<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 December 31, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission file number 0-26878
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 December 31, 1996, there were outstanding 31,273,253 shares of the
Registrant's Ordinary Shares, par value $0.01 per share.
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- December 31, 1996
and March 31, 1996...................................... 1
Condensed Consolidated Statements of Operations -- Three
and Nine Months Ended December 31, 1996 and 1995........ 2
Condensed Consolidated Statements of Cash Flows -- Nine
Months Ended December 31, 1996 and 1995................. 3
Notes to Condensed Consolidated Financial Statements..... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 5
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 8
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES................................................. 11
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,742 $ 64,097
Marketable securities 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
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, par value $.01 per share.
Authorized 500,000,000 shares; issued and
outstanding 31,273,253 shares at December 31,
1996 and 30,928,285 shares at March 31, 1996 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 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 Nine Months
Ended Ended
December 31, December 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 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>
Nine Months Ended
December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 9,298 $(29,592)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,380 1,390
Deferred income taxes 968 454
Changes in assets and liabilities:
Prepaid expenses and other assets 2,513 (3,850)
Accounts payable, accrued expenses and other liabilities (13,242) 37,709
Deferred revenue 1,669 2,671
-------- --------
Net cash provided by operating activities 2,586 8,782
-------- --------
Cash flows from investing activities:
Decrease in due from related parties - 2,414
Net purchases of marketable securities (25,525) -
Additions to property and equipment (1,146) (3,004)
Increase to intangible assets (754) (629)
Increase in other assets (902) (484)
-------- --------
Net cash used in investing activities (28,327) (1,703)
-------- --------
Cash flows from financing activities:
Dividend paid - (5,000)
Proceeds from the issuance of Ordinary Shares - 12,270
Proceeds from public offerings of Ordinary Shares 7,920 36,159
-------- --------
Net cash provided by financing activities 7,920 43,429
-------- --------
Effect of exchange rate changes on cash and cash equivalents (15) 32
-------- --------
Net (decrease) increase in cash and cash equivalents (17,836) 50,540
Cash and cash equivalents at beginning of period 60,578 12,740
Adjustment to conform VideoGuide, Inc.'s fiscal year - (1,091)
======== ========
Cash and cash equivalents at end of period $ 42,742 $ 62,189
======== ========
</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"). The 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.
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, 1996 and the
Supplemented Consolidated Financial Statements and related Notes included in the
Company's Form 6-K for the month of March 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 December 31, 1996 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 1997.
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
On December 12, 1996, the Company completed its acquisition of VideoGuide by
acquiring all of the outstanding capital stock of VideoGuide. The acquisition
has been accounted for under the pooling of interests method and accordingly,
the accompanying condensed consolidated financial statements have been restated
to include the accounts and results of operations of VideoGuide for all periods
presented.
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.
4
<PAGE>
Item 2.
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 related Notes and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 20-F and the
Supplemental Consolidated Financial Statements and related Notes included in the
Company's Form 6-K for the month of March 1997. This analysis is not intended to
serve as a basis for projections of future events.
Overview
The Company develops, markets and licenses propriety 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), as 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.
5
<PAGE>
Quarterly operating results are affected by, among other matters, changes in
the market acceptance of existing products sold by licensees incorporating the
Company's propriety technologies. In addition, there can be no assurance that
new products incorporating the Company's propriety 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.
Results of Operations
6
<PAGE>
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.
7
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents 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. The increase was due primarily to the net
proceeds from the Company's secondary offering 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. Net cash provided by operating activities was $2.6
million for the nine months ended December 31, 1996, as compared to net cash
provided by operating activities of $8.8 million, for the nine months ended
December 31, 1995. The decrease in cash provided by operating activities was
primarily the result of the timing of payments offset by an increase in
earnings. Net cash used in investing activities was $28.3 million which was
primarily attributable to the purchase of marketable securities. The Company
also used cash of $2.8 million for additions to equipment, intangible assets and
other assets. Net cash provided by financing activities was $7.9 million, which
was comprised of the net proceeds from the Company's Secondary offering of
Ordinary Shares.
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently a party in a consolidated lawsuit in which the
adverse party is StarSight Telecast, Inc., a California Corporation
("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 (hereinafter "StarSight Litigation"), 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 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 additional 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 such additional patents and that such patents are
invalid and unenforceable. See "Patent and Proprietary Information; Litigation"
in Item 1.
On December 23, 1996, the Company and StarSight entered into an Agreement and
Plan of Merger (the "Merger Agreement"). In the Merger Agreement, the Company
and StarSight agreed that all activity with respect to the pending litigation
between them will be held in abeyance until the earlier of the termination of
the Merger Agreement or the Effective Time of the Merger. Following the
effective date of the Merger, the litigation between the Company and Starsight
will be dismissed by all parties. If the Merger Agreement is terminated, 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.
8
<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.
23.1** Consent of KPMG Peat Marwick LLP.
27.1*** 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).
9
<PAGE>
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.
* 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 6-K of the Company filed on or about March
11, 1997, and incorporated herein by reference.
*** Filed herewith.
(b) Reports on Form 8-K
None.
10
<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: February 10, 1998
By: /s/ Henry C. Yuen
-------------------
Henry C. Yuen
Chief Executive Officer
By: /s/ Elsie Leung
-------------------
Elsie Leung
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRCTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 42,742
<SECURITIES> 29,044
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,610
<PP&E> 7,176
<DEPRECIATION> 2,537
<TOTAL-ASSETS> 87,195
<CURRENT-LIABILITIES> 38,511
<BONDS> 0
0
0
<COMMON> 60,849
<OTHER-SE> (17,326)
<TOTAL-LIABILITY-AND-EQUITY> 87,195
<SALES> 0
<TOTAL-REVENUES> 46,072
<CGS> 0
<TOTAL-COSTS> 34,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,418
<INCOME-TAX> 5,120
<INCOME-CONTINUING> 9,298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,298
<EPS-PRIMARY> .28
<EPS-DILUTED> 0
</TABLE>
