<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, 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 December 31, 1997, there were outstanding 48,228,588 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 --
December 31, 1997 and March 31, 1997............................. 1
Condensed Consolidated Statements of Operations --
Three and Nine Months Ended December 31, 1997 and 1996........... 2
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended December 31, 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................................................. 13
Item 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURES........................................................ 16
</TABLE>
i
<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,
1997 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119,428 $ 59,909
Marketable securities 22,869 48,946
Prepaid expenses and other current assets 3,815 6,442
--------- ---------
Total current assets 146,112 115,297
Property and equipment, net 4,101 5,126
Intangible assets, net 16,618 6,855
Marketable securities - 1,535
Other assets 2,333 2,463
--------- ---------
$ 169,164 $ 131,276
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 41,128 $ 43,141
Current portion of deferred revenue 23,248 18,180
--------- ---------
Total current liabilities 64,376 61,321
Deferred revenue, less current portion 1,620 11,077
Other liabilities 10,523 5,161
Shareholders' equity:
Ordinary Shares, par value $.01 per share. Authorized 500,000,000
shares; issued and outstanding 48,228,588 shares at December 31, 1997
and 46,800,876 shares at March 31, 1997 482 468
Additional paid-in capital 205,933 186,515
Accumulated deficit (113,568) (132,788)
Unearned compensation (60) (388)
Cumulative translation adjustments (142) (90)
--------- ---------
Net shareholders' equity 92,645 53,717
--------- ---------
$ 169,164 $ 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 Nine Months Ended
December 31, December 31,
-------------------- --------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $30,530 $22,113 $83,832 $ 51,879
Operating costs and expenses:
Selling and marketing 7,736 12,860 22,755 28,473
Research and development 3,278 3,471 9,899 11,950
General and administrative 4,456 7,239 13,285 20,700
Merger costs - - 11,713 -
------- ------- ------- --------
Earnings (loss) from operations 15,060 (1,457) 26,180 (9,244)
Other income, net 2,032 1,308 5,118 3,731
------- ------- ------- --------
Earnings (loss) before income tax expense 17,092 (149) 31,298 (5,513)
Income tax expense 5,074 1,975 12,078 5,120
------- ------- ------- --------
Net earnings (loss) $12,018 $(2,124) $19,220 $(10,633)
======= ======= ======= ========
Net earnings (loss) per share:
Basic $ 0.25 $ (0.05) $ 0.41 $ (0.23)
Diluted $ 0.23 $ (0.05) $ 0.39 $ (0.23)
======= ======= ======= ========
</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,
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 19,220 $(10,633)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Amortization of unearned compensation 328 1,164
Depreciation and amortization 3,161 2,626
Deferred income taxes 5,079 968
Tax benefit associated with stock options 4,000 -
Changes in assets and liabilities:
Prepaid expenses and other assets 2,757 3,002
Accounts payable, accrued expenses and other liabilities (1,730) (13,917)
Deferred revenue (4,389) 19,829
-------- --------
Net cash provided by operating activities 28,426 3,039
-------- --------
Cash flows from investing activities:
Net maturities (purchases) of marketable securities 27,612 (27,514)
Additions to property and equipment (617) (1,571)
Additions to intangible assets (11,282) (1,007)
-------- --------
Net cash provided by (used in) investing activities 15,713 (30,092)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of Ordinary Shares, net - 32,545
Proceeds from the exercise of stock options 15,432 755
-------- --------
Net cash provided by financing activities 15,432 33,300
-------- --------
Effect of exchange rate changes on cash and cash equivalents (52) (15)
-------- --------
Net increase in cash and cash equivalents 59,519 6,232
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 $119,428 $ 68,450
======== ========
</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 10-K 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 December 31, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 1998.
2. Net earnings (Loss) Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128") during the quarterly
period ended December 31, 1997. This statement specifies new standards designed
to improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. As required under SFAS No. 128, the Company has
retroactively adjusted earnings (loss) per share information for all period
presented.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computation:
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Net earnings (loss) available to
Ordinary shareholders $12,018 48,129 $0.25 $(2,124) 46,749 $(0.05)
===== ======
Effect of Dilutive Securities:
Options - 2,635 - -
Warrants - 469 - -
------- ------ ------- ------
Diluted Earnings (Loss) Per Share:
Net earnings (loss) available to
Ordinary shareholders including
assumed conversions $12,018 51,233 $0.23 $(2,124) 46,749 $(0.05)
======= ====== ===== ======= ====== ======
<CAPTION>
Nine Months Ended December 31,
--------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Net earnings (loss) available to
Ordinary shareholders $19,220 47,427 $0.41 $(10,633) 46,680 $(0.23)
===== ======
Effect of Dilutive Securities:
Options - 2,146 - -
Warrants - 343 - -
------- ------ -------- ------
Diluted Earnings (Loss) Per Share:
Net earnings (loss) available to
Ordinary shareholders including
assumed conversions $19,220 49,916 $0.39 $(10,633) 46,680 $(0.23)
======= ====== ===== ======== ====== ======
</TABLE>
Subsequent to December 31, 1997, the Company granted options and warrants
to purchase approximately 4.2 million and 2.5 million of the Company's Ordinary
Shares, respectively. Accordingly, the number of shares outstanding included in
the diluted earnings (loss) per share calculation would have been increased due
to the options and warrants granted, if the option and warrant grants had
occurred on or before December 31, 1997.
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 $720,000 and
$1,645,000 for the three and nine months ended December 31, 1996, respectively,
to conform accounting policies of StarSight Telecast with those of the Company.
4
<PAGE>
4. Recent Accounting Pronouncements
The Company intends to adopt SFAS No. 130, Reporting Comprehensive Income
("SFAS No. 130") and SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information ("SFAS No. 131") in fiscal 1999. Both Standards will
require additional disclosure, but will not have a material effect on the
Company's financial position or results of operations. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and is expected
to first be reflected in the Company's first quarter of fiscal 1999 interim
financial statements. Components of comprehensive income include items such as
net income and changes in value of available-for-sale securities. SFAS No. 131
changes the way companies report segment information and requires segments to be
determined based on how management measures performance and makes decisions
about allocating resources. SFAS No. 131 will first be reflected in the
Company's fiscal 1999 Annual Report.
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 10-K for the year ended March 31, 1997, as well
as the "Certain Factors Affecting Business, Operating and Financial Condition"
section 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
December 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 has also developed and acquired a large portfolio of
interactive program guide technologies and intellectual property necessary to
implement interactive program guides (the "Gemstar Guide Technology"), which
enable consumers to select, schedule and record television programming with the
touch of a button. The Gemstar Guide Technology has been licensed or
incorporated into televisions, VCRs, TV-VCR combination units, cable set top
boxes, integrated satellite receiver decoders, personal computers, PCTVs and
Internet appliances. The Company believes that with the increase in programming
content and number of accessible channels, the Gemstar Guide Technology will
become an increasingly important tool for assisting consumers in selecting,
scheduling and recording television programming. The Company further believes
that the Gemstar Guide Technology will provide an attractive vehicle for the
sale of advertising on interactive program guides.
The Company has pursued a licensing strategy for its VCR Plus+ technology,
and is pursuing a similar strategy for its Gemstar Guide Technology, wherein the
Company is paid up front, one-time licensing fees plus ongoing per unit license
fees based upon the number of units shipped by a licensee that incorporate the
VCR Plus+ technology or Gemstar Guide Technology, as the case may be. In
addition, the Company is pursuing a recurring revenue model for its Gemstar
Guide Technology wherein the Company would receive revenues from the sale of
advertising and promotion displayed on the guides, sponsorship of guide pages
and from data services and interactive transactions accessed through the guide.
The Company believes that the successful implementation of the Company's
technology into a broad range of platforms requires the cooperation of companies
in many industries. Accordingly, the Company seeks long-term relationships with
a broad range of consumer electronics and other manufactures, television
broadcasters, cable companies and software developers. The Company has recently
entered into three strategic relationships to cover multiple interactive program
guide platforms. In November 1997, the Company signed a multi-year cooperative
agreement with Thomson Consumer Electronics, Inc. ("Thomson"), the United
States' largest manufacturer and marketer of television receivers and related
video products which Thomson sells under the RCA, ProScan and GE brand names.
Pursuant to the cooperative agreement, the Company granted Thomson a multi-year,
multi-million dollar license of the Gemstar Guide Technology and the parties
agreed to cooperate in establishing the Gemstar Guide Technology as the industry
standard in North and South America and to explore further opportunities
presented by the interactive program guide platform primarily in the area of
consumer electronics. In January 1998, the Company entered into a cross-
licensing agreement with Microsoft Corporation ("Microsoft") pursuant to which
Microsoft is expected to adopt the Gemstar Guide Technology as part of its TV
Viewer feature in the Windows '98 operating system and in all Microsoft products
worldwide that incorporate interactive program guides. In January 1998, the
Company and United Video Satellite Group, Inc., a subsidiary of TCI
Communications, Inc. ("United Video"), jointly formed Interactive Prevue Guide
Inc. ("IPGI") for the purpose of marketing a portfolio of intellectual property,
technology and data services for interactive program guides licensed to
multichannel video service providers. Additionally, IPGI entered into a 10-year
licensing agreement with TCI Communications ("TCI") for the deployment of the
Company's interactive program guides in its digital cable customers' homes.
Until fiscal 1997, the Company's primary source of revenues 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, and
to a lesser extent, licensing of the Gemstar Guide Technology.
6
<PAGE>
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 10-K 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. The
following proforma presentation includes VideoGuide and StarSight Telecast
results only for periods after the date of the actual acquisition and excludes
merger costs for the nine months ended December 31, 1997. 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 nine months ended December
31, 1997, which include both the VideoGuide and StarSight Telecast operations,
with the year-ago results as reported by the Company prior to all restatements
for the aforementioned pooling of interests.
STATEMENT OF OPERATIONS DATA
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
As Reported Pro Forma
Three Months ended December 31, Three Months ended December 31,
------------------------------- -------------------------------
1997(a) 1996(a) 1997(a) 1996(c)
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 30,530 $ 22,113 $ 30,530 $ 19,119
Operating costs and expenses:
Selling and marketing 7,736 12,860 7,736 7,027
Research and development 3,278 3,471 3,278 2,675
General and administrative 4,456 7,239 4,456 3,269
--------- -------- -------- --------
Earnings (loss) from operations 15,060 (1,457) 15,060 6,148
Other income, net 2,032 1,308 2,032 1,163
--------- -------- -------- --------
Earnings (loss) before income tax expense 17,092 (149) 17,092 7,311
Income tax expense 5,074 1,975 5,074 1,975
--------- -------- -------- --------
Net earnings (loss) $ 12,018 $ (2,124) $ 12,018 $ 5,336
========= ======== ======== ========
<CAPTION>
As Reported Pro Forma
Nine Months ended December 31, Nine Months ended December 31,
------------------------------ ------------------------------
1997(a) 1996(a) 1997(b) 1996(c)
------------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $ 83,832 $ 51,879 $ 83,832 $ 45,318
Operating costs and expenses:
Selling and marketing 22,755 28,473 22,755 13,175
Research and development 9,899 11,950 9,899 7,634
General and administrative 13,285 20,700 13,285 8,770
Merger costs 11,713 - - (b) -
--------- -------- -------- --------
Earnings (loss) from operations 26,180 (9,244) 37,893 15,739
Other income, net 5,118 3,731 5,118 3,234
--------- -------- -------- --------
Earnings (loss) before income tax expense 31,298 (5,513) 43,011 18,973
Income tax expense 12,078 5,120 12,078 5,120
--------- -------- -------- --------
Net earnings (loss) $ 19,220 $(10,633) $ 30,933 $ 13,853
========= ======== ======== ========
</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 prior to their acquisitions.
7
<PAGE>
For the quarter ended December 31, 1997, the Company reported revenues of
$30.5 million, operating income of $15.1 million and net earnings of $12.0
million. Revenues for the nine months ended December 31, 1997 were $83.8
million. Operating income and net earnings were $37.9 million and $30.9 million,
respectively, before merger related costs associated with the acquisition of
StarSight Telecast of $11.7 million.
For the quarter ended December 31, 1996, prior to restatements, the Company
reported revenues of $19.1 million, operating income of $6.1 million and net
earnings of $5.3 million. For the nine months ended December 31, 1996, prior to
restatements, the Company reported revenues of $45.3 million, operating income
of $15.7 million and net earnings of $13.9 million.
As a result of the acquisitions of VideoGuide and StarSight Telecast, the
financial results for the quarter ended December 31, 1996 were restated to show
revenues of $22.1 million, an operating loss of $1.5 million and a net loss of
$2.1 million. The financial results for the nine months ended December 31, 1996
were restated to show revenues of $51.9 million, an operating loss of $9.2
million and a net loss of $10.6 million.
As reported revenues for the quarter ended December 31, 1997 were $30.5
million which represents an increase of 60% when compared to the year-ago
quarter prior to restatement and an increase of 38% when compared to year-ago
revenues after restatement. As reported revenues for the nine months ended
December 31, 1997 were $83.8 million, an increase of 85% when compared to the
year-ago period prior to restatement and an increase of 62% when compared to
year-ago revenues after restatement. The growth in revenues is due in part to
an increase in revenues associated with the expansion of the Gemstar Guide
Technology from the consumer electronics industry into the cable and personal
computer industries and, in part to the continued increase in VCR Plus +
licensing income.
Total operating expenses for the quarter ended December 31, 1997 were $15.5
million, comprised of selling and marketing expenses of $7.7 million, research
and development expenses of $3.3 million and general and administrative expenses
of $4.5 million. Compared with the year-ago quarter results, restated to include
the VideoGuide and StarSight Telecast operations, total operating expenses for
the current quarter decreased 34%. Total operating expenses for the nine months
ended December 31, 1997 were $46.0 million, comprised of selling and marketing
expenses of $22.8 million, research and development expenses of $9.9 million and
general and administrative expenses of $13.3 million. Compared with the year-ago
results, after restatement, total operating expenses for the nine months ended
December 31, 1997 decreased 25%. The decrease in total operating expenses when
compared with year-ago results after restatement, is primarily attributed to the
implementation of cost control measures and the synergy of the combined
companies after the merger.
Compared with the year-ago results, prior to restatement for the VideoGuide
and StarSight Telecast operations, total operating expenses for the three and
nine months ended December 31, 1997 increased by 19% and 55%, respectively.
These increases reflect a larger operation resulting from the acquisitions of
VideoGuide and StarSight Telecast and the addition of new business focuses in
the electronic program guide area. However, the increase in operating expenses
was more than offset by the increase in revenues, resulting in an increase in
operating margins to 49% and 45% for the quarter and nine months ended December
31, 1997, respectively, before merger related costs.
8
<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 $5.1 million for the quarter ended December 31, 1997
and $12.1 million for the nine months ended December 31, 1997. Excluding the
impact of merger related costs, the Company's effective tax rates for the three
and nine months ended December 31, 1997 were 30% and 28%, respectively. 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.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash, cash equivalents and
marketable securities totaling $142.3 million. Net cash provided by operating
activities was $28.4 million for the nine months ended December 31, 1997, as
compared to net cash provided by operating activities of $3.0 million, for the
as reported nine months ended December 31, 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 $15.7 million
which was attributable to cash received from net maturities of marketable
securities of $27.6 million offset by cash used of $11.9 million for additions
to equipment and intangible assets. The additions to intangible assets consist
primarily of a one-time payment for the purchase of patents and invention rights
related to electronic program guides. Net cash provided by financing activities
was $15.4 million which was comprised of cash from the exercise of stock
options.
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 for the next twelve months.
Recent Accounting Pronouncements
Recent accounting pronouncements, Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, and No. 131, Disclosures
About Segments of an Enterprise and Related Information, are discussed in Note 4
to the Condensed Consolidated Financial Statements.
9
<PAGE>
Certain Factors Affecting Business, Operating Results and Financial Condition
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Annual Report on Form 10-K
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 10-K
and "Risk Factors" contained in Form F-4.
Dependence on Single Product Category: Uncertainty of Acceptance of New
Products; Rapid Technological Change. Until fiscal 1997, the Company's
historical revenues have been primarily derived from license fees for its VCR
Plus+ technology, consisting of per unit license fees from VCR and television
Manufacturers, and to a lessers extent, license fees for PlusCode Number
publication rights from newspapers and other publications. While VCR Plus+
license fees have increase significantly in each year since the Company's
inception, future growth of revenues derived from VCR Plus+ may be limited by
the fact that virtually all major VCR and television Manufacturers have licensed
the VCR Plus+ technology, and the fact that the Company has already expanded
into most major markets worldwide. Any further growth in VCR Plus+ license
revenues will come only from further penetration of increasingly saturated
markets. Accordingly, the Company's future success depends to a significant
extent upon its ability to develop, market and license emerging and new products
and services, including the Gemstar Guide Technology and the Company's
interactive program guide systems. The Company has only a limited history on
which to base an evaluation of its interactive program guide business and
prospects. The market for the consumer electronics products such as interactive
program guides is characterized by rapidly changing technologies, short product
life cycles, the frequent introduction of new products and evolving industry
standards. Moreover, consumer demand for new product categories such as
interactive program guides is inherently uncertain. There can be no assurance
that the Company will successfully develop, market and license the Gemstar Guide
Technology and the Company's interactive program guide systems, that the Company
will ever achieve significant revenues or operating income from its interactive
program guide business or, if significant revenues are achieved, that they can
be sustained. The failure of the Company's interactive program guides to be
accepted by consumers could have a material adverse effect on the Company's
business prospects, financial condition and results of operations.
Moreover, the life cycle of the Gemstar Guide Technology and any future
products and services may be limited by the emergence of new entertainment
products and technologies, changes in consumer preferences and other factors.
The Company's future performance will depend on its ability to continue to
consistently (i) identify emerging technological trends in its market, (ii)
identify changing consumer needs, desires or tastes, (iii) develop and maintain
competitive technology, including new product and service offerings, (iv)
improve the performance, features and reliability of its products and services,
particularly in response to technological change and competitive offerings, and
(v) bring technology to market quickly at cost-effective prices. There can be no
assurance that the Company will be successful in developing and marketing new
products and services that respond to technological and competitive developments
and changing customer needs, or that such products and services will gain market
acceptance and be incorporated into the technology or products of third parties.
Any significant delay or failure to develop new or enhanced technologies,
including new product and service offerings, would have a material adverse
effect on the Company's business, financial condition and results of operations.
10
<PAGE>
Risks Associated with Strategic Relationships. Part of the Company's
business strategy is to enter into strategic or other similar collaborative
relationships with manufacturers, service providers, software developers and
other partners in order to offer products and services to a larger customer base
than could be reached through the Company's own sales and marketing efforts. For
instance, the Company has recently entered into certain strategic relationships
relating to the Gemstar Guide Technology, including a multi-year cooperative
agreement with Thomson Consumer Electronics, Inc. and a cross-licensing
agreement with Microsoft Corporation for inclusion of the Gemstar Guide
Technology in specified Microsoft products. The Company believes that such
strategic relationships accelerate the market penetration of the Company's
products and technologies while limiting the Company's sales and marketing
costs. However, there can be no assurance that the Company will be able to
expand or maintain its existing strategic relationships or establish new
strategic relationship on commercially reasonable terms, if at all. If the
Company is unable to maintain its existing strategic relationships, or to
establish similar strategic relationships with respect to future products and
services, it will be required to devote substantially more resources to the
distribution, sale and marketing of its products and services. Any future
inability of the Company to maintain its strategic relationships or to enter
into additional strategic relationships, or the failure of one or more of the
Company's strategic relationships to result in the development and maintenance
of a market for the Company's products and services, could have a material
adverse effect on the Company's business, operating results and financial
condition.
Moreover, as a result of the Company's emphasis on these relationships, the
Company's success will depend both on the ultimate success of the other parties
to such relationships, particularly in the promotion of interactive program
guides, and on the ability of these parties to market the Company's products and
services successfully. For instance, in January 1998, the Company and United
Video formed a joint venture (the "Joint Venture") to form Interactive Program
Guide, Inc. ("IPGI"). The Company granted IPGI the exclusive right, as Gemstar's
agent, to market the Gemstar Guide Technology and related services to service
providers (other than DSS providers). The Company's exclusive arrangements with
IPGI represent a departure from the Company's prior business strategy of
licensing its technology itself, rather than relying on the services of an
agent. There can be no assurance that IPGI can or will market the Gemstar Guide
Technology and related services effectively to a sufficiently broad range of
Service Providers. In particular, certain Service Providers other than TCI may
be reluctant to employ IPGI's services because United Video is controlled by
TCI. More generally, no assurance can be given that the parties to the Company's
strategic relationships will successfully cooperate with the Company or that the
Company will realize any of the anticipated benefits of such relationships. The
failure of one or more of the Company's strategic relationships to result in the
successful development and maintenance of a market for the Company's products
and services could have a material adverse effect on the Company's business,
operating results and financial condition.
11
<PAGE>
Seasonability 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 consumer electronics products
manufacturers have incorporated the Company's systems into an increasing numbers
of products and 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 Company's systems, tend to be higher in
the third and fourth calendar quarters, or the Company 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 fiscal 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 anticipates that its revenues and operating results will also
be affected by the timing of market introductions and market acceptance of new
systems. There can be no assurance, however, that future systems developed by
the Company, including the Company's interactive program guides, will ever
result in significant revenues or profits. Further, it 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 same 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.
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal proceedings
United Video Litigation
The Company and United Video entered into a complete and final settlement
in the parties' patent litigation pending in the United States Federal Court,
Northern District of Oklahoma in January 1998. In connection with such
settlement, the parties formed the IPGI joint venture.
General Instruments Arbitration
On May 17, 1997 StarSight filed a Demand for Arbitration with the American
Arbitration Association ("AAA") in San Francisco, California, and by such action
commenced an arbitration action against NextLevel Systems, Inc. ("NextLevel"),
formerly known as General Instruments, Inc. (in January 1998, NextLevel
announced that it had changed its name back to General Instruments). The claims
in the arbitration center upon NextLevel's alleged delay in deploying StarSight-
capable set-top boxes, and NextLevel's development of a competing interactive
program guide which allegedly uses StarSight patented technology, confidential
information and technical information in violation of a License and Technical
Assistance Agreement executed by the parties on October 1, 1992. A three-judge
panel of the AAA has been selected, and a preliminary pre-arbitration conference
was held on November 21, 1997. The arbitration is scheduled for July 12, 1998
through August 7, 1998, in San Francisco, California.
In response to the arbitration, NextLevel on December 1, 1997 filed a
separate action in the United States District Court for the Northern District of
California (San Francisco Division), requesting that the Court enjoin StarSight
from pursuing certain of its claims before the AAA. On January 9, 1998,
NextLevel moved for a preliminary injunction, and StarSight simultaneously moved
to dismiss the complaint. Hearings on the motions currently are scheduled for
late February and early March, 1998. A trial date has not been set in the
action, and no discovery has occurred to date.
TV Data Arbitration
On August 5, 1997, TV Data Technologies, Inc. ("TV Data") filed a demand of
arbitration with the American Arbitration Association ("AAA") against the
Company's subsidiary StarSight Telecast, Inc. ("StarSight") related to two
agreements with TV Data to provide StarSight with certain television program
listing data (the "Listing Data Contract") and television and cable channel
lineup information (the "Channel Lineup Contract" and collectively, the
"Contracts"). In the demand, as amended, TV Data has claimed that StarSight has
violated the terms of the Listing Data Contract by delivering or agreeing to
deliver such data and information to third parties, has failed to make timely
payments as required by the Contracts, and has repudiated and terminated the
Listings Data Contract without any legal right or excuse to do so. TV Data seeks
injunctive relief to prohibit the delivery of data to third parties unless in
conformance with the terms of the Listing Data Contract, payments of amounts
allegedly due under the Listing Data Contract, unspecified damages, pre-judgment
interest, legal fees and any other legal or equitable relief deemed proper by
the arbitration panel. The Company has denied TV Data's claims. An arbitration
hearing on TV Data's demands is currently scheduled for August 1998.
The Company intends to vigorously defend its rights in each of these cases.
13
<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.
10.8*** TDN, Inc., Stockholders Agreement, dated as of October 31, 1997, by
and among TDN, Inc., a Delaware corporation, Gemstar Marketing,
Inc., a California corporation, and Thomson Consumer Electronics,
Inc., a Delaware corporation.
10.9*** Agreement, dated as of October 31, 1997, by and among TDN, Inc., a
Delaware corporation, and Gemstar International Group Limited.
10.10*** Definitive Agreement, dated as of January 9, 1998, by and among
Gemstar International Group Limited, StarSight Telecast, Inc., a
California corporation, and Microsoft Corporation, a Washington
corporation.
10.11*** Rescission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation and Microsoft
Corporation, a Washington corporation.
10.12**** Joint Venture Formation and Stockholders Agreement, dated as of
January 19, 1998, by and among United Video Satellite Group, Inc.,
a Delaware corporation, Prevue Ventures, Inc., a Delaware
corporation, Gemstar International Group Limited, a British Virgin
Islands corporation, G-Sub Corporation, a Delaware corporation and
effective as of the closing, Interactive Prevue Guide, Inc., a
Delaware corporation.
10.13**** Warrant Agreement, dated as of January 19, 1998, by and among
Gemstar International Group Limited, a British Virgin Islands
corporation, United Video Satellite Group, Inc., a Delaware
corporation, and TCI Ventures Group, LLC, a Delaware limited
liability company.
14
<PAGE>
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.
*** Previously filed as part of Current Report on Form 8-K filed with
the Commission on January 12, 1998, and incorporated herein by
reference. Certain information in this exhibit has been omitted.
Confidential Treatment has been requested with respect to the
omitted portions.
**** Previously filed as part of Current Report on Form 8-K filed with
the Commission on February 6, 1998, and incorporated herein by
reference. Certain information in this exhibit has been omitted.
Confidential Treatment has been requested with respect to the
omitted portions.
(b) Report on Form 8-K
None filed during reporting period.
15
<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 17, 1998 By: /s/ Elsie Leung
---------------------
Elsie Leung
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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 DECEMBER
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 119,428
<SECURITIES> 22,869
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 146,112
<PP&E> 13,424
<DEPRECIATION> 9,323
<TOTAL-ASSETS> 169,164
<CURRENT-LIABILITIES> 64,376
<BONDS> 0
<COMMON> 206,415
0
0
<OTHER-SE> (113,770)
<TOTAL-LIABILITY-AND-EQUITY> 169,164
<SALES> 0
<TOTAL-REVENUES> 83,832
<CGS> 0
<TOTAL-COSTS> 45,939
<OTHER-EXPENSES> 11,713
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 31,298
<INCOME-TAX> 12,078
<INCOME-CONTINUING> 19,220
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