<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to _______
Commission file number 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
British Virgin Islands N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
(Address of principal executive offices, including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
-
As of October 31, 1997, there were outstanding 48,085,880 shares of the
Registrants' Ordinary Shares, par value $0.01 per share.
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
September 30, 1997 and March 31, 1997............................ 1
Condensed Consolidated Statements of Operations --
Three and Six Months Ended September 30, 1997 and 1996........... 2
Condensed Consolidated Statements of Cash Flows --
Six Months Ended September 30, 1997 and 1996.................... 3
Notes to Condensed Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 12
SIGNATURES........................................................ 13
</TABLE>
i
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 117,595 $ 59,909
Marketable securities 26,562 48,946
Prepaid expenses and other current assets 5,242 6,442
--------- ---------
Total current assets 149,399 115,297
Property and equipment, net 4,580 5,126
Intangible assets, net 8,633 6,855
Marketable securities - 1,535
Other assets 2,570 2,463
--------- ---------
$ 165,182 $ 131,276
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 48,235 $ 43,141
Current portion of deferred revenue 27,920 18,180
--------- ---------
Total current liabilities 76,155 61,321
Deferred revenue, less current portion 4,545 11,077
Other liabilities 9,586 5,161
Shareholders' equity:
Ordinary Shares, par value $.01 per share. Authorized 500,000,000
shares; issued and outstanding 48,063,842 shares at September 30, 1997
and 46,800,876 shares at March 31, 1997 481 468
Additional paid-in capital 200,211 186,515
Accumulated deficit (125,586) (132,788)
Unearned compensation (120) (388)
Cumulative translation adjustments (90) (90)
--------- ---------
Net shareholders' equity 74,896 53,717
--------- ---------
$ 165,182 $ 131,276
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
-------------------- --------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $27,677 $15,235 $53,302 $29,766
Operating costs and expenses:
Selling and marketing 7,576 3,839 15,019 15,613
Research and development 3,124 4,181 6,621 8,479
General and administrative 4,239 6,248 8,829 13,461
Merger costs - - 11,713 -
------- ------- ------- -------
Earnings (loss) from operations 12,738 967 11,120 (7,787)
Other income, net 1,540 1,344 3,086 2,423
------- ------- ------- -------
Earnings (loss) before income tax expense 14,278 2,311 14,206 (5,364)
Income tax expense 3,855 1,590 7,004 3,145
------- ------- ------- -------
Net earnings (loss) $10,423 $ 721 $ 7,202 $(8,509)
======= ======= ======= =======
Earnings (loss) per share $ 0.20 $ 0.01 $ 0.14 $ (0.18)
======= ======= ======= =======
Weighted average shares outstanding 51,705 51,054 51,019 46,679
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 7,202 $ (8,509)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Amortization of unearned compensation 268 696
Depreciation and amortization 1,795 1,983
Deferred income taxes 4,371 195
Changes in assets and liabilities:
Prepaid expenses and other assets 1,093 2,734
Accounts payable, accrued expenses and other liabilities 5,148 (4,571)
Deferred revenue 3,208 3,690
-------- --------
Net cash provided by (used in) operating activities 23,085 (3,782)
-------- --------
Cash flows from investing activities:
Net maturities (purchases) of marketable securities 23,919 (26,582)
Additions to property and equipment (442) (674)
Additions to intangible assets (2,585) (678)
-------- --------
Net cash provided by (used in) investing activities 20,892 (27,934)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of Ordinary Shares, net - 32,545
Proceeds from the exercise of options for Ordinary Shares 13,709 730
-------- --------
Net cash provided by financing activities 13,709 33,275
-------- --------
Effect of exchange rate changes on cash and cash equivalents - (6)
-------- --------
Net increase in cash and cash equivalents 57,686 1,553
Cash and cash equivalents at beginning of period 59,909 69,365
Adjustment to conform StarSight Telecast, Inc.'s fiscal year - (7,147)
-------- --------
Cash and cash equivalents at end of period $117,595 $ 63,771
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
As more fully discussed in Note 3, in December 1996, the Company acquired
VideoGuide, Inc. ("VideoGuide") and in May 1997, the Company acquired StarSight
Telecast, Inc. ("StarSight Telecast"). Each transaction has been accounted for
under the pooling of interests method. Accordingly, the accompanying financial
statements have been restated to include the accounts and results of operations
of VideoGuide and StarSight Telecast.
The Condensed Consolidated Financial Statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
Consolidated Financial Statements and related Notes included in the Company's
Annual Report on Form 20-F for the year ended March 31, 1997.
The Condensed Consolidated Financial Statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows for such periods. The results of operations for the
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 1998.
2. Earnings (Loss) Per Share
Earnings (loss) per share for all periods presented is based on the
weighted average number of Ordinary Shares and dilutive Ordinary Share
equivalents outstanding during the period.
3. Business Combinations
Effective May 8, 1997, the Company acquired StarSight Telecast. StarSight
Telecast is the developer of and markets an interactive program guide available
in cable set-top boxes, televisions, VCRs, TVCRs and satellite integrated
descramblers. In addition, StarSight Telecast licenses its intellectual property
for non-StarSight-capable products which provide features based on StarSight
Telecast's proprietary technology and patented inventions. The Company issued
approximately 15.5 million Ordinary Shares for all of the outstanding stock of
StarSight Telecast and assumed outstanding StarSight Telecast stock options and
warrants which were converted to options and warrants to purchase approximately
1.4 million and 1.8 million of the Company's Ordinary Shares, respectively.
Effective December 12, 1996, the Company acquired VideoGuide, a developer
of interactive program guide technology, for approximately 475,000 Ordinary
Shares of the Company and also assumed outstanding VideoGuide stock options
which converted into options to purchase approximately 16,500 of the Company's
Ordinary Shares.
The VideoGuide and StarSight Telecast acquisitions have each been accounted
for under the pooling of interests method and accordingly, the accompanying
financial statements have been restated to include the accounts and results of
operations of VideoGuide and StarSight Telecast for all periods prior to the
acquisitions.
StarSight Telecast had a calendar year end. In order to conform StarSight
Telecast's year end to Gemstar's fiscal year end, a charge was made to retained
earnings during the three months ended June 30, 1996 of $7,147,000. In addition,
the Company increased the net loss of StarSight Telecast by $556,000 and
$925,000 for the three and six months ended September 30, 1996, respectively, to
conform accounting policies of StarSight Telecast with those of the Company.
4
<PAGE>
4. Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS No. 128), "Earnings per Share" (EPS). Under SFAS No.
128 the Company will be required to change the method currently used to compute
EPS and restate all prior periods. The Statement modifies the standards for
computing EPS in APB Opinion No. 15 "Earnings per Share" and makes them
comparable to international EPS standards. It also replaces the presentation of
primary EPS with a presentation of basic EPS and fully diluted EPS with diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of the common shares
outstanding for the period. Diluted EPS includes the potential dilution that
could occur from the exercise or conversion of securities or other contracts to
issue common stock. The Statement also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for periods ending after December 15,
1997, including interim periods. The Company will adopt SFAS No. 128 in its
third quarter of fiscal year 1998.
The Financial Accounting Standards Board has also issued SFAS No. 129,
"Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." These new accounting standards are for
disclosure purposes and the Company is analyzing the impact of these standards
for future reporting.
5
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes",
"anticipates," "estimates," "expects," and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are referred to the "Certain Factors
Affecting Business, Operating Results and Financial Condition" section of the
Company's Annual Report on Form 20-F for the year ended March 31, 1997, as
well as the "Future Growth Subject to Risks", "Potential Volatility in Operating
Results," and "Volatility of Stock Price" sections contained in this report
which identify those important risk factors which could cause actual results to
differ from those contained in the forward-looking statements.
Overview
Since the launch of the VCR Plus+ system in November 1990 in the United
States, the Company has continued to focus on its mission of providing
technologies to make life easier for consumers all over the world. As of
September 1997, the VCR Plus+ system is available in over 30 countries, and the
combined worldwide circulation of publications publishing the PlusCode numbers
increased to over 300 million. In 1997, the Company introduced Index Plus+, an
interactive on-screen directory of video-tape content by titles automatically
captured from the broadcast. The Company developed, and in 1997 introduced, TV
Guide Plus+, a no fee, on-screen, interactive program guide built into
televisions and VCRs. As a result of its acquisitions of VideoGuide and
StarSight Telecast, the Company acquired additional proprietary technologies and
patented inventions in the interactive program guide area. The Company believes
that the growth in the number of television channels, along with the
proliferation of viewing choices, has created a need for an easy-to-use method
of identifying, selecting and recording television programs. The Company
believes that as consumer needs for improved television schedule information
grows, the need for accurate and convenient methods of program selection and
recording will also grow. The Company licenses its technology and intellectual
property to various industry sectors including consumer electronics (TV, VCR and
TVCR), satellite, cable, telco and personal computers. The Company believes that
its interactive program guide technology will be an important feature for all
providers of analog and digital video services to consumers. The Company's
licensees include Aiwa, Akai, Cox Communications, Daewoo, Funai, General
Instrument, GTE Communication Systems, Hitachi, Hughes Network Systems, JVC, LG
Electronics (Goldstar), Matsushita (Panasonic and Quasar), MediaOne, Microsoft
Corporation, Mitsubishi, Orion, Philips (Magnavox and Philips), Samsung, Sanyo,
Scientific-Atlanta, Sharp, Shintom, Sony, Southern New England Telephone,
Thomson Consumer Electronics (GE, Proscan, RCA), Time Warner, Toshiba, Uniden
and Zenith.
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 20-F for the year
ended March 31, 1997. The acquisitions of VideoGuide and StarSight Telecast have
each been accounted for under the pooling of interests method, and accordingly,
the Company's Condensed Consolidated Financial Statements have been restated to
include VideoGuide and StarSight Telecast for all periods presented. A fair
measure of the Company's financial performance is to include VideoGuide and
StarSight Telecast results only for periods after the date of the actual
acquisition. Since the acquisition of VideoGuide did not become effective until
December 1996, and the acquisition of StarSight Telecast did not become
effective until May 1997, the Company will compare below its financial results
for the three and six ended September 30, 1997, which include both the
VideoGuide and StarSight Telecast operations, with the year-ago results as
reported by the Company prior to all restatements.
STATEMENT OF OPERATIONS DATA
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
As Reported Pro Forma
Three Months ended September 30 Three Months ended September 30
------------------------------- -------------------------------
1997(a) 1996(a) 1997(a) 1996(c)
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 27,677 $ 15,235 $ 27,677 $ 13,120
Operating costs and expenses:
Selling and marketing 7,576 3,839 7,576 3,107
Research and development 3,124 4,181 3,124 2,473
General and administrative 4,239 6,248 4,239 2,797
--------- -------- -------- --------
Earnings from operations 12,738 967 12,738 4,743
Other income, net 1,540 1,344 1,540 1,158
--------- -------- -------- --------
Earnings before income tax expense 14,278 2,311 14,278 5,901
Income tax expense 3,855 1,590 3,855 1,590
--------- -------- -------- --------
Net earnings $ 10,423 $ 721 $ 10,423 $ 4,311
========= ======== ======== ========
<CAPTION>
As Reported Pro Forma
Six Months ended September 30 Six Months ended September 30
----------------------------- -----------------------------
1997(a) 1996(a) 1997(b) 1996(c)
------------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $ 53,302 $ 29,766 $ 53,302 $ 26,199
Operating costs and expenses:
Selling and marketing 15,019 15,613 15,019 6,148
Research and development 6,621 8,479 6,621 4,959
General and administrative 8,829 13,461 8,829 5,501
Merger costs 11,713 - - -
--------- -------- -------- --------
Earnings (loss) from operations 11,120 (7,787) 22,833 9,591
Other income, net 3,086 2,423 3,086 2,071
--------- -------- -------- --------
Earnings (loss) before income tax expense 14,206 (5,364) 25,919 11,662
Income tax expense 7,004 3,145 7,004 3,145
--------- -------- -------- --------
Net earnings (loss) $ 7,202 $ (8,509) $ 18,915 $ 8,517
========= ======== ======== ========
</TABLE>
(a) Includes VideoGuide and StarSight Telecast.
(b) Includes VideoGuide and StarSight Telecast but excludes merger costs
related to the acquisition of StarSight Telecast.
(c) Excludes VideoGuide and StarSight Telecast.
For the quarter ended September 30, 1997, the Company reported revenues of
$27.7 million, operating income of $12.7 million and net income of $10.4
million. Revenues for the six months ended September 30, 1997 were $53.3
million. Operating income and net income were $22.8 million and $18.9 million,
respectively, before merger related costs associated with the acquisition of
StarSight Telecast of $11.7 million.
For the quarter ended September 30, 1996, prior to restatements, the
Company reported revenues of $13.1 million, operating income of $4.7 million and
net income of $4.3 million. For the six months ended September 30, 1996, prior
to restatements, the Company reported revenues of $26.2 million, operating
income of $9.6 million and net income of $8.5 million.
As a result of the acquisitions of VideoGuide and StarSight Telecast, the
financial results for the quarter ended September 30, 1996 were restated to show
revenues of $15.2 million, operating income of $1 million and net income of
$0.7 million. The financial results for the six months ended September 30, 1996
were restated to show revenues of $29.8 million, an operating loss of $7.8
million and a net loss of $8.5 million.
As reported revenues for the quarter ended September 30, 1997 were
$27.7 million which represents an increase of 111% when compared to the year-ago
quarter prior to restatement and an increase of 82% when compared to year-ago
revenues after restatement. As reported revenues for the six months ended
September 30, 1997 were $53.3 million, an increase of 103% when compared to the
year-ago period prior to restatement and an increase of 79% when compared to
year-ago revenues after restatement. Revenues contributed by VideoGuide and
StarSight Telecast were not significant to the results of operations for the
year-ago periods. The growth in revenues is attributable to the expansion of
the Company's opportunities from consumer electronics into the cable, satellite
and personal computer industries, the continued increase in license income for
VCR Plus+ and license income associated with the Company's electronic program
guide technology and intellectual property. Subscription income from the
VideoGuide and StarSight systems were not significant.
Total operating expenses for the quarter ended September 30, 1997 were
$14.9 million, comprised of selling and marketing expenses of $7.6 million,
research and development expenses of $3.1 million and general and administrative
expenses of $4.2 million. Compared with the year-ago quarter results, restated
to include the VideoGuide and StarSight Telecast operations, total operating
expenses for the current quarter increased 5%. Total operating expenses for the
six months ended September 30, 1997 were $30.5 million, comprised of selling and
marketing expenses of $15 million, research and development expenses of $6.6
million and general and administrative expenses of $8.8 million. Compared with
the year-ago results, after restatement, total operating expenses for the six
months ended September 30, 1997 decreased 19%.
Compared with the year-ago results, prior to restatement for the VideoGuide
and StarSight Telecast operations, total operating expenses for the three and
six months ended September 30, 1997 increased by 78% and 83%, respectively.
These increases reflect a larger operation resulting from the acquisitions of
VideoGuide and StarSight Telecast. For the six months ended September 30, 1997,
the 83% increase in operating expenses was more than offset by the 103%
increase in revenues.
6
<PAGE>
As a result of the acquisition of StarSight Telecast, the Company recorded
merger related costs totaling $11.7 million in the quarter ended June 30, 1997.
These costs were comprised of fees of financial advisors, attorneys and
accountants, severance related costs, and other transaction costs.
Income tax expense was $3.9 million for the quarter ended September 30,
1997 and $7 million for the six months ended September 30, 1997. Excluding
merger related costs, the Company's effective tax rate for the three and six
months ended September 30, 1997 was 27%. The overall effective tax rate reported
by the Company in any single period is 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.
7
<PAGE>
Future Growth Subject to Risks
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Annual Report on Form 20-F
for the year ended March 31, 1997 and the Company's Registration Statement on
Form F-4 (Registration Statement No. 333-6790, the "Form F-4"). This report on
Form 10-Q should be read in conjunction with such Annual Report and Form F-4,
particularly "Certain Factors Affecting Business, Operating Results and
Financial Condition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Annual Report on Form 20-F
and "Risk Factors" contained in Form F-4.
The Company's growth is dependent upon market growth for its technologies
and systems and its ability to enhance its existing products and introduce new
products and services on a timely basis. One way the Company has addressed the
need to develop new products and services and to enter new markets is through
its acquisitions. Acquisitions involve numerous risks, including difficulties in
assimilation of the operations, technologies and products of the acquired
companies; risks of entering markets in which the Company has no or limited
direct prior experience and where competitors in such markets have stronger
market positions; and the potential loss of key employees of the acquired
company. The Company must also maintain its ability to manage any such growth
effectively. Failure to manage growth effectively and successfully integrate
acquisitions made by the Company could adversely effect the Company's business
and operating results.
The markets for the Company's products and services are characterized by
rapidly changing technology, evolving industry standards, frequent new product
or service introductions and short product life cycles. There can be no
assurance that the Company will successfully identify new product or service
opportunities and develop and bring new products or services to market in a
timely manner, or that products, services and technologies developed by others
will not render the Company's products, services or technologies obsolete or
non-competitive. The failure of the Company's new product, service or technology
development efforts could have a material adverse effect on the Company's
business, operating results and financial condition.
8
<PAGE>
Potential Volatility in Operating Results
The Company expects that, in the future, it will continue to experience
variability in its revenues and operating results on a quarterly basis as a
result of a number of factors. As manufacturers have incorporated the Company's
technologies into products, the Company's license revenues have displayed a
seasonality typical of those consumer electronics products manufacturers.
Shipments by manufacturers of VCRs and televisions in general, and therefore
VCRs and televisions incorporating the Company's VCR Plus+ or TV GUIDE Plus+
technologies, tend to be higher in the third or 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 with consumer
electronics manufacturers 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 the manufacturer over the year. As VCR Plus+
incorporation volume increases, the Company has experienced declining average
per unit license fees due to volume discounts provided for in license agreements
and expects this trend to continue. The Company anticipates 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+. 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 acceptance, the timing of manufacturers'
implementation of shipments is uncertain and may result in greater variability
of the Company's quarterly and annual operating results. In addition there can
be no assurance that the licensing of the Company's intellectual property will
result in significant revenues or profits. The Company's licensing revenues from
non-consumer electronics sectors, such as cable, satellite, telco and personal
computers may, generally, experience less seasonal variability.
Another factor contributing to the variability of 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 (prior to the restatement for the
acquisitions) will continue on a quarterly or annual basis.
9
<PAGE>
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 explore additional opportunities to exploit the Company's
intellectual property. However, there can be no assurance that the Company will
be successful in its ability to continue to enter into favorable license
arrangements, the lack of which could have a material adverse effect on the
business, operating results and financial condition of the Company.
The Company conducts business on a global basis. Accordingly, the
Company's future results could be adversely affected by a variety of
uncontrollable and changing factors, including foreign currency exchange rates,
regulatory, political or economic conditions in a specific country or region,
trade protection measures and other regulatory requirements, among other
factors.
Volatility of Stock Price
The Company's Ordinary Shares have experienced substantial price
volatility. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many technology
companies in particular and have often been unrelated to the operating
performance of any specific company. These factors, as well as general economic
and political conditions, may adversely affect the market price of the Company's
Ordinary Shares in the future.
Liquidity and Capital Resources
At September 30, 1997, the Company had cash, cash equivalents and
marketable securities totaling $144.2 million. Net cash provided by operating
activities was $23.1 million for the six months ended September 30, 1997, as
compared to net cash used in operating activities of $3.8 million, for the as
reported six months ended September 30, 1996. The increase in cash provided by
operating activities was primarily the result of increased earnings and the
timing of payments. Net cash provided by investing activities was $20.9 million
which was primarily attributable to cash received from maturities of marketable
securities. The Company also used cash of $3 million for additions to equipment
and intangible assets. Net cash provided by financing activities was $13.7
million which was comprised of cash from the exercise of options for Ordinary
Shares.
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.
The Company believes that the anticipated cash flows from operations, and
existing cash, cash equivalents and marketable securities balances, will be
sufficient to satisfy its expected working capital and capital expenditure
requirements through fiscal 1998.
10
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal proceedings
United Video Litigation
In October 1993, United Video and its Tracker, Inc. subsidiary brought
suit against StarSight Telecast in the U.S. District Court for the Northern
District of Oklahoma, seeking a declaratory judgment that its interactive
program guide products do not infringe certain of StarSight Telecast's patents.
StarSight Telecast counterclaimed charging infringement of one of the patents.
Through subsequent procedural motions, the lawsuit expanded to include a total
of ten patents to which StarSight Telecast has rights and to federal antitrust
claims. The Court has deferred consideration of all of the other claims and
counterclaims pending the resolution of the infringement, validity and
enforceability issues of one of the patents. 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 this patent. In subsequent
proceedings, StarSight Telecast has presented witnesses relating to the
validity, enforceability and infringement of this patent. To date there has been
no ruling from the Court on this issue. Proceedings have been scheduled by the
Court to resume in May 1998.
General Instrument Arbitration
In May 1997, StarSight Telecast brought an arbitration action against
General Instrument Corporation* concerning General Instrument Corporation's
alleged delay in deployment of StarSight-capable set-top boxes and its
development of a competing electronic program guide allegedly using StarSight
Telecast's technology in violation of its agreement with StarSight Telecast. The
arbitrators have been selected, but there has been no discovery. A preliminary
hearing has been scheduled in November 1997 to address discovery, case
administration and scheduling two future hearings. StarSight Telecast is seeking
a permanent injunction, monetary damages and other relief in the arbitration.
*On July 28, 1997 General Instrument Corporation split into three separate
companies, Next Level Systems, Inc., CommScope, Inc. and General Semiconductor,
Inc.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 requested).
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.
27 Financial Data Schedule
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.
99.9** Letter Agreement, dated December 23, 1996, between Larry W.
Wangberg and StarSight Telecast, Inc.
99.10** Letter Agreement, dated December 23, 1996, between Brian L.
Klosterman and StarSight Telecast, Inc.
99.11** Employment Agreement between StarSight Telecast, Inc. and Larry W.
Wangberg dated as of December 23, 1996.
99.12** Employment Agreement between StarSight Telecast, Inc. and Brian L.
Klosterman dated as of December 23, 1996.
99.13** Employment Agreement between StarSight Telecast, Inc. and Martin W.
Henkel dated as of December 23, 1996.
99.14** Employment Agreement between StarSight Telecast, Inc. and William
Scharninghausen dated as of December 23, 1996.
------------------------------
* 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-4 Registration Statement of the
Company (333-6790), which was declared effective on April 15, 1997,
and incorporated herein by reference.
(b) Report on Form 8-K
The Company filed two current reports on Form 8-K/A during the
quarter ended September 30, 1997 amending Form 8-K filed on May 22,
1997. In the Form 8-K, the Company reported under item 2 its
acquisition of StarSight Telecast, and filed under Item 7 certain
of the financial statements required to be filed in connection with
the acquisition. Form 8-K/A Amendment No. 1 and Amendment No.
2 were filed on July 22, 1997 and July 30, 1997 respectively,
amending Item 7 of Form 8-K. The Form 8-K amendments were filed to
include the following financial statements and the related
auditor's report and consent:
1. StarSight Telecast, Inc.'s audited balance sheets as of December
31, 1996 and 1995 and the related audited statements of
operations, shareholders' equity and 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.
2. Unaudited Pro Forma Condensed Combined Balance Sheets as of
December 31, 1996.
3. Unaudited Pro Forma Condensed Combining Statements of Operations
for the Nine Months Ended December 31, 1996 and for the Years
Ended March 31, 1996, 1995 and 1994.
4. StarSight Telecast, Inc.'s Condensed Balance Sheets as of March
31, 1997 (unaudited) and December 31, 1996 and the related
unaudited condensed statements of operations and cash flows for
the Three Months Ended March 31, 1997 and 1996.
5. Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1997.
6. Unaudited Pro Forma Condensed Combining Statements of
Operations for the Year Ended March 31, 1997.
12
<PAGE>
SIGNATURES
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)
Date: November 14, 1997 By: /s/ Larry Goldberg
------------------
Larry Goldberg
Secretary and Corporate Counsel
13
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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