
on all documents and the completeness and the conformity to original documents,
of all copies submitted to us and that all representations of fact (other than
those opined on below) expressed in or implied by the documents are accurate.
On the basis of the foregoing, we are of the opinion that when the Shares are
issued and paid for in accordance with regulation 6 of the Articles of
Association of the Company, at least to the extent of their par value, in
accordance with the provisions of the Plan including the corporate action of the
Compensation Committee constituted by the directors of the Company, the Shares
will be legally issued, fully paid and nonassessable.
<PAGE>
Gemstar International Group Limited
LAB/wjm/009-0244.003
18th June, 1996
Page 2
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement.
Yours Faithfully,
HARNEY, WESTWOOD & RIEGELS
/s/ Harney, Westwood & Riegels
<PAGE>
Accountants' Consent
The Board of Directors
Gemstar International Group Limited and Subsidiaries
We consent to the incorporation by reference in the registration statement on
Form S-8 of Gemstar International Group Limited and Subsidiaries of our report
dated April 5, 1996 relating to the consolidated balance sheets of Gemstar
International Group Limited and Subsidiaries as of March 31, 1996 and 1995 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1996, which
report appears in the 1996 annual report on Form 20-F of Gemstar International
Group Limited and Subsidiaries.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
July 19, 1996
<PAGE>
APPENDIX O
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Gemstar International Group Limited
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
British Virgin Islands 98-0139960
- --------------------------------------------------------------------------------
(State of Incorporation or Organization) (I.R.S. Employer Identification no.)
135 North Los Robles Avenue, Suite 870, Pasadena, California 91101
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Ordinary Shares, par value $.01 per share
(Title of class)
<PAGE>
Item 1. Description of Registrant's Securities to Be Registered.
- -----------------------------------------------------------------
Registrant incorporates herein by reference the information included under
the heading "Description of Capital Stock" in the preliminary prospectus
contained within Amendment No. 6 to Registration Statement on Form F-1
(Registration No. 33-79016) filed by the Registrant on September 19, 1995, with
the Securities and Exchange Commission pursuant to the Securities Act of 1933,
as amended.
Item 2. Exhibits.
- -----------------
1.1(a) Amended and Restated Memorandum of Association of the Company
(incorporated by reference to Exhibit 3.1(a) to the Registration
Statement on Form F-1 (Registration No. 33-79016)).
1.1(b) Amended and Restated Articles of Association of the Company
(incorporated by reference to Exhibit 3.1(b) to the Registration
Statement on Form F-1 (Registration No. 33-79016)).
2.1 Specimen Ordinary Shares Certificate (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form F-1 (Registration No.
33-79016)).
2
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
Date: September 29, 1995 By: /s/ Larry Goldberg
---------------------------------
Larry Goldberg
Secretary
<PAGE>
APPENDIX P
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD JOHN ARNOT WILSON
PALO ALTO, CALIFORNIA 94304-1050 RETIRED
TELEPHONE 415-493-9300 FACSIMILE 415-493-6811
March 11, 1997
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: StarSight Telecast, Inc. -- Commission File No. 0-21902.
Ladies and Gentlemen:
Enclosed herewith for filing on behalf of StarSight Telecast, Inc.
("StarSight") is StarSight's Annual Report on Form 10-K for the period ended
December 31, 1996. Please be advised that StarSight has requested confidential
treatment with respect to certain portions of Exhibit 10.64 by separate letter
filed today with the Office of the Secretary.
Should you have questions or comments, please contact Chris F. Fennell
of this office or me at 415-493-9300.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Julia Reigel
Julia Reigel
Enclosures
cc: The Nasdaq National Market
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.
<PAGE>
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.
1
<PAGE>
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
2
<PAGE>
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.
3
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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<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.
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<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>
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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),
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<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.
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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.
39
<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.
40
<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.
41
<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
48
<PAGE>
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.
49
<PAGE>
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
50
<PAGE>
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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<PAGE>
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
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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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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.
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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.
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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.
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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.
62
<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.
63
<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
66
<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.
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*** 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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"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.
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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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"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.
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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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"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.
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*** 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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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.
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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
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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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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.
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(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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treatment filed with the Securities and Exchange Commission. Omitted
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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*** 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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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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*** 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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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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*** 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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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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*** 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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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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*** 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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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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*** 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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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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*** 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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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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*** 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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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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*** 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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(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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*** 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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(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.
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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
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*** 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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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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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:
-25-
<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.
-26-
<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
------------------------------------ -----------------------
-27-
<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.
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(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.
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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.
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(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
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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
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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
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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.
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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.
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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
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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
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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
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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.
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(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
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<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
3
<PAGE>
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
5
<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.
6
<PAGE>
(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.
7
<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
8
<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
10
<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.
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 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.
3
<PAGE>
(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.
4
<PAGE>
(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
5
<PAGE>
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.
11
<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
(DOCUMENT)
(TYPE) EX-27
(DESCRIPTION) FINANCIAL DATA SCHEDULE
(TEXT)
(ARTICLE) 5
(MULTIPLIER) 1,000
(TABLE)
(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
(PREFERRED-MANDATORY) 0
(PREFERRED) 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)
<PAGE>
APPENDIX Q
<PAGE>
TOTAL NUMBER OF PAGES 4
FORM 8-A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
STARSIGHT TELECAST, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3003250
- --------------------------------------------------------------------------------
(State of incorporation or organization) (I.R.S. Employer
Identification No.)
39650 Liberty Street, Third Floor, Fremont, CA 94538
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
- --------------------------------------------------------------------------------
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK
- --------------------------------------------------------------------------------
(Title of class)
<PAGE>
Item 1. Description of Registrant's Securities to be Registered
The description of the Common Stock of Registrant set forth under the
caption "Description of Capital Stock" in Registrant's Registration
Statement on Form S-1 (File No. 33-64138) as originally filed or as
subsequently amended (the "Registration Statement"), which was filed
on June 9, 1993, and in the Prospectus included therein, is hereby
incorporated by reference in response to this item.
Item 2. Exhibits
The following exhibits, except as otherwise indicated, are
incorporated by reference to the exhibits with the same numbers in the
Registration Statement or to the text of the Registration Statement,
as indicated:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title or Description
------- ----------------------------
<S> <C>
3.1* Articles of Incorporation of Registrant, as amended to
date.
3.2* Form of Amended and Restated Articles of Incorporation,
effecting a two-for-three reverse stock split of the
Registrant's Common Stock (including a corresponding
adjustment to the conversion price of the Preferred
Stock) and authorizing 5,000,000 shares of undesignated
Preferred Stock, to be filed on the date of the closing
of the initial pubic offering of the Registrant's
Common Stock.
3.3* Bylaws of Registrant, as amended.
4.1* Form of specimen certificate for Registrant's Common
Stock.
4.2* Form of Lock-Up Agreement.
10.5* Corporate Partnership Agreement dated as of September
12, 1991, as amended, between Registrant and Viacom
International Inc.
10.27* Warrants issued by Registrant to Tribune Company, dated
January 22, 1992.
</TABLE>
-2-
<PAGE>
Exhibit
Number Exhibit Title or Description
------- -----------------------------
10.28* Warrants issued by Registrant to KBL Ventures, Inc.
dated February 3, 1993.
10.29* Warrants issued by Registrant to Providence Journal
Company dated May 7, 1993.
10.30* Warranties issued by Registrant to Times Mirror
Cable Television dated May 18, 1993.
28.01 Pages 56 through 57 of the Prospectus included in
the Registration Statement, setting forth the
"Description of Capital Stock."
- -----------------------
* Exhibit to the Registration Statement.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this registration statement on
Form 8-A to be signed on its behalf by the undersigned.
Date: June 8, 1993 STARSIGHT TELECAST, INC.
By: /s/ Martin W. Henkel
----------------------------
Martin W. Henkel
Vice President, Operations
Chief Financial Officer
-4-
<PAGE>
FORM OF STARSIGHT PROXY
<PAGE>
- --------------------------------------------------------------------------------
REVOCABLE PROXY
STARSIGHT TELECAST, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
SPECIAL MEETING OF SHAREHOLDERS
The undersigned shareholder of StarSight Telecast, Inc., a California
corporation ("StarSight"), hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Joint Proxy Statement/Prospectus, each dated April
18, 1997, and hereby appoints Larry W. Wangberg, Martin W. Henkel and William
Scharminghausen, and each of them, with full power of substitution, on behalf
and in the name of the undersigned, to represent the undersigned at the Special
Meeting of Shareholders of StarSight to be held May 1, 1997 at 7:00 a.m.,
California time, at 3300 Kearney Street Freemont, California 94538 and at any
adjournments or postponements thereof, and to vote shares of the StarSight
common stock which the undersigned would be entitled to vote, if then and there
personally present, on the matters set forth on the reverse side hereof.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENVELOPE
PROVIDED.
THE STARSIGHT BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1 TO
APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER, DATED AS OF DECEMBER 23,
1996 (THE "MERGER AGREEMENT"), BY AND AMONG STARSIGHT, GEMSTAR INTERNATIONAL
GROUP LIMITED, A BRITISH VIRGIN ISLAND CORPORATION ("GEMSTAR"), AND G/S
ACQUISITION SUBSIDIARY, A NEWLY-FORMED WHOLLY-OWNED SUBSIDIARY OF GEMSTAR
INCORPORATED UNDER THE LAWS OF CALIFORNIA ("SUB"), AND THE TRANSACTIONS
CONTEMPLATED THEREUNDER, INCLUDING A MERGER PURSUANT TO WHICH SUB WOULD BE
MERGED WITH AND INTO STARSIGHT, WITH STARSIGHT BEING THE SURVIVING CORPORATION
(THE "MERGER") AND STARSIGHT BECOMING A WHOLLY-OWNED SUBSIDIARY OF GEMSTAR.
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Please mark your votes as indicated [X]
1. To approve and adopt the Merger Agreement and the transactions contemplated
thereunder, including the Merger. FOR AGAINST ABSTAIN
[_] [_] [_]
2. Upon such other business as may properly come before the StarSight Special
Meeting or any adjournments or postponements thereof, as determined by a
majority of StarSight's Board of Directors.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL
BE VOTED FOR THE PROPOSAL LISTED, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING, INCLUDING, AMONG OTHER THINGS,
CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT OF THE MEETING (INCLUDING,
WITHOUT LIMITATION, FOR PURPOSES OF SOLICITING ADDITIONAL VOTES TO APPROVE THE
MERGER AGREEMENT AND THE MERGER).
The undersigned shareholder may revoke this proxy at any time before it is
voted by filing with the Secretary of StarSight either an instrument revoking
the proxy or a duly executed proxy bearing a later date, or by attending the
StarSight Special Meeting and voting in person.
PLEASE DATE AND SIGN
EXACTLY AS NAME APPEARS ON
SHARE CERTIFICATES.
Signature(s)_______________________________________ Dated_________________, 1997
Each executor, administrator, trustee, guardian, attorney-in-fact and other
fiduciary should sign and indicate his or her full title. When shares have been
issued in the name of two or more persons, all should sign. If a corporation,
please sign in corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
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FORM OF GEMSTAR PROXY
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REVOCABLE PROXY
GEMSTAR INTERNATIONAL GROUP LIMITED
ANNUAL MEETING OF SHAREHOLDERS
This Proxy is Solicited by the Board of Directors
The undersigned shareholder of Gemstar International Group Limited, a
British Virgin Islands Corporation ("Gemstar"), hereby acknowledges receipt of
the Notice of Annual Meeting of Shareholders and Joint Proxy
Statement/Prospectus, each dated April 18, 1997, and hereby appoints Henry C.
Yuen, Elsie Ma Leung and Larry Goldberg, and each of them, with full power of
substitution, on behalf of and in the name of the undersigned, to represent the
undersigned at the Annual Meeting of the Shareholders of Gemstar to be held May
1, 1997 at 7:00 a.m., California time, at 2-29-18 Nishi-Ikeburu, Ioshima-ku,
Tokyo 171, Japan and at any adjournments or postponements thereof, and to vote
shares of the Gemstar Ordinary Shares which the undersigned would be entitled to
vote, if then and there personally present, on the matters set forth on the
reverse side hereof.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE
ENVELOPE PROVIDED.
(SEE REVERSE SIDE)
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Please mark [X]
your votes
as indicated
THE GEMSTAR BOARD OF DIRECTORS RECOMMENDS A VOTE (i) FOR APPROVAL OF THE
ISSUANCE OF GEMSTAR ORDINARY SHARES, PAR VALUE $.01 PER SHARE ("GEMSTAR ORDINARY
SHARE"), AS CONTEMPLATED BY THE AGREEMENT AND PLAN OF MERGER, DATED AS OF
DECEMBER 23, 1996 (THE "MERGER AGREEMENT"), BY AND AMONG GEMSTAR, G/S
ACQUISITION SUBSIDIARY, A NEWLY-FORMED WHOLLY-OWNED SUBSIDIARY OF GEMSTAR
INCORPORATED UNDER THE LAWS OF CALIFORNIA ("SUB"), AND STARSIGHT TELECAST, INC.,
A CALIFORNIA CORPORATION ("STARSIGHT"), PURSUANT TO WHICH SUB WOULD BE MERGED
WITH AND INTO STARSIGHT, WITH STARSIGHT BEING THE SURVIVING CORPORATION AND
STARSIGHT BECOMING A WHOLLY-OWNED SUBSIDIARY OF GEMSTAR; (ii) FOR APPROVAL AND
ADOPTION OF A PROPOSAL TO INCREASE THE NUMBER OF GEMSTAR ORDINARY SHARES
AVAILABLE FOR ISSUANCE UNDER GEMSTAR'S 1994 STOCK INCENTIVE PLAN, AS AMENDED, BY
3,500,000 GEMSTAR ORDINARY SHARES (THE "STOCK INCENTIVE PLAN PROPOSAL"); (iii)
FOR ELECTION OF DR. GEORGE F. CARRIER AND TERUYUKI TOGAMA AS CLASS II DIRECTORS
OF GEMSTAR; AND (iv) FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAR MARWICK
LLP AS GEMSTAR'S INDEPENDENT AUDITORS FOR THE YEAR ENDED MARCH 31, 1998.
FOR AGAINST ABSTAIN
10.12.1 To approve the issuance of [_] [_] [_]
Gemstar Ordinary Shares as contemplated
by the Merger Agreement.
10.12.3 To elect Dr. George F. Carrier and [_] [_] [_]
Teruyuki Togama as Class II
director of Gemstar.
10.12.2 To approve and adopt [_] [_] [_]
the Stock Incentive Plan
Proposal.
10.12.4 To ratify the appointment [_] [_] [_]
of KPMG Peat Marwick
LLP as Gemstar's independent
auditors.
10.12.5 Upon such other business as may properly come before the Gemstar Annual
Meeting or any adjournments or postponements thereof, as determined by
a majority of Gemstar's Board of Directors.
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL
BE VOTED FOR THE PROPOSAL LISTED,AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING, INCLUDING, AMONG OTHER THINGS,
CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT OF THE MEETING
(INCLUDING, WITHOUT LIMITATION, FOR PURPOSES OF SOLICITING ADDITIONAL VOTES TO
APPROVE THE ISSUANCE OF GEMSTAR ORDINARY SHARES AS CONTEMPLATED BY THE MERGER
AGREEMENT.
The undersigned shareholder may revoke this proxy at any time before it is
voted by filing with the Secretary of Gemstar either an instrument revoking the
proxy or a duly executed proxy bearing a later date, or by attending the
Gemstar Annual\Meeting and voting in person.
Signature(s) of Shareholder or Authorized Representative______________________
Date_______________
NOTE: Please date and sign exactly as name appears on share certificates. Each
executor, administrator, trustee, guardian, attorney-in-fact and other fiduciary
should sign and indicate his or her full title. When shares have been issued in
the name of two or more persons, all should sign. If a corporation, please sign
in corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
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