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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-26878
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GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of Registrant as specified in its charter)
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BRITISH VIRGIN ISLANDS N/A
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
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135 NORTH LOS ROBLES AVENUE, SUITE 800, PASADENA, CALIFORNIA 91101
(Address of Principal Executive Offices) (Zip Code)
(626) 792-5700
(Registrant's telephone number, including area code)
Securities registered or to be registered pursuant to Section 12(b) of the
Act: NONE
Securities registered or to be registered pursuant to Section 12(g) of the
Act:
ORDINARY SHARES, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of June 15, 1998, there were outstanding 48,507,739 shares of the
Registrant's ordinary shares, par value $.01 per share ("Ordinary Shares"),
which is the only class of Ordinary Shares of the Registrant. As of June 15,
1998, the aggregate market value of Ordinary Shares held by non-affiliates of
the Registrant, based on the closing sales price of $33 7/8 per share as
reported by Nasdaq, was approximately $1,142.4 million.
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PART I
ITEM 1. BUSINESS.
GENERAL
Gemstar International Group Limited (the "Company" or "Gemstar") develops,
markets and licenses proprietary technologies and systems that simplify and
enhance consumers' interaction with electronics products and other platforms
that deliver video, programming information and other data. The Company seeks
to have its technologies widely licensed, incorporated and accepted as the
technologies and systems of choice by consumer electronics manufacturers;
service providers ("Service Providers") such as owners or operators of cable
systems, telephone networks, Internet service providers, direct broadcast
satellite providers, wireless systems and other multi-channel video
programming distributors; software developers; and consumers.
The Company's first proprietary system, VCR Plus+, was introduced in 1990
and is widely accepted as a de facto industry standard for programming VCRs
and is currently incorporated into virtually every major brand of VCR sold
worldwide. VCR Plus+ enables consumers to record a television program by
simply entering a PlusCode Number (a proprietary one to eight digit number)
into a VCR or television equipped with the VCR Plus+ technology ("PlusCode
Numbers"). PlusCode Numbers are printed next to television program listings in
over 1,800 publications worldwide, with a combined circulation of over 330
million.
The Company has also developed and acquired a large portfolio of
technologies and intellectual property necessary to implement interactive
programming guides (the "Gemstar Guide Technology") which enable consumers to
navigate through, sort, select, and record television programming. The Gemstar
Guide Technology has been licensed for, 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 sorting, selecting and recording
television programming. The Company further believes that its interactive
program guides will provide an attractive vehicle for the delivery of
advertising and other content to consumers.
The Company's primary source of revenues to date has been license fees paid
by consumer electronics 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. The Company pursues a licensing strategy for its VCR Plus+ system
and Gemstar Guide Technology wherein the Company is paid on-going per unit
license fees and, in certain instances, one-time, up-front license fees. In
addition, the Company is planning to pursue a recurring revenue model for its
proprietary Gemstar Guide Technology wherein the Company would receive
revenues from the delivery of advertising and promotion displayed on the
guides, from sponsorship of guide pages and from data services and interactive
transactions accessed through the guide, however, to date, the Company has not
derived any revenue from such model. The Company does not charge consumers
set-up or subscription fees for the use of the guide and encourages its
licensed Service Providers to similarly provide the guide without incremental
cost to the consumer.
The Company believes that successful implementation of the its technology
into a broad range of platforms requires the Company to coordinate the
activities of companies in many industries. Accordingly, the Company seeks
long-term relationships with a broad range of consumer electronics and other
manufacturers, television broadcasters, cable companies and software
developers. The Company recently entered into two strategic relationships to
cover multiple interactive program guide platforms. In November 1997, the
Company signed a multi-year agreement with Thomson Consumer Electronics, Inc.
("Thomson"), the United States' largest manufacturer and marketer of
television receivers and related video products, in which the parties agreed,
among other things, to cooperate in establishing the Gemstar Guide Technology
as the industry standard in North and South America, and to jointly pursue a
recurring revenue model in the consumer electronics sector. In January 1998,
the Company entered into a cross-licensing agreement with Microsoft
Corporation ("Microsoft") pursuant to which Microsoft agreed to license the
Gemstar Guide Technology as part of its TV viewer feature in the Windows 98
operating system. Microsoft has also licensed the right to incorporate the
Gemstar Guide Technology in products worldwide that incorporate interactive
program guides.
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The Company's licensees include: Aiwa Company, Ltd.; Akai Electronics Co.,
Ltd.; Cox Cable Communications; Daewoo Electronics Company, Ltd.; Funai
Electric Co., Ltd.; GTE Communications Systems; Hitachi Corporation, Ltd.;
Hughes Network Systems; JVC; LG Electronics; Matsushita Electric Industrial
Co., Ltd. (Panasonic); Microsoft; Mitsubishi Electric Corporation; Orion
Electric Company, Ltd.; Philips/Magnavox; Pioneer Electronics Corp.; Samsung
Electronics Company, Ltd.; Sanyo Electric Co., Ltd.; Scientific-Atlanta; Sharp
Corporation; Shintom Co. Ltd.; Sony Corporation; SNET Personal Vision, Inc.;
Thomson (ProScan, RCA, GE); Time Warner Cable; Toshiba Corporation; Uniden
America Corporation; and Zenith Electronics Corporation.
The Company was organized in April 1992 as a British Virgin Islands
corporation. Historically, the Company's licensing operations in the United
States were conducted through Gemstar Development Corporation ("GDC"), the
shareholders of which were the same as the Company's shareholders, and the
Company operated internationally through its various subsidiaries incorporated
outside of the United States. In June 1995, the Company consolidated its
domestic and international licensing operations by exchanging Ordinary Shares
of the Company for all of the outstanding stock of GDC (the "GDC Exchange").
As a result of the GDC Exchange, GDC became a wholly owned subsidiary of the
Company. In May 1997, the Company acquired StarSight Telecast, Inc., a
California corporation ("StarSight"). In connection with the acquisition of
StarSight, the Company issued approximately 15.5 million Ordinary Shares for
all of the outstanding stock of StarSight and assumed outstanding StarSight
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.
INDUSTRY OVERVIEW
Television viewers today are faced with a daunting array of viewing options.
Expansion of analog cable television system capacity has increased the number
of available channels in many households to 100 or more. Direct satellite
broadcast systems now available in most areas of the U.S. can deliver over 200
channels. The adoption of digital broadcasting technology and further
improvement in compression technologies promise an even greater increase in
channel capacity (300 to 500 channels) in digital cable or terrestrial digital
broadcast systems. Further fueling the wealth of consumer viewing choices is
the rapid growth in the number of national broadcast and cable networks in the
past decade, as well as the widespread availability of premium cable
programming and pay-per-view options.
The Company believes that the proliferation of television programming
choices gives rise to the need for consumer electronics devices, including
televisions and VCRs, that provide effective interactive methods of sorting,
selecting and recording television shows which go beyond the limited utility
offered by printed program listings. At the same time, the experience of
consumer electronics manufacturers shows that customer tolerance for complex
and expensive functionalities in video entertainment devices is extremely
limited. To appeal to a broad range of consumers, the Company believes that
home video technology enhancements must be intuitive, cost-effective and easy
to use.
Accordingly, the Company has focused on developing a variety of cost-
effective interactive technologies which help viewers cope with the
proliferation of programming options in a straightforward, user-friendly
manner. The Company's first product, the VCR Plus+ system, simplified the task
of recording television programming. Traditional VCR programming required
users to input multiple data items for each program to be recorded, including
the date, beginning time, length and channel of the desired programs--a
difficult, tedious and error-prone process for many users. By simplifying the
program recording process to entering a single PlusCode number for a desired
program, VCR Plus+ eliminates the complexity and frustration attendant to
traditional VCR programming methods. VCR Plus+ obviates the need for consumers
to track complex and changing program schedules and channel line-ups.
Similarly, the Gemstar Guide Technology is designed to simplify a viewer's
navigation, selection and recording of broadcast, cable and satellite
programming. Gemstar Guide Technology allows users to easily sort, select and
record programming from all available sources, and to intuitively schedule
programs for viewing or recording.
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VCR Plus+ is now widely accepted and incorporated into most major brands of
VCR, television and TV-VCR combination products. Similarly, the Gemstar Guide
Technology has been licensed by major manufacturers, Service Providers and
software developers in the consumer electronics, satellite, cable,
multichannel multipoint distribution service, and personal computer
industries.
According to the Broadcast Information Bureau World Guide to Television
("BIB"), in France, Germany, Italy, United Kingdom and Spain, the percentage
of television households owning VCRs as of 1997, was 68%, 60%, 69%, 79% and
58%, respectively. BIB estimates that, as of 1997, 84.2% of the television
households in the U.S. owned VCRs. Electronic Industries Association estimated
that consumer VCR sales in the U.S. were over 16.7 million in 1997, an
increase of 7% percent over the previous year. The Company believes that VCR
sales in the U.S. are driven by the replacement of older equipment and the
purchase of multiple units for use within a single household, and that VCR
sales outside the U.S. are substantially greater than those within the U.S.
because of the greater percentage of television households lacking VCRs.
According to Electronic Industry Association, in 1997 consumer portable and
table color television sales in the U.S. were approximately 21.3 million
units. The Company estimates that the number of hardware platforms shipped
annually which are suitable for incorporating the Gemstar Guide Technology may
be as many as 50 million or more, and include televisions (24.5 million units
per year in the U.S., including TV-VCR combination units), VCRs (16.7 million
units per year in the U.S.), set top cable boxes (5 million units per year in
the U.S.), integrated satellite receivers and decoders (4 million per year in
the U.S.) and tuner-equipped personal computers.
The manufacture and sale of VCRs and televisions is highly competitive and
dominated by large consumer electronics companies such as Hitachi Corporation,
Ltd., Matsushita Electric Industrial Co., Ltd., Mitsubishi Electric
Corporation, Samsung Electronics Company, Ltd., Sony Corporation; Thomson,
Toshiba Corporation, Zenith Electronics Corporation and others. Manufacturers
of VCRs and televisions compete primarily on price and features. Innovations
such as remote control and on-screen programming were quickly adopted by major
manufacturers. Innovations such as these initially permit a product model to
command a premium price and, if cost-effective for mass market implementation,
may become "must-have" features that are later incorporated into a broad range
of products. The Company believes that the size of the television and VCR
markets and the competitive pressures within the industry present an
opportunity for companies that can provide innovative technologies that both
appeal to consumers and are attractive to, and cost-effective for,
manufacturers.
Service Providers such as cable system owners and operators and direct
broadcast satellite broadcasters compete with other multi-channel video
programming distributors based on price, the breadth of programming choices
and other viewing features. Service Providers seek to differentiate themselves
from competitive programming distributors and to enhance potential revenues by
offering viewers premium services such as "pay-per-view" programming and other
subscription services. The Company believes that consumer demand for systems
and technologies that help to organize viewing choices, together with Service
Providers' desire to differentiate themselves from competitive programming
distributors and to enhance potential revenues, provides an opportunity for
the Gemstar Guide Technology.
GEMSTAR STRATEGY
The Company's objective is to strengthen its position as a worldwide leader
in developing, marketing and licensing proprietary technologies and systems
that simplify and enhance consumers' interaction with electronics products and
other platforms that deliver video, programming information and other data.
Key elements of the Company's strategy include the following:
Develop Solutions that Address Consumer Needs. The Company believes that
the development of solutions that address consumers' needs for user-
friendly video entertainment products is central to the success of its
technologies and systems. Due to the complexity of video entertainment
devices, consumers typically utilize only a portion of their available
features. To appeal to a broad range of consumers, the Company believes
that home video technology enhancements must be intuitive, cost-effective
and easy to
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use. Accordingly, the Company seeks to identify and develop technologies
and systems that simplify and enhance consumers' interaction with
electronics products and other platforms that deliver video, programming
information and other data, thereby providing significant value to
consumers. The Company also believes that the growth in available viewing
options has created a need for interactive program guides to assist
consumers in the sorting, selection and recording of programs, much like a
browser or a search engine facilitates the location of desired sites on the
Internet. The Company intends to continue to identify and address consumer
needs with value-added technologies.
Protect Proprietary Solutions. The Company believes that significant
value lies in the intellectual property it has developed, acquired and
incorporated into its technologies and systems. The markets in which the
Company competes are extremely competitive, and it is critical to the
Company's success that it protect and enhance its competitive advantages,
including its intellectual property. Accordingly, the Company has
implemented an extensive intellectual property protection program,
including seeking patent protection where appropriate. In addition, where
the Company believes that others have infringed its intellectual property
rights, it has taken appropriate actions, including litigation, to protect
its rights. The Company intends to continue to aggressively protect its
intellectual property and other competitive advantages.
Establish and Maintain Cross-Industry Support. The successful
implementation of the Company's technologies and systems requires the
Company to coordinate the activities of companies in many industries that
have not historically worked closely together, including consumer
electronics products manufacturers, publishers, broadcasters, cable and
software companies. The Company has established long-term relationships
within these industries and has demonstrated an ability to understand their
varying business objectives and coordinate cross-industry efforts. The
Company believes that its ability to work closely with disparate industry
participants facilitated the success of VCR Plus+ and will contribute to
the successful adoption of the Gemstar Guide Technology. The Company
believes that its ability to understand and coordinate the business
objectives of multiple industry groups provides a significant competitive
advantage.
Develop Multi-Platform Technologies and Systems. The Company seeks to
provide the technologies and systems through which video programming
information and other related data and services is obtained, irrespective
of the delivery platform. As a result, the Company is aggressively pursuing
a multi-platform strategy with respect to licensing its technologies and
systems. The Company has designed its technology to be adaptable to
multiple platforms so that its extensive feature set can become a de facto
industry standard. To date, the Company has licensed its technologies for
inclusion in a range of information delivery platforms that includes
televisions, VCRs, TV-VCR combination units, digital versatile disk
recorders ("DVD Recorders"), cable set top boxes, integrated satellite
receiver decoders, personal computers, PCTVs and Internet appliances. The
Company intends to license its technologies for use on other platforms that
it believes may be widely adopted by consumers.
License Broadly to Create de facto Standard. The Company's strategy is to
establish its technologies and systems as industry standards. Accordingly,
the Company strives to broadly license its technologies non-exclusively
within targeted industry groups. For example, VCR Plus+, widely accepted as
a de facto industry standard, is licensed to virtually every major VCR
manufacturer. Additionally, the Company has
licensed its Gemstar Guide Technology to television manufacturers, cable
operators, and DSS service providers and intends to continue to
aggressively pursue additional licensees. The Company has established
itself as an independent licensor that does not directly compete with its
licensees.
Pursue Recurring Revenue Model. The Company is pursuing recurring revenue
opportunities that may arise in connection with the implementation of the
Gemstar Guide Technology. For example, the Company believes it can provide
additional value-added services to end users, such as on-screen advertising
and subscription services that can be accessed through its future installed
base of Company-licensed interactive program guides.
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PRODUCTS
VCR Plus+
VCR Plus+ was introduced in 1990 to simplify the programming of VCRs for
consumers and has been adopted as the standard VCR programming aid by
virtually every major consumer electronics manufacturer worldwide. VCR Plus+
is incorporated into VCRs by licensed consumer electronics manufacturers and
enables consumers to record a television program by simply entering a
proprietary one to eight digit PlusCode Number, via a remote control, into a
VCR or television. PlusCode Numbers are published next to television listings
in participating newspapers and television program guides. PlusCode Numbers
are generated through a patented process developed by the Company and are now
carried by over 1,800 newspapers and magazines worldwide, including the New
York Times, the Los Angeles Times, TV Guide, the Asahi Shimbun (Japan), the
Sun (U.K.), the Daily Mirror (U.K.) and the South China Morning Post (Hong
Kong). The Company estimates that in 1997 the combined worldwide circulation
of all publications that contained PlusCode Numbers was approximately 330
million.
The Company continues to develop and introduce additional VCR Plus+ features
that manufacturers can license from the Company to enhance the functionality
of VCR Plus+. These features include systems which are capable of automating
the setup for VCR Plus+, systems which control set-top boxes, systems which
update the clock information and cable channel lineup information, and systems
which enhance the functionality of the V-chip parental control system. The V-
chip parental control system becomes mandatory on at least half of each
manufacturers' TV models with a picture size of 13 inches or greater sold in
the United States beginning after July 1, 1998, and the remaining half of each
manufacturers' models by January 1, 2000, is intended to give a parent the
flexibility and control to identify specific shows to block or unblock from
viewing. VCR Plus+ is also licensed to be incorporated into DVD Recorders. The
Company believes that DVD Recorders incorporating the VCR Plus+ technology
will become commercially available during the Company's 1999 fiscal year.
Interactive Program Guides
The Gemstar Guide Technology was introduced by the Company to implement
interactive programming guides which enable consumers to navigate through,
sort, select and record television programming. The Gemstar Guide Technology
also allows broadcasters to disseminate program information, offers consumer
electronics manufacturers an additional television feature, and provides
Service Providers with an effective tool for marketing their video programming
content. The Gemstar Guide Technology has been licensed for, 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 its interactive program guides will
provide an attractive vehicle for the delivery of advertising and other
content to consumers.
The following are major current and anticipated features of the Gemstar
Guide Technology, some of which are not available in all implementations of
the Company's guides:
Program Schedules. The Gemstar Guide Technology provides an up-to-date
and accurate on-screen program schedule listing all programs by title. The
program schedule covers all over-the-air broadcast and cable channels and
provides consumers with future schedule information from one to eight days.
Program Descriptions. In certain implementations, program descriptions
are provided. A program description for a movie, for example, may include
the title, year of release, leading actors/actresses, rating,
star-rating, plot description, black & white or color, stereo, closed
captioning and secondary audio information. Some implementations offer a
dynamic program description which is displayed as soon as the user
highlights a program title. Additionally, in certain implementations, two
levels of descriptions are presented, an abbreviated description, and a
detailed description.
Sorting Functions. The Gemstar Guide Technology offers a variety of
sorting capabilities. Implemented features include sorting by category
(such as movies, sports, children's programming), sorting by theme within a
category (such as drama, action, horror, within the movie category, and
baseball, basketball, football, within the sports category), and sorting by
title. Other features that may be implemented are sorting by rating (in
conjunction with parental guidance and parental control), sorting by
actors/actresses and directors, and sorting by new or repeat showings.
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Picture-in-Guide. In consumer electronics implementations of the Gemstar
Guide Technology, the television picture is integrated into the guide
screen using picture-in-guide technology. This allows a viewer to continue
television viewing while using the guide. The picture window features full
video and sound while a written description of the program is presented.
The viewer then has a choice of two modes of operation. Under the first
mode, the picture window changes channels automatically to correspond with
the channel highlighted in the guide by the viewer. This mode permits full
text and video surfing by the viewer. Under the second mode, the picture
window is locked on a selected channel. This mode permits the viewer to
continue watching the current program while reviewing other program
options.
Tuning by Title. The Gemstar Guide Technology allows a viewer, with the
push of a button, to tune to a selected program that is highlighted on the
interactive program guide.
One Button Recording. The Gemstar Guide Technology enables a viewer to
highlight a program on the guide and schedule it for recording by touching
a single button. The viewer has the choice of recording single episodes,
daily episodes for programs like soap operas or talk shows, or weekly
episodes for programs that are televised once each week. A review screen
displays all programs selected for recording. In some implementations, the
length of tape needed to record all of the scheduled programs within the
next 24 hours is displayed.
One Button Scheduling. The Gemstar Guide Technology is expected to enable
a viewer to highlight a future program and schedule it for viewing. At the
appropriate time, the television will change channels, or cause the channel
to be changed, to the scheduled program. If the television is turned off,
it is automatically turned on, and automatically turned off after the end
of the scheduled program.
Automatic Clock and Channel Setup. The Gemstar Guide Technology
automatically sets the VCR clock and the channel lineup (both broadcast and
cable) as soon as the user enters the zip code in which the unit is
located.
The Company currently markets and licenses the Gemstar Guide Technology to
consumer electronics manufacturers which incorporate the technology into TVs,
VCRs and TV-VCR combination units ("Consumer Electronics Guides"), and to
Service Providers and manufacturers that supply Service Providers with cable
set-top boxes ("Service Provider Guides"). In the consumer electronics sector,
the Gemstar Guide Technology enables licensed manufacturers to enhance the
functionality and appeal of their products and to realize additional revenue
through premium pricing. The Company believes that the additional costs to
manufacturers of incorporating its technologies into their products must be as
low as possible in order to encourage adoption of its technology by
manufacturers. The Company also believes that its systems' design must be
user-friendly and aesthetically appealing to consumers. The Company's research
and design team in Bedford, Massachusetts works closely with each licensed
manufacturer to achieve these implementation and design objectives. In the
Service Provider sector, the Gemstar Guide Technology enables Service
Providers to market additional services to subscribers. The Gemstar Guide
Technology allows Service Providers to customize certain elements of the guide
for subscribers and also allows subscribers to upgrade features and services
over time. The guide is compatible with the Service Provider's subscription
management and pay-per-view operations.
LICENSEES AND LICENSING
The Company generates licensing revenue through licenses to consumer
electronics manufacturers, Service Providers and software developers, via a
combination of one-time, non-refundable licensing payments and per-unit
license fees as well as to newspapers, magazines and other publications via
license fees for the right to print the PlusCode Numbers. In some cases, the
Company also charges a fee for the development and transfer of relevant
technologies.
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VCR Plus+
The Company has licensed the VCR Plus+ technology to virtually every major
VCR manufacturer, including the following manufacturers and their associated
North American, European, Asian and South American brands:
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Aiwa Company, Ltd. Nokia Technology GmbH Shintom Co., Ltd.
Akai Electric Co., Ltd. North American Philips Corporation Sony Corporation
Daewoo ElectronicsCompany, Ltd. Orion Electric Company, Ltd. Thomson Consumer Electronics
Funai Electric Co., Ltd. Philips Electronics N.V. (Proscan, RCA, GE)
Goldstar Co., Ltd. Pioneer Electronics Corp. Toshiba Corporation
Hitachi Corporation, Ltd. Samsung Electronics Company, Ltd. Victor Company of Japan, Ltd.
Matsushita Electric Sanyo Electric Co., Ltd. Zenith Electronics Corporation
Industrial Co., Ltd. Sharp Corporation
Mitsubishi Electric Corporation
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The licensed manufacturers which employ the Company's technology pay the
Company an ongoing per unit license fee based upon the number of units shipped
that incorporate the VCR Plus+ technology. In some cases, such manufacturers
have also paid the Company an up-front, one-time licensing fee. The Company
continues to develop and introduce additional VCR Plus+ features that
manufacturers can license from the Company to enhance the functionality of VCR
Plus+. Manufacturers are required to pay an additional license fee for each
unit incorporating an enhanced feature. License agreements with manufacturers
have terms which typically range from three to seven years.
The Company's license fees for the right to print its proprietary PlusCode
Numbers in publications are based on the circulation of each publication. The
Company's agreements with newspapers and magazines that publish PlusCode
Numbers have terms ranging from one to seven years and provide for modest
license fees to the Company. Agreements with certain publications require the
publications to provide substantial promotion of the VCR Plus+ system. The
Company has entered into an agency agreement with United Feature Syndicate,
Inc. to handle the licensing of PlusCode Numbers to newspapers in the U.S. and
other countries and to maintain certain ongoing relationships with existing
publishers.
Interactive Program Guides
The Company licenses the Gemstar Guide Technology to major consumer
electronics manufacturers, including the following manufacturers and their
associated North American, European, Asian and South American brands:
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Hitachi, Ltd. Philips Consumer Electronics Company Thomson Multimedia S.A.
Matsushita Electric Industrial Co., Ltd. Sanyo Electric Company, Ltd. (Proscan, RCA, GE)
(Panasonic) Sharp Corporation Victor Company of Japan, Ltd.
Mitsubishi Electric Corporation Sony Corporation Zenith Electronics Corporation
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The Company licenses the Gemstar Guide Technology to consumer electronics
manufacturers for a combination of a one-time non-refundable fee and
continuing license fees based on the number of units shipped incorporating the
licensed technology. License agreements with such manufacturers have terms
which typically range from three to seven years.
The Company licenses the Gemstar Guide Technology to Service Providers and
manufacturers in the cable, satellite and set-top box industries, including
the following:
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CABLE OPERATORS SATELLITE SET-TOP BOX MANUFACTURERS
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Americast Hitachi Corporation, Ltd. Scientific Atlanta
Cox Cable Communications Hughes Network Systems
GTE Communications Systems Matsushita Consumer Electronics Company
Time Warner Cable Sony Corporation
TKR Cable Company Americast Toshiba Corporation
Thomson
Uniden America Corporation
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In January 1998 the Company entered into a cross-licensing agreement with
Microsoft pursuant to which Microsoft agreed to adopt the Gemstar Guide
Technology as part of its TV Viewer feature in the Windows '98 operating
system and in Microsoft products worldwide that incorporate interactive
program guides.
The Company typically requires that licensees adhere to a set of
specifications for incorporating Gemstar technology in their products. The
specifications prescribe minimum functionality which must be implemented,
maximum permitted functionality, and certain functionalities or features which
require additional license fees or special licensing terms. The Company's
license agreements typically contain limitations on licensees' ability to
assert that the Company's technology infringes their intellectual property.
The Company intends to require software developer licensees to agree to obtain
such commitments from Service Providers to whom they supply software
incorporating Gemstar technology.
TECHNOLOGY
VCR Plus+
The Company's VCR Plus + technology allows a user to record a program simply
by entering a proprietary PlusCode Number into a VCR or television. The
PlusCode Numbers encode, in a compressed and encrypted form, the essential
elements of programming information, including date, time, channel and length
of program. The PlusCode Numbers are decoded by the Company's proprietary
software, which is embedded in a microprocessor in the VCRs or televisions by
licensed consumer electronics manufacturers. Accordingly, when the user enters
a PlusCode Number, the VCR Plus+ system turns on the VCR, records the
appropriate channel at the appropriate time and then shuts off the VCR. The
VCR Plus+ technology has also been incorporated into televisions and licensed
to be incorporated into DVD Recorders. A television incorporating the VCR
Plus+ technology controls a VCR through infrared signals.
Interactive Program Guides
In order to transmit programming information directly to end-users of its
interactive program guides, the Company has designed and implemented a data
delivery system (the "Gemstar Data Delivery System"). The Gemstar Data
Delivery System includes communication networks comprised of a central
computer which transmits program data via various means to the Company's
insertion equipment located in network headends, cable headends and broadcast
stations for inclusion in television signals, as well as proprietary methods
and technologies for assembling, editing, data encryption, data packaging,
data insertion, data distribution and data broadcasting of television program
listing information and other data. It also includes mirror sites, emergency
override systems and procedures, emergency recovery systems and procedures,
and data quality monitoring systems to ensure the successful transmission of
the Company's data.
The Company typically receives television program listing data from
commercial suppliers and applies quality control and editing procedures to
customize the data in a format suitable for the Company's interactive program
guides. The Company has entered into an agreement to purchase programming
information in electronic form from Tribune Media Service, Inc., a subsidiary
of the Tribune Company and a leading supplier of television program
information, as well as other commercial services. Once the data is received,
it is electronically converted into data packets ready for transmission. In
most cases, the data is encrypted. Consumer Electronic Guides utilize the VCR
Plus+ system for program identification, data encryption and data compression.
After the program information is reformatted, the data packets are transmitted
via a variety of transmission means, including land-line telephone link, NABTS
broadcast, and satellite link to the Company's insertion equipment located in
network headends, cable headends, and broadcast stations for inclusion in the
television signals. The data is then broadcast by the Company pursuant to
agreements with local television stations, cable broadcasters and national
television networks. The Gemstar Data Delivery System presently includes over
500 local television broadcast stations, three national cable networks,
five national broadcast networks (ABC, FOX, CBS, UPN and PBS) which combine to
cover virtually all U.S. television households with multiple redundancy in
most areas. Similar agreements have been reached with the Tokyo Broadcasting
System, the largest private television
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network in Japan, Canadian Broadcasting Company, a national broadcaster in
Canada, and RTL, a national broadcaster in Germany. The Company also intends
to seek similar agreements with other broadcasters which will provide the
Company with additional redundancy of coverage and will provide broadcasters
with the ability to update their own program information. These television
stations and cable companies broadcast, both over the air and through local
cable television operators, the television program listing data for all
channels (including information of other networks or stations) through their
vertical blanking interval which is the unused air time between television
picture frames.
In each of its agreements with broadcasters, the Company has the right to
install its insertion equipment required to insert data into the vertical
blanking interval without charge to the broadcasters. In order to ensure the
availability and quality of such equipment to its broadcasters, in 1993 the
Company acquired a majority ownership interest in NORPAK Corporation, a
Canadian based company and leading manufacturer of broadcast data insertion
equipment. NORPAK Corporation presently supplies data-insertion equipment to
major broadcasters such as the ABC and CBS Television Networks and Turner
Broadcasting Systems.
The current design of the Company's Service Provider Guides includes a
software application that is downloaded and stored in flash memory in advanced
analog and digital converter boxes containing up to seven days of program
information. The application is supplied with data, updated daily, through the
Gemstar Data Delivery System to viewers through their Service Providers. The
Service Provider Guides store the infra-red code base of VCRs and cable set-
top boxes and control them by infra-red emission.
STRATEGIC RELATIONSHIPS
In addition to its customary licensing arrangements with consumer
electronics manufacturers and Service Providers, the Company has entered into
relationships with parties that can offer strategic benefits. The Company
believes that the design and capabilities of the Gemstar Guide Technology will
allow the Company and the entities with which the Company enters into
strategic relationships to target advertisers, such as cable and broadcast
television networks and video and entertainment related product providers to
generate advertising revenues. The Company intends to further exploit the
Gemstar Guide Technology through these strategic relationships.
Thomson. In November 1997, the Company signed an agreement with Thomson to
establish the Company's interactive program guides technologies in consumer
electronics. The first element is a multi-year, multi-million dollar license
of the Gemstar Guide Technology to Thomson. The second element provides for
cooperation in establishing the Company's interactive program guides as a
standard for North and South America. The third element provides for a long-
term cooperative effort by the Company and Thomson to explore opportunities
presented by the interactive program guide platform in the consumer
electronics area, including advertising, promotion, sponsorship and
interactive services.
Microsoft. In January 1998, the Company entered into a long-term, worldwide
cross-licensing agreement with Microsoft in which the two companies agreed to
cross license their respective intellectual property in the interactive
program guide area. Pursuant to the agreement, Microsoft purchased a non-
exclusive license to Gemstar's technology in the interactive program guide
area and the Company received a license to Microsoft's intellectual property
in the program guide area. Microsoft agreed to pay Gemstar a combination of
up-front and per unit license fees. The parties will also share in recurring
revenues that may result from an interactive program guide incorporated by
Microsoft, including advertising, promotion, sponsorship and linking.
Microsoft has agreed to license the Gemstar Guide Technology as a part of its
TV viewer feature in the Windows '98 operating system. Microsoft has also
incorporated interactive program guides under license from the Company in
current and future versions of its WebTV Plus Internet terminals worldwide.
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COMPETITION
The Company's technologies and systems compete with those of other
companies. Many of the Company's present and potential future competitors
have, or may have, substantially greater resources than the Company to devote
to further technological and new product developments. The Company believes
that it will compete effectively based primarily on the originality of its
concepts, the speed with which it has introduced such concepts to the market,
the uniqueness of its designs, the focus of its business approach, the
strength of its intellectual property portfolio, the extensiveness of its
business relationships, the quality and innovation of its technologies and its
ability to identify and meet consumer needs. See "Certain Factors Affecting
Business, Operating Results And Financial Condition."
VCR Plus+ System
The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include on-screen program guides incorporating
point-and-click recording capability. Certain of the Company's interactive
program guides use the VCR Plus+ system. As a result, licensees of such guides
also license the Company's VCR Plus+ technology. To the extent that electronic
program guides with recording capability offered by companies other than
Gemstar are widely adopted, such guides may reduce the need for VCR Plus+. All
electronic program guides, including those that do not have a point-and-click
recording feature, may compete with the printed television guides, and may
adversely affect the Company's PlusCode Number coverage and publication
license income.
Interactive Program Guides
Competition in the market for the delivery of television program schedule
information is intense. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company who
produce and market television schedule information in various formats which
compete or will compete with the Company's interactive program guides products
and services. These alternative formats currently include traditional printed
television guides, as well as non-interactive (passive) and interactive on-
screen electronic guide services, printed television guides in newspapers and
weekly publications, and local cable television guides.
Certain manufacturers of cable and satellite set-top boxes, including
General Instrument, offer advanced analog and digital set-top boxes which
incorporate an interactive program guide with various features similar to
those offered by the Company's interactive program guides. Many of such
manufacturers have significantly greater resources than the Company to devote
to the development and commercialization of such products. If the competing
interactive on-screen guides are effectively developed and promoted, and are
not deemed to violate the Company's intellectual property rights, they will
present a significant competitive challenge to the Company's interactive
program guides.
Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels.
Several other companies have announced that they will provide on-screen
programming information in connection with pay-per-view and satellite
broadcasting. There can be no assurance that the producers of such systems
will not expand the products to include interactive access to programming
information that will be competitive with the Company's interactive program
guides. See "--Certain Factors Effecting Business, Operating Results and
Financial Condition--Competition."
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Printed television schedule competitors of the Company include TV Guide,
printed guides for satellite customers, local cable television guides and
local newspaper guides, all of which benefit from their familiarity to
television viewers, their broad base of distribution and their presentation of
feature articles and entertainment news. The established market presence of
printed program guides may give them a competitive advantage.
Although the Company believes that its interactive program guides are in a
strong competitive position with respect to its known competitors, there may
be competitors with additional strengths that are unknown to the Company. Such
potential competitors, which may include hardware manufacturers, software
developers, broadcasters or service providers, could be larger, more
established companies with greater resources in the program information
delivery market.
INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are
important for success. The Company relies on a variety of intellectual
property protections for its products and services, including patent,
copyright, trademark and trade secret laws, and contractual obligations, and
pursues a policy of vigorously enforcing such rights. In addition, because
much of the Company's technology relies on complex encryption methods, the
technology is inherently difficult for unauthorized persons to penetrate.
The Company follows a vigorous and aggressive patent and trademark policy,
both in the U.S. and internationally. The Company has a number of methods and
design patents and pending patent applications relating to the VCR Plus+
system and its related technologies. In the area of interactive program
guides, the Company has a large portfolio of patents and pending applications
including those originated by the Company prior to the StarSight acquisition,
those originated by StarSight prior to the StarSight acquisition, those
acquired from inventor Michael R. Levine (including patents covering the broad
principles used in storing television programming data in a television
receiving device and allowing a user to select and display television guide
information), and exclusive licensing rights in certain third-party patents.
The Company believes that with this combination of rights, it has one of the
world's most extensive portfolios of intellectual property in the area of
interactive program guides which spans the fundamental concept of local
storage and retrieval of television program information to specific user
interface, functionality and methods of implementation of interactive program
guides. Pursuant to an agreement entered into in 1997, the Company has
acquired the future invention rights of Mr. Levine in the audio-visual
technology area. The Company also continues to develop and file additional
patent applications in a variety of areas in addition to the visual technology
area.
Most of the Company's licensing agreements contain a non-assertion provision
which prohibits the licensees from asserting patent infringement claims
against the Company's VCR Plus+ system or Gemstar Guide Technology. The
Company generally takes advantage of the Patent Convention Treaty procedures
for patent protection in foreign countries. This procedure results in a delay
in the application and issuance of foreign patents, but if and when issued, is
more cost efficient and these foreign patents will enjoy the same priority
date as their U.S. counterparts.
The Company holds extensive trademark registrations throughout the world and
has multiple trademark applications pending for a variety of marks. Marks for
which the Company has registrations or applications to register in the U.S. or
foreign countries include, Gemstar, VCR Plus+ (Video Plus+, ShowView and G
Code are marks used in place of the mark VCR Plus+ in certain countries to
avoid or minimize conflicts in those countries), Guide Plus+, ShowGuide,
ShowList, V-Chip Plus+, Index Plus+, PlusCode, CallSet, iPlus+, SpotPlus+,
Instant Programmer, Control Tower and C/3/. The Company has U.S. copyright
registrations for the encoding and decoding computer programs with respect to
its compression and encryption technology. The Company considers portions of
its encryption technology to be a protectable trade secret and has undertaken
considerable efforts to maintain its secrecy.
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The Company's policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of the Company's
proprietary information is disclosed. These agreements prohibit the disclosure
of confidential information to anyone outside the Company, both during and
subsequent to employment or the duration of the working relationship.
RESEARCH AND DEVELOPMENT
The market for VCR- and television-related services and products is subject
to rapid and significant changes in technology and frequent new service and
product introductions. The Company believes that its future success will
depend on its ability to enhance its existing technologies and to introduce
new technologies on a competitive basis. Accordingly, the Company will
continue to engage in significant research and development activities. There
can be no assurance, however, that the Company will successfully complete the
development of any future technology or that such technology will be
compatible with, accepted by or incorporated in the technology or products of
third parties. Any significant delay or failure to develop new or enhanced
technology could have a material adverse effect on the Company's business,
financial condition and results of operations.
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CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the United States Securities Act of 1933, as amended, and
Section 21E of the United States Securities Exchange Act of 1934, as amended,
which involve risks and uncertainties. Such forward-looking statements are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed
below. Such factors, together with the other information in this Annual
Report, should be considered carefully in evaluating an investment in the
Ordinary Shares.
Dependence on Single Product Category; Uncertainty of Acceptance of New
Products; Rapid Technological Change. The Company's historical revenues to
date 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 lesser extent, license fees for PlusCode Number
publication rights from newspapers and other publications. While VCR Plus+
license fees have increased 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 which have yet to generate
significant revenues. The Company has only a limited history on which to base
an evaluation of its interactive program guide business and prospects. The
market for 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 and achieve revenues 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 developed by the Company 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 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.
Risks Associated with Strategic Relationships. Part of the Company's
business strategy is to enter into strategic or other similar collaborative
relationships with consumer electronics 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, multi-element cooperative agreement with Thomson and a
cross-licensing agreement with Microsoft for
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inclusion of the Gemstar Guide Technology in specified Microsoft products. The
Company believes that such strategic relationships can 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 relationships 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.
Risks Associated with Changes in Consumer Electronics Market. The Company
derives a substantial majority of its revenues from manufacturer license fees
for its VCR Plus+ technology and Gemstar Guide Technology. Such fees are
largely assessed based on unit shipment volumes of televisions, VCRs and other
devices incorporating the Company's technologies. Accordingly, the Company's
future operating results are substantially dependent on continued growth in
the video entertainment products category, and any decline in sales of
consumer electronics products employing the Company's technologies would have
an immediate and adverse impact on the Company's operating results. Demand for
new VCRs and televisions may be adversely affected by increasing market
saturation, a decline in consumer interest due to a lack of desirable new
product features, and a decreased need for unit replacement as the durability
of consumer electronics products improves. Moreover, sales of consumer
electronics devices incorporating the Company's technologies may be adversely
impacted by the emergence of new product categories and consumer entertainment
options. For instance, even though the Company's VCR Plus+ technology has been
licensed to be incorporated into DVD Recorders, increased sales of non-
recording DVD Recorders or other non-recording video entertainment devices and
widespread availability of video on demand or near-video on demand services
from cable service providers may reduce demand for the Company's VCR Plus+
technology. The availability of alternative home entertainment options such as
the Internet may also reduce consumer spending on VCRs and televisions. A
decline in demand for VCRs, televisions and other consumer electronics devices
employing the Company's technologies would have a material adverse effect on
the Company's business, operating results and financial condition.
Seasonality and Variability of Results. The Company experiences variability
in its revenues and operating results on a quarterly basis as a result of many
factors. Most importantly, as consumer electronics 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
the operating results of consumer electronics manufacturers. Shipments by
manufacturers of consumer electronics devices, tend to be higher in the third
and fourth calendar quarters, or the Company's second and third fiscal
quarters. However, because the Company generally receives license revenues
within 90 days after the end of the quarter in which the consumer electronics
devices incorporating its technology are 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, if 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.
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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. 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.
Reliance on Third-Party Manufacturers. The Company depends on the
cooperation of third-party consumer electronics manufacturers which
incorporate the Company's technology into their products. The Company does not
manufacture such hardware itself. Most of the Company's license agreements do
not require the inclusion of the Company's technology into any specific number
or percentage of units shipped by the licensees, and only a few of these
agreements guarantee a minimum licensing fee to the Company over their term.
Accordingly, the Company cannot control or predict the number of models or
units shipped by any manufacturer employing the Company's technology. Most of
the above-described license agreements may be terminated by the manufacturer
without substantial financial penalty.
Further, there can be no assurance that the Company's interactive program
guides and related technologies and services will achieve market acceptance or
that manufacturers, Service Providers and software developers will devote
resources adequate to achieve such market acceptance. In addition, there can
be no assurance that such entities will in fact incorporate the Company's
technologies into their products, that licensing agreements
will not be terminated and, if terminated, that the Company would be able to
negotiate alternative relationships on commercially acceptable terms. The
Company has no control over the number of TVs, VCRs, DVD Recorders, TVCRs,
cable set-top boxes or other products incorporating the Company's technologies
that will be manufactured, and there can be no assurances with respect to the
quantity thereof that will include the Company's technologies or the amount of
licensing revenues the Company will receive as a result of inclusion by
manufacturers licensing or incorporating the Company's systems.
The incorporation of the Gemstar Guide Technology into televisions, VCRs,
TVCRs, DVD Recorders, set-top boxes, integrated satellite receiver decoders,
and other hardware currently requires a Company-designed Application Specific
Integrated Circuits ("ASIC"). The Company currently outsources the production
of ASICs. The development of, or the identification of alternative sources
for, ASICs could require significant lead time. An inability to provide for
sufficient quantities of ASICs could delay the incorporation of the Gemstar
Guide Technology into products, which would have a materially adverse effect
on the Company's business. Furthermore, there can be no assurance that
suppliers of such ASICs will successfully produce sufficient volumes of the
ASICs to ensure the timely availability of products incorporating the Gemstar
Guide Technology in commercial quantities. A failure in any one of the steps
leading to the successful incorporation of the Company's technologies into
products could have a material adverse effect on the Company's business. The
Company believes that the cost of the hardware required to support the Gemstar
Guide Technology must be significantly reduced in order for consumer
electronics manufacturers to incorporate the Company's interactive program
guides in a broader range of consumer electronics devices, including low-to-
mid range televisions and VCRs. Although the Company is currently attempting
to reduce the number and complexity of chips required to support its
interactive program guides and realize additional manufacturing efficiencies,
no assurance can be given that the cost of the required chip sets can be
significantly reduced. Moreover, the semiconductor industry is highly cyclical
and ASICs and memory chips are subject to unanticipated and dramatic price
volatility. Neither the Company nor, to its knowledge, any of the Company's
licensed manufacturers, have long-term supply agreements. As a result, a
significant increase in the cost of ASICs and memory chips could significantly
impede adoption of the Company's interactive program guide technologies by
manufacturers.
Dependence on the Cooperation of Cable, Television Broadcasters and
Publications. The Gemstar Data Delivery System, which broadcasts data
necessary to operate the Company's interactive program guides as well
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as certain advanced features of VCR Plus+, depends on the cooperation of both
cable and television broadcasters. The Company has entered into agreements
with television broadcast networks (including ABC, FOX, CBS, UPN and PBS),
cable program providers (including WGN Superstation, The Family Channel and
A&E) and over 500 local television stations to broadcast data needed to
support the Gemstar Guide Technology and the other features through the
vertical blanking interval, the unused air time between television picture
frames. There can be no assurance that these broadcasters, program providers,
or local broadcast stations will broadcast the data without error. There can
be no assurance that these agreements will not be terminated, and upon
expiration, be renewed on terms acceptable to the Company or at all.
The Company's data broadcast through the vertical blanking interval could be
deleted or modified by local cable operators, so that such data would be
degraded or unavailable to some consumers. In such a case, the Company's
technology may become less attractive to end-users, or the Company may have to
incur additional expense to activate alternative measures to broadcast and
allow end-users to receive such data, or the Company may have to enter into
further agreements with local cable operators to ensure retransmission of
required information. There can be no assurance that such decrease in service
would be acceptable to end users, or that alternative measures of broadcasting
and receiving data would be acceptable, or that agreements with cable
operators could be reached or if reached, that they would be on terms
acceptable to the Company. In addition, increased use of digital broadcast
satellite or digital cable technology, which does not involve a vertical
blanking interval, would require the Gemstar Data Delivery System to be
modified to allow receipt of program data in digital form, and there can be no
assurances that such system could be so modified in a commercially acceptable
manner.
The Company purchases television program listing information from various
commercial vendors for insertion into, and dissemination through, the Gemstar
Data Delivery System. There can be no assurance that the quality, accuracy or
timeliness of such data will meet, or continue to meet, the standard required
to provide interactive program guides satisfactory to the end user.
The Gemstar Guide Technology that is integrated into set-top boxes requires
Service Providers to order new set-top boxes from manufacturers for
distribution to new and existing customers. The Company believes that delays
in the availability of set-top boxes incorporating new analog and digital
technology have caused many Service Providers to defer purchases of new set-
top boxes. Deployment of new set-top boxes has also been delayed by the high
cost of such devices and the capital spending constraints of many cable
operators. As a result, the deployment of Gemstar Guide Technology capable
hardware has been and could be further delayed. There can be no assurance that
the Company's agreements and arrangements with Service Providers will result
in the successful acceptance of the Gemstar Guide Technology or data services
by Service Providers or end-users.
The Company's VCR Plus+ system relies on consumer access to PlusCode Numbers
through licensed publications that carry the PlusCode Numbers. The Company
presently licenses the PlusCode Numbers to newspapers and major television
guides in VCR Plus+ markets worldwide. The license agreements call for royalty
payments to the Company and have initial terms ranging from one to seven
years. There is no assurance that these agreements will be renewed upon
expiration or, if renewed, that they will be on terms as favorable to the
Company as existing license agreements. In addition, the Company will be
dependent on the cooperation and support of publications in countries in which
it is not presently doing business in order to continue to expand the
international availability of the VCR Plus+ system.
Competition. The Company operates in a highly competitive and rapidly
evolving market. To compete successfully in this market, the Company must
produce and provide products and services which are relatively low in cost and
easy for consumers to use. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company who produce
and market television schedule information in various formats which compete or
will compete with the Company's interactive program guides products and
services. These alternative formats currently include traditional printed
television guides, as well as non-interactive (passive) and interactive on-
screen electronic guide services, printed television guides in newspapers and
weekly publications, and local cable television guides.
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Certain manufacturers of cable and satellite set-top boxes, including
General Instrument, offer advanced analog and digital set-top boxes which
incorporate an interactive program guide with various features similar to
those offered by the Company's interactive program guides. Many of these
manufacturers have significantly greater resources than the Company to devote
to the development and commercialization of such products. If the competing
interactive on-screen guides are effectively developed and promoted, and are
not deemed to violate the Company's intellectual property rights, they will
present a significant competitive challenge to the Company's interactive
program guides.
Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels. Several other companies have announced that they will
provide on-screen programming information in connection with pay-per-view and
satellite broadcasting. There can be no assurance that the producers of such
systems will not expand the products to include interactive access to
programming information that will be competitive with the Company's
interactive program guides.
The Prevue Channel and other passive on-screen electronic guides with which
the Company's interactive program guides may compete are typically offered to
cable television subscribers at no cost. There can be no assurance that the
passive guides, which do not require a set-top box to deploy, will not
continue to command greater market share than the interactive guides or that
the producers of the passive guides will not develop new products that will
offer features similar to those found in the Company's interactive program
guides system.
Several entities have announced PC- and Internet-based guide products which
have many features similar to the Company's interactive program guides. Among
others, Intel Corporation currently offers Smart Guide, a PC-based electronic
program guide licensed from Harman Interactive Group. The combination of these
PC- and Internet-based guides and the present and future widespread
availability of Internet-enabled consumer electronics devices (including
Internet-enabled TVs and set-top boxes) and integrated PC-centered home
entertainment systems could pose a significant competitive challenge to the
Company's products. While the Company believes that current PC- and Internet-
based program guides are less attractive to consumers because they lack the
ability to directly control televisions and VCRs, and involve a delay in
responding to user commands, it is possible that the performance and
functionality of PC- and Internet-based guides will be enhanced such that they
are able to compete with the Company's electronic program guides in the
future.
Printed television schedule competitors of the Company include TV Guide,
printed guides for satellite customers, local cable television guides and
local newspaper guides, all of which benefit from their familiarity to
television viewers from their familiarity to television viewers, their broad
base of distribution and their presentation of feature articles and
entertainment news. The established market presence of printed program guides
may give them a competitive advantage.
The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include on-screen program guides which
incorporate point-and-click recording capability and may compete with VCR
Plus+. Certain of the Company's electronic program guides use the VCR Plus+
system, such that every unit that licenses the Gemstar Guide Technology also
licenses the Company's VCR Plus+ technology. However, to the extent that
electronic program guides with recording capability offered by companies other
than Gemstar are widely adopted, such guides may reduce the need for VCR
Plus+. All electronic program guides, including those that do not have a
point-and-click recording feature, may compete with the printed television
guides, and may adversely affect the Company's PlusCode Number coverage and
publication license income.
There may be competitors with significant competitive strengths which are
not known to the Company or discussed herein. Such potential competitors may
include larger, more established companies both within and
17
<PAGE>
outside of the interactive multimedia services and interactive television
fields that could develop, deliver and sell simplified VCR programming
products, on-screen program guides or other devices that meet all or portions
of the functionality provided by the Company's technology. There can be no
assurance that the Company's systems will achieve consumer acceptance or that
they will be able to compete successfully with such known or unknown
competitors, some of which possess substantially greater financial, sales and
marketing resources than those of the Company.
Dependence on Key Employees. The Company is dependent on certain key members
of its management, operations and development staff, including Henry C. Yuen,
its Chief Executive Officer, the loss of whose services could have a material
adverse effect on the Company. Although the Company has employment contracts
with such key employees, such employment contracts would generally not
restrict the employee's ability to leave the Company. Furthermore, recruiting
and retaining additional qualified engineering, marketing, and operations
personnel will be critical to the Company's success. There can be no assurance
that the Company will be able to recruit or retain such personnel on
acceptable terms. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, operating results and
financial condition.
Passive Foreign Investment Company. A foreign corporation is classified as a
"passive foreign investment company" ("PFIC") if (1) 75% or more of its gross
income (including the pro rata gross income of any subsidiary of which the
corporation owns 25% or more of the stock by value) in a taxable year is
passive income or (2) the average percentage of its assets by value (including
the pro rata value of the assets of any subsidiary of which the corporation
owns 25% or more of the stock by value) which produce or are held for the
production of passive income is at least 50% in a taxable year. (For purposes
of these tests, stock of a 25% or more owned U.S. subsidiary (by value) is a
non-passive asset and income from such stock is non-passive income.) Passive
income includes dividends, interest and royalties but excludes royalties that
are derived in the active conduct of a trade or business (as defined for U.S.
federal income tax purposes) and that are received from an unrelated person.
The Company does not believe that it is currently a PFIC because, based on
the substantial management and operational functions of its subsidiaries in
connection with the creation and development of its proprietary products, the
royalty income of these subsidiaries is derived from the active conduct of a
trade or business and because the average value of assets producing passive
income is less than 50% of aggregate asset value. Characterization of royalty
income as active business income is based on the treatment of the Company's
operating subsidiaries, collectively, as the developer and licensor of the
proprietary products for purposes of this test. However, there is little
authority on which to rely in this area, and there can be no assurance that
the Internal Revenue Service will agree with this position. For purposes of
the assets test, the Company values its tangible and intangible assets on a
fair market basis. If the Company were a PFIC, a U.S. holder would be subject
to increased tax liability upon the sale of the Company Ordinary Shares at a
gain or upon the receipt of certain dividends, unless such U.S. holder makes
an election (a "qualifying electing fund election") to be taxed currently on
his pro rata portion of the Company's income, whether or not such income is
distributed in the form of dividends or otherwise.
A U.S. holder making a qualifying electing fund election is required for
each taxable year to include in income a pro rata share of the ordinary
earnings of the qualifying electing funds as ordinary income and a pro rata
share of the net capital gain of the qualifying electing fund as long-term
capital gain. The Company will, at the request of a shareholder making a
"qualifying electing fund election," comply with the applicable information
reporting requirements. U.S. holders should consult their tax advisors
regarding the consequences of PFIC status, including certain reporting
requirements applicable to U.S. shareholders of a PFIC, and the election to
treat the Company as a qualifying electing fund.
Patent, Proprietary Information and Related Litigation. The Company's
continuing success depends in part on its ability to protect and maintain the
proprietary nature of its technology through a combination of patents, trade
secrets, trademarks, copyrights, licenses and other intellectual property
arrangements. The Company has been notified in the past and the Company may be
notified in the future of claims that the Company
18
<PAGE>
may be infringing patents or other intellectual property rights owned by third
parties. In the past the Company has been involved in disputes regarding its
intellectual property rights and believes it may be involved in similar
disputes in the future. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that in the future any
patents held by the Company will not be invalidated. Further, there can be no
assurance that the Company's pending patent applications will issue or that a
third party will not violate, or attempt to invalidate, the Company's
intellectual property rights, possibly forcing the Company to expend
substantial legal fees. An adverse determination in any such dispute could
result in the loss of the company's proprietary rights, subject the Company to
significant liabilities and litigation costs or prevent the Company from
licensing its technologies, any of which could have a material adverse effect
on the Company's business, operating results and financial condition.
Moreover, the laws of certain foreign countries in which the Company's
technology is or may in the future be licensed may not protect the Company's
intellectual property rights to the same extent as the laws of the United
States, thus increasing the possibility of infringement of the Company's
intellectual property. In addition, if any of the Company's licensees
determine that any additional third party licenses are required as a result of
any dispute, there can be no assurance that any such licenses would be
available on terms acceptable to Company, if at all. Additionally, there can
be no assurance that certain aspects of the Company's technology will not be
reverse-engineered by third parties without violating the Company's
proprietary rights. The Company's existing protections also may not preclude
competitors from developing products with features and prices similar to or
better than those of the Company.
To preserve its intellectual property rights, the Company believes it may be
necessary to initiate litigation against one or more third parties. In
addition, one or more of these parties may bring suit against the Company.
In the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. Any litigation, whether as a plaintiff or as defendant,
would likely result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation is ultimately determined in favor of the Company. In addition,
the results of any litigation matter are inherently uncertain.
Holding Company Structure; Restrictions on Subsidiary Dividends. The Company
conducts all of its operations through subsidiaries. Accordingly, the primary
source of the Company's income is dividends and other distributions from its
subsidiaries. Some of the Company's subsidiaries were formed under and have
operations in countries other than the British Virgin Islands, the
jurisdiction of the Company's organization. In addition, each of the Company's
subsidiaries receives its revenues in either U.S. dollars or the local
currency of the jurisdictions in which it operates. As a consequence, the
Company's ability to obtain dividends or other distributions is subject to,
among other things, possible restrictions on dividends under applicable local
laws and foreign currency exchange regulations of the jurisdictions in which
its subsidiaries operate. In addition, dividends or distributions from the
Company's U.S. subsidiary are subject to a 30% withholding tax, which makes
such dividends and distributions unattractive. The subsidiaries' ability to
pay dividends or make other distributions to the Company is also subject to
the subsidiaries having sufficient funds from their operations legally
available for the payment of dividends or other distributions which are not
needed to fund their operations, obligations or other business plans. Because
the Company is a shareholder of its subsidiaries, the Company's right to the
assets of such subsidiaries will be subordinated to the rights of all
creditors and claimants against its subsidiaries. Additionally, while the
Company has paid certain cash dividends to shareholders in the past, the
Company has no current plans to pay cash dividends, and there can be no
assurance that current or future laws of the British Virgin Islands will not
restrict or eliminate the ability of the Company to pay dividends to
shareholders.
Volatility of Stock Price. There has been a history of significant
volatility in the market price of the Company's Ordinary Shares on the Nasdaq
National Market, and it is likely that the market price of the Company's
Ordinary Shares will continue to be subject to significant fluctuations. For
example, in the 52-week period preceding June 23, 1998, the Company's stock
price fluctuated from a low of $15 1/8 to a high of $45 3/4. The Company
believes that future announcements concerning the Company, its competitors or
its principal
19
<PAGE>
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in earnings estimated by
analysts, may cause the market price of the Ordinary Shares to fluctuate
substantially in the future. Sales of substantial amounts of the Company's
outstanding Ordinary Shares in the public market could materially adversely
affect the market price of the Ordinary Shares. Further, in recent years the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of any high
technology companies and that often have been unrelated to the operating
performance of such companies. These fluctuations as well as general economic,
political and market conditions such as recessions, international currency
fluctuations, potential insolvency of international distributors and
representatives, or tariffs and other trade barriers, may materially adversely
affect the market price of the Ordinary Shares.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four-
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in approximately two years, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with compliance. The Company has made and will continue to make
modifications in its computer system to address these compliance issues.
Although the Company believes that it is Year 2000 compliant, there can be no
assurance that coding errors or other defects will not be discovered in the
future. Any Year 2000 compliance problem of the Company, its vendors or its
customers could result in a material adverse effect on the Company's business,
operating results and financial conditions.
EMPLOYEES
The Company employed 165 individuals, including 13 part-time employees, as
of March 31, 1998, of whom 15 were employed outside the U.S. None of the
Company's employees is covered by a collective bargaining agreement or is
presently represented by a labor union. The Company has not experienced any
work stoppages and considers its employee relations to be good.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the United States Securities Act of 1933, as amended
and Section 21E of the United States Securities Exchange Act of 1934, as
amended) that are based on the reasonable expectations and beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Such forward-looking statements are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this document and in the documents
incorporated herein by reference, the words "may," "will," "continue,"
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions including, but not limited to the
following, the Company's ability to have its technologies widely licensed,
incorporated and accepted as the technologies of choice; that the Company
considers its employee relations to be good; with an increase in programming
content and number of accessible channels, the Gemstar Guide Technology will
become an increasingly important tool for assisting customers in sorting,
selecting and recording television programming; the Company's belief that DVD
Recorders incorporating the Company's VCR Plus+ technology will become
commercially available during its 1999 fiscal year; the Company's ability to
enter into long-term relationships with a broad range of consumer electronics
and other manufacturers, television broadcasters, cable companies and software
developers; that the Company's interactive program guides will provide an
attractive vehicle for the delivery of advertising to consumers; the
proliferation of television programming choices gives rise to the need for
consumer electronics devices, including televisions and VCRs; the number of
hardware platforms shipped annually which are suitable for Gemstar Guide
Technology may be as many as 50 million or more; the size of the television
and VCR markets and the
20
<PAGE>
competitive pressures within the industry present an opportunity for companies
that can provide innovative technologies that both appeal to consumers and are
attractive to, and cost-effective for, manufacturers; the consumer demand for
systems and technologies that help organize viewing choices provides an
opportunity for Gemstar Guide Technology; the Company's ability to work
closely with disparate industry participants will contribute to the successful
adoption of the Gemstar Guide Technology; the Company's intention to license
its technologies for use on other platforms; the Company's belief it can
provide additional value-added services to end-users; the design and
capabilities of the Gemstar Guide Technology will allow the Company to enter
into strategic relationships to target advertisers; the Company's interactive
program guides will provide an attractive vehicle for the delivery of
advertising and other content to consumers; the ability to enhance existing
technologies and introduce new technologies on a competitive basis; the
performance and functionality of the Company's PC- and Internet-based guides;
the timing of market introductions and the acceptance of new systems; the
Company's belief that it is Year 2000 compliant; and the Company's belief that
it has a reasonable basis for its tax position with the Internal Revenue
Service.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in,
or implied by, any such forward-looking statements. Factors that could cause
or contribute to such material differences include, but are not limited to,
those discussed in Item 1 under "Business" and "Certain Factors Affecting
Business, Operating Results and Financial Conditions" and Item 3, "Legal
Proceedings," as well as those factors discussed elsewhere in this Form 10-K
and in the documents incorporated herein by reference. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such forward-
looking statements that may reflect events or circumstances occurring after
the date of this Form 10-K.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases an office facility in Pasadena, California covering
approximately 14,354 square feet. The Company's lease on such property expires
on October 14, 2000. The Company leases two facilities in Fremont, California,
one covering approximately 28,500 square feet that expires on March 31, 2002,
and the other covering approximately 32,000 square feet that expires on April
30, 2000. The Company leases an office facility in Bedford, Massachusetts
covering 15,602 square feet. The Company's lease on the Bedford property
expires on December 31, 1998. The Company leases an office facility in Hong
Kong covering approximately 3,000 square feet. The Company's lease on the Hong
Kong property is month to month and can be terminated by either party at any
time.
The Company believes that its facilities are adequate to meet the Company's
needs for the foreseeable future. Should the Company need additional space,
management believes that the Company will be able to secure additional space
at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
In October 1993, United Video Satellite Group, Inc. ("United Video") and its
Tracker, Inc. subsidiary brought suit against StarSight, a now wholly owned
subsidiary of the Company, in the United States District Court for the
Northern District of Oklahoma, seeking a declaratory judgment that its
interactive program guide products do not infringe certain of StarSight's
patents. StarSight 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 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 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 July 1998.
21
<PAGE>
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 General Instrument, Inc.
("GI"). The claims in the arbitration center upon GI's alleged delay in
deploying StarSight-capable set-top boxes, and GI'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.
The arbitration is scheduled to commence July 13, 1998 in San Francisco,
California.
In response to the Demand for Arbitration filed by StarSight, on December 1,
1997 GI filed a complaint against StarSight 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, GI moved for a preliminary injunction, and
StarSight simultaneously moved to dismiss the complaint. The District Court
action filed by GI was dismissed in its entirety pursuant to a voluntary
dismissal filed by GI.
On August 5, 1997, TV Data Technologies, Inc. ("TV Data") filed a demand of
arbitration with the American Arbitration Association ("AAA") against
StarSight, the Company's wholly owned subsidiary, 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 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 United States Internal Revenue Service (the "Service") has conducted an
audit of the federal tax returns for Gemstar Development Corporation ("GDC"),
a U.S. subsidiary of the Company, for the years ended March 31, 1991, 1992 and
1993. The Service has issued a 30-day letter to GDC in which it has proposed
adjustments to GDC's taxable income by reallocating income to GDC, for revenue
related to the Company's VCR Plus+ technology. The Company has filed a protest
with the Service. The Company believes that it has a reasonable basis for its
tax position and accordingly plans to vigorously defend its position. While
there can be no assurance as to the ultimate outcome of the audit, the Company
believes that it has made adequate provision in its financial statements with
respect to the proposed adjustments.
The Company and its subsidiaries are from time to time also involved in
routine legal matters incidental to their businesses. In the opinion of the
Company, the resolution of such matters will not have a material effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 12, 1998, the Company held a Special Meeting of shareholder at
which the shareholders approved the following: (i) amendments to, and the
restatement of, the Company's 1994 Stock Incentive Plan, as amended, (the
"Stock Incentive Plan") to increase the number of Ordinary Shares reserved for
issuance thereunder, extend the term thereof, and make certain other changes
to the Plan; and (ii) certain performance-based provisions of the Amended and
Restated Employment Agreement (the "New Yuen Agreement") for Henry C. Yuen,
the Company's President and Chief Executive Officer. The amendments to the
Stock Incentive Plan increased the number of the Company's Ordinary Shares
reserved for issuance thereunder from 9,100,000 to 20,000,000 and increased
the limit on the number of Ordinary Shares that may be delivered to any one
person from 6,000,000 to 10,000,000. See Item 10, "Directors and Executive
Officers of the Registrant," and Item 11, "Executive Compensation."
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
NASDAQ NATIONAL MARKET
The Company's Ordinary Shares began trading on the Nasdaq National Market
("Nasdaq Stock Market") on October 11, 1995, under the symbol GMSTF. Prior to
that date, the Ordinary Shares were not listed or traded on any organized
market system.
The sole market for the Company's Ordinary Shares continues to be the Nasdaq
Stock Market in the United States. The Ordinary Shares of the Company are not
currently traded on any non-United States trading market.
The following table sets forth, for the previous two fiscal years, the high
and low sales prices per share of Ordinary Shares on the Nasdaq Stock Market
as reported by Nasdaq for the last two fiscal years:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter.............................................. $40 1/4 $24
Second Quarter............................................. 31 3/4 23
Third Quarter.............................................. 29 3/4 12 1/4
Fourth Quarter............................................. 18 1/2 9 5/8
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter.............................................. $21 1/2 $10
Second Quarter............................................. 25 1/2 15 1/8
Third Quarter.............................................. 26 1/8 18 5/8
Fourth Quarter............................................. 37 3/8 20 3/4
</TABLE>
The reported closing sales price of the Company's Ordinary Shares on the
Nasdaq Stock Market on June 15, 1998 was $33 7/8. As of June 15, 1998, there
were 48,507,739 Ordinary Shares outstanding and approximately 231 holders of
record.
DIVIDENDS
The Company has not paid any dividends since its Ordinary Shares began
trading on the Nasdaq Stock Market. The Company's Board of Directors has no
current plans to pay cash dividends. Future dividend policy will depend on the
Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Company's Board of Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions were accounted for under the pooling of interests method and
accordingly, the Company's historical consolidated financial statements were
restated for all periods to include the accounts and results of operations of
VideoGuide and StarSight. See Note 2 of the Notes to Consolidated Financial
Statements for a discussion of these business combinations. This information
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 27,025 $ 41,814 $ 55,365 $ 82,997 $126,552
Operating costs and
expenses:
Selling and marketing...... 16,468 24,970 68,923 45,924 30,993
Research and development... 11,866 16,169 17,462 16,286 13,372
General and
administrative............ 16,111 27,827 25,162 25,558 18,693
Merger costs (1)........... -- -- -- -- 11,713
-------- -------- ---------- -------- --------
Total operating costs and
expenses................ 44,445 68,966 111,547 87,768 74,771
-------- -------- ---------- -------- --------
Earnings (loss) from
operations................. (17,420) (27,152) (56,182) (4,771) 51,781
Other income, net........... 2,462 2,391 2,650 5,156 7,359
-------- -------- ---------- -------- --------
Earnings (loss) from
continuing operations
before income tax expense.. (14,958) (24,761) (53,532) 385 59,140
Income tax expense.......... 2,238 3,681 5,497 8,369 20,433
-------- -------- ---------- -------- --------
Earnings (loss) from
continuing operations...... (17,196) (28,442) (59,029) (7,984) 38,707
Earnings from discontinued
operations (2)............. 6,726 5,197 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $(10,470) $(23,245) $ (59,029) $ (7,984) $ 38,707
======== ======== ========== ======== ========
Basic earnings (loss) per
share (3):
Earnings (loss) from
continuing operations..... $ (0.44) $ (0.71) $ (1.41) $ (0.17) $ 0.81
Earnings from
discontinuing operations.. 0.17 0.13 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $ (0.27) $ (0.58) $ (1.41) $ (0.17) $ 0.81
======== ======== ========== ======== ========
Weighted average shares
outstanding................ 38,816 39,792 41,929 46,707 47,654
======== ======== ========== ======== ========
Diluted earnings (loss) per
share (3):
Earnings (loss) from
continuing operations..... $ (0.44) $ (0.71) $ (1.41) $ (0.17) $ 0.76
Earnings from
discontinuing operations.. 0.17 0.13 -- -- --
-------- -------- ---------- -------- --------
Net earnings (loss)...... $ (0.27) $ (0.58) $ (1.41) $ (0.17) $ 0.76
======== ======== ========== ======== ========
Weighted average shares
outstanding, assuming
dilution................... 38,816 39,792 41,929 46,707 50,763
======== ======== ========== ======== ========
<CAPTION>
MARCH 31,
---------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $57,256 $25,700 $25,477 $ 53,976 $110,446
Total assets................ 97,680 64,457 96,513 131,276 186,078
Debt (4).................... 9,812 -- -- -- --
Shareholders' equity (5).... 75,062 39,916 34,246 53,717 103,482
</TABLE>
- - -------
(1) Merger costs for the year ended March 31, 1998 were incurred as a result
of the acquisition of StarSight. See Note 2 of the Notes to Consolidated
Financial Statements for a discussion of the business combination.
(2) Discontinued operations for the year ended March 31, 1995 included a
nonrecurring tax benefit of $8.1 million.
(3) See Note 1 of the Notes to Consolidated Financial Statements for a
discussion of earnings (loss) per share information.
(4) Amounts are included in current net assets and non-current net liabilities
related to discontinued operations.
(5) Cash dividends of $0.20 and $0.12 per Ordinary Share were declared in the
years ended March 31, 1994 and 1995, respectively.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company develops, markets and licenses proprietary technologies and
systems that simplify and enhance consumers' interaction with electronics
products and other platforms that deliver video, programming information and
other data. The Company generates revenues through licensing of their
technology and intellectual property to consumer electronics manufacturers,
service providers, software developers, microchip makers and Internet
appliance manufacturers, as well as to newspapers and television guide
publishers through a combination of upfront, non-refundable license payments
and per unit license fees. Historically, the primary source of revenues has
been license fees paid by consumer electronics manufacturers and publications
for the licensing of the VCR Plus+ technology and the right to print the
PlusCode numbers, respectively. Starting fiscal year 1998, the Company began
to derive significant license revenues from the Gemstar Guide Technology.
Revenues from up front license fees are recognized ratably over the term of
the particular license and revenues from on-going per unit license fees are
recognized when payments are due, and generally, when payments are actually
received from the licensee.
The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions were accounted for under the pooling of interests method and
accordingly, the Company's historical consolidated financial statements were
restated for all periods to include the accounts and results of operations of
VideoGuide and StarSight.
Both VideoGuide and StarSight incurred substantial operating losses since
their inception through the date of acquisition by the Company. Due to these
losses, the restated financial results as reported contain significant
marketing, research and development, and general and administrative expenses
resulting in significant operating losses during certain periods. All of the
selling and marketing efforts and a portion of the research and development
effort expended by VideoGuide were directed toward marketing a subscription-
based electronic program guide service delivered through the 900 MHz paging
signal. After the acquisition, the VideoGuide service was terminated in
September 1997. A significant portion of the selling and marketing and
research and development effort of StarSight was directed toward marketing a
subscription-based electronic program guide service delivered through the
vertical blanking interval of the television signal. A significant portion of
the general and administrative expenses incurred by StarSight prior to the
acquisition was comprised of legal fees related to litigation with the
Company, which terminated upon the acquisition.
The fiscal year 1998 results show significant cost reductions after the
acquisitions of VideoGuide and StarSight which was due primarily to the
implementation of the Company's cost control measures. Such measures resulted
in lower payroll costs due to headcount reductions, cost savings from
combining marketing and development efforts and reduction of legal costs by
eliminating the litigation between the Company and StarSight. The Company also
realized synergies of the combined companies which resulted in further cost
savings.
Recent Developments
The Company has integrated the technical expertise of VideoGuide and
StarSight to better serve the respective needs of consumer electronics
manufacturers and service providers, and combined the technologies developed
by VideoGuide and StarSight into the Gemstar Guide Technology. The Company
also developed significant strategic relationships in the consumer electronics
and computer/Internet appliance sectors.
. In November 1997, the Company entered into a multi-year license agreement
with Thomson for the Gemstar Guide Technology and entered into a joint
venture, TDN, Inc., for the exploration of advertising, promotion,
linking and transaction opportunities through interactive program guides
on consumer electronics platforms.
25
<PAGE>
. In January 1998, the Company entered into a worldwide cross-licensing
agreement with Microsoft in which the two companies agreed to cross-
license their respective intellectual property in the interactive program
guide area and under which Microsoft agreed to license the Company's
intellectual property in all Microsoft interactive program guide
products.
The Company continued to add new license agreements for the Gemstar Guide
Technology with consumer electronics manufacturers, and licensees in the cable
and satellite industries.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto. The following table presents
the Company's results of operations for the years ended March 31, 1996, 1997
and 1998. Such results of operations have been restated for the effects of the
acquisitions of VideoGuide and StarSight accounted for under the pooling of
interests method. The table also presents unaudited pro forma results of
operations for the years ended March 31, 1996 and 1997, which reflect the
Company's reported results, excluding VideoGuide's results and StarSight's
results prior to the acquisitions. The Company has included the prior period
financial information on a pro forma basis for informational purposes and to
facilitate the understanding of the effects of the two acquisitions on the
Company's results of operations. The pro forma results do not purport to
present the Company's results of operations in accordance with generally
accepted accounting principles.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
YEAR ENDED MARCH 31, YEAR ENDED MARCH 31,
--------------------------- ---------------------
1996 1997 1998 1996 1997
-------- ------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................... $ 55,365 $82,997 $126,552 $ 53,436 $ 70,367
Operating costs and
expenses:
Selling and marketing..... 68,923 45,924 30,993 15,496 20,661
Research and development.. 17,462 16,286 13,372 8,428 10,699
General and
administrative........... 25,162 25,558 18,693 9,957 12,160
Merger costs.............. -- -- 11,713 -- --
-------- ------- -------- ---------- ----------
Total operating costs
and expenses........... 111,547 87,768 74,771 33,881 43,520
-------- ------- -------- ---------- ----------
Earnings (loss from
operations................. (56,182) (4,771) 51,781 19,555 26,847
Other income, net........... 2,650 5,156 7,359 2,025 4,162
-------- ------- -------- ---------- ----------
Earnings (loss) before
income tax expense......... (53,532) 385 59,140 21,580 31,009
Income tax expense.......... 5,497 8,369 20,433 5,497 8,369
-------- ------- -------- ---------- ----------
Net earnings (loss)..... $(59,029) $(7,984) $(38,707) $ 16,083 $ 22,640
======== ======= ======== ========== ==========
</TABLE>
Revenues
Revenues were $126.6 million, $83.0 million and $55.4 million for fiscal
years 1998, 1997 and 1996, respectively. The increase in revenues of 52% in
fiscal 1998 and 50% in fiscal 1997 were due primarily to the continued
increase in unit shipments incorporating the VCR Plus+ technology worldwide
and an increase in revenues associated with the expansion of the Gemstar Guide
Technology from the consumer electronics industry into the cable, satellite
and personal computer industries.
Pro forma revenues were $70.4 million for fiscal 1997 and $53.4 million for
fiscal 1996. The increase in revenues of 80% in fiscal 1998 and 32% in fiscal
1997, when compared with pro forma revenues for the year-ago period, were due
to increased revenues associated with the VCR Plus+ technology and the Gemstar
Guide Technology.
26
<PAGE>
Selling and Marketing Expenses
Selling and marketing expenses consist of advertising and marketing program
costs, contracted services and salaries of marketing personnel, as well as
operational costs required to support the interactive program guide data
broadcast system and content requirements.
Selling and marketing expenses were $31.0 million, $45.9 million and $68.9
million for fiscal years 1998, 1997 and 1996, respectively. The decrease of
33% in fiscal 1998 was due primarily to a reduction in marketing, selling and
support costs as well as personnel costs associated with activities related to
StarSight and VideoGuide services. The decrease of 33% in fiscal 1997 was
attributable to a decrease in marketing, promotional and product launch costs
related to the VideoGuide system, offset by an increase in marketing,
promotional and operational costs required to launch and support the Gemstar
Guide Technology.
Pro forma selling and marketing expenses were $20.7 million for fiscal 1997
and $15.5 million for fiscal 1996. The increases of 50% in fiscal 1998 and 33%
in fiscal 1997, when compared with pro forma selling and marketing expenses
for the year ago period, were attributable to the marketing and support costs
associated with the Gemstar Guide Technology, and costs associated with
StarSight's and VideoGuide's operations.
Research and Development Expenses
Research and development expenses were $13.4 million, $16.3 million and
$17.5 million for fiscal years 1998, 1997 and 1996, respectively. The
decreases of 18% in fiscal 1998 and 7% in fiscal 1997 were due to lower
development costs associated with realized synergies of the combined companies
and cost control measures implemented by the Company after the acquisitions.
Pro forma research and development expenses were $10.7 million for fiscal
1997 and $8.4 million for fiscal 1996. The increases of 25% in fiscal 1998 and
27% in fiscal 1997, when compared with pro forma research and development
expenses for the year ago period, were due primarily to increased activities
associated with the development and testing of the Gemstar Guide Technology.
General and Administrative Expenses
General and administrative expenses were $18.7 million, $25.6 million and
$25.2 million for fiscal year 1998, 1997 and 1996, respectively. The decrease
of 27% in fiscal 1998 is attributable to lower personnel and operational costs
associated with realized synergies of the combined companies; a reduction in
legal expenses due to the elimination of the litigation between the Company
and StarSight; and cost control measures implemented by the Company after the
acquisitions. The slight increase in fiscal 1997 was due primarily to
increased personnel costs to support the Company's licensing business on a
worldwide basis as well as increased legal expenses associated with the
litigation between the Company and StarSight. These increases were offset by a
reduction in operating expenses associated with VideoGuide's operations.
Pro forma general and administrative expenses were $12.2 million for fiscal
1997 and $10.0 million for fiscal 1996. The increases of 54% in fiscal 1998
and 22% in fiscal 1997, when compared with pro forma general and
administrative expenses for the year ago period, were due primarily to an
increase in personnel cost to support the Company's licensing business on a
worldwide basis, and costs associated with StarSight's and VideoGuide's
operations in fiscal 1998.
Merger Costs
As a result of the acquisition of StarSight, the Company recorded merger
related costs totaling $11.7 million in fiscal 1998. These costs were
comprised of fees for financial advisors, attorneys, and accountants;
severance and other transaction costs.
Income Tax Expense
Income tax expense was $20.4 million, $8.4 million and $5.5 million for
fiscal years 1998, 1997 and 1996, respectively. Excluding merger costs, the
Company's effective tax rate was 29% in fiscal 1998. 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 tax expense may
27
<PAGE>
vary from year to year. Certain income tax benefits included in income tax
expense for fiscal years 1997 and 1996 were limited due to uncertainty
regarding the realization of net operating loss carryforwards, tax credit
carryforwards, and temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents and short-term
marketable securities totaling $157.9 million and working capital of $110.4
million. Net cash provided by operating activities was $55.5 million for
fiscal 1998 and $14.4 million for fiscal 1997. Net cash used in operating
activities was $15.0 million for fiscal 1996. The increases in net cash
provided by operating activities in fiscal years 1998 and 1997 were primarily
the result of increased earnings and timing of payments.
Net cash provided by investing activities was $33.4 million for fiscal 1998,
comprised of proceeds from net maturities of marketable securities of $46.1
million offset by additions to property and equipment and intangible assets of
$12.7 million. Additions to intangible assets consist primarily of a one-time
payment for the purchase of patents and invention rights related to the
interactive program guide technology. Net cash used in investing activities
was $50.1 million for fiscal 1997, comprised of net purchases of marketable
securities of $47.0 million and additions to property and equipment and
intangible assets of $3.2 million. Net cash provided by investing activities
was $13.8 million for fiscal 1996, comprised of proceeds from net maturities
of marketable securities of $18.4 million offset by additions to property and
equipment and intangible assets of $4.7 million.
Net cash provided by financing activities was $4.7 million, $33.5 million
and $48.8 million for fiscal years 1998, 1997 and 1996, respectively. The
Company received proceeds of $32.6 million in fiscal 1997 and $53.6 million in
fiscal 1996 from private and public sales of the Company's Ordinary Shares.
Proceeds from stock option exercises were $17.5 million in fiscal 1998 and
were not significant in fiscal years 1997 and 1996. The Company repurchased a
warrant to purchase 606,000 Ordinary Shares from the warrant holder for $12.8
million in fiscal 1998. Dividends of $5.0 million were paid in fiscal 1996.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130") and Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131") in fiscal year 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 year 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 year 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information with respect to this Item 8 is set forth in "Index to
Consolidated Financial Statements."
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the Company's
directors and executive officers as of March 31, 1998:
<TABLE>
<CAPTION>
EXECUTIVE
NAME AGE POSITION AND OFFICE DIRECTOR SINCE OFFICER SINCE
---- --- ------------------- --------------- -------------
<C> <C> <S> <C> <C>
Thomas L. H. Lau.. 44 Chairman of the Board
and Director April, 1992 --
Henry C. Yuen..... 49 Chief Executive Officer,
President and Director April, 1992 August, 1994
Elsie Ma Leung.... 51 Chief Financial Officer
and Director April, 1994 August, 1994
Larry Goldberg.... 50 Secretary, Corporate
Counsel and Director August, 1994 August, 1994
George F. Carrier. 80 Director August, 1994 --
Teruyuki Toyama... 68 Director August, 1994 --
Brian Klosterman.. 40 Director September, 1997 --
Douglas B. Macrae. 39 Director September, 1997 --
James E. Meyer.... 43 Director May, 1997 --
George Smith...... 49 Director May, 1997 --
</TABLE>
Mr. Thomas L. H. Lau is a co-founder of the Company and has served as a
director of the Company since April 1992 and currently serves as the Chairman
of the Board of the Company. Since February, 1998, Mr. Lau has served as an
Executive Director of The Kwong Sang Hong Limited, a company engaged in
property investment and distribution and trading of cosmetics. Since 1985, Mr.
Lau has been an Executive Director of Chinese Estates Holdings Ltd., Hong
Kong, a holding company for various Hong Kong business interests, including
real estate and securities. Since 1996, Mr. Lau has also served as Deputy
Chairman of Evergo International Holdings Co. Ltd., a company principally
engaged in property investment and financing in the People's Republic of
China. Prior to that, Mr. Lau was involved in a broad spectrum of business
activities, including manufacturing, international trading, real estate
investment and development and securities transactions. Mr. Lau holds a B.A.
(Business Administration) from the University of Toronto and an M.B.A. from
the University of Windsor.
Dr. Henry C. Yuen is a co-founder of the Company and has served as the
Company's Chief Executive Officer and President since August 1994 and as a
director of the Company since April 1992. Dr. Yuen has been the Chief
Executive Officer and President of Gemstar Development Corporation ("GDC"), a
wholly owned subsidiary of the Company, since 1989. Prior to his association
with the Company, Dr. Yuen was a research scientist at TRW, Inc. Dr. Yuen has
continued his relationship with TRW, Inc. since joining the Company, becoming
a Technical Fellow in 1990, a position he continues to hold. Dr. Yuen's
ongoing research at TRW, Inc. has been devoted exclusively to the study of
ocean wave theory. Dr. Yuen held faculty positions at the California Institute
of Technology in 1973 and Courant Institute of Mathematical Sciences of New
York University in 1974. Dr. Yuen has a number of pending and issued patents
in various technological fields and has published over 70 reviewed scientific
publications. Dr. Yuen is also a lawyer admitted to practice in California.
Dr. Yuen holds a B.S. (Mathematics) from the University of Wisconsin, a Ph.D.
(Applied Mathematics) from the California Institute of Technology and a J.D.
from Loyola University School of Law, Los Angeles. Dr. Yuen was elected the
1996 National Entrepreneur of the Year by the Entrepreneur of the Year
Institute, jointly sponsored by USA Today, Ernst & Young and Nasdaq.
Ms. Elsie Ma Leung has served as the Company's Chief Financial Officer since
August 1994 and as a director of the Company since April 1994. Ms. Leung has
been Chief Financial Officer of GDC since January 1993. Ms. Leung founded a
public accounting firm, Leung, Kaufman & Co., in 1983 and was its
29
<PAGE>
managing partner until joining the Company. Ms. Leung also served as Chief
Financial Officer of American Plant Growers, Inc. from 1988 to 1993. Prior to
1983, Ms. Leung performed audit duties at Kenneth Leventhal & Company. Ms.
Leung is a licensed Certified Public Accountant. Ms. Leung holds a B.A.
(Accounting) from California State University, Los Angeles.
Mr. Larry Goldberg joined the Company in August 1994 as Secretary and
Corporate Counsel. For eight years prior to joining the Company, he was a
partner in the law firm of Schneider, Goldberg and Yuen, specializing in
business law and business litigation where he continues to be of counsel.
Prior to practicing law, Mr. Goldberg performed audit duties with Price
Waterhouse and Kenneth Leventhal & Company. Mr. Goldberg is admitted to
practice law in California. Mr. Goldberg holds a B.A. (Economics) from UCLA
and a J.D. from Loyola University School of Law, Los Angeles.
Dr. George F. Carrier In August 1994, he was appointed a director of the
Company. He served on the faculty of Harvard University from 1952 until he
retired in 1988. While at Harvard, he served as the Gordon McKay Professor of
Mechanical Engineering and T. Jefferson Coolidge Professor of Applied
Mathematics. Since 1995, Dr. Carrier has served as a private consultant to TRW
Inc.'s Aerospace and Automotive Divisions and since 1992 has served as a
private consultant to the National Science Foundation. Dr. Carrier holds a
B.S. (Mechanical Engineering) from Cornell University and a Ph.D. (Applied
Mechanics) from Cornell University.
Mr. Teruyuki Toyama was appointed a director of the Company in August 1994.
From 1993 to 1997, Mr. Toyama was the President and Chief Executive Officer of
Overseas Courier Services Co., Ltd. In 1997 he was appointed as Executive
Advisor of that company. Mr. Toyama worked for over 40 years in various
capacities with Asahi Shimbun Co., Ltd. ("Asahi Shimbun"). From 1991 to 1993,
he was Senior Managing Director and Chief Operating Officer of Asahi Shimbun.
From 1987 to 1991, he was Asahi Shimbun's Managing Director in charge of
Advertising. Prior to 1987 he served as a Director of the Advertising Division
and as a member of the board of directors. Mr. Toyama holds a degree in
Foreign Studies from Tokyo University.
Mr. Brian Klosterman was appointed a director of the Company in September
1997. Since 1993, Mr. Klosterman has held various positions with StarSight,
most recently as President of StarSight. From 1988 to 1993, Mr. Klosterman
held various positions with Sony Corporation of America, including Vice
President. From 1985 to 1988, Mr. Klosterman served in various positions with
Thomson Consumer Electronics, Inc., including Manager--TV Marketing and
Planning.
Mr. Douglas B. Macrae was appointed a director of the Company in September
1997. Mr. Macrae founded VideoGuide Inc., a now wholly-owned subsidiary of the
Company, in September 1993 and has served as its President and Chief Executive
officer since that time. Mr. Macrae currently serves as Chairman of the Board
of GCC Technologies, Inc., a privately held company that designs, licenses,
manufactures and sells consumer electronics and computer products. From 1981
to 1993, Mr. Macrae served as Vice President of Engineering of GCC
Technologies, Inc. From 1985 to 1991, Mr. Macrae served as a director of Blyth
Holdings, a publicly held database company. Since 1988, Mr. Macrae has served
on the Board of Trustees of the Pingry School in Martinsville, New Jersey.
Mr. James E. Meyer was appointed a director of the Company in May 1997. Mr.
Meyer has served as Chief Operating Officer for Thomson since 1997. Mr. Meyer
served as Senior Vice President--Product Management for Thomson from 1992 to
1996. From December 1996 to September 1997, Mr. Meyer served as Executive Vice
President, Marketing & Sales-Americas for Thomson. Since June 1995, Mr. Meyer
has served as a director of Thomson Sun Interactive.
Mr. George Smith was appointed a director of the Company in May 1997. Mr.
Smith has served as Senior Vice President and Chief Financial Officer of
Viacom, Inc. since November 1987. Mr. Smith served as Vice President and
Controller of Viacom from 1985 to 1997 and Vice President--Finance and
Administration of Viacom Broadcast Group from 1983 to 1985.
30
<PAGE>
The Board of Directors is divided into three classes: Class I, Class II, and
Class III. The Class I directors consist of Messrs. Goldberg, Klosterman,
Macrae and Smith; the Class II directors consist of Dr. Carrier, Mr. Toyama
and Mr. Meyer and the Class III directors consist of Mr. Lau, Dr. Yuen and Ms.
Leung. Each director serves for a term ending following the third annual
meeting following the annual meeting at which such director was elected. The
terms of office of directors in Class I, Class II and Class III end following
the annual meetings in 1999, 2000, and 1998, respectively. The appointment of
all officers is subject to the discretion of the Board of Directors.
The Executive Committee of the Board of Directors consists of Dr. Yuen, Mr.
Lau and Ms. Leung. The Executive Committee has authority to take any action
other than appointment of auditors, election and removal of directors and
appointment of officers, which can be taken only by the Board of Directors.
The Company's Audit Committee consists of Dr. Carrier and Messrs. Toyama and
Goldberg. The Audit Committee recommends to the Board of Directors the
independent public accountants to be selected to audit the Company's annual
financial statements and approves any special assignments given to such
accountants. The Audit Committee also reviews the planned scope of the annual
audit and the independent accountants' letter of comments and management's
responses thereto, any major accounting changes made or contemplated and the
effectiveness and efficiency of the Company's internal accounting staff.
The Company's Compensation Committee consists of Dr. Carrier and Mr. Toyama.
The Compensation Committee establishes remuneration levels for executive
officers of the Company, reviews management organization and development,
reviews significant employee benefit programs and administers the Company's
Stock Incentive Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the United States Securities Exchange Act of 1934, as
amended, requires that the Company's directors and officers, and persons who
own more than 10% of a registered class of the Company's equity securities,
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission") and the National Association of
Securities Dealers, Inc. ("NASD"). Directors, officers, and beneficial owners
of more than 10% of the Company's Ordinary Shares are required by the
Commission to furnish the Company with copies of the reports they file.
Based solely on its review of the copies of such reports and written
representations from certain reporting persons that certain reports were not
required to be filed by such persons, the Company believes that all of its
directors, officers and greater than 10% beneficial owners complied with all
filing requirements applicable to them with respect to transactions during the
1998 fiscal year except that a Form 3 for Mr. Klosterman was inadvertently not
filed on a timely basis following his appointment to the Company's Board of
Directors in September 1997. Mr. Klosterman's Form 3 was subsequently filed
with the Commission and the NASD.
31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid by the Company for fiscal years 1998, 1997 and 1996 to the
Company's principal executive officer and the five other most highly
compensated executive officers during the 1998 fiscal year (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(2)(3) AWARDS
-------------------------- ------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS UNDERLYING COMPENSATION
POSITIONS(1) YEAR ($) ($) OPTIONS(#) ($)(4)
------------------ ------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Thomas L. H. Lau........... 1998 $360,000 $ -- -- $ --
Chairman of the Board 1997 360,000 -- -- --
1996 270,000 -- 230,000 --
Henry C. Yuen.............. 1998 888,800 1,611,200 4,162,725 493,912
Chief Executive Officer 1997 648,000 518,400 -- 495,681
and President
1996 540,000 432,000 2,600,000 497,083
Elsie Ma Leung............. 1998 570,000 228,000 1,500,000 2,427
Chief Operating Officer 1997 475,000 190,000 -- 4,076
and Chief Financial
Officer 1996 326,875 130,750 410,000 --
Roy J. Mankovitz........... 1998 296,100 118,440 150,000 1,474
Asst. Secretary, Corporate 1997 423,000 169,200 -- 4,658
Counsel--Intellectual
Property 1996 352,500 141,000 372,500 --
Larry Goldberg............. 1998 388,800 155,520 300,000 2,248
Secretary and Corporate 1997 324,000 129,600 -- 4,427
Counsel 1996 270,000 108,000 372,500 --
Brian Klosterman(5)........ 1998 240,000 120,000 340,930 255
President, StarSight
Telecast, Inc.
</TABLE>
- - --------
(1) All of the Named Executive Officers are or were employed in the indicated
positions with GDC, except Mr. Lau, who is employed by the Company and is
the Chairman of the Board, and Mr. Klosterman, who serves as President of
StarSight, a wholly owned subsidiary of the Company. Dr. Yuen also serves
as Chief Executive Officer and President of the Company and Ms. Leung also
serves as Chief Financial Officer of the Company.
(2) No individual listed in the table received aggregate other compensation
exceeding $50,000 or 10% of the compensation reported in the table for
such individual.
(3) The salary paid to each of the Named Executive Officers represents each
such officer's adjusted base salary for each of the indicated fiscal
years, calculated pursuant to the applicable formula under such officer's
employment agreement with the Company, GDC or StarSight, as the case may
be. The bonuses paid to Dr. Yuen represent the aggregate amounts of
Dr. Yuen's merit bonus and annual incentive bonus, calculated pursuant to
the applicable formulae set forth in the Employment Agreement between GDC
and Dr. Yuen, dated April 1, 1994, as amended, and the New Yuen Agreement.
The bonuses paid to each of Messrs. Lau, Mankovitz and Goldberg and Ms.
Leung represent the amount of the annual incentive bonus paid to each such
officer for each of the indicated fiscal years, calculated pursuant to the
applicable formula in such officer's employment agreement with GDC or the
Company, as the case may be. The bonus paid to Mr. Klosterman represents
the amount of the annual performance bonus (or other special bonus) paid
to Mr. Klosterman pursuant to his employment agreement with StarSight.
32
<PAGE>
(4) The Company, GDC or StarSight, as the case may be, provide the Named
Executive Officers with certain group life, health, medical and other non-
cash benefits generally available to all salaried employees and not
included in this column pursuant to the Securities and Exchange
Commission's rules. The amounts shown in this column include the
following:
(a) Matching contributions by the Company, GDC or StarSight, as the case
may be, under the Gemstar Employees 401(k) and Profit Sharing Plan, which
permits salaried employees to make tax-deferred contributions of a portion
of their base compensation pursuant to Section 401(k) of the Code. Under
the Plan, prior to January 1, 1998, GDC or the Company will match 100% of
3% of a participant's compensation up to $16,667 contributed as elective
deferrals and 50% of 3% of a participant's compensation in excess of
$16,667 contributed as elective deferrals up to applicable limits under the
Code. Effective January 1, 1998, GDC's matching contribution will be an
amount equal to 100% of up to 2% of a participant's compensation
contributed, up to applicable limits under the Code.
(b) Represents premiums paid for split dollar life insurance policies.
(5) Mr. Klosterman joined the Company following consumation of the Company's
acquisition of StarSight in May 1997.
SUMMARY OF OPTION GRANTS
The following table provides certain summary information concerning grants
of options to the Named Executive Officers of the Company during the 1998
fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM
OPTIONS TO EMPLOYEES IN EXERCISE PRICE ----------------------
NAME GRANTED FISCAL YEAR PER SHARE EXPIRATION DATE 5% 10%
---- ---------- --------------- -------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. H. Lau........ -- -- -- -- -- --
Henry C. Yuen........... 4,162,725 50.2% $22.00 01/06/08 57,594,138 145,954,855
Elsie Ma Leung.......... 300,000 3.6 15.38 05/08/07 2,901,720 7,353,528
1,200,000 14.5 30.00 03/30/08 22,640,207 57,374,729
Roy J. Mankovitz........ 150,000 1.8 15.38 05/08/07 1,450,860 3,676,764
Larry Goldberg.......... 150,000 1.8 15.38 05/08/07 1,450,860 3,676,764
150,000 1.8 30.00 03/30/08 2,830,026 7,171,841
Brian Klosterman........ 100,000 1.2 14.75 05/07/07 927,620 2,350,770
150,000 1.8 30.00 03/30/08 2,830,026 7,171,841
</TABLE>
SUMMARY OF OPTIONS EXERCISED
The following table provides certain summary information concerning the
exercise of stock options by the Named Executive Officers during the 1998
fiscal year together with the fiscal year-end value of unexercised options.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR-END (1)
SHARES ACQUIRED VALUE (1) ----------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ---------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas L. H. Lau........ -- -- 143,750 86,250 $ 2,601,875 $ 1,561,125
Henry C. Yuen........... 43,000 $ 488,050 3,389,545 3,330,180 52,942,060 26,651,440
Elsie Ma Leung.......... -- -- 815,350 1,094,650 10,423,217 1,383,783
Roy J. Mankovitz........ 175,000 1,971,434 300,175 47,325 5,075,859 691,892
Larry Goldberg.......... 247,000 2,371,485 228,175 197,325 3,772,659 691,892
Brian Klosterman........ -- -- 118,014 222,916 2,646,090 1,111,969
</TABLE>
33
<PAGE>
- - --------
(1) Market value of the securities underlying the options at exercise date or
year-end, as the case may be, minus the exercise or base price of "in-the-
money" options and transaction costs.
COMPENSATION OF DIRECTORS
The Company will pay each director who is not an employee of the Company
$25,000 per year for services as a director of the Company and $1,000 per
Board or Committee meeting attended. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with attendance at meetings of,
and other activities relating to service on, the Board of Directors or any
Board Committee. In addition, directors who are not full-time employees are
eligible to participate in, and each director has received awards pursuant to,
the Company's Stock Incentive Plan. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
EMPLOYMENT AGREEMENTS
Amended and Restated Employment Agreement with Dr. Yuen
In January 1998, the Company's Compensation Committee and Board of Directors
approved the New Yuen Agreement. The New Yuen Agreement supersedes and
replaces Dr. Yuen's former Employment Agreement with GDC, and provides for Dr.
Yuen's service to each of the Company and GDC as Chief Executive Officer and
President through October 31, 2002, subject to a three-year renewal term and
to earlier termination under certain circumstances. The New Yuen Agreement
also provides that Dr. Yuen will serve as a director of each of the Company,
GDC and StarSight.
The New Yuen Agreement includes provisions (collectively, the "Performance-
Based Provisions") pursuant to which Dr. Yuen's annual base salary ("Base
Salary") is adjusted and his merit bonus, annual incentive bonus and annual
stock option grants are calculated. The Performance-Based Provisions of the
New Yuen Agreement were subject to shareholder approval to satisfy one of the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), in order to permit the Company to deduct payments in
excess of $1 million in any fiscal year. The Performance-Based Provisions of
the New Yuen Agreement were approved by the shareholders at a Special Meeting
of Members of the Company held on March 12, 1998 (the "March Special
Meeting").
Under the New Yuen Agreement, Dr. Yuen's Base Salary initially is set at $1
million. The New Yuen Agreement provides for annual adjustments to Dr. Yuen's
Base Salary based on the growth of the Company's consolidated revenues and
consolidated net earnings, as similar to his former employment agreement. The
New Yuen Agreement also provides for the payment to Dr. Yuen of a merit bonus
(the "Merit Bonus") which is equal to a percentage of Dr. Yuen's then-current
Base Salary (reflecting any prior adjustments), equal to the percentage
increase, if any, in the Company's consolidated earnings before interest,
taxes, depreciation and amortization ("EBITDA") for its most recently
completed fiscal year from the Company's EBITDA for the comparable period in
the immediately preceding fiscal year, as similar to his former employment
agreement. The New Yuen Agreement also provides for the payment to Dr. Yuen of
an additional bonus (the "Annual Incentive Bonus"), the amount of which, if
any, is tied to the annual rate of growth of the Company's consolidated
earnings per share, as similar to his former employment agreement. Under the
New Yuen Agreement, the aggregate dollar amount of Dr. Yuen's Base Salary (as
adjusted), Merit Bonus, and Annual Incentive Bonus for each compensation
period is subject to an annual limitation, as similar to his former employment
agreement except with respect to the dollar amount of annual limitation. The
amount of the adjustment to Dr. Yuen's Base Salary, and the amounts of the
Merit Bonus and the Annual Incentive Bonus payable to Dr. Yuen under the New
Yuen Agreement for the fiscal year ended on March 31, 1998, were dependent
upon the Company's financial performance for such year and on whether the
Company's consolidated revenues and consolidated earnings from operations for
the fiscal quarter ended March 31, 1998 exceeded the Company's consolidated
revenues and consolidated earnings from operations, respectively, for the
fiscal quarter ended March 31, 1997, as similar to his former employment
agreement. The New Yuen Agreement provided for the immediate grant to Dr. Yuen
of options to purchase 4,162,725 Ordinary Shares and annual grants of options
to purchase 832,545 Ordinary Shares. The Company's shareholders approved these
stock option grants to Dr. Yuen at the March Special Meeting. Dr. Yuen is also
entitled to a $1,000 a month automobile allowance and other benefits,
including, health insurance and participation in bonus and incentive and stock
option compensation plans.
34
<PAGE>
Under the New Yuen Agreement, as similar to his former employment agreement
all inventions, designs, improvements, patents, copyrights, discoveries and
other intellectual property which (i) are developed by Dr. Yuen while
performing his duties for GDC or using GDC's equipment or trade secret
information, (ii) are related at the time of conception to GDC's business or
actual or demonstrably anticipated research, or (iii) result from any work
performed by Dr. Yuen for GDC, are the property of GDC, if and only to the
extent GDC can show by clear and convincing evidence that such property is
GDC's property.
Employment Agreement with Ms. Leung
The Company and GDC entered into an Amended and Restated Employment
Agreement with Ms. Leung, dated as of March 31, 1998 (the "New Leung
Agreement"), which supersedes and replaces Ms. Leung's former employment
agreement. The New Leung Agreement provides for an initial term effective from
January 1, 1998 through December 31, 2003 and will be automatically renewed
for a three-year period unless either party gives written notice of
termination.
Under the New Leung Agreement, Ms. Leung will serve as Chief Financial
Officer of the Company and Chief Operating Officer and Chief Financial Officer
of GDC. Ms. Leung will also serve as a director of the Company, GDC and
StarSight. Beginning April 1, 1998, Ms. Leung will receive a base salary of
$700,000 per year, with annual adjustments based upon the Company's
consolidated revenues, as similar to her former employment agreement. The New
Leung Agreement also provides that Ms. Leung may receive an annual incentive
bonus based upon the Company's consolidated earnings per share, as similar to
her former employment agreement. Under the New Leung Agreement, Ms. Leung
received options to purchase 1,200,000 Ordinary Shares, scheduled to vest
ratably over the six-year term of the New Leung Agreement over the term of the
Agreement, of which 200,000 became exercisable upon the execution of the
Agreement. Ms. Leung is also entitled to a $750 per month automobile allowance
and other benefits, including, health insurance and participation in bonus and
incentive and stock option compensation plans.
All inventions, designs, improvements, patents, copyrights and discoveries
conceived by Ms. Leung during the term of the New Leung Agreement which are
competitive with or related to existing products or services of GDC shall be
assigned to GDC.
Other Agreements with the Other Executives
The Company has entered into an employment agreement with Mr. Lau and GDC
has entered into employment agreements with Messrs. Goldberg and Mankovitz,
all of which contain substantially similar provisions (hereinafter, these
employment agreements, as amended, are sometimes collectively referred to as
the "Other Agreements," and the Named Executive Officers who have entered into
these agreements are sometimes collectively referred to as the "Other
Executives"). The term of the employment agreements with Messrs. Lau,
Goldberg, and Mankovitz is from April 1, 1994 to March 31, 2001, with and will
be automatically renewed for a one-year period unless either party gives
written notice of termination.
Each of the Other Agreements provides for a base salary subject to an annual
adjustment based upon the Consumer Price Index and the Company's revenues and
net earnings. Each of the Other Executives is also entitled under his
employment agreement to an annual incentive bonus based upon the growth of the
Company.
The Other Agreements provide that, in the event the Company (or GDC, as
applicable) is involved in a merger or a sale of all or substantially all of
its assets to another entity, the Company (or GDC) will (or will cause a
successor to) provide for such adjustment to such executive officers'
compensation as may be necessary to preserve, as nearly as practicable, the
payment of his base salary and certain other benefits under such agreements.
The Other Executives are also entitled under their employment agreements to
such other benefits, including, without limitation, health insurance.
Each of the Other Agreements provides that termination of the Other
Executives (or termination of any compensation or benefits payable to the
Other Executives under the Other Employment Agreements) may be effected upon
the occurrence of certain specified events. In addition, the Other Agreements
(other than the Mankovitz employment agreements) provide that all inventions,
patents, copyrights and other intellectual
35
<PAGE>
property developed or conceived by the Other Executives during the term of the
Other Employment Agreements which are competitive with any existing products
or services of the Company or its affiliates, are the property of the Company
(or GDC, as the case may be). Under the Mankovitz employment agreement, all
inventions, patents, copyrights and other intellectual property which (i) are
developed during the term of the agreement while the inventor was performing
duties for the Company (or GDC) or using the Company's (or GDC's) equipment or
trade secret information, (ii) are related at the time of completion to the
Company's (or GDC's) business or actual or demonstrably anticipated research,
or (iii) result from any work performed by the inventor for the Company (or
GDC), are the property of the Company (or GDC) provided such entity can show
by clear and convincing evidence that such property is such entity's property.
All other intellectual property belongs to the Other Executives.
StarSight entered into an employment agreement with Mr. Klosterman, as of
December 23, 1996 (the "Klosterman Employment Agreement"), which provides for
Mr. Klosterman's services as President of StarSight through December 22, 1999,
unless the Klosterman Employment Agreement is otherwise terminated in
accordance with its terms (the "Employment Period"). In addition, the
Klosterman Employment Agreement provides for an automatic one-year renewal
unless either of the parties thereto notifies the other of the termination
thereof. Pursuant to the Klosterman Employment Agreement, Mr. Klosterman
receives a base salary of $240,000 per year and is eligible to receive an
annual performance bonus (or other special bonus) in no event less than 50% of
his current base salary. Mr. Klosterman is also entitled to a $1,000 a month
automobile allowance and other benefits, including, without limitation, health
insurance.
If StarSight terminates Mr. Klosterman without Cause (as defined below)
during the Employment Period, then Mr. Klosterman is entitled to continue to
receive his salary from StarSight for the remainder of one Employment Period.
If he is terminated for Cause, StarSight shall have no further obligations to
pay any salary or other compensation to him. The Employment Period will also
terminate in the event of Mr. Klosterman's death or disability, and in each
such case, StarSight will be required to make certain limited payments. Mr.
Klosterman may be terminated for "Cause" if: (i) he has engaged in illegal or
other wrongful conduct substantially detrimental to the business or reputation
of StarSight or any affiliated company, or is charged with or convicted of a
felony; (ii) he refuses or fails to act in accordance with any reasonable
direction or order of the StarSight board of directors; provided that the
StarSight board of directors has given him written notice of such refusal or
failure and he fails to comply with such direction or order within thirty days
after the date of such notice; or (iii) he has engaged in any fraud,
embezzlement, misappropriation or similar conduct against StarSight.
In addition, the Klosterman Employment Agreement provides that Mr.
Klosterman will not (i) accept any other employment or (ii) engage in any
other business activity that is competitive with, or places him in a competing
position to that of, StarSight or any affiliated company. In addition, subject
to certain conditions, for a period of one year after the termination of the
Employment Period, Mr. Klosterman will not for himself or any third party,
directly or indirectly, including without limitation, (i) solicit or interfere
with any of StarSight's suppliers or customers; (ii) employ, solicit for
employment, or recommend for employment any person employed by StarSight,
during the period of his employment by StarSight and for one year thereafter;
or (iii) engage in any business activity that is competitive with StarSight;
provided that in no event shall Mr. Klosterman engage in such competitive
activities during the period which he continues to receive payments pursuant
to the termination provisions of the Klosterman Employment Agreement. The
Klosterman Employment Agreement also contains standard employee invention and
intellectual property confidentiality provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Dr. George F. Carrier and
Mr. Teruyuki Toyama, neither of whom is an officer or employee of the Company
or was previously an officer or employee of the Company.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to the
beneficial ownership of the Ordinary Shares as of June 15, 1998, for (i) each
person who beneficially owns more than 5% of the Ordinary Shares, (ii) each of
the directors and Named Executive Officers and (iii) all directors and
executive officers as a group. Except as otherwise indicated, beneficial
ownership includes voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF SHARES
NAME AND POSITION OWNED(1) OUTSTANDING
----------------- ------------ -----------
<S> <C> <C>
Thomas L. H. Lau (2)............................... 11,666,325 23.9%
Henry C. Yuen (3).................................. 6,454,535 12.4
THOMSON multimedia S.A. (4)........................ 3,833,066 7.9%
Viacom International, Inc (5)...................... 2,895,743 5.9%
Elsie Ma Leung (6)................................. 865,349 1.7
Roy L. Mankovitz (7)............................... 300,175 *
Larry Goldberg (8)................................. 228,175 *
Douglas Macrae (9)................................. 190,293 *
Brian Klosterman (10).............................. 118,014 *
George F. Carrier (11)............................. 22,000 *
Teruyuki Toyama (12)............................... 22,000 *
James E. Meyer (13)................................ 16,062 *
George Smith (14).................................. 14,747 *
Executive Group (6 persons) (15)................... 19,632,573 36.6
Non-Executive Director Group (5 persons) (16)...... 265,103 *
Executive Officers and Directors as a group (11
persons) (17)..................................... 19,897,676 37.0
</TABLE>
- - --------
* Less than 1%
(1) Applicable percentage of ownership is based on 48,507,739 Ordinary
Shares outstanding as of June 15, 1998 together with applicable options
or warrants for such shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares subject to options held by
that person that are currently exercisable or that become exercisable
within 60 days following May 31, 1998 are deemed outstanding. However,
such shares are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Unless otherwise indicated,
each of the shareholders named in this table has sole voting and
dispositive power with respect to the Ordinary Shares shown as
beneficially owned by such shareholder. The address for all directors
and officers of the Company is c/o Gemstar International Group Limited,
135 North Los Robles Avenue, Suite 800, Pasadena, California, 91101.
(2) Includes shares held by Dynamic Core Holdings Limited, of which Mr. Lau
is the sole shareholder. Also includes 143,750 shares issuable upon
exercise of options that are currently exercisable or will become
exercisable within 60 days following May 31, 1998.
(3) Includes 3,389,545 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(4) Reflects ownership as reported on a Schedule 13D/A by THOMSON multimedia
S.A., dated as of April 22, 1998, filed with the Securities and Exchange
Commission. Includes 606,200 Ordinary Shares subject to currently
exercisable warrants held by THOMSON multimedia S.A.
(5) Reflects ownership as reported on a Schedule 13D/A filed by Viacom
International, Inc., dated as of February 13, 1998, filed with the
Securities and Exchange Commission.
(6) Includes 815,350 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(7) Includes 300,175 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(8) Includes 228,175 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
37
<PAGE>
(9) Includes 63,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(10) Includes 118,014 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(11) Includes 22,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(12) Includes 22,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(13) Includes 16,062 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(14) Includes 10,000 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(15) Includes 4,995,009 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(16) Includes 133,062 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
(17) Includes 5,128,071 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days
following May 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company continues to maintain a license agreement with Gemstar
Manufacturing Holding Limited, a former wholly owned subsidiary (the
"Holdings"), that allows for the incorporation of the VCR Plus+ technology in
the manufacture and distribution of handsets. Pursuant to the license
agreement, the Holdings pays the Company a per unit royalty fee based on unit
shipments. Royalty fees totaled $112,000 and $1,446,000 for the years ended
March 31, 1996 and 1997, respectively. There were no royalty fees for the year
ended March 31, 1998.
The Company continues to maintain service relationships with certain
Holdings subsidiaries. Pursuant to the services agreements, the Holdings
subsidiaries provide marketing and promotion services for the Company in their
respective territories in connection with the Company's systems, maintain
relationships with licensees and maintain and promote and monitor the
publication of the PlusCode Numbers. Service fees paid to these companies
totaled $7,100,000, $8,300,000 and $8,178,000 for each of the years in the
three-year period ended March 31, 1998. In the future, certain of the
Company's current foreign subsidiaries may enter into similar services
agreements with the subsidiaries of Holdings to promote and maintain the
Company's systems overseas. Compensation under any such agreement is expected
to be calculated on a "costs plus" basis.
The Company has from time to time loaned money to various shareholders and
employees. Most of such loans were unsecured and generally bore interest at
the prime rate as in effect from time to time. At March 31, 1998, there was
one loan in the principal amount of $185,000 plus accrued interest outstanding
to Roy Mankovitz. The loan to Mr. Mankovitz bears interest at 8% per annum and
is secured by a second trust deed on Mr. Mankovitz's personal residence.
Larry Goldberg remains of counsel to the law firm of Schneider, Goldberg,
and Yuen, a firm in which he was previously a partner. Schneider, Goldberg has
provided, and may continue to provide, legal services for the Company from
time to time. Mr. Goldberg does not receive any compensation from Schneider,
Goldberg. Henry Yuen was formerly a partner of Schneider, Goldberg, but Dr.
Yuen no longer has any affiliation with the firm.
The Company believes that all current and any future transactions between
the Company and any affiliates are or will be on terms no less favorable to
the Company than could otherwise be obtained from unaffiliated third parties.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Index to Financial Statements on page F-1.
(a)(2) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
----------- --------------------
<C> <S>
2.1** Parent Significant Shareholder Agreement, dated as of December 23,
1996 by and among StarSight Telecast, Inc., a California
corporation and certain significant shareholders of Gemstar
International Group Limited.
2.2** Agreement and Plan of Merger dated as of December 23, 1996 by and
among Gemstar International Group Limited, a British Virgin
Islands corporation, StarSight Telecast, Inc., a California
corporation, and G/S Acquisition Subsidiary, a California
corporation).
3.1* Amended and Restated Memorandum of Association of the Company.
3.2* 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 J. 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 C.
Yuen, Wilson K. C. Cho and Daniel S. W. 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** Company Significant Shareholder Agreement, dated as of December
23, 1996, by and among Gemstar International Group Limited, a
British Virgin Islands corporation, and certain significant
shareholders of StarSight Telecast, Inc.
10.9** Company Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation.
10.10** Parent Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation (included as Appendix G to the Joint Proxy
Statement/Prospectus).
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
----------- --------------------
<C> <S>
10.11**** 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.
10.12**** Cost and Reimbursement Support Agreement, dated as of October 31,
1997, by and among TDN, Inc., a Delaware corporation, and Gemstar
International Group Limited.
10.13**** 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.
10.14**** Recission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation and Microsoft
Corporation, a Washington corporation.
10.15**** 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.
10.16**** 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.
21***** Material Subsidiaries of Gemstar.
23.1***** Consent of KPMG Peat Marwick LLP.
23.2***** Consent Deloitte & Touche 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 C. Yuen, as amended.
(Confidential treatment requested).
99.3* Employment Agreement, dated August 1995, between Gemstar
International Group Limited and Thomas L. H. Lau.
99.4* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Daniel S. W. Kwoh, as amended.
(Confidential treatment requested).
99.5* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Roy J. Mankovitz, as amended.
(Confidential treatment requested).
99.6* Employment Agreement, dated August 16, 1995, between Pros
Technology Limited and Wilson K. C. Cho. (Confidential treatment
requested).
99.7* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Elsie Ma Leung, as amended.
99.8* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Larry Goldberg, as amended.
99.10* Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as
amended.
99.11***** Amendment to 1994 Stock Incentive Plan, as amended, adopted on
March 12, 1998.
99.12****** Amended and Restated Employment Agreement, effective as of January
7, 1998 among Gemstar International Group Limited, Gemstar
Development Corporation and Henry C. Yuen.
99.13****** Amended and Restated Employment Agreement, dated as of March 31,
1998, among Gemstar International Group Limited, Gemstar
Development Corporation and Elsie Leung.
</TABLE>
40
<PAGE>
- - --------
* 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 Form 20-F of the Company which was filed on
or about June 7, 1996, and incorporated herein by reference.
**** Previously filed as part of Form 8-K, dated January 12, 1998, as
amended on June 11, 1998, or Form 8-K dated February 6, 1998, as
amended on June 11, 1998. Certain information contained in these
exhibits has been omitted pursuant to a request for Confidential
Treatment granted by the Securities and Exchange Commission.
***** Filed herewith.
****** Certain information contained in this exhibit, which has been filed
herewith, has been omitted pursuant to a request for Confidential
Treatment which was filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
(1) The January 12, 1998 Report on Form 8-K, as amended on June 11, 1998, is
filed as part of and incorporated herein by reference into this Report.
(2) February 6, 1998 Report on Form 8-K, as amended on June 11, 1998, is
filed as part of and incorporated herein by reference into this Report.
41
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Pasadena, State of California, on the 29th of June, 1998.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
Dated June 29, 1998 By: /s/ Henry C. Yuen
__________________________________
Henry C. Yuen
Chief Executive Officer,
President and Director
(Principal Executive Officer)
Dated June 29, 1998 By: /s/ Elsie Ma Leung
__________________________________
Elsie Ma Leung
Chief Financial Officer and
Director (Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 29th day of June, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Henry C. Yuen Chief Executive Officer, President and
____________________________________ Director
Henry C. Yuen
/s/ Elsie Ma Leung Chief Financial Officer and Director
____________________________________
Elsie Ma Leung
Chairman of the Board and Director
____________________________________
Thomas L. H. Lau
/s/ Larry Goldberg Secretary and Director
____________________________________
Larry Goldberg
/s/ George F. Carrier Director
____________________________________
George F. Carrier
/s/ Teruyuki Toyama Director
____________________________________
Teruyuki Toyama
Director
____________________________________
James E. Meyer
Director
____________________________________
George Smith
/s/ Brian Klosterman Director
____________________________________
Brian Klosterman
/s/ Douglas B. Macrae Director
____________________________________
Douglas B. Macrae
</TABLE>
S-1
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports............................................. F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-4
Consolidated Statements of Operations for each of the years in the three-
year period ended March 31, 1998......................................... F-5
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended March 31, 1998............................... F-6
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended March 31, 1998......................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gemstar International Group Limited:
We have audited the accompanying consolidated balance sheets of Gemstar
International Group Limited and subsidiaries as of March 31, 1997 and 1998,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended March 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of StarSight Telecast, Inc., as of and for the years
ended December 31, 1995 and 1996, a company acquired by Gemstar International
Group Limited in a business combination accounted for as a pooling of
interests on May 8, 1997 as described in note 2 to the consolidated financial
statements, which statements reflect total assets of $35,031,000 as of
December 31, 1996, and total revenues of $1,913,000 and $8,698,000 for the
years ended December 31, 1995 and 1996, of the related consolidated totals.
Those statements, before the effects of conforming adjustments that were
applied to restate such financial statements, were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for StarSight Telecast, Inc., is based solely on the
report of the other auditors. As described in note 2 to the consolidated
financial statements, subsequent to the issuance of the report of the other
auditors, the financial statements of StarSight Telecast, Inc. were restated
to conform to the accounting policies and fiscal year of Gemstar International
Group Limited as of March 31, 1997 and for each of the years in the two-year
period ended March 31, 1997.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Gemstar International Group
Limited and subsidiaries as of March 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
We also audited the combination including the conforming adjustments for
accounting policies and fiscal year of the accompanying consolidated balance
sheet as of March 31, 1997, and the related consolidated statements of
operations and cash flows for each of the years in the two-year period ended
March 31, 1997 after restatement for the pooling of interests on May 8, 1997.
In our opinion, such consolidated financial statements have been properly
combined on the basis described in note 2 to the consolidated financial
statements.
KPMG Peat Marwick LLP
Los Angeles, California
May 8, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
StarSight Telecast, Inc.:
We have audited the balance sheets of StarSight Telecast, Inc. ("StarSight")
as of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for the twelve months ended December 31,
1996 and 1995, not presented separately herein, prior to restatement to
conform StarSight's accounting policies and fiscal year to those of Gemstar
International Group Limited. These financial statements are the responsibility
of StarSight's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of StarSight as of December 31, 1996 and
1995, and the results of its operations and its cash flows for the twelve
months ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
San Francisco, California
March 7, 1997
F-3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 59,909 $153,517
Marketable securities................................... 48,946 4,343
Prepaid expenses and other current assets............... 6,442 5,580
--------- --------
Total current assets.................................. 115,297 163,440
Property and equipment, net............................... 5,126 3,769
Intangible assets, net.................................... 6,855 16,543
Marketable securities..................................... 1,535 --
Other assets.............................................. 2,463 2,326
--------- --------
$ 131,276 $186,078
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................... $ 43,141 $ 29,766
Current portion of deferred revenue..................... 18,180 23,228
--------- --------
Total current liabilities............................. 61,321 52,994
Deferred revenue, less current portion.................... 11,077 14,877
Deferred income taxes..................................... 4,299 13,664
Other liabilities......................................... 862 1,061
Shareholders' equity:
Preference Shares, par value $.01 per share. Authorized
50,000 shares, none issued............................. -- --
Ordinary Shares, par value $.01 per share. Authorized
500,000 shares; issued and outstanding 46,801 shares at
March 31, 1997, and 48,411 shares at March 31, 1998... 468 484
Additional paid-in capital.............................. 186,515 197,211
Accumulated deficit..................................... (132,788) (94,081)
Unearned compensation................................... (388) --
Cumulative translation adjustments...................... (90) (132)
--------- --------
Net shareholders' equity.............................. 53,717 103,482
Commitments and contingencies (note 7)
--------- --------
$ 131,276 $186,078
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Revenues........................................... $ 55,365 $82,997 $126,552
Operating costs and expenses:
Selling and marketing............................ 68,923 45,924 30,993
Research and development......................... 17,462 16,286 13,372
General and administrative....................... 25,162 25,558 18,693
Merger costs..................................... -- -- 11,713
-------- ------- --------
Earnings (loss) from operations................ (56,182) (4,771) 51,781
Other income, net.................................. 2,650 5,156 7,359
-------- ------- --------
Earnings (loss) before income tax expense...... (53,532) 385 59,140
Income tax expense................................. 5,497 8,369 20,433
-------- ------- --------
Net earnings (loss)............................ $(59,029) $(7,984) $ 38,707
======== ======= ========
Basic earnings (loss) per share.................... $ (1.41) $ (0.17) $ 0.81
======== ======= ========
Diluted earnings (loss) per share.................. $ (1.41) $ (0.17) $ 0.76
======== ======= ========
Weighted average shares outstanding................ 41,929 46,707 47,654
Dilutive effect of:
Stock options.................................... -- -- 2,728
Warrants......................................... -- -- 381
-------- ------- --------
Weighted average shares outstanding, assuming
dilution.......................................... 41,929 46,707 50,763
======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORDINARY
SHARES ADDITIONAL CUMULATIVE NET
------------- PAID-IN ACCUMULATED UNEARNED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENTS EQUITY
------ ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1995................... 36,546 $365 $ 98,161 $ (57,537) $ (984) $ (89) $ 39,916
Net loss............... -- -- -- (59,029) -- -- (59,029)
Issuance of Ordinary
Shares................ 7,526 76 53,484 -- -- -- 53,560
Exercise of stock
options............... 133 1 242 -- -- -- 243
Adjustment for change
in VideoGuide, Inc.
year end.............. -- -- -- (1,091) -- -- (1,091)
Amortization of
unearned compensation. -- -- -- -- 613 -- 613
Equity adjustment from
foreign currency
translation........... -- -- -- -- -- 34 34
------ ---- -------- --------- ------- ----- --------
Balances at March 31,
1996................... 44,205 442 151,887 (117,657) (371) (55) 34,246
Net loss............... -- -- -- (7,984) -- -- (7,984)
Issuance of Ordinary
Shares................ 2,379 24 32,582 -- -- -- 32,606
Exercise of stock
options............... 217 2 854 -- -- -- 856
Adjustment for change
in StarSight Telecast,
Inc. year end......... -- -- -- (7,147) -- -- (7,147)
Compensatory repricing
of stock option grant. -- -- 1,027 -- (1,027) -- --
Compensatory stock
option grants......... -- -- 165 -- (165) -- --
Amortization of
unearned compensation. -- -- -- -- 1,175 -- 1,175
Equity adjustment from
foreign currency
translation........... -- -- -- -- -- (35) (35)
------ ---- -------- --------- ------- ----- --------
Balances at March 31,
1997................... 46,801 468 186,515 (132,788) (388) (90) 53,717
Net earnings........... -- -- -- 38,707 -- -- 38,707
Exercise of stock
options............... 1,610 16 17,503 -- -- -- 17,519
Tax benefit associated
with stock options.... -- -- 6,000 -- -- -- 6,000
Repurchase of warrant.. -- -- (12,807) -- -- -- (12,807)
Amortization of
unearned compensation. -- -- -- -- 388 -- 388
Equity adjustment from
foreign currency
translation........... -- -- -- -- -- (42) (42)
------ ---- -------- --------- ------- ----- --------
Balances at March 31,
1998................... 48,411 $484 $197,211 $ (94,081) $ -- $(132) $103,482
====== ==== ======== ========= ======= ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ............................ $(59,029) $ (7,984) $ 38,707
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 3,755 3,953 4,389
Deferred income taxes......................... 1,547 2,754 9.365
Amortization of unearned compensation......... 613 1,175 388
Tax benefit associated with stock options..... -- -- 6,000
Changes in assets and liabilities:
Prepaid expenses and other assets........... (3,093) 1,952 999
Accounts payable, accrued expenses and other
liabilities................................ 35,692 (6,654) (13,176)
Deferred revenue............................ 5,489 19,192 8,848
-------- -------- --------
Net cash provided by (used in) operating
activities................................. (15,026) 14,388 55,520
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities ............. (3,637) (71,387) (18,480)
Maturities of marketable securities............. 22,062 24,425 64,618
Additions to property and equipment............. (3,693) (1,910) (781)
Increase in intangible assets................... (968) (1,252) (11,939)
-------- -------- --------
Net cash provided by (used in) investing
activities................................... 13,764 (50,124) 33,418
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Ordinary Shares....... 53,560 32,606 --
Proceeds from exercise of stock options ........ 243 856 17,519
Repurchase of warrant........................... -- -- (12,807)
Dividends paid.................................. (5,000) -- --
-------- -------- --------
Net cash provided by financing activities..... 48,803 33,462 4,712
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... 34 (35) (42)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................. 47,575 (2,309) 93,608
Cash and cash equivalents at beginning of year... 22,881 69,365 59,909
Adjustment for change in VideoGuide, Inc. year
end............................................. (1,091) -- --
Adjustment for change in StarSight Telecast, Inc.
year end........................................ -- (7,147) --
-------- -------- --------
Cash and cash equivalents at end of year ........ $ 69,365 $ 59,909 $153,517
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes...................... $ 3,807 $ 6,128 $ 4,740
======== ======== ========
Noncash investing and financing activities:
</TABLE>
On December 12, 1996, the Company acquired all of the outstanding capital
stock of VideoGuide, Inc. for 475,000 Ordinary Shares of the Company
(Note 2).
On May 8, 1997, the Company acquired all of the outstanding capital stock of
StarSight Telecast, Inc. for 15.5 million Ordinary Shares of the Company
(Note 2).
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description of Business
Gemstar International Group Limited ("Gemstar International Group") and its
wholly and majority owned subsidiaries (collectively the "Company") develops,
markets and licenses proprietary technologies and systems that simplify and
enhance consumers' interaction with electronics products and other platforms
that deliver video, programming information and other data.
The Company acquired all of the outstanding capital stock of VideoGuide,
Inc. ("VideoGuide") and StarSight Telecast, Inc. ("StarSight") on December 12,
1996 and May 8, 1997, respectively (Note 2). Both mergers have been accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements for periods prior to the combinations have been restated to include
the accounts and results of operations of VideoGuide and StarSight.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Gemstar International Group and its wholly and majority owned subsidiaries.
For all periods presented the minority interest in majority owned subsidiaries
was immaterial. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include all highly liquid investments, such as certificates of
deposit and commercial paper, with original maturities of three months or
less. Cash and cash equivalents are maintained with several high credit
quality financial institutions. As part of its cash management process, the
Company performs periodic evaluations of the relative credit ratings of these
financial institutions. The Company has established guidelines relative to
diversification and maturities that attempt to maintain safety and liquidity.
These guidelines are reviewed periodically and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its cash and cash equivalents.
Marketable Securities
The Company accounts for its investments in marketable securities under the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). Under
SFAS No. 115, the Company must classify its investments in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the intent and ability to hold until maturity. All other
securities not included in trading or held-to-maturity categories are
classified as available-for-sale. The Company has classified all its
investments in marketable securities as held-to-maturity securities.
Unrealized gains and losses and realized gains and losses for all periods
presented were not material as all investments were held to maturity.
Investments
Investments with ownership interests of less than 20% are accounted for
under the cost method of accounting. Investments with ownership interests
between 20% and 50% are accounted for under the equity method of accounting.
Investments with ownership interests in excess of 50% are consolidated with
the accounts of the Company.
F-8
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment... 3 to 8 years
Office furniture and
equipment................ 3 to 8 years
Property and leasehold
improvements............. Shorter of estimated useful life or lease term
</TABLE>
Intangible Assets
Intangible assets consist of capitalized patent and trademark costs and
goodwill. Capitalized patent and trademark costs consist of direct costs
associated with obtaining patents and trademarks. Patent and trademark costs
are amortized on a straight line basis over the estimated useful lives of
seven to ten years. Goodwill, which represents the excess of cost over net
assets acquired, is amortized on a straight line basis over five years.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), on April 1, 1996. SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to undiscounted future operating cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
Accounting for Stock Options
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in fiscal year 1996
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
F-9
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars. Gains and losses resulting from translation are accumulated in a
separate component of shareholders' equity until the investment in the foreign
entity is sold or liquidated. The Company's transactions predominately occur
in U.S. dollars. Gains and losses on currency transactions were immaterial for
all periods presented.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and accrued expenses approximate
their fair value because of their short maturities. The fair values of
marketable securities are based on quoted market prices which approximates
cost (Note 6).
Revenue Recognition
Revenues from nonrefundable initial sign-up fees collected upon signing of
multiyear licensing contracts are deferred and recognized over the term of the
agreement. Revenues under continuing license arrangements are recognized when
license payments are due, generally when paid by the licensee.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense
as incurred.
Merger Costs
As a result of the acquisition of StarSight, the Company recorded merger
related costs totaling $11.7 million in the year ended March 31, 1998. These
costs were comprised of fees for financial advisors, attorneys and
accountants; severance and other transaction costs (Note 2).
Net Interest Income
Net interest income, included in other income, net, totaled $2,601,000,
$5,084,000 and $6,983,000 for each of the years in the three-year period ended
March 31, 1998.
Income Taxes
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
SFAS No. 109 requires that deferred income taxes be recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Changes in tax rates and laws are reflected in earnings in the
period such changes are enacted.
Earnings (Loss) Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("SFAS No. 128") during fiscal year 1998
and has restated earnings (loss) per share information for
F-10
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
all periods presented to conform to the requirements of SFAS No. 128. Basic
earnings (loss) per share is computed using the weighted average number of
Ordinary Shares outstanding during the period. Diluted earnings (loss) per
share includes the dilutive effect of stock options and warrants using the
treasury stock method. Stock options and warrants to purchase 6,570,000 and
8,208,000 Ordinary Shares were outstanding at March 31, 1996 and 1997,
respectively, but were not included in the computation of diluted earnings
(loss) per share for the years ended March 31, 1996 and 1997, because the
Company had a net loss in each of these years and therefore, the effect would
be antidilutive.
Recent Accounting Pronouncements
The Company intends to adopt Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130") and Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131") in fiscal year 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 year 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 year 1999 Annual Report.
Reclassifications
Certain reclassifications have been made to prior years financial
information to conform with the current year presentation.
(2) BUSINESS COMBINATIONS
On May 8, 1997, the Company acquired all of the outstanding capital stock of
StarSight for 15.5 million Ordinary Shares of the Company. In addition, the
Company assumed all outstanding StarSight stock options which were converted
to options to purchase 1.4 million Ordinary Shares of the Company. The Company
also assumed all outstanding StarSight warrants which were converted to
warrants to purchase 1.8 million Ordinary Shares of the Company at exercise
prices ranging from $12.37 to $57.74 per share. In January 1998, the Company
repurchased a warrant to purchase 606,000 Ordinary Shares from the warrant
holder for $12.8 million in cash. The warrant was originally issued by
StarSight in connection with a sale of equity securities. The warrant holder
did not have any right to put the warrant to the Company. The Company
accounted for the repurchase of the warrant as a reduction in additional paid-
in-capital. Warrants to purchase 1.2 million Ordinary Shares were outstanding
at March 31, 1998 and expire during fiscal year 1999.
F-11
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) BUSINESS COMBINATIONS (CONTINUED)
On December 12, 1996, the Company acquired all of the outstanding capital
stock of VideoGuide for 475,000 Ordinary Shares of the Company. In addition,
the Company assumed all outstanding VideoGuide stock options which converted
into options to purchase 17,000 Ordinary Shares of the Company.
Both mergers have been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements for periods prior to the
combinations have been restated to include the results of operations,
financial position and cash flows of StarSight and VideoGuide. Information
concerning Ordinary Shares, stock options, warrants and per share data has
been restated on an equivalent share basis.
Prior to the combinations, the fiscal year end for both StarSight and
VideoGuide was December 31. In recording the business combinations, the
financial statements of StarSight and VideoGuide were conformed to the
Company's fiscal year end of March 31. As a result, the Company recorded an
accumulated deficit charge of $7,147,000 in fiscal year 1997 for StarSight's
net loss during the three months ended March 31, 1996 which included revenues
of $862,000. The Company recorded an accumulated deficit charge of $1,091,000
in fiscal year 1996 for VideoGuide's net loss during the three months ended
March 31, 1995. VideoGuide had no revenues during this three month period.
In recording the business combinations, StarSight's revenues for the years
ended March 31, 1996 and 1997 were adjusted by $417,000 and $404,000,
respectively, to conform to the Company's accounting policies. In addition,
all significant intercompany balances and transactions between the Company and
VideoGuide and StarSight have been eliminated.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues:
Gemstar International Group...................... $ 53,436 $ 70,367 (1)
VideoGuide....................................... 433 754 (1)
-------- --------
Subtotal....................................... 53,869 71,121
StarSight........................................ 1,913 12,280
Adjustment to conform accounting policies........ (417) (404)
-------- --------
Combined....................................... $ 55,365 $ 82,997
======== ========
Net earnings (loss):
Gemstar International Group...................... $ 16,083 $ 22,640 (1)
VideoGuide....................................... (42,915) (4,555)(1)
-------- --------
Subtotal....................................... (26,832) 18,085
StarSight........................................ (31,780) (25,665)
Adjustment to conform accounting policies........ (417) (404)
-------- --------
Combined....................................... $(59,029) $ (7,984)
======== ========
</TABLE>
- - -------
(1) Since the merger with VideoGuide occurred during the quarter ended
December 31, 1996, the results of operations of VideoGuide for the six
months ended March 31, 1997 have been combined with the results of
operations of Gemstar International Group.
F-12
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAX EXPENSE
Under the current British Virgin Islands law, income generated by entities
incorporated under the International Business Companies Act in the British
Virgin Islands is not subject to taxation. However, certain subsidiaries are
subject to taxation in countries where they operate. Additionally, license
income payments received from licensees in certain tax jurisdictions are
subject to withholding taxes.
The provision for income tax expense consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Current............................................. $3,950 $5,615 $11,068
Deferred............................................ 1,547 2,754 9,365
------ ------ -------
Total............................................. $5,497 $8,369 $20,433
====== ====== =======
</TABLE>
The significant components of deferred income taxes attributable to earnings
(loss) before income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Deferred tax expense (benefit).............. $(12,325) $(11,271) $10,683
Change in valuation allowance for deferred
tax assets................................. 13,872 14,025 (1,318)
-------- -------- -------
Total..................................... $ 1,547 $ 2,754 $ 9,365
======== ======== =======
</TABLE>
A reconciliation of the expected U.S. Federal tax expense (benefit) to the
provision for income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Expected U.S. Federal
tax expense (benefit).. $(18,736) $ 135 $20,699
State taxes, net of
Federal benefit........ -- -- 987
Merger costs and other
non-deductible
expenses .............. -- -- 995
Foreign earnings,
differential in tax
rates.................. 10,361 (5,791) (930)
Change in valuation
allowance.............. 13,872 14,025 (1,318)
-------- ------- -------
Actual income tax
expense ............... $ 5,497 $ 8,369 $20,433
======== ======= =======
</TABLE>
F-13
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAX EXPENSE (CONTINUED)
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated
financial statements. The tax effects of temporary differences that give rise
to significant portions of deferred tax assets and liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue......................................... $ 10,025 $ 14,555
Net operating losses available for carryforward to future
periods................................................. 31,509 26,424
Tax credits available for carryforward to future periods. 4,356 6,308
Accrued expenses......................................... 3,306 3,105
Intangible assets........................................ 7,769 6,100
Other.................................................... 465 463
-------- --------
Gross deferred tax assets................................ 57,430 56,955
Valuation allowance........................................ (55,515) (54,197)
-------- --------
Deferred tax assets, net of valuation allowance.......... 1,915 2,758
Deferred tax liability--taxes provided on intercompany
income.................................................... (6,214) (16,422)
-------- --------
Net deferred tax liability............................... $ (4,299) $(13,664)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable earnings in specific
tax jurisdictions during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable earnings and tax planning strategies in
making this assessment.
As of March 31, 1998, the Company had available net operating loss
carryforwards aggregating approximately $75,000,000 to offset future United
States income taxes expiring through fiscal year 2013. At March 31, 1998, the
Company had available foreign tax credit carryforwards aggregating $6,308,000
to offset future United States income taxes expiring through fiscal year 2003.
The net operating loss and tax credit carryforwards are subject to certain
limitations under United States tax laws with respect to the annual use of
such carryforwards which include, among other things, certain changes in stock
ownership.
As a result of previous transactions which involved an ownership change as
defined in the applicable section of the Internal Revenue Code, the Company
will be subject to limitations on the use of its net operating loss
carryforwards. Accordingly, there can be no assurance that a significant
amount of the existing net operating loss carryforwards will be available to
the Company.
Based upon the level of historical taxable earnings and projections of
future taxable earnings over the periods which the deferred tax assets are
deductible, management has concluded that it is more likely than not that the
Company will realize the benefits of these deductible differences at March 31,
1998, net of reserves established.
The United States Internal Revenue Service (the "IRS") has conducted an
audit of the federal tax returns for Gemstar Development Corporation ("GDC"),
a U.S. subsidiary of the Company, for the years ended March 31, 1991, 1992 and
1993. The IRS has issued a 30-day letter to GDC in which it has proposed
adjustments to GDC's taxable income by reallocating income to GDC, for revenue
related to the Company's
F-14
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAX EXPENSE (CONTINUED)
VCR Plus+ technology. The Company has filed a protest with the IRS. The
Company believes that it has a reasonable basis for its tax position and
accordingly plans to vigorously defend its position. While there can be no
assurance as to the ultimate outcome of the audit, the Company believes that
it has made adequate provision in its financial statements with respect to the
proposed adjustments.
(4) STOCK INCENTIVE PLAN
Pursuant to the Company's 1994 Stock Incentive Plan as amended, (the
"Plan"), the Company's Compensation Committee may grant stock options to
purchase Ordinary Shares of the Company to employees of the Company (including
executive officers) and certain other persons (including directors and
consultants) who are eligible to participate in the Plan. Subject to early
termination or acceleration provisions, a stock option generally will be
exercisable, in whole or in part, from the date specified in the related award
agreement until the expiration date determined by the Compensation Committee.
In no event, however, is a stock option exercisable prior to six months, or
after ten years, from its date of grant.
In connection with the acquisitions of StarSight and VideoGuide, the Company
assumed all outstanding StarSight and VideoGuide stock options. Information
concerning stock options has been restated on an equivalent share basis.
As of March 31, 1998, the number of Ordinary Shares reserved for issuance
under the Plan was 20,000,000 Ordinary Shares. At March 31, 1998 there were
5,538,000 shares available for future option grants under the Plan.
The per share weighted-average fair value of stock options granted during
the years ended March 31, 1996, 1997 and 1998, was $10.64, $14.21, and $17.21
respectively, on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield....................................... -- % -- % -- %
Risk-free interest rate....................................... 6.5% 5.5% 5.8%
Expected volatility........................................... 83% 85% 80%
Expected life (years)......................................... 9.3 7.9 5
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net earnings (loss) would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Net earnings (loss):
As reported................................... $(59,029) $ (7,984) $38,707
Pro forma..................................... (74,253) (22,626) 18,127
Diluted earnings (loss) per share:
As reported................................... (1.41) (0.17) 0.81
Pro forma..................................... (1.77) (0.48) 0.36
</TABLE>
F-15
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) STOCK INCENTIVE PLAN (CONTINUED)
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the above pro forma disclosures because
compensation cost is reflected over the options' vesting periods and
compensation cost for options granted prior to fiscal year 1996 is not
considered. Because additional option grants are expected to be made each
year, the above pro forma disclosures are not likely to be representative of
pro forma effects on reported net earnings for future years.
The following table summarizes information about stock option transactions
(shares in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------------------
1996 1997 1998
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,016 $15.01 5,964 $12.09 6,390 $12.29
Granted............... 5,275 11.68 992 13.80 8,290 23.21
Exercised............. (133) 5.03 (217) 5.08 (1,610) 10.88
Cancelled............. (194) 20.83 (349) 17.70 (227) 16.41
----- ----- ------
Outstanding at end of
year................... 5,964 12.09 6,390 12.29 12,843 19.44
===== ===== ======
Options exercisable at
end of year............ 2,158 12.01 3,859 11.91 4,455 13.37
===== ===== ======
</TABLE>
The following table summarizes information about of the Company's stock
options outstanding as of March 31, 1998 (shares in thousands):
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
------------------------------- -------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF YEARS OF AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- - -------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.54-$15.00 4,225 7.5 $11.87 3,723 $11.73
$15.01-$20.00 1,717 9.1 16.97 330 16.22
$20.01-$25.00 4,551 9.7 21.94 187 21.28
$25.01-$36.70 2,350 10.0 30.04 215 30.47
------ -----
Total 12,843 8.9 19.44 4,455 13.37
====== =====
</TABLE>
(5) 401(K) PLAN
The Company has a 401(k) benefit plan ("401(k) Plan") allowing an employee
to contribute up to a maximum of 15% of gross salary, subject to applicable
IRS limits. The Company will match the employee's contributions based on
certain percentages of the employee's contributions. The Company made
contributions of $76,000 and $50,000 to the 401(k) Plan during the years ended
March 31, 1997 and 1998, respectively. There were no contributions during the
year ended March 31, 1996.
F-16
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) SELECTED BALANCE SHEET ACCOUNTS
Marketable securities at amortized cost by major security type and class of
security consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1998
------- ------
<S> <C> <C>
Corporate debt securities.................................. $22,038 $2,817
U.S. Treasury securities................................... 28,443 1,526
------- ------
$50,481 $4,343
======= ======
</TABLE>
The amortized cost of the marketable securities approximated fair value at
March 31, 1997 and 1998. No marketable securities at March 31, 1998 were due
after one year.
Property and equipment, at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Machinery and equipment.................................. $ 5,568 $ 5,650
Office furniture and equipment........................... 6,177 6,726
Property and leasehold improvements...................... 1,062 1,212
------- -------
12,807 13,588
Less accumulated depreciation and amortization........... (7,681) (9,819)
------- -------
Property and equipment, net............................ $ 5,126 $ 3,769
======= =======
Intangible assets consist of the following (in thousands):
<CAPTION>
MARCH 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Patents and trademarks................................... $10,811 $22,750
Goodwill................................................. 1,025 1,025
------- -------
11,836 23,775
Less accumulated amortization............................ (4,981) (7,232)
------- -------
Intangible assets, net............................... $ 6,855 $16,543
======= =======
Amortization expense was $1,335,000, $1,490,000 and $2,251,000 for each of
the years in the three-year period ended March 31, 1998.
Accounts payable and accrued expenses consist of the following (in
thousands):
<CAPTION>
MARCH 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Accounts payable and accrued expenses.................... $24,438 $24,369
Accrued purchase commitments............................. 14,436 --
Accrued payroll and related benefits..................... 4,267 5,397
------- -------
Total.................................................. $43,141 $29,766
======= =======
</TABLE>
F-17
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under long-term noncancelable
operating leases. The Company also has an agreement to purchase transmission
services. Future minimum payments under operating leases and the transmission
services agreement are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING TRANSMISSION
LEASES SERVICES
--------- ------------
<S> <C> <C>
Year ended March 31:
1999............................................. $1,510 $1,240
2000............................................. 1,364 1,240
2001............................................. 871 1,240
2002............................................. 614 930
------ ------
$4,359 $4,650
====== ======
</TABLE>
Rent expense under operating leases was $1,515,000, $1,722,000 and
$1,630,000, for each of the years in the three-year period ended March 31,
1998. Fees under the transmission services agreement were $1,124,000,
$1,170,000 and $1,240,000, for each of the years in the three-year period
ended March 31, 1998.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company,
the resolution of such matters will not have a material effect on its
financial position, results of operations, or liquidity.
(8) RELATED PARTY TRANSACTIONS
Effective January 1, 1995, the Company elected to discontinue the marketing
and distribution of the VCR Plus+ technology through the sale of handsets and
to limit its operations solely to licensing activities. In connection with
this decision the Company transferred all of its handset operations to Gemstar
Manufacturing Holding Limited ("Holdings"), its then wholly owned subsidiary,
and then distributed the shares of Holdings to the Company's shareholders.
The Company continues to maintain a license agreement with a Holdings
subsidiary that allows for the incorporation of the VCR Plus+ technology in
the manufacture and distribution of handsets. Pursuant to the license
agreement, the Holdings subsidiary pays the Company a per unit royalty fee
based on unit shipments. Royalty fees totaled $112,000 and $1,446,000 for the
years ended March 31, 1996 and 1997, respectively. There were no royalty fees
for the year ended March 31, 1998.
The Company continues to maintain service relationships with certain
Holdings subsidiaries. Pursuant to the services agreements, the Holdings
subsidiaries provide marketing and promotion services for the Company in their
respective territories in connection with the Company's systems, maintain
relationships with licensees and promote and monitor the publication of the
PlusCode numbers. Service fees paid to these companies totaled $7,100,000,
$8,300,000 and $8,178,000 for each of the years in the three-year period ended
March 31, 1998.
F-18
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) BUSINESS SEGMENT REPORTING
A summary of the Company's revenues and earnings (loss) from operations by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States................................ $ 21,486 $ 37,424 $ 80,708
Foreign (1).................................. 33,879 45,573 45,844
-------- -------- --------
Total...................................... $ 55,365 $ 82,997 $126,552
======== ======== ========
Earnings (loss) from operations (2):
United States................................ $(74,333) $(34,266) $ 24,046
Foreign...................................... 18,151 29,495 27,735
-------- -------- --------
Total...................................... $(56,182) $ (4,771) $ 51,781
======== ======== ========
</TABLE>
- - --------
(1) Revenues from license fees included in foreign are principally earned by
entities in the British Virgin Islands.
(2) Earnings (loss) from operations consists of total revenues less operating
expenses and does not include other income.
The Company had one customer constituting 21% of revenues and another
customer constituting 12% of revenues during the year ended March 31, 1998.
There were no customers constituting 10% or more of revenues during the years
ended March 31, 1996 and 1997.
A summary of the Company's identifiable assets used in the Company's
operations by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
United States.................................... $30,760 $ 54,629 $ 69,978
Foreign.......................................... 65,753 76,647 116,100
------- -------- --------
Total.......................................... $96,513 $131,276 $186,078
======= ======== ========
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
2.1** Parent Significant Shareholder Agreement, dated as of December 23,
1996 by and among StarSight Telecast, Inc., a California
corporation and certain significant shareholders of Gemstar
International Group Limited.
2.2** Agreement and Plan of Merger dated as of December 23, 1996 by and
among Gemstar International Group Limited, a British Virgin
Islands corporation, StarSight Telecast, Inc., a California
corporation, and G/S Acquisition Subsidiary, a California
corporation).
3.1* Amended and Restated Memorandum of Association of the Company.
3.2* 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 J. 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 C.
Yuen, Wilson K. C. Cho and Daniel S. W. 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** Company Significant Shareholder Agreement, dated as of December
23, 1996, by and among Gemstar International Group Limited, a
British Virgin Islands corporation, and certain significant
shareholders of StarSight Telecast, Inc.
10.9** Company Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation.
10.10** Parent Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation (included as Appendix G to the Joint Proxy
Statement/Prospectus).
10.11*** 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.
10.12*** Cost and Reimbursement Support Agreement, dated as of October 31,
1997, by and among TDN, Inc., a Delaware corporation, and Gemstar
International Group Limited.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
10.13*** 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.
10.14*** Recission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation and Microsoft
Corporation, a Washington corporation.
10.15*** 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.
10.16*** 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.
21**** Material Subsidiaries of Gemstar.
23.1***** Consent of KPMG Peat Marwick LLP.
23.2 Consent Deloitte & Touche 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 C. Yuen, as amended.
(Confidential treatment requested).
99.3* Employment Agreement, dated August 1995, between Gemstar
International Group Limited and Thomas L. H. Lau.
99.4* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Daniel S. W. Kwoh, as amended.
(Confidential treatment requested).
99.5* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Roy J. Mankovitz, as amended.
(Confidential treatment requested).
99.6* Employment Agreement, dated August 16, 1995, between Pros
Technology Limited and Wilson K. C. Cho. (Confidential treatment
requested).
99.7* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Elsie Ma Leung, as amended.
99.8* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Larry Goldberg, as amended.
99.10* Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as
amended.
99.11***** Amendment to 1994 Stock Incentive Plan, as amended, adopted on
March 12, 1998.
99.12****** Amended and Restated Employment Agreement, effective as of January
7, 1998 among Gemstar International Group Limited, Gemstar
Development Corporation and Henry C. Yuen.
99.13****** Amended and Restated Employment Agreement, dated as of March 31,
1998, among Gemstar International Group Limited, Gemstar
Development Corporation and Elsie Leung.
</TABLE>
- - --------
* Previously filed as part of Form F-1 Registration Statement of the
Company (33-79016) which was declared effective on October 10, 1995, and
incorporated herein by reference.
<PAGE>
** 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 Form 20-F of the Company which was filed on
or about June 7, 1996, and incorporated herein by reference.
**** Previously filed as part of Form 8-K, dated January 12, 1998, or Form
8-K dated February 6, 1998 and Form 8-K/A, dated June 11, 1998. Certain
information contained in these exhibits has been omitted pursuant to a
request for Confidential Treatment granted by the Securities and
Exchange Commission.
***** Filed herewith.
****** Certain information contained in this exhibit has been omitted pursuant
to a request for Confidential Treatment which was filed with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF GEMSTAR INTERNATIONAL GROUP LIMITED
<TABLE>
<CAPTION>
STATE OR OTHER
PERCENTAGE JURISDICTION OF
NAME OF OWNERSHIP INCORPORATION
- - ---- ------------ ---------------
<S> <C> <C>
E Guide, Inc. 100% California
GCE, Inc. 100% Delaware
Gemstar (B.V.I.) Limited 100% British Virgin
(Changed name from Gemstar International Group Islands
----
Limited on 8/19/94
Gemstar Development Corporation 100% California
Gemstar Development Limited 100% United Kingdom
Gemstar Holdings, Inc. 100%* California
Gemstar Technology, Inc. 100% California
Index Systems (Canada) Inc. 100%** Canada
Index Systems Inc. 100% British Virgin
Islands
Laminar Trading Limited 100%** British Virgin
Islands
Norpak Corporation 54%*** Canada
(Changed name from Norpak Limited on 11/4/82)
----
Pros Technology Limited 100% Hong Kong
(Changed name from Right Harvest Limited on
----
4/27/95)
StarSight Telecast, Inc. 100% California
Wardpark Limited 100% Liberia
VCR Index Systems B.V. 100% Netherlands
VideoGuide, Inc. 100% Delaware
</TABLE>
*Wholly owned subsidiary of GemStar Development Corporation
**Wholly owned subsidiary of Index Systems Inc.
***54% owned subsidiary of Index Systems (Canada) Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Gemstar International Group Limited
We consent to incorporation by reference in the Registration Statement (No.
333-6886) on Form S-8 of Gemstar International Group Limited of our report
dated May 8, 1998, relating to the consolidated balance sheets of Gemstar
International Group Limited and subsidiaries as of March 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three year period ended March 31,
1998, which report appears in the March 31, 1998, Annual Report on Form 10-K
of Gemstar International Group Limited.
KPMG Peat Marwick LLP
Los Angeles, California
June 29, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to incorporation by reference in the Registration Statement (No.
333-6886) on Form S-8 of Gemstar International Group Limited ("Gemstar") of
our report dated March 7, 1997, relating to the balance sheets of StarSight
Telecast, Inc. ("StarSight") as of December 31, 1996 and 1995, and the
related statements of operations, shareholders' equity and cash flows for the
twelve months ended December 31, 1996 and 1995, not presented separately
therein, prior to restatement to conform StarSight's accounting policies and
fiscal year to those of Gemstar, which report appears in this March 31, 1998
Annual Report on Form 10-K of Gemstar.
Deloitte & Touche LLP
San Francisco, California
June 29, 1998
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
1994 STOCK INCENTIVE PLAN, AS AMENDED AND RESTATED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
I. THE PLAN............................................. 1
1.1 Purpose........................................ 1
1.2 Administration and Authorization; Power and
Procedure...................................... 1
1.3 Participation.................................. 3
1.4 Shares Available for Awards.................... 3
1.5 Grant of Awards................................ 4
1.6 Award Period................................... 4
1.7 Limitations on Exercise and Vesting of
Awards......................................... 4
1.8 Acceptance of Notes to Finance Exercise........ 4
1.9 No Transferability............................. 5
1.10 Restrictions on Transfer of Shares............. 6
II. OPTIONS.............................................. 7
2.1 Grants......................................... 7
2.2 Option Price................................... 7
2.3 Limitations on Grant and Terms of Incentive
Stock Options.................................. 8
2.4 Option Repricing/Cancellation and
Regrant/Waiver of Restrictions................. 9
III. STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS........... 9
3.1 Stock Units.................................... 9
3.2 Dividend Equivalent Rights..................... 10
IV. OTHER PROVISIONS..................................... 10
4.1 Rights of Eligible Persons and Beneficiaries... 10
4.2 Adjustments; Acceleration...................... 11
4.3 Effect of Termination of Employment............ 12
4.5 Tax Withholding................................ 13
4.6 Plan Amendment, Termination and Suspension..... 14
4.7 Privileges of Stock Ownership.................. 15
4.8 Effective Date of the Plan..................... 15
4.9 Term of the Plan............................... 15
4.10 Governing Law/Construction/Severability........ 15
4.11 Captions....................................... 16
4.12 Effect of Change of Subsidiary Status.......... 16
4.13 Non-Exclusivity of Plan........................ 16
V. DEFINITIONS.......................................... 16
5.1 Definitions.................................... 16
</TABLE>
i
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GEMSTAR INTERNATIONAL GROUP LIMITED
1994 STOCK INCENTIVE PLAN, AS AMENDED AND RESTATED
(January 7, 1998)
I. THE PLAN
1.1 Purpose.
-------
The purpose of this Plan is to promote the success of the Corporation
and its Subsidiaries (the "Company") by providing a means of attracting,
-------
rewarding and retaining individuals who provide services to the Company in
various capacities. It is intended that this purpose be achieved by extending
to employees (including officers) of the Corporation and its Subsidiaries and
certain other Eligible Persons added long-term incentives for high levels of
performance and unusual efforts designed to improve the financial performance of
the Corporation and its Subsidiaries through the grant of Options to purchase
shares of its Common Stock and other Awards hereunder. Capitalized terms are
defined in Article V.
1.2 Administration and Authorization; Power and Procedure.
-----------------------------------------------------
(a) Committee. This Plan shall be administered by and all Awards
---------
shall be authorized by the Committee. Action of the Committee with respect to
the administration of this Plan shall be taken pursuant to a majority vote or by
written consent of its members.
(b) Awards; Interpretation; Powers of Committee. Subject to the
-------------------------------------------
express provisions of this Plan, the Committee shall have the authority:
(i) to determine eligibility and, from among those persons determined
to be Eligible Persons, those to whom Awards will be granted;
(ii) to grant Awards to Eligible Persons (provided, however, that any
grant to a member of the Committee shall be subject to ratification by the
Board), determine the price at which securities will be offered or awarded
and the amount of securities to be offered or awarded to any of such
persons, and determine the other specific terms and conditions of such
Awards consistent with the express limits of this Plan, and establish the
installments (if any) in which such Awards shall become exercisable or
shall vest, or determine that no delayed exercisability or vesting is
1
<PAGE>
required, and establish the events of termination, conversion or reversion
of such Awards;
(iii) to approve the forms of Award Agreements (which need not be
identical either as to type of Award or among Eligible Persons);
(iv) to construe and interpret this Plan and any agreements defining
the rights and obligations of the Corporation and Eligible Persons under
this Plan, further define the terms used in this Plan, and prescribe, amend
and rescind rules and regulations relating to the administration of this
Plan;
(v) to cancel, modify, or waive the Corporation's rights with respect
to, or modify, discontinue, suspend, or terminate any or all outstanding
Awards held by Eligible Persons, subject to any required consent under
Section 4.6;
(vi) to accelerate the exercisability or the vesting of any Awards
under such circumstances as the Committee shall determine, including a
Change in Control Event, or to extend the exercisability or extend the term
of any or all such outstanding Awards within the term limits on Awards
under Section 1.6;
(vii) to determine the circumstances that constitute a termination of
services for purposes of this Plan; and
(viii) to make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable for the
administration of this Plan and the effectuation of its purposes.
(c) Binding Determinations. Any action taken by, or inaction of, the
----------------------
Corporation, any Subsidiary, the Board or the Committee relating or pursuant to
this Plan shall be within the absolute discretion of that entity or body and
shall be conclusive and binding upon all persons. No member of the Board or
Committee, or officer of the Corporation or any Subsidiary, shall be liable for
any such action or inaction of the entity or body, of another person or, except
in circumstances involving bad faith, of himself or herself. Subject only to
compliance with the express provisions hereof, the Board and Committee may act
in their absolute discretion in matters within their authority related to this
Plan.
(d) Reliance on Experts. In making any determination or in taking or
-------------------
not taking any action under this Plan, the Committee or the Board, as the case
may be, may obtain and may rely upon the advice of experts,
2
<PAGE>
including employees of and professional advisors to the Corporation. No
director, officer or agent of the Company shall be liable for any such action or
determination taken or made or omitted in good faith.
(e) Delegation. The Committee may delegate ministerial, non-
----------
discretionary functions to individuals who are officers or employees of the
Company.
1.3 Participation.
-------------
Awards may be granted by the Committee only to those persons that the
Committee determines to be Eligible Persons. An Eligible Person who has been
granted an Award may, if otherwise eligible, be granted additional Awards if the
Committee shall so determine.
1.4 Shares Available for Awards.
---------------------------
Subject to the provisions of Section 4.2, the capital stock that may
be delivered under this Plan shall be shares of the Corporation's authorized but
unissued Common Stock and any shares of its Common Stock held as treasury
shares.
(a) Number of Shares; Individual Limit. The maximum number of shares
----------------------------------
of Common Stock that may be delivered pursuant to Awards (including Incentive
Stock Options) granted to Eligible Persons under this Plan shall not exceed
20,000,000 shares, subject to adjustments contemplated by Section 4.2. The
maximum number of shares of the Corporation's Common Stock which may be
delivered pursuant to all Options granted during any one-year period to any
individual Eligible Person under this Plan shall not exceed 10,000,000 shares
and the maximum number of shares of the Corporation's Common Stock which may be
delivered pursuant to all Awards (including Options) granted during any one-year
period to any individual Eligible Person under this Plan shall not exceed
10,000,000 shares, subject to adjustments contemplated by Section 4.2.
(b) Calculation of Available Shares and Replenishment. Shares subject
-------------------------------------------------
to outstanding Awards shall be reserved for issuance. If any Option or any
right to acquire Common Stock under or to receive shares in respect of an Award
shall expire or be cancelled or terminated without having been exercised or paid
in full, the unpurchased, unvested, or undelivered shares subject thereto shall
again be available for the purposes of the Plan, subject only to any applicable
limitations for the preservation of deductibility under Section 162(m) of the
Code. If the Corporation withholds shares of Common Stock pursuant to Section
4.5, the number of shares that would
3
<PAGE>
have been deliverable with respect to an Award but that are withheld may not be
issued under this Plan.
1.5 Grant of Awards.
---------------
Subject to the express provisions of this Plan, the Committee shall
determine the number of shares of Common Stock subject to each Award, and the
price (if any) to be paid for the shares or the Award and the other terms of the
Award. Each Award shall be evidenced by an Award Agreement signed by the
Corporation and, if required by the Committee, by the Eligible Person.
1.6 Award Period.
------------
Any Option shall expire and any other Award shall either vest or be
forfeited not more than ten (10) years after the date of grant; provided,
however, that any delivery of stock pursuant to an Award may be delayed until a
future date through the award of Stock Units or any other deferral mechanism if
specifically authorized by the Committee in writing.
1.7 Limitations on Exercise and Vesting of Awards.
---------------------------------------------
(a) Provisions for Exercise. No Award shall be exercisable or shall
-----------------------
vest until at least six months after the initial Award Date, and once
exercisable an Award shall remain exercisable until the expiration or earlier
termination of the Award, unless the Committee otherwise provides.
(b) Procedure. Any exercisable Award shall be deemed to be exercised
---------
when the Secretary of the Corporation receives written notice of such exercise
from the Participant together with any required payment made in accordance with
Section 2.2.
(c) Fractional Shares/Minimum Issue. Fractional share interests shall
-------------------------------
be disregarded, but may be accumulated. The Committee, however, may determine
that cash, other securities, or other property will be paid or transferred in
lieu of any fractional share interests. No fewer than 50 shares may be
purchased on exercise of any Award at any time unless the number purchased is
the total number at the time available for purchase under the Award.
1.8 Acceptance of Notes to Finance Exercise.
---------------------------------------
The Corporation may, with the Committee's approval, accept one or more
promissory notes from any Participant in connection with the exercise, receipt
or vesting of any outstanding Award; provided that any such note shall be
subject to the following terms and conditions:
4
<PAGE>
(a) The principal of the note shall not exceed the amount required to
be paid to the Corporation upon the exercise, receipt or vesting of one or
more Awards under the Plan and the note shall be delivered directly to the
Corporation in consideration of such exercise, receipt or vesting.
(b) The initial term of the note shall be determined by the
Committee; provided that the term of the note, including extensions, shall
--------
not exceed a period of ten (10) years.
(c) The note shall provide for full recourse to the Participant and
shall bear interest at a rate determined by the Committee but not less than
the applicable imputed interest rate specified by the Code.
(d) If the Participant's services to the Company terminate, the
unpaid principal balance of the note shall become due and payable on the
10th business day after such termination unless the Committee otherwise
provides; provided, however, that if a sale of such shares would cause the
-------- -------
Participant to incur liability under Section 16(b) of the Exchange Act, the
unpaid balance shall become due and payable on the 10th business day after
the first day on which a sale of such shares could have been made without
incurring such liability assuming for these purposes that there are no
other transactions by the Eligible Person subsequent to such termination.
(e) If required by the Committee or by applicable law, the note shall
be secured by a pledge of any shares or rights financed thereby in
compliance with applicable law.
(f) The authorization, terms, repayment provisions, and collateral
release provisions of the note and the pledge securing the note shall
conform with applicable laws, including rules and regulations of the
Federal Reserve Board as then in effect.
1.9 No Transferability.
------------------
Awards may be exercised only by, and amounts payable or shares
issuable pursuant to an Award shall be paid only to (or registered only in the
name of), the Participant or, if the Participant has died, the Participant's
Beneficiary or, if the Participant has suffered a Total Disability, the
Participant's Personal Representative, if any, or if there is none, the
Participant, or (to the extent permitted by applicable law and the other
provisions of this Plan and, if applicable, Rule 16b-3) to a third party
pursuant to such conditions and
5
<PAGE>
procedures as the Committee may establish in the Award Agreement or by amendment
thereto. Other than by will or the laws of descent and distribution (or
pursuant to a QDRO or other exception to transfer restrictions so authorized by
the Committee and consistent with Rule 16b-3, if applicable, or, in the case of
an Incentive Stock Option, with the Code), no right or benefit under this Plan
or any Award, shall be transferrable by the Participant or shall be subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge (other than to the Corporation) and any such attempted
action shall be void. The Corporation shall disregard any attempt at transfer,
assignment or other alienation prohibited by the preceding sentences and shall
pay or deliver such shares of Common Stock in accordance with the provisions of
this Plan. The designation of a Beneficiary hereunder shall not constitute a
transfer for these purposes. The restrictions set forth herein shall not apply
to shares actually issued on exercise of Awards, except to the extent required
by Sections 1.10 and 4.4 or by the Committee in the Award Agreement.
1.10 Restrictions on Transfer of Shares.
----------------------------------
(a) Restrictions. If any Award is exercised or if shares become
------------
payable in respect of an Award at a time when there is not in effect a current
and effective registration statement with respect to the shares to be received,
the Participant shall become a "Restricted Stockholder" and the shares acquired
----------------------
upon exercise or payment of shares in respect of any Award by the Participant
(or, in the event of the Participant's death or Total Disability, his
Beneficiary or Personal Representative, as applicable) shall be deemed
"Restricted Shares". The Restricted Stockholder and Restricted Shares shall be
-----------------
subject to the restrictions contemplated by Section 4.4(a). Any permitted
transferee shall agree (at the request of the Corporation) to the same
restrictions on all subsequent transfers. Each Restricted Stockholder (or his
or her Beneficiary or Personal Representative, as applicable) and any permitted
transferee shall execute and deliver such representations and further
agreements or documents as the Corporation may reasonably request to enforce
restrictions imposed hereunder and under all applicable securities laws.
(b) Legend. All certificates evidencing shares subject to the
------
restrictions of this Section 1.10 shall bear the following legends and/or any
other appropriate or required legends under applicable laws so long as the
transfer of the shares, in the judgment of the Committee, remains restricted
thereunder or hereunder:
"OWNERSHIP OF THIS CERTIFICATE AND THE SHARES EVIDENCED BY THIS
CERTIFICATE AND ANY INTEREST
6
<PAGE>
THEREIN ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFER UNDER
APPLICABLE LAW AND UNDER AGREEMENTS WITH THE COMPANY, INCLUDING
RESTRICTIONS ON THE SALE, ASSIGNMENT, TRANSFER, PLEDGE OR OTHER
DISPOSITION UNDER SECTIONS 1.9, 1.10 and 4.4 OF THE CORPORATION'S 1994
STOCK OPTION PLAN, AS AMENDED AND RESTATED, COPIES OF WHICH ARE
AVAILABLE FOR REVIEW AT THE OFFICE OF THE SECRETARY OF THE
CORPORATION."
"THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. NEITHER THESE
SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
AND QUALIFICATION UNDER SUCH LAWS AND AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION OR
QUALIFICATION ARE NOT REQUIRED."
II. OPTIONS.
2.1 Grants.
------
One or more Options may be granted under this Article to any Eligible
Person, subject to Section 1.4. Each Option granted may be either an Option
intended to be an Incentive Stock Option (if the optionee is eligible for such
an award under the Code), or not so intended, and such intent shall be indicated
in the applicable Award Agreement. Each Option shall be evidenced by an Award
Agreement signed by the Corporation, and, if required by the Committee, by the
Eligible Person.
2.2 Option Price.
------------
(a) Pricing Limits. The purchase price per share of the Common Stock
---------------
covered by each Option shall be determined by the Committee at the time of the
grant, but in the case of Incentive Stock Options shall not be less than 100%
(110% in the case of an Eligible Person who owns or is deemed to own under
Section 424(d) of the Code more than 10% of the total combined voting power of
all classes of stock of the Corporation) of the Fair Market Value of the Common
Stock on the date of grant and in all cases shall not be less than the par value
thereof.
(b) Payment Provisions. The purchase price of any shares purchased on
-------------------
exercise of an Option granted under this Article shall be paid in full at the
time of each purchase in one or a combination of the following methods: (i) in
money, including by electronic funds transfer; (ii) by check
7
<PAGE>
payable to the order of the Corporation; (iii) if expressly authorized by the
Committee or specified in the applicable Award Agreement, by a promissory note
of the Participant consistent with the requirements of Section 1.8; or (iv) to
the extent permitted by and consistent with the Corporation's Articles of
Association (as amended) and applicable law, by notice and third party payment
in such manner, if any, as may be authorized by the Committee or by the delivery
of shares of Common Stock of the Corporation already owned by the Participant,
provided, however, that the Committee may in its absolute discretion limit the
- - -------- -------
Participant's ability to exercise an Option by delivering such shares. Shares
of Common Stock that are permitted to be used to satisfy the exercise price of
an Option shall be valued at their Fair Market Value on the date of exercise and
shall have been beneficially owned by the Optionee for at least six months prior
to such delivery.
2.3 Limitations on Grant and Terms of Incentive Stock Options.
---------------------------------------------------------
(a) $100,000 Limit. To the extent that the aggregate "fair market
--------------
value" of stock with respect to which incentive stock options first become
exercisable by a Participant in any calendar year exceeds $100,000, taking into
account both Common Stock subject to Incentive Stock Options under this Plan and
stock subject to incentive stock options under all other plans of the Company,
such options shall be treated as nonqualified stock options. For this purpose,
the "fair market value" of the stock subject to options shall be determined as
of the date the options were awarded. In reducing the number of options treated
as incentive stock options to meet the $100,000 limit, the most recently granted
options shall be reduced first. To the extent a reduction of simultaneously
granted options is necessary to meet the $100,000 limit, the Committee may, in
the manner and to the extent permitted by law, designate which shares of Common
Stock are to be treated as shares acquired pursuant to the exercise of an
Incentive Stock Option.
(b) Option Period. Subject to the proviso in Section 1.6, each Option
-------------
and all rights thereunder shall expire no later than ten (10) years after the
Option Date or, in the case of an Incentive Stock Option granted to any 10%
Holder (as defined below), five (5) years after the Option Date.
(c) Other Code Limits; Limits on 10% Holders. No Incentive Stock
----------------------------------------
Option may be granted to any person who, at the time the Option is granted, owns
(or is deemed to own under Section 424(d) of the Code) shares of outstanding
Common Stock possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation
8
<PAGE>
("10% Holder"), unless the exercise price of such Option is at least 110% of the
----------
Fair Market Value of the stock subject to the Option and such Option by its
terms is not exercisable after the expiration of five years from the date such
Option is granted. There shall be imposed in any Award Agreement relating to an
Incentive Stock Option such terms and conditions as from time to time are
required in order that the Option be an "incentive stock option" as that term is
defined in Section 422 of the Code.
2.4 Option Repricing/Cancellation and Regrant/Waiver
------------------------------------------------
of Restrictions.
- - ---------------
Subject to Section 1.4 and Section 4.6 and the specific limitations on
Options contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Person any
adjustment in the exercise or purchase price, the number of shares subject to,
the restrictions upon or the term of, an Option granted under this Article by
cancellation of an outstanding Option and a subsequent regranting of an Option,
by amendment, by substitution of an outstanding Option, by waiver or by other
legally valid means. Such amendment or other action may result among other
changes in an exercise or purchase price which is higher or lower than the
exercise or purchase price of the original or prior Option, provide for a
greater or lesser number of shares subject to the Option, or provide for a
longer or shorter vesting or exercise period.
III. STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS.
3.1 Stock Units.
-----------
(a) Grants. Subject to Section 3.1(d), and such rules and procedures
------
as the Committee may establish from time to time, the Committee may, in its
discretion, authorize Awards of Stock Units and permit an Eligible Person to
elect to defer or receive in Stock Units all or a portion of the compensation
the Eligible Person could otherwise elect to defer under any other Company plan,
or in respect of any Award hereunder, or may grant Awards in the form of Stock
Units in lieu of or in addition to any other Award under this Plan. The
specific terms, conditions and provisions relating to each Stock Unit Award or
election, including the form of payment to be made at or following the vesting
thereof, shall be set forth in or pursuant to the Participant's Award Agreement
in respect thereof.
(b) Other Provisions. The Committee shall determine, among other
----------------
terms of a Stock Unit Award, the form of payment of the Stock Units, whether in
Common Stock, another Award, or any combination thereof, and the
9
<PAGE>
applicable vesting and payout provisions of the Award. The Committee in the
Award Agreement may permit the Participant to elect the form and time of payout
of vested Stock Units on such conditions or subject to such procedures as the
Committee may impose.
(c) Stock Units. Each Award Agreement for an Award of Stock Units
-----------
shall include the applicable benefit distribution and termination provisions,
which may include elective features, for such Award and shall specify the form
of payment.
(d) Limit on Certain Stock Unit Awards. Notwithstanding anything
----------------------------------
contained herein to the contrary, any Stock Unit Award or Stock Unit Awards
which individually or in the aggregate would constitute an "employee pension
benefit plan" (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) shall be made only to Eligible
Persons who are members of "a select group of management or highly compensated
employees" (as provided in Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA) of
the Company.
3.2 Dividend Equivalent Rights. In its discretion, the Committee may
--------------------------
grant to any Eligible Person DERs concurrently with the grant of any Option or
Stock Unit, on such terms as set forth by the Committee in the Award Agreement.
DERs shall be based on all or part of the amount of dividends declared on shares
of Common Stock underlying the Award and shall be credited in respect of the
period between the date of grant (or such later date as the Committee may set)
and the date the Option or Stock Unit is exercised or expires (or such earlier
date as the Committee may set) or is settled, as determined by the Committee.
DERs shall be payable in shares or other Awards and (to the extent permitted by
law) may be subject to such conditions, not inconsistent with Section 162(m) of
the Code (in the case of Options or other Awards intended to satisfy its
conditions with respect to deductibility), as may be determined by the
Committee.
IV. OTHER PROVISIONS.
4.1 Rights of Eligible Persons and Beneficiaries.
--------------------------------------------
(a) Employment Status. Status as an Eligible Person or Participant
-----------------
shall not be construed as a commitment that any Award or additional Award will
be made under this Plan.
(b) No Employment Contract. Nothing contained in this Plan (or in any
----------------------
other documents related to this Plan or to any Award) shall confer upon any
Eligible Person or
10
<PAGE>
Participant any right to continue in the employ or other service of the Company
or constitute any contract or agreement of employment or other service, nor
shall interfere in any way with the right of the Company to change such person's
compensation or other benefits or to terminate the employment or services of
such person, with or without cause, but nothing contained in this Plan or any
document related hereto shall adversely affect any independent contractual right
of such person without his or her consent thereto.
(c) Plan Not Funded. Awards payable under this Plan shall be payable
---------------
in shares of Common Stock and no special or separate reserve (except as provided
in Section 1.4(b)), fund or deposit shall be made to assure payment of such
Awards. No Participant, Beneficiary or other person shall have any right, title
or interest in any fund or in any specific asset (including shares of Common
Stock, except as expressly otherwise provided) of the Company by reason of any
Award hereunder. Neither the provisions of this Plan (or of any related
documents), nor the creation or adoption of this Plan, nor any action taken
pursuant to the provisions of this Plan shall create, or be construed to create,
a trust of any kind or a fiduciary relationship between the Company and any
Eligible Person, Participant, Beneficiary or other person. To the extent that
an Eligible Person, Beneficiary or other person acquires a right to receive
payment pursuant to any Award hereunder, such right shall be no greater than the
right of any unsecured general creditor of the Company and shall be subject to
any prior or senior rights of creditors to the assets of the Company under
applicable law.
4.2 Adjustments; Acceleration.
-------------------------
(a) Adjustments. If there shall occur any extraordinary dividend or
-----------
other extraordinary distribution in respect of the Common Stock (whether in the
form of cash, Common Stock, other securities, or other property), or any
recapitalization, stock split (including a stock split in the form of a stock
dividend), reverse stock split, reorganization, merger, combination,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Common Stock or other securities of the Corporation, issuance of warrants or
other rights to purchase shares, or any other like corporate transaction or
event in respect of the Common Stock or a sale of substantially all the assets
of the Corporation as an entirety, then the Committee shall, in such manner and
to such extent (if any) as it deems appropriate and equitable (1)
proportionately adjust any or all of (a) the number and type of shares of Common
Stock (or other securities) or other consideration which thereafter may be made
the subject of Awards (including the specific limits, maxima and numbers of
shares set forth elsewhere in
11
<PAGE>
this Plan), (b) the number, amount and type of shares of Common Stock (or other
securities or property) or other consideration subject to any or all outstanding
Awards, (c) the grant, purchase, or exercise price of any or all outstanding
Awards, (d) the securities, cash or other property deliverable upon exercise of
any outstanding Awards, or (2) in the case of an extraordinary dividend or other
distribution, merger, reorganization, consolidation, combination, sale of
assets, split up, exchange, or spin off, make provision for a cash payment or
for the substitution or exchange of any or all outstanding Awards or the cash,
securities or property deliverable to the holder of any or all outstanding
Awards based upon the distribution or consideration payable to holders of the
Common Stock of the Corporation upon or in respect of such event; provided,
--------
however, in each case, that with respect to Incentive Stock Options, no such
- - -------
adjustment shall be made which would cause this Plan to violate Section 422 or
424 of the Code or any successor provisions thereto without provision for
compensatory adjustment to Optionees adversely affected thereby.
(b) Possible Acceleration of Awards Upon Change in Control. In the
------------------------------------------------------
event of or in anticipation of a Change in Control Event, the Committee may
provide acceleration of exercisability, vesting, payment or other benefits under
some or all Awards or for certain other limited benefits under some or all
Awards and may determine the extent and duration of such limited rights,
including (in the discretion of the Committee) stock appreciation rights. Any
acceleration of Awards shall comply with any applicable regulatory requirements.
(c) Possible Early Termination of Accelerated Awards. If any Award or
------------------------------------------------
other right to acquire Common Stock under this Plan is fully exercisable or has
been fully accelerated as permitted by Section 4.2(b) but is not exercised prior
to (i) a dissolution of the Corporation, or (ii) a reorganization event
described in Section 4.2(a) that the Corporation does not survive, or (iii) the
consummation of reorganization event described in Section 4.2(a) that results in
a Change of Control approved by the Board, and no provision has been made for
the survival, substitution, exchange or other settlement of such Award or right,
such Award or right shall terminate upon the occurrence of such dissolution or
reorganization.
4.3 Effect of Termination of Employment.
-----------------------------------
The Committee shall establish in respect of each Award granted to an
Eligible Person the effect of a termination of employment or services on the
rights and benefits thereunder and in so doing may make distinctions based upon
the cause of termination.
12
<PAGE>
4.4 Compliance with Laws.
--------------------
(a) General. This Plan, the grant, exercise and vesting of Awards
-------
under this Plan and the issuance and delivery of shares of Common Stock and/or
any other value under this Plan or under Awards granted hereunder are subject to
compliance with all applicable laws, rules and regulations (including but not
limited to securities law and margin requirements) and to such approvals by any
listing, regulatory or governmental authority as may, in the opinion of counsel
for the Corporation, be necessary or advisable in connection therewith. Any
securities delivered under this Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Corporation,
provide such assurances and representations to the Corporation as the
Corporation may deem necessary or desirable to assure compliance with all
applicable legal requirements.
(b) Controlled Foreign Corporation. No Award shall be granted by the
------------------------------
Corporation if the grant of such Award would cause the Corporation to be a
controlled foreign corporation within the meaning of Section 957 of the Code.
(c) Foreign Personal Holding Company. No Award shall be granted by
--------------------------------
the Corporation if the grant of such Award would cause the Corporation to be a
foreign personal holding company within the meaning of Section 552 of the Code.
(d) Personal Holding Company. No Award shall be granted by the
------------------------
Corporation if the grant of such Award would cause the Corporation to be a
personal holding company within the meaning of Section 542 of the Code.
4.5 Tax Withholding.
---------------
(a) Cash or Shares. Upon the exercise, vesting, or payment of any
--------------
Award or upon the disposition of shares of Common Stock acquired pursuant to the
exercise of an Incentive Stock Option prior to the satisfaction of the holding
requirements of Section 422 of the Code, the Company shall have the right at its
option to (i) require the Eligible Person (or Personal Representative or
Beneficiary, as the case may be) to pay or provide for payment in cash of the
amount of any taxes which the Company may be required to withhold with respect
to such transaction or (ii) deduct from any amount payable the amount (or
equivalent value) of any taxes which the Company may be required to withhold
with respect to such amount payable or (iii) require the Participant to satisfy
any withholding obligation through any combination of the foregoing methods. In
any case where a tax is required to be withheld in connection with the delivery
of shares of Common Stock under this Plan, the
13
<PAGE>
Committee may grant (either at the time of the Award or thereafter) to the
Participant the right to elect, pursuant to such rules and subject to such
conditions as the Committee may establish, to have the Corporation reduce the
number of shares to be delivered by (or otherwise reacquire) the appropriate
number of shares to satisfy such withholding obligation. Any shares offset or
delivered to satisfy withholding shall be valued at their then Fair Market
Value.
(b) Tax Loans. The Company may, in its discretion and to the extent
---------
permitted by law, authorize a loan to an Eligible Person in the amount of any
taxes which the Company may be required to withhold with respect to shares of
Common Stock to be issued on exercise for a term, at a rate of interest and
pursuant to such other terms and conditions as the Corporation or its
Subsidiary, under applicable law, may establish and such loan need not comply
with the provisions of Section 1.8.
4.6 Plan Amendment, Termination and Suspension.
------------------------------------------
(a) Board Authorization. The Board may, at any time, terminate or,
-------------------
from time to time, amend, modify or suspend this Plan, in whole or in part. No
Awards may be granted during any suspension of this Plan or after termination of
this Plan, but the Committee shall retain jurisdiction as to Awards then
outstanding in accordance with the terms of this Plan.
(b) Shareholder Approval. If an amendment would (i) materially
--------------------
increase the benefits accruing to Participants under this Plan, (ii) materially
increase the aggregate number of securities that may be issued under this Plan,
or (iii) materially modify the requirements as to eligibility for participation
in this Plan, then to the extent required by applicable law, or deemed necessary
or advisable by the Committee or the Board, such amendment shall be subject to
shareholder approval.
(c) Amendments to Awards. Without limiting any other express
--------------------
authority of the Committee hereunder, but subject to the express limits of this
Plan, the Committee by agreement or resolution may waive conditions of or
limitations on Awards to Participants that the Committee in the prior exercise
of its discretion has imposed, without the consent of a Participant and may make
other changes to the terms and conditions of Awards that do not affect in any
manner materially adverse to the Participant, his or her rights and benefits
under an Award.
(d) Limitations on Amendments to Plan and Awards. No amendment,
--------------------------------------------
suspension or termination of the Plan or change of or affecting any outstanding
Award shall, without
14
<PAGE>
written consent of the Participant, affect in any manner materially adverse to
the Participant any rights or benefits of the Participant or obligations of the
Corporation under any Award granted under this Plan prior to the effective date
of such change. Changes contemplated by Section 4.2 shall not be deemed to
constitute changes or amendments for purposes of this Section 4.6.
4.7 Privileges of Stock Ownership.
-----------------------------
Except as otherwise expressly authorized by the Committee or this
Plan, a Participant shall not be entitled to any privilege of stock ownership as
to any shares of Common Stock not actually delivered to and held of record by
him or her. No adjustment will be made for dividends or other rights as a
shareholders for which a record date is prior to such date of delivery.
4.8 Effective Date of the Plan.
--------------------------
This amendment and restatement of the Plan is effective upon its
approval by the Board (the "Effective Date"), subject to approval by the holders
of not less than an absolute majority of the votes of the outstanding shares of
the Corporation entitled to vote.
4.9 Term of the Plan.
----------------
No Award shall be granted after the day before the 10th anniversary of
the Effective Date (the "Termination Date"). Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award theretofore
granted may extend beyond such date, and all authority of the Committee with
respect to Awards hereunder shall continue during any suspension of this Plan
and in respect of outstanding Awards on such Termination Date.
4.10 Governing Law/Construction/Severability.
---------------------------------------
(a) Choice of Law. This Plan, the Awards, all documents evidencing
-------------
Awards and all other related documents shall be governed by, and construed in
accordance with the laws of the State of California except to the extent the law
of the British Virgin Islands applies as the jurisdiction of incorporation of
the Corporation.
(b) Severability. If any provision shall be held by a court of
------------
competent jurisdiction to be invalid and unenforceable, the remaining provisions
of this Plan shall continue in effect.
15
<PAGE>
4.11 Captions.
--------
Captions and headings are given to the sections and subsections of
this Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
4.12 Effect of Change of Subsidiary Status.
-------------------------------------
For purposes of this Plan and any Award hereunder, if an entity ceases
to be a Subsidiary, a termination of employment or services shall be deemed to
have occurred with respect to each Participant who does not otherwise remain an
Eligible Person after giving effect to such event.
4.13 Non-Exclusivity of Plan.
-----------------------
Nothing in this Plan shall limit or be deemed to limit the authority
of the Board or the Committee to grant awards or authorize any other
compensation, with or without reference to the Common Stock, under any other
plan or authority.
V. DEFINITIONS.
5.1 Definitions.
-----------
(a) "Award" shall mean an award of any Option, Stock Unit, or DER, or
-----
any combination thereof, whether alternative, sequential, or cumulative,
authorized by and granted under this Plan.
(b) "Award Agreement" shall mean any writing setting forth the terms
---------------
of an Award that has been authorized by the Committee.
(c) "Award Date" shall mean the date upon which the Committee took the
----------
action granting an Award or such later date as the Committee designates as the
Award Date at the time of the Award.
(d) "Beneficiary" shall mean the person, persons, trust or trusts
-----------
validly designated by the Participant or in the absence of a valid designation
entitled by will or the laws of descent and distribution to receive the benefits
specified in the Award Agreement and under this Plan in the event of a
Participant's death, and shall mean the Participant's executor or administrator
if no other Beneficiary is so designated and able to act under the
circumstances.
16
<PAGE>
(e) "Board" shall mean the Board of Directors of the Corporation.
-----
(f) "Change in Control Event" shall mean any of the following (other
-----------------------
than as a direct result of a public offering of shares of the Corporation):
(1) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation;
(2) Approval by the shareholders of the Corporation of an
agreement to merge or consolidate, or otherwise recapitalize or reorganize,
with or into one or more entities that are not Subsidiaries, as a result of
which less than 50% of the outstanding voting securities of the surviving
or resulting entity immediately after the event are, or will be, owned by
the shareholders of the Corporation and/or Related Parties immediately
before such event (assuming for purposes of such determination that there
is no change in the record ownership of the Corporation's securities from
the record date for such approval until such event but taking into
consideration securities of the other parties to such transaction held by
such record holders);
(3) Approval by the shareholders of the Corporation of the sale
of substantially all of the Corporation's business and/or assets to a
person or entity which is not a Subsidiary or Related Party;
(4) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) (other than a Related Party or other person
having beneficial ownership of more than 50% of the outstanding voting
securities at the time of adoption of this Plan, or any successor,
affiliate or associate of such owner) becomes the "beneficial owner" (as
----------------
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing more than 50% of the combined
voting power of the Corporation's then outstanding securities entitled to
then vote generally in the election of directors of the Corporation; or
(5) During any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the Board cease
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Corporation's shareholders, of each new
Board member was approved by a vote of at least three-fourths of the Board
members then still in office who were Board members at the
17
<PAGE>
beginning of such period, including for these purposes (but without
duplication of predecessors and successors), new members whose election or
nomination was so approved.
(g) "Code" shall mean the United States Internal Revenue Code of 1986,
----
as amended from time to time.
(h) "Commission" shall mean the United States Securities and Exchange
----------
Commission.
(i) "Committee" shall mean the Board or a committee appointed by the
---------
Board to administer this Plan, which committee shall be comprised only of two or
more directors or such greater number of directors as may be required under
applicable law, each of whom, during such time as one or more Eligible Persons
may be subject to Section 16 of the Exchange Act, shall be Disinterested.
(j) "Common Stock" shall mean the Ordinary Shares of the Corporation,
------------
subject to any adjustments made under Section 4.2 of this Plan.
(k) "Company" shall mean, collectively, the Corporation and its
-------
Subsidiaries.
(l) "Corporation" shall mean Gemstar Inter-national Group Limited and
-----------
its successors.
(m) "Disinterested" shall mean disinterested within the meaning of
-------------
Rule 16b-3.
(n) "Dividend Equivalent Right" or "DER" shall mean a right authorized
------------------------- ---
under Section 3.2 of this Plan.
(o) "Eligible Person" shall mean (subject to the proviso below) (1) a
---------------
director, officer or key employee of the Corporation or a Subsidiary, or (2) any
consultant or advisor who (directly or through an entity with which he or she is
associated) renders or has rendered bona fide services (other than services in
---- ----
connection with the offering or sale of securities of the Corporation or any
Subsidiary in a capital raising transaction) to the Company, and who is selected
to participate in this Plan by the Committee, or (3) a non-employee agent of the
Corporation or any Subsidiary providing such bona fide services to the Company
---------
(other than as an eligible advisor or consultant) if such agent's participation
in this Plan would not adversely affect (x) the Corporation's eligibility in the
future to use Form S-8 to register under the Securities Act of 1933, as amended,
the offering of shares issuable under this Plan, or (y) the Corporation's
compliance with any other applicable securities or other laws; provided,
--------
however, in any case that if the Corporation's officers and directors
- - -------
18
<PAGE>
become subject to Section 16 of the Exchange Act, a member of the Committee
shall not during his or her service in such capacity (and during the applicable
period prior thereto under Rule 16b-3) be an Eligible Person.
(p) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
(q) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended from time to time.
(r) "Fair Market Value" shall mean (i) if the stock is listed or
-----------------
admitted to trade on a United States national securities exchange, the closing
price of the stock on the Composite Tape, as published in the Western Edition of
The Wall Street Journal, of the principal national securities exchange on which
the stock is so listed or admitted to trade, on such date, or, if there is no
trading of the stock on such date, then the closing price of the stock as quoted
on such Composite Tape on the next preceding date on which there was trading in
such shares; (ii) if the stock is not listed or admitted to trade on such a
national securities exchange, the last price for the stock on such date, as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through the NASDAQ National Market Reporting System or a similar organization if
the NASD is no longer reporting such information; (iii) if the stock is not
listed or admitted to trade on a national securities exchange and is not
reported on the National Market Reporting System, the mean between the bid and
asked price for the stock on such date, as furnished by the NASD or a similar
organization; or (iv) if the stock is not listed or admitted to trade on a
national securities exchange, is not reported on the National Market Reporting
System and if bid and asked prices for the stock are not furnished by the NASD
or a similar organization, the value as established by the Board at such time
for purposes of this Plan.
(s) "Incentive Stock Option" shall mean an Option which is designated
----------------------
as an incentive stock option within the meaning of Section 422 of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(t) "Nonqualified Stock Option" shall mean an Option that is
-------------------------
designated as a Nonqualified Stock Option and shall include any Option intended
as an Incentive Stock Option that fails to meet the applicable legal
requirements thereof. Any Option granted hereunder that is not designated as an
incentive stock option shall be deemed to be designated a nonqualified stock
option under this Plan and not an incentive stock option under the Code.
19
<PAGE>
(u) "Option" shall mean an option to purchase Common Stock under this
------
Plan. The Committee shall designate any Option granted to an Eligible Person as
a Nonqualified Stock Option or an Incentive Stock Option.
(v) "Participant" means an Eligible Person who has been granted an
-----------
Award.
(w) "Personal Representative" shall mean the person or persons who,
-----------------------
upon the disability or incompetence of a Participant, shall have acquired on
behalf of the Eligible Person, by legal proceeding or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall have
become the legal representative of the Eligible Person.
(x) "Plan" shall mean this 1994 Stock Incentive Plan, as amended and
----
restated.
(y) "QDRO" shall mean a qualified domestic relations order as defined
----
in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to the
same extent as if this Plan were subject thereto), or the applicable rules
thereunder.
(z) "Related Party" means a person or entity related (by blood or
-------------
marriage in the case of individuals) to, or associated or affiliated with, the
subject person or entity.
(aa) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the
----------
Commission pursuant to the Exchange Act, as amended from time to time but
subject to any applicable transition rules.
(bb) "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended from time to time.
(cc) "Stock Unit" shall mean a non-voting unit of measurement which is
----------
deemed for bookkeeping purposes to be equivalent to one outstanding share of
Common Stock (subject to adjustment) solely for purposes of this Plan.
(dd) "Stock Unit Account" shall mean the bookkeeping account
------------------
maintained by the Company on behalf of each Participant which is credited with
Stock Units in accordance with Section 3.1(c) and which is payable in stock or
another Award.
20
<PAGE>
(ee) "Subsidiary" shall mean any corporation or other entity a
----------
majority of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Corporation.
(ff) "Total Disability" or "Disability" shall mean a "permanent and
---------------- ----------
total disability" within the meaning of Section 22(e)(3) of the Code and such
other disabilities, infirmities, afflictions or conditions as the Committee by
rule may include.
21
<PAGE>
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is entered
into as of January 7, 1998, by and among Gemstar International Group Limited, a
British Virgin Islands corporation ("GIGL"), Gemstar Development Corporation, a
California corporation ("Company"), and Henry C. Yuen ("Employee").
WITNESSETH:
WHEREAS, Company and Employee are parties to an Employment Agreement,
entered into as of April 1, 1994, as amended August 16, 1995 and September 1,
1996 (collectively, the "Predecessor Agreement"), pursuant to which Employee has
served Company as President and Chief Executive Officer; and
WHEREAS, GIGL and Company desire to obtain the benefit of continued service
by Employee to Company and GIGL, and Employee desires to render services to
Company and GIGL; and
WHEREAS, Employee is very productive in the creation of new products,
designs and ideas, both in the line of Company's business, which thus become the
property of Company, and outside the Company's business, which remain the
property of Employee; and
WHEREAS, the Board of Directors of Company (the "Company Board") has
determined that because of Employee's substantial experience and business
relationships in connection with the business of Company and Employee's
familiarity with and creation of technologies used and exploited by Company, it
is in best interest of the Company and GIGL, the Company's sole shareholder, to
retain the services of Employee and to provide Employee certain additional
benefits; and
WHEREAS, GIGL, Company and Employee desire to set forth in this Agreement
the terms and conditions of Employee's future employment with Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree to terminate in its entirety the Predecessor
Agreement, and the parties further agree as follows:
1. Term and Renewals; Shareholder Approval.
---------------------------------------
(a) Initial Term; Shareholder Approval.
----------------------------------
(i) Company agrees to employ Employee and Employee agrees to serve
Company, in accordance with the terms of this Agreement, for an initial term
commencing with an effective date of October 1, 1997 and ending October 31, 2002
(the "Initial Term"), unless this Agreement is earlier terminated in accordance
with the provisions which follow.
1
<PAGE>
(ii) Notwithstanding the foregoing or any other provision of this
Agreement, (A) if this Agreement has not been approved on or before March 15,
1998 by the affirmative vote of holders of a majority of the ordinary shares,
par value $.01 per share (the "Ordinary Shares"), of GIGL voted on the matter in
person or by proxy at a duly held meeting of the holders of Ordinary Shares in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended
("Shareholder Approval"), this Agreement shall automatically terminate at 12:01
a.m., Los Angeles time, on March 16, 1998 (the "Termination Time"), except that
Employee shall be entitled to retain all options (the "Current Options") to
acquire Ordinary Shares available to be granted to Employee pursuant to this
Agreement under GIGL's current employee stock option plan that was previously
approved by the holders of Ordinary Shares (the "Current Plan"), all of which
Current Options shall at the Termination Time immediately vest in full and shall
become fully exercisable for their full term, and (B) only the Current Options
shall be exercisable unless and until the Shareholder Approval has been
obtained, whereupon all options granted under this Agreement shall become
exercisable in accordance with the terms hereof.
(iii) Concurrently with its approval of this Agreement, the Board of
Directors of GIGL (the "GIGL Board") has amended the Current Plan (as amended,
the "New Plan") for GIGL pursuant to which all options to acquire Ordinary
Shares to be granted to Employee under this Agreement can and will be issued.
Promptly after execution and delivery of this Agreement by the parties, GIGL
shall prepare and file with the Securities and Exchange Commission (the "SEC")
proxy materials complying with the rules and regulations of the SEC for the
submission to the holders of Ordinary Shares of this Agreement and the New Plan
for their approval. GIGL shall use its best efforts to hold a special meeting
of holders of Ordinary Shares to approve this Agreement and the New Plan on or
before March 15, 1998, and the Board of GIGL shall unanimously recommend that
such holders vote in favor of approval of this Agreement and the New Plan.
(b) Renewal.
-------
Upon expiration of the Initial Term, this Agreement shall be
automatically renewed for a term of three additional years (the "Renewal Term"),
unless either party gives notice, in writing, at least twelve (12) months prior
to the expiration of the Initial Term of its desire to terminate this Agreement.
If Company delivers to Employee the written termination notice
contemplated by this Section 1(b), or if the Renewal Term expires without GIGL,
Company and Employee having reached an agreement for the continued employment of
Employee by GIGL and Company that is satisfactory to GIGL, Company and Employee
(in their sole and absolute discretion), such termination or expiration shall be
treated as a termination Without Cause pursuant to Section 4(d) of this
Agreement, and the date of such termination or expiration shall be deemed the
date of notice of termination for purposes of Section 4(d).
2
<PAGE>
(c) Compensation Period; Current Term.
---------------------------------
Each June 1- May 31 annual period (or portion thereof) during the term
of this Agreement and during any period following termination of Employee's
employment hereunder during which Company has ongoing obligations hereunder
shall be a distinct and separate compensation period ("Compensation Period").
The then-current term of this Agreement, whether it is the Initial Term
(together with the Renewal Term if the termination deadline under Section 1(b)
has passed without delivery of the termination notice contemplated thereunder)
or the Renewal Term, shall be known as the "Current Term."
2. Specific Position; Duties and Responsibilities.
----------------------------------------------
Company and Employee agree that, subject to the provisions of this
Agreement, Company will employ Employee and Employee will serve Company as
President and Chief Executive Officer of Company, and Employee shall have such
other additional duties and responsibilities befitting the foregoing positions
as the Company Board shall determine from time to time. GIGL and Employee agree
that, subject to the provisions of this Agreement, GIGL will employ Employee as
President and Chief Executive Officer of GIGL, and Employee shall have such
other additional duties and responsibilities befitting the foregoing positions
as the GIGL Board shall determine from time to time. GIGL and Company also
agree that Employee shall serve as a director of GIGL, Company and StarSight
Telecast, Inc. ("StarSight") during the entire term of this Agreement. GIGL and
Company also agree that Employee shall have the right, on behalf of GIGL, to
appoint and remove directors from any of GIGL's subsidiaries in which GIGL
holds, directly or indirectly, a majority of the shares entitled to vote in the
election of directors, or any entity for which GIGL has the right, directly or
indirectly, to appoint directors.
Employee agrees to devote substantially all of his time, energy and
ability to the business of Company and GIGL. Nothing herein shall prevent
Employee, upon approval of the GIGL Board, from serving as a director,
consultant or trustee of other corporations or businesses that are not in
competition with the business of GIGL or in competition with any affiliate of
GIGL. Such approval of the GIGL Board shall not be unreasonably withheld.
Nothing herein shall prevent Employee from continuing his relationship with TRW,
Inc. as a Technical Fellow devoted to scientific research in the general area of
wave theory and partial differential equations and their applications. Nothing
herein shall prevent Employee from (i) investing in real estate for his own
account, (ii) becoming a partner or a shareholder in any privately-held
corporation, partnership or other venture not in competition with the business
of GIGL or any affiliate of GIGL or (iii) becoming a partner or a shareholder
with an equity interest of not more than ten percent (10%) in any corporation,
partnership or other venture whose equity securities are publicly traded,
whether or not such corporation, partnership or other venture is in competition
with the business of GIGL or any affiliate of GIGL. Nothing in this Agreement
shall restrict the GIGL Board from paying and granting to Employee additional
cash compensation and/or grants of stock or stock options from entities created
as joint ventures between GIGL (or any of its affiliates) and third parties as a
means of providing further incentives for Employee.
3
<PAGE>
For the term of this Agreement, Employee shall report to the GIGL
Board. For purposes of this Agreement, the termination of Employee's employment
by Company shall also constitute termination of Employee's employment by GIGL.
3. Compensation.
------------
(a) Base Compensation and Adjustments.
---------------------------------
(i) During the term of this Agreement, Company agrees to pay Employee
a base salary at the rate of One Million Dollars (US$1,000,000.00) per year, as
adjusted as hereinafter provided (as in effect from time to time, the "Base
Salary"). Such salary shall be earned monthly and shall be payable in periodic
installments no less frequently than monthly in accordance with Company's
customary practices. Amounts payable shall be reduced by standard withholding
and other authorized deductions.
(ii) On June 1 of each Compensation Period, commencing June 1, 1998,
if "R" or "P" (as defined below) for the fiscal year ending on the immediately
preceding March 31 is positive, the Base Salary for such Compensation Period and
each Compensation Period thereafter shall be adjusted by adding to the Base
Salary for the previous Compensation Period the amount obtained by multiplying
the Base Salary for the previous Compensation Period by the positive percentage,
if any, equal to the Adjusted Percentage (as defined below); provided, however,
-------- -------
that no such adjustment shall be made with respect to Base Salary for the
Compensation Period commencing June 1, 1998 unless GIGL's consolidated revenues
and consolidated earnings from operations for the fiscal quarter ending March
31, 1998 exceed GIGL's consolidated revenues and consolidated earnings from
operations, respectively, for the fiscal quarter ended March 31, 1997, in each
case as shown on the consolidated financial statements of GIGL (the "Financial
Statements").
For purposes of this Section 3(a)(ii), the "Adjusted Percentage" means
the percentage equal to the product of (1) the sum of "R" plus "P," multiplied
by (2) twenty-five hundredths (0.25), where "R" is the percentage increase, if
any, from the previous fiscal year in GIGL's consolidated revenues, as shown on
the Financial Statements; and "P" is the percentage increase, if any, from the
previous fiscal year in GIGL's consolidated net earnings, as shown on the
Financial Statements.
(b) Merit Bonus.
-----------
(i) Within fifty (50) days following the end of each fiscal year
ending March 31 of the Company (or portion thereof) during the term of this
Agreement ("Fiscal Year"), the Company shall determine the amount of the merit
bonus (the "Merit Bonus") payable to Employee equal to a percentage of the Base
Salary, which percentage shall equal the percentage increase, if any, in GIGL's
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") for its most recently completed Fiscal Year from GIGL's EBITDA for
the comparable period in the immediately preceding Fiscal Year; provided,
--------
however, that no Merit Bonus shall be paid with respect to the percentage
- - -------
increase in EBITDA for the Fiscal Year ending March 31, 1998 unless GIGL's
consolidated revenues and consolidated
4
<PAGE>
earnings from operations for the fiscal quarter ending March 31, 1998 exceed
GIGL's consolidated revenues and consolidated earnings from operations,
respectively, for the fiscal quarter ended March 31, 1997, in each case as shown
on the Financial Statements. GIGL shall immediately inform Employee of the
amount, if any, of the Merit Bonus.
(ii) Within ten (10) days following notice to Employee of the amount
of the Merit Bonus, Employee may elect in writing to receive such Merit Bonus in
the form of options to acquire Ordinary Shares (the "Merit Options"), which
Merit Options shall be issued under GIGL's employee stock option plan if
sufficient options are available thereunder and shall be issued outside of such
plan if insufficient options are available thereunder. If Employee does not
elect to receive Merit Options for a given Fiscal Year, the Company shall
promptly pay to Employee the Merit Bonus in cash. If Employee elects to receive
Merit Options in respect of a Fiscal Year, such Merit Options shall be issued on
the last day of the Compensation Period in which such Fiscal Year ends, and (A)
each Merit Option shall represent an option to acquire one (1) Ordinary Share,
and the number of Merit Options to be issued to Employee shall equal the
quotient of (1) the aggregate dollar amount of such Merit Bonus divided by (2)
the product of the Market Price (as defined below) per Ordinary Share as of the
last day of the Compensation Period in which such Fiscal Year ends multiplied by
twenty-five hundredths (0.25), (B) subject to the accelerated vesting provisions
of this Agreement, one-third (1/3) of the aggregate number of such Merit Options
shall be immediately vested in full and fully exercisable, and one-third (1/3)
of the aggregate number of such Merit Options shall become vested in full and
fully exercisable as of each of the first (1st) and second (2nd) anniversaries
of the last day of the Compensation Period in which such Fiscal Year ends, (C)
the exercise price per Ordinary Share under such Merit Options shall equal the
Market Price (as defined below) per Ordinary Share as of the last day of the
Compensation Period in which such Fiscal Year ends, and (D) such Merit Options
shall be exercisable through the tenth (10th) anniversary of the last day of the
Compensation Period in which such Fiscal Year ends.
As used in this Agreement, the "Market Price" per Ordinary Share as of
any date shall equal the most recent closing price per Ordinary Share on the
principal securities exchange or market on which Ordinary Shares then trade.
(c) Annual Incentive Bonus.
----------------------
Company shall pay to Employee in respect of each Fiscal Year (or
portion thereof) during the term of this Agreement, the incentive bonus
compensation benefits described in, and in accordance with the terms of,
Schedule I to this Agreement (the "Annual Incentive Bonus"), which is
incorporated herein by reference as though set forth in full; provided, however,
-------- -------
that no Annual Incentive Bonus shall be paid with respect to the Compensation
Period ending May 31, 1998 unless GIGL's consolidated revenues and consolidated
earnings from operations for the fiscal quarter ending March 31, 1998 exceed
GIGL's consolidated revenues and consolidated earnings from operations,
respectively, for the fiscal quarter ended March 31, 1997, in each case as shown
on the Financial Statements.
5
<PAGE>
(d) Annual Stock Options.
--------------------
(i) Concurrently with the execution of this Agreement, GIGL shall
grant to Employee, subject to the vesting provisions described in this
Agreement, options to acquire four million one hundred sixty-two thousand seven
hundred and twenty-five (4,162,725) Ordinary Shares (the "Initial Grant"). On
the first day of each Compensation Period that commences after the date of this
Agreement, GIGL shall grant to Employee, subject to the vesting provisions
described in this Agreement, options to acquire eight hundred thirty-two
thousand five hundred forty-five (832,545) Ordinary Shares ("Periodic Grants").
All such options granted under this Section 3(d) are referred to in this
Agreement as the "Annual Options." Each Annual Option shall represent the right
to acquire one (1) Ordinary Share. Subject to Section 1(a)(ii) and to the other
accelerated vesting provisions of this Agreement, eight hundred thirty-two
thousand five hundred forty-five (832,545) Annual Options shall vest in full and
become immediately exercisable on the last day of each of the Compensation
Periods (or portion thereof) that follow the date of this Agreement, with the
options granted earliest to vest first and the options available under the
Current Plan to vest earliest. The exercise price per Ordinary Share under each
Annual Option shall equal the Market Price per Ordinary Share as of the date of
grant of such Annual Option. Each Annual Option shall be exercisable through
the tenth (10th) anniversary of the date of its grant.
(ii) All Annual Options shall be issued under GIGL's employee stock
option plan if sufficient options are available thereunder and shall be issued
outside of such plan if insufficient options are available thereunder. GIGL
represents and warrants to Employee that, as of the date hereof, only one
million one hundred thirty thousand one hundred fifty (1,130,150) options and
the same number of underlying Ordinary Shares remain available for issuance
under the Current Plan, and all of such options and underlying Ordinary Shares
have been included in the Initial Grant.
(e) Additional Benefits.
-------------------
Employee shall also be entitled to all rights and benefits for which
Employee is otherwise eligible under any bonus, incentive, participation, stock
option or extra compensation plan, pension plan, profit-sharing plan, life,
medical, dental, disability, or insurance plan or policy or other plan or
benefit that Company its subsidiaries or affiliates may provide for Employee or
(provided Employee is eligible to participate therein) for employees of Company
generally, as from time to time in effect, during the term of this Agreement.
In order to maximize Employee's time availability to the Company, the Company
shall also promptly reimburse Employee for the Grossed-Up Value (as defined
below) of all professional fees and expenses incurred by Employee in connection
with (A) the negotiation and documentation of this Agreement and any amendment
thereto, (B) income tax planning and preparation, (C) income tax audits and the
defense of income tax claims and (D) estate planning and the creation and
modification of wills, codicils and trusts. All of the benefits described in
this Section 3(e) are collectively referred to herein as the "Additional
Benefits." The Additional Benefits shall be provided at the level commensurate
with the office held at the time and shall recognize for vesting and eligibility
purposes (but not for purposes of calculating Employee's age or for benefit
6
<PAGE>
accrual purposes) Employee's prior service with Company to the extent (if any)
that such prior service is recognized under any such plans.
As used in this Agreement, the "Grossed-Up Value" of an amount shall
equal the result obtained by dividing (A) such amount by (B) the difference of
one (1) minus the sum of the highest marginal federal and state personal income
tax rates, the highest Medicare tax rate (expressed as a decimal), the
additional effective income tax rate (expressed as a decimal) resulting from the
receipt of such amount reducing available deductions of Employee, and any other
income, payroll or similar rate of tax (expressed as a decimal) imposed on the
receipt by Employee of such amount.
(f) Vacation.
--------
In each Compensation Period, Employee shall be entitled to an amount
of paid vacation equal to the sum of four (4) weeks plus an additional three (3)
days for each Compensation Period (or portion thereof) previously completed
during the term of this Agreement. Up to sixty (60) unused vacation days may be
carried over from any Compensation Period to the ensuing Compensation Period,
and Employee shall be paid in cash, on the last day of each Compensation Period,
for any unused vacation days that cannot be carried over to the ensuing
Compensation Period at a rate per day equal to the quotient of Employee's Base
Salary for the just-completed Compensation Period divided by two hundred twenty
(220) (the number of working days in the year).
(g) Professional Organizations and Education.
----------------------------------------
Company shall promptly reimburse Employee for the Grossed-Up Value of
(A) the professional and membership fees and dues incurred by Employee to
maintain a membership in, or to belong to, such professional organizations and
societies as may be designated by Employee from time to time and one (1) social
or country club in the vicinity of each geographic location of an office of GIGL
or any of its subsidiaries and (B) the fees and costs incurred by Employee in
attending professional education courses selected by Employee.
(h) Automobile Allowance.
--------------------
Company shall provide Employee with a car allowance of one thousand
dollars (US$1,000.00) per month to be used for the purchase, lease and
maintenance of an appropriate automobile for his use during the term of
Employee's employment hereunder. If Company leases or purchases an automobile
for Employee's use, Employee shall have the ability to assume the lease at the
end of the term thereof or purchase the automobile at its residual or
depreciated value upon termination of his employment.
(i) Life Insurance.
--------------
(i) The Company has entered into split dollar life insurance
agreements with the trustee of a trust of which Employee is a trustor. The
split dollar life insurance agreements obligate the Company to pay all of the
premiums with respect to, and otherwise maintain in full force and effect, one
or more life insurance policies on the life of Employee. Except in the event
7
<PAGE>
Employee is terminated for Cause, as defined in Section 4(c) hereof, the Company
shall pay the premiums and maintain such policies until the death of Employee.
Such policy or policies shall provide (in the aggregate) that, at all times, the
death benefits minus the aggregate of all premiums paid by the Company, shall be
at least twenty million dollars (US$20,000,000.00). The policy or policies
shall be in such form and scope, and issued by insurers satisfactory to
Employee. Such a policy is currently in effect under the Predecessor Agreement,
and Employee has been advised by the Company and GIGL and their professional
advisors that no tax is due or payable. However, in the event Employee is
instructed by his tax advisor or required by a taxing authority to pay any tax,
interest, penalty or addition to tax with respect to the split-dollar life
insurance arrangement described in this Section 3(i), the Company shall pay
Employee the Grossed-Up Value of such amounts, as well as the Grossed-Up Value
of all reasonable expenses incurred by Employee in connection with such tax
issues, including professional fees and expenses of accountants, attorneys and
other advisors.
(ii) The split dollar agreements shall provide that the trustee of the
trust shall be the owner of the policy or policies, and shall contain such
further provisions as are acceptable to the parties, provided, however, the
split dollar agreement shall provide that the beneficiaries of Employee, upon
the death of Employee, whether or not Employee is employed by the Company at the
time of death, are entitled to a death benefit in the amount of twenty million
dollars (US$20,000,000.00). The Company shall be entitled to receive any death
benefit paid by the policies in excess of twenty million dollars
(US$20,000,000.00).
(j) Other Benefits.
--------------
Employee will, from time to time, receive such other benefits as he
may reasonably request that are commensurate with Employee's position and
facilitate performance of his duties under this Agreement.
(k) Maximum Compensation.
--------------------
Notwithstanding the foregoing provisions of this Section 3, the
aggregate amount of Base Salary, Merit Bonus and Annual Incentive Bonus payable
in cash under this Agreement for each of the Compensation Periods described in
the table below shall not exceed the dollar amount set forth opposite such
Compensation Period in such table:
<TABLE>
<CAPTION>
Compensation Period
Ending May 31, Cash Maximum
-----------------------------------------------------------
<S> <C>
1998 $ 2,500,000
-----------------------------------------------------------
1999 4,000,000
-----------------------------------------------------------
2000 5,000,000
-----------------------------------------------------------
2001 6,250,000
-----------------------------------------------------------
2002 8,000,000
-----------------------------------------------------------
2003 12,000,000
-----------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Compensation Period
Ending May 31, Cash Maximum
-----------------------------------------------------------
<S> <C>
2004 15,000,000
-----------------------------------------------------------
2005 22,000,000
-----------------------------------------------------------
</TABLE>
4. Termination. The compensation and other benefits provided to Employee
-----------
pursuant to this Agreement, and the employment of Employee by Company, shall be
terminated prior to expiration of the term of this Agreement only as provided in
this Section 4:
(a) Disability.
----------
In the event that Employee shall fail, because of illness, incapacity
or injury which is determined to be total and permanent by a physician selected
by Company or its insurers and acceptable to Employee or Employee's legal
representative (such agreement as to acceptability not to be withheld
unreasonably) to render for three consecutive months or for shorter periods
aggregating seventy five (75) or more business days in any twelve (12) month
period, the services contemplated by this Agreement, Employee's employment
hereunder may be terminated by written notice of termination from Company to
Employee. Thereafter, Company shall pay Employee all of his previously earned
Base Salary and Additional Benefits and shall continue for sixty (60) months
after the date of such notice or until expiration of the Current Term, whichever
period is longer, to pay Base Salary to Employee at a rate and time and in an
amount and manner equal to one hundred percent (100%) of the Base Salary payable
immediately prior to the termination. Thereafter, no further salary shall be
paid except to the extent otherwise expressly provided in Section 4(b). Upon
any such employment termination pursuant to this Section 4(a), all options to
acquire Ordinary Shares previously granted to Employee shall immediately vest in
full and shall become fully exercisable for their full term, and all previously
vested options to acquire Ordinary Shares shall remain fully exercisable for
their full term.
(b) Death.
-----
In the event of Employee's death during the term or during the
extended benefit period contemplated by Section 4(a), Company shall pay to such
person or persons as Employee shall have directed in writing or, in the absence
of a designation, the estate of Employee (the "Beneficiary") all of Employee's
previously earned Base Salary and Additional Benefits and shall continue for
sixty (60) months (less any period during which post-termination payments were
made under Section 4(a) above) after the date of Employees death or until
expiration of the Current Term, whichever period is longer, to pay Employee's
Base Salary to the Beneficiary at a rate and time and in an amount and manner
equal to one hundred percent (100%) of the Base Salary payable immediately prior
to death. If Employee's death occurs while receiving payments under Section
4(a) above, such payments shall cease and the Beneficiary shall be entitled only
to payments and benefits under this Section 4(b) at one hundred percent (100%)
of the rate of Base Salary in effect immediately prior to the disability. Upon
Employee's death, all options to acquire Ordinary Shares previously granted to
Employee shall immediately vest in full and shall become fully exercisable for
their full term, and all previously vested options to acquire Ordinary Shares
shall remain fully exercisable for their full term. This Agreement in all other
respects will terminate upon the death of Employee except as otherwise expressly
provided.
9
<PAGE>
(c) For Cause, Right to Appeal.
--------------------------
Employee's employment hereunder shall be terminated, and all of his
unearned rights to receive Base Salary and (subject to the terms of any plans
relating thereto) Additional Benefits hereunder in respect of any period after
such termination shall immediately terminate upon a reasonable determination by
the GIGL Board, acting in good faith based upon actual knowledge at such time,
that Employee (i) is engaging or has engaged in acts of fraud, material
dishonesty or other acts of willful misconduct that have had a material adverse
effect on the business of Company, (ii) has repeatedly and willfully refused to
perform his significant duties hereunder after notice, (iii) has habitually
abused any substance (such as narcotics or alcohol) and such abuse has had a
material adverse effect on the business of Company or (iv) has been convicted
of, or plead guilty to, an act constituting a felony that has a material adverse
effect on the business of Company (any of the conduct described in the foregoing
clauses being referred to in this Agreement as "Cause").
Notwithstanding the foregoing, Employee's employment hereunder shall
not be terminated for Cause pursuant to this Section 4(c) unless and until
Employee has received notice of a proposed termination for Cause and Employee
has had an opportunity to be heard before at least a majority of the members of
the GIGL Board. Employee shall be deemed to have had such opportunity if given
written notice by any director acting on behalf of the GIGL Board at least
seventy two (72) hours in advance of a meeting if scheduled in California or
ninety six (96) hours in advance if such meeting is scheduled outside
California. After Employee's hearing before the GIGL Board pursuant to this
Section, the GIGL Board shall decide to uphold or rescind Employee's termination
for Cause (the "Final Action").
If the Final Action upholds Employee's termination for Cause, Employee
shall have the right to appeal the Final Action pursuant to Section 9(f) of this
Agreement; provided, however, that Employee shall prevail in such appeal, and
-------- -------
Cause shall not be deemed to exist, unless GIGL and Company establish in such
appeal by "clear and convincing evidence" that Cause existed for such
termination. If Employee elects to appeal the Final Action, Company shall
continue for a period of six (6) months after the date of the Final Action, or
until final resolution of such appeal (the "Decision"), whichever period is
shorter, to pay Base Salary and Additional Benefits to Employee at a rate and
time and in an amount and manner equal to one hundred percent (100%) of the Base
Salary and Additional Benefits payable immediately prior to the Final Action.
If Employee is the nonprevailing party in the Decision, Employee shall
pay the costs of such action as provided in Section 9(f) and shall reimburse
Company for any Base Salary and Additional Benefits paid to Employee since the
Final Action.
If Employee is the prevailing party in the Decision, Company shall pay
the costs of such action as provided in Section 9(f), reimburse Employee for all
professional fees and expenses in connection with the Final Act and the
Decision, reinstate Employee as President and Chief Executive Officer and treble
Employee's Base Salary and Additional Benefits retroactive to October 1, 1997;
provided, however, that Company shall not be required to pay treble Employee's
- - -------- -------
Base Salary and Additional Benefits retroactive to October 1, 1997, and shall
instead
10
<PAGE>
pay Employee's Base Salary and Additional Benefits retroactive to October 1,
1997, if the Decision is in response to the first attempt by the GIGL Board to
terminate Employee for Cause and the Decision includes a finding that the GIGL
Board acted in good faith in taking the Final Action relating to such
termination. Employee shall be entitled to receive in a lump sum payment, within
thirty (30) days after the Decision, the difference between (x) the trebled
amount of Base Salary and Additional Benefits that would have been paid and (y)
the amount of Base Salary and Additional Benefits actually paid, for the period
from November 1, 1997 through the date of the Decision. Any proceedings by the
GIGL Board pursuant to this Section 4(c) shall be conducted in a confidential
manner and all steps shall be taken to prevent any harm to Employee's
reputation.
Upon any such employment termination pursuant to this Section 4(c),
all options to acquire Ordinary Shares previously granted to Employee and then
remaining unvested shall be forfeited, and all previously vested options to
acquire Ordinary Shares shall remain fully exercisable for their full term.
(d) Without Cause.
-------------
Notwithstanding any other provision of this Section 4, the GIGL Board
shall have the right to terminate Employee's employment with Company at any
time, but in the event of any such termination, other than as expressly provided
in Section 4(a), (b) or (c) herein, or in the event Company elects not to renew
the term of this Agreement by giving notice of termination under Section 1(b)
hereof, (any such termination of Employee's employment under this Section 4(d)
being referred to in this Agreement as a termination "Without Cause") Company
shall thereafter pay and grant to Employee, in addition to any other amounts due
under this Agreement, on the last day of Employee's employment, an amount equal
to the product of Employee's then-current Base Salary multiplied by five (5),
and Company shall thereafter continue to provide to Employee the Additional
Benefits for sixty (60) months from such last day of employment. Upon any such
employment termination pursuant to this Section 4(d), all options to acquire
Ordinary Shares previously granted to Employee shall immediately vest in full
and shall become fully exercisable for their full term, and all previously
vested options to acquire Ordinary Shares shall remain fully exercisable for
their full term.
(e) Limited Succession of Additional Benefits Upon Termination.
----------------------------------------------------------
If Employee's services are terminated hereunder pursuant to Sections
4(a) or 4(b) and Employee is no longer eligible for Additional Benefits (under
the terms of any plans relating thereto) because of such termination Employee
(or in event of death, the Beneficiary) shall be entitled to and Company shall
provide benefits substantially equivalent to those benefits in the nature of
health and welfare type benefits to which Employee was entitled immediately
prior to such termination for the period (if any) during which Employee (or
Beneficiary, as the case may be) remains entitled to receive the Base Salary
under such sections. During such period, however, Employee shall not be
entitled to option, equity, appreciation, profit sharing, deferred compensation,
savings, bonus, participation, pension, extra compensation and other incentive
plan benefits (except to the extent otherwise expressly provided in any then
outstanding awards to such Employee).
11
<PAGE>
(f) Constructive Termination.
------------------------
A Constructive Termination (defined below) shall be treated as a
termination Without Cause pursuant to Section 4(d) of this Agreement.
For purposes of this Agreement, "Constructive Termination" means the
removal of Employee from any of the positions of President or Chief Executive
Officer of Company or GIGL or from his position as a director of GIGL, Company
or StarSight, assignment to Employee of duties or responsibilities inconsistent
with such positions, relocation of Employee's principal office to another
geographic location without Employee's written consent, or requiring Employee to
report to any other person or entity other than the full Board of Directors of
the GIGL, in any case other than as a result of grounds for termination of
employment for Cause under Section 4(c), for disability under Section 4(a) or
because of death or retirement.
(g) Termination by Employee.
-----------------------
(i) Subject to Section 4(h), Employee shall have the right, in his
sole discretion, to terminate his employment under this Agreement at any time
after expiration of the period ending eighteen (18) months after the date of
this Agreement, by providing notice, in writing, at least six (6) months prior
to Employee's termination of employment, but in the event of any such
termination Company shall thereafter pay and grant to Employee, in addition to
any other amounts due under this Agreement, on the last day of Employee's
employment, an amount equal to the product of Employee's then-current Base
Salary multiplied by one and one-half (1.5), and Company shall thereafter
continue to provide to Employee all other elements of compensation under Section
3 (including, without limitation, the vesting of options to acquire Ordinary
Shares) for eighteen (18) months from such last day of employment. Upon the
expiration of such eighteen (18) month period, all options to acquire Ordinary
Shares previously granted to Employee and then remaining unvested shall be
forfeited, and all previously vested options to acquire Ordinary Shares shall
remain fully exercisable for their full term.
(ii) Employee shall have the right to reduce his employment by GIGL
and the Company from full time to part time at any time following expiration of
the eighteen (18) month period immediately following the date of this Agreement
by providing written notice, at least three (3) months prior to such reduction
of employment, to GIGL and the Company that Employee will reduce the number of
his working days per week for the Company and GIGL from five (5) to any number
not less than one (1) working day per week. Upon the effectiveness of such
reduction, all elements of Employee's compensation or benefits under Section 3
and 4 (except Sections 3(e), 3(g) through (j), 4(c), 4(e) and 4(f) and any cost
or expense reimbursements required under this Agreement) shall be reduced by a
fraction thereof, the numerator of which is the difference of one (1) minus
Employee's reduced number of working days per week, and the denominator of which
is five (5). Upon the effectiveness of such reduction of employment, the
Company and GIGL shall be specifically relieved of their obligations under
Section 4(f), and Employee shall have the right to accept other employment that
is not in direct competition with the business of GIGL or its affiliates in
relation to the matters identified on Exhibits A and B attached hereto.
12
<PAGE>
(h) [*]
___________
[*] Omitted, confidential treatment requested
13
<PAGE>
[*]
5. Business Expenses.
-----------------
During the term of this Agreement, Company shall reimburse Employee
promptly for reasonable business expenditures, whether or not Company can fully
deduct such expenses according to federal income tax laws.
6. Inventions and Patents.
----------------------
(a) During the term of Employee's employment under this Agreement, all
inventions, designs, improvements, patents, copyrights, and discoveries ("IP
Products") conceived or reduced to practice by Employee shall be the property of
Company if and only to the extent that Company can establish, by clear and
convincing evidence, that such IP Products (i) were developed by Employee while
performing his duties for Company under this Agreement or using Company's
equipment, supplies, facilities or trade secret information, unless such usage
is not substantial, in which case, if Employee reimburses Company for the
reasonable cost of such usage, such IP Products shall not belong to Company,
(ii) relate at the time of conception or reduction to practice (as those terms
have been interpreted by the Federal courts in connection with the Patent Act
(35 U.S.C. (S)(S) 101, et seq.)) to Company's business or to actual or
demonstrably anticipated research or development of Company, or (iii) result
from any work performed by Employee for Company. Employee hereby assigns all
right, title and interest in IP Products owned by Company pursuant to the
preceding sentence. For the purpose of this Agreement, Company's business and
research or development referred to in (ii) above shall be as described in
Exhibits A and B respectively attached hereto, which may, from time to time, be
- - ---------- -
modified or augmented, but only by resolution of the Company Board in meetings
to which Employee shall be invited to attend, but at which only non-management
directors applying the standard referred to in (ii) above can vote. Employee
will promptly and fully disclose to Company all such inventions, designs,
improvements, and discoveries (whether developed individually or with other
persons) and shall take all steps necessary and reasonably required to assure
Company's ownership thereof and to assist Company in protecting or defending
Company's proprietary rights therein.
- - -----------
[*] Omitted, confidential treatment requested
14
<PAGE>
(b) All IP Products conceived or reduced to practice by Employee prior to,
during or after the term of Employee's employment under this Agreement that are
not owned by Company pursuant to Section 6(a) shall be the property of Employee
("Employee IP Products") and, subject to the provisions of this Section 6(b),
may be exploited in any manner as Employee, in his uncontrolled discretion, may
determine. Upon Employee's conception or reduction to practice of a new
Employee IP Product during Employee's employment by Company, Employee shall so
notify Company in writing, describing the nature of such Employee IP Product,
and, for the six (6) month period following such notice, Company shall have the
exclusive right to negotiate with Employee for the acquisition of such Employee
IP Product; provided, however, that neither party shall have any obligation
whatsoever to enter into any agreement for Company's acquisition of such
Employee IP Product. In consideration for such exclusive right, Company shall
bear the cost and expense of patent or copyright investigation, prior art
research, filing, prosecution and registration relating to such Employee IP
Product and all associated costs for such Employee IP Product, whether or not
Company acquires such Employee IP Product from Employee and without compromise
to Employee's absolute ownership of such Employee IP Product.
(c) Notwithstanding anything to the contrary, including the provisions of
Section 2870 of the California Labor Code and the provisions of this Section 6,
Exhibit C attached hereto lists those inventions and other intellectual property
- - ---------
rights that, as of the date hereof, are acknowledged by Company to be the
property of Employee. Employee acknowledges hereby receipt of written notice
from Company pursuant to California Labor Code Section 2872 that this Agreement
(to the extent it requires an assignment or offer to assign rights to any
invention of Employee) does not apply to an invention that qualifies fully under
California Labor Code Section 2870.
7. Indemnity.
---------
To the maximum extent permitted by applicable law, Company shall
indemnify Employee and hold Employee harmless from and against any and all
claims, liabilities, judgments, fines, penalties, costs and expenses (including,
without limitation, reasonable attorneys' fees, costs of investigation and
experts, settlements and other amounts actually incurred by Employee in
connection with the defense of any action, suit or proceeding, and in connection
with any appeal thereon) incurred by Employee in any and all threatened, pending
or completed actions, suits or proceedings, whether civil, criminal,
administrative or investigative (including, without limitation, actions, suits
or proceedings brought by or in the name of Company), arising, directly or
indirectly, by reason of Employee's status, actions or inaction as a director,
officer, employee or agent of Company or of an affiliate of Company so long as
Employee's conduct was in good faith. Company shall promptly advance to
Employee upon request any and all expenses incurred by Employee in defending any
and all such actions, suits or proceedings to the maximum extent permitted by
applicable law.
8. GIGL Agreement.
--------------
GIGL agrees to perform, and to cause Company to perform, their
respective obligations under this Agreement so as to give full force and effect
to the provisions hereof.
15
<PAGE>
9. Miscellaneous.
-------------
(a) Succession; Survival.
--------------------
This Agreement shall inure to the benefit of and shall be binding upon
Company and GIGL and their respective successors and assigns, but without the
prior written consent of Employee this Agreement may not be assigned other than
in connection with a merger or sale of substantially all the assets of Company
or GIGL or a similar transaction in which the successor or assignee assumes
(whether by operation of law or express assumption) all obligations of Company
or GIGL hereunder. The obligations and duties of Employee hereunder are
personal and otherwise not assignable.
(b) Notices.
-------
Any notice or other communication provided for in this Agreement shall
be in writing and sent, if to GIGL or Company, to its office at:
Gemstar Development Corp.
Suite 800
135 North Los Robles Ave.
Pasadena, California 91101
Facsimile: (818) 792-4051
Attention: General Counsel
or at such other address as GIGL or Company may from time to time in writing
designate, and, if to Employee, at such address as Employee may from time to
time in writing designate (or Employee's business address of record in the
absence of such designation). Each such notice or other communication shall be
effective (i) if given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 9(b) and an appropriate
answerback is received, (ii) if given by mail, three days after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when actually
delivered at such address.
(c) Entire Agreement; Amendments.
----------------------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof and it supersedes any prior agreements,
undertakings, commitments and practices relating to Employee's employment by
Company or its affiliates except for any and all other agreements necessary to
give effect to the provisions of this Agreement or the Predecessor Agreement (to
the extent not modified by this Agreement), including, without limitation, stock
option agreements, life insurance agreements, and agreements relating to
Additional Benefits. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and signed by Employee and, on
behalf of Company and GIGL, by senior executive officers after approval thereof
by their respective boards of directors.
16
<PAGE>
(d) Waiver.
------
No failure on the part of any party to exercise or delay in exercising
any right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.
(e) Choice of Law.
-------------
This Agreement, the legal relations between the parties and any
action, whether contractual or non-contractual, instituted by any party with
respect to matters arising under or growing out of or in connection with or in
respect of this Agreement, the relationship of the parties or the subject matter
hereof shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and performed in such State and
without regard to conflicts of law doctrines.
(f) Arbitration.
-----------
Any controversy or claim arising out of or relating to this Agreement,
its enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Los Angeles County, California in accordance with
California Code of Civil Procedure Sections 1282-1284.2. In the event either
party institutes arbitration under this Agreement, the party prevailing in any
such arbitration shall be entitled, in addition to all other relief, to
reasonable attorneys' fees relating to such arbitration. The nonprevailing
party shall be responsible for all costs of the arbitration, including but not
limited to, the arbitration fees, court reporter fees, etc.
(g) Confidentiality, Proprietary Information.
----------------------------------------
Employee agrees to not make use of, divulge or otherwise disclose,
directly or indirectly, any trade secret or other confidential or proprietary
information concerning the business (including, but not limited to its products,
employees, services, practices or policies) of Company or any of its affiliates
of which Employee may learn or be aware as a result of Employee's employment
during the term of this Agreement or prior thereto as shareholder, employee,
officer or director of or consultant to Company and its predecessors, except to
the extent such use or disclosure is (i) necessary to the performance of this
Agreement and in furtherance of Company's best interests, (ii) required by
applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized
in writing by Company. The provisions of this Section 9(g) shall survive the
expiration, suspension or termination, for any reason, of this Agreement.
(h) Trade Secrets.
-------------
Employee, prior to and during the term of employment, has had and will
have access to and become acquainted with various trade secrets, consisting of
software, plans, formulas, patterns, devices, secret inventions, processes,
customer lists, contracts, and compilations of information, records and
specifications that are owned by Company or by its affiliates and regularly used
in the operation of their respective businesses and that may give
17
<PAGE>
Company an opportunity to obtain an advantage over competitors who do not know
or use such trade secrets. Employee agrees and acknowledges that Employee has
been granted access to these valuable trade secrets only by virtue of the
confidential relationship created by Employee's employment and Employee's prior
relationship to, interest in and fiduciary relationships to Company and its
predecessors. Employee shall not disclose any of the aforesaid trade secrets,
directly or indirectly, or use them in any way, either during the term of this
Agreement or at any time thereafter, except as required in the course of
employment by Company and for its benefit.
All records, files, documents, drawings, specifications, software,
equipment, and similar items relating to the business of Company or its
affiliates, including without limitation all records relating to customers (the
"Documents"), whether prepared by Employee or otherwise coming into Employee's
possession, shall remain the exclusive property of Company or such affiliates
and shall not be removed from the premises of Company or its affiliates under
any circumstances whatsoever without the prior consent of a senior executive
officer of Company. Upon termination of employment, Employee agrees to promptly
deliver to Company all Documents in the possession or under the control of
Employee.
(i) Severability.
------------
If any provision of this Agreement is held invalid or unenforceable,
the remainder of this Agreement shall nevertheless remain in full force and
effect, and if any provision is held invalid or unenforceable with respect to
particular circumstances, it shall nevertheless remain in full force and effect
in all other circumstances, to the fullest extent permitted by law.
(j) Withholding; Deductions.
-----------------------
All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.
(k) Section Headings.
----------------
Section and other headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(l) Counterparts.
------------
This Agreement and any amendment hereto may be executed in several
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.
(m) Representation By Counsel; Interpretation.
-----------------------------------------
Each party hereto acknowledges that it or he has been represented by
counsel in connection with this Agreement and the matters contemplated by this
Agreement. Accordingly, any rule of law, including but not limited to Section
1654 of the California Civil Code, or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement
18
<PAGE>
against the party that drafted it has no application and is expressly waived.
The provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of the parties.
(n) Antidilution Adjustments.
------------------------
All amounts of shares, options and option exercise prices referred to
in this Agreement shall be subject to appropriate adjustment for stock splits,
reverse stock splits, stock dividends, restructurings and recapitalizations
occurring after the date hereof.
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
"GIGL"
GEMSTAR INTERNATIONAL GROUP LIMITED
By:/s/ ELSIE M. LEUNG
-----------------------------------------------
Elsie M. Leung, Chief Operating Officer and
Chief Financial Officer
By:/s/ LARRY GOLDBERG
-----------------------------------------------
Larry Goldberg, Secretary
"Company"
GEMSTAR DEVELOPMENT CORPORATION
By:/s/ ELSIE M. LEUNG
-----------------------------------------------
Elsie M. Leung, Chief Operating Officer and
Chief Financial Officer
By:/s/ LARRY GOLDBERG
-----------------------------------------------
Larry Goldberg, Assistant Secretary
"Employee"
HENRY C. YUEN
/s/ HENRY C. YUEN
----------------------------------------------
20
<PAGE>
EXHIBIT A
COMPANY'S BUSINESS
(for purposes of this exhibit Company
shall include [*])
[*]
Includes the following disclosures, patent applications, patents,
continuations, continuations-in-part and foreign counterparts thereto:
[*] [*]
PATENT NO. 5,335,079 PATENT NO. 5,382,983
[*] [*]
PATENT NO. 5,307,173
[*]
1
LC973100.078
___________
[*] Omitted. Confidential treatment requested.
<PAGE>
EXHIBIT B
ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR
DEVELOPMENT OF GEMSTAR
[*]
- - -----------------
[*] Omitted, confidential treatment requested.
<PAGE>
EXHIBIT C
LIST OF THE INTELLECTUAL PROPERTY OF HENRY C. YUEN
[*]Includes the following disclosures, patent applications, patents,
continuations, continuations-in-part and foreign counterparts thereto:
[*]
TAIWAN PATENT NO. 66638
[*]
[*]Includes the following patent applications, continuations,
continuations-in-part and foreign counterparts thereto:
[*]Includes the invention disclosure in the following file:
[*]Includes the following disclosures, patent applications, continuations,
continuations-in-part and foreign counterparts thereto:
[*]Includes the invention disclosure in the following file:
[*]Includes the invention disclosure in the following file:
[*]Includes the invention disclosure in the following file:
[*]Includes the invention disclosure in the following file:
___________
[*] Omitted, confidential treatment requested
C-1
<PAGE>
[*] Includes the invention disclosure in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosures and patent applications and
continuations, continuations-in-part and foreign counterparts thereto in the
following:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
___________
[*] Omitted, confidential treatment requested
C-2
<PAGE>
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
___________
[*] Omitted, confidential treatment requested
C-3
<PAGE>
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
[*] Includes the invention disclosed in the following file:
note: Docket and file numbers relate to files at the law firm of [*]
___________
[*] Omitted, confidential treatment requested
C-4
<PAGE>
<TABLE>
<CAPTION>
YUEN FILE REPORT
03-Dec-97
================================================================================================================================
FILE NO. COUNTRY TITLE SERIAL NO. FILING DATE REGISTRATION NO. PATENT NO.
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
[*] GENERAL [*] [*] [*] [*]
TRADEMARK SEARCHES
US [*]
US
US
US
US
US
US
US
US
US
US
<CAPTION>
========================================================
STATUS CLIENT REF. NO.
========================================================
[*] [*]
</TABLE>
___________
[*] Omitted, confidential treatment requested
C-5
<PAGE>
<TABLE>
<CAPTION>
FILE NO. COUNTRY TITLE SERIAL NO. FILING DATE REGISTRATION NO. PATENT NO.
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
[*] US [*] [*] [*] [*] [*]
US
US
US
- - ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
========================================================
STATUS CLIENT REF. NO.
========================================================
[*] [*]
</TABLE>
- - ------------
[*] Omitted, confidential treatment requested
C-6
<PAGE>
[*]
- - ----------
[*] Omitted, confidential treatment requested
C-7
<PAGE>
[*]
- - ------------
[*] Omitted, confidential treatment requested
C-8
<PAGE>
SCHEDULE I
ANNUAL INCENTIVE BONUS COMPENSATION
(a) Subject to the terms and conditions of this Agreement, and in addition
to the Base Salary, Merit Bonus and other Additional Benefits to which Employee
may otherwise be entitled from Company, at the end of each Fiscal Year (or
portion thereof) during the term of this Agreement, Employee shall be deemed to
have earned a bonus (the "Annual Incentive Bonus" or "B"), payable by the
Company to Employee on the last day of the Compensation Period in which such
Fiscal Year ends (or such sooner date as of which this Agreement terminates),
calculated according to the following formula:
(i) if C/E less than or equal to 1.00, then B = 0.00;
(ii) if C/E greater than 1.00, then B = [(C/E)/1/n/ = 1.00] x 2.5 x S
Where:
C = The sum of GIGL's consolidated earnings per share for each of
the four (4) fiscal quarters in such Fiscal Year (or, if this
Agreement terminates prior to the end of a Fiscal Year, the
portion of such Fiscal Year preceding the date of such
termination) as reflected, with respect to the first three
(3) of such quarters, in the respective quarterly reports on
Form 10-Q filed by GIGL with the SEC and, with respect to the
fourth quarter, in the annual report on Form 10-K filed by
GIGL with the SEC, in each case excluding the effect of one-
time charges ("EPS");
E = EPS of GIGL for the Fiscal Year ended March 31, 1997 (or, if
this Agreement terminates prior to the end of a Fiscal Year,
the portion of the Fiscal Year ended March 31, 1997
comparable to the portion of such Fiscal Year preceding the
date of such termination);
n = the number of the then-completed Fiscal Years, numbering them
consecutively considering the Fiscal Year ended March 31,
1997 as n=0, determined as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
March 31, n
-----------------------------------------------------
<S> <C>
1998 n=1
-----------------------------------------------------
1999 n=2
-----------------------------------------------------
2000 n=3
-----------------------------------------------------
: :
-----------------------------------------------------
2004 n=7
-----------------------------------------------------
: :
-----------------------------------------------------
2010 n=13
-----------------------------------------------------
: :
-----------------------------------------------------
</TABLE>
S.= Base Salary as of the last day of such Fiscal Year.
I-1
<PAGE>
(b) In the event that Employee's employment with Company terminates during
a Fiscal Year and it is impracticable to calculate "C" or "E" for a portion of a
Fiscal Year, Employee's Annual Incentive Bonus shall be calculated based on what
would have been payable for a full Fiscal Year and prorating that amount based
upon the number of days during the Fiscal Year that Employee was employed by
Company.
(c) The Annual Incentive Bonus amount due for each Fiscal Year shall be
paid by Company to Employee at the end of each Compensation Period (or such
sooner date as of which this Agreement terminates) (the "Due Date"). Employee
may, at his own expense, audit the applicable records at the place where Company
maintains the same in order to verify the calculation of the Annual Incentive
Bonus. Any such audit shall be conducted only by a reputable public accountant
during reasonable business hours in such manner as not to interfere with
Company's normal business activities. in no event shall an audit with respect to
the calculation of the Annual Incentive Bonus commence later than twelve (12)
months after the Due Date.
If any audit of Company's records by Employee reveals that Company has
failed to properly account for and pay Employee the Annual Incentive Bonus that
should have been paid for that Fiscal Year, and the amount of any Annual
Incentive Bonus which Company has failed to properly account and pay for in
respect of any Fiscal Year exceeds by at least three percent (3%) the amount of
Annual Incentive Bonus actually accounted for and paid to Employee for such
Fiscal Year, Company shall, in addition to paying Employee such overdue amount
of Annual Incentive Bonus, reimburse Employee for his direct, reasonable out-of-
pocket expenses incurred in conducting such audit.
(d) In lieu of receiving his Annual Incentive Bonus in cash, Employee may
elect to receive such Annual Incentive Bonus in the form of options to acquire
Ordinary Shares (the "Annual Incentive Options"), which Annual Incentive Options
shall be issued under GIGL's employee stock option plan if sufficient options
are available thereunder and shall be issued outside of such plan if
insufficient options are available thereunder. If Employee elects to receive
Annual Incentive Options in respect of a Fiscal Year, (A) each Annual Incentive
Option shall represent an option to acquire one (1) Ordinary Share, and the
number of Annual Incentive Options to be issued to Employee shall equal the
quotient of (1) the aggregate dollar amount of such Annual Incentive Bonus
divided by (2) the product of the Market Price per Ordinary Share as of the last
day of the Compensation Period in which such Fiscal Year ends multiplied by
0.25, (B) subject to the accelerated vesting provisions of this Agreement, one-
third (1/3) of the aggregate number of such Annual Incentive Options shall be
vested in full and fully exercisable as of the last day of the Compensation
Period in which such Fiscal Year ends, and one-third (1/3) of the aggregate
number of such Annual Incentive Options shall become vested in full and fully
exercisable as of each of the first (1st) and second (2nd) anniversaries of the
last day of the Compensation Period in which such Fiscal Year ends, (C) the
exercise price per Ordinary Share under such Annual Incentive Options shall
equal the Market Price per Ordinary Share as of the last day of the Compensation
Period in which such Fiscal Year ends, and (D) such Annual Incentive Options
shall be exercisable through the tenth (10th) anniversary of the last day of the
Compensation Period in which such Fiscal Year ends.
I-2
<PAGE>
(e) The provisions of this Schedule I shall not be deemed to restrict in
any way any rights of GIGL or the GIGL Board, acting in good faith, during the
term of this Agreement to dissolve, reorganize or take any other action or make
any other change (fundamental or otherwise) affecting the structure, existence,
organization, operations or business of Company or any of its subsidiaries. If
at any time during any Fiscal Year Company shall be dissolved, the right to
Annual Incentive Bonus payments pursuant to this Agreement shall terminate. If
at any time during any Compensation Period, Company shall be a party to a merger
or sale of all or substantially all of its assets to another entity, Company
shall (or shall cause a successor to) provide for adjustment as nearly
equivalent as practicable to preserve to Employee the benefits of this Agreement
relating to payment of Annual Incentive Bonus amounts in respect of the business
of Company or such successor. Such adjustments by the GIGL Board made in good
faith shall be conclusive.
(f) All accounting terms or concepts used herein have the meanings assigned
or applied under generally accepted accounting principles, consistently applied.
I-3
<PAGE>
SCHEDULE II
Excise Tax Gross-Up
(Capitalized terms not defined herein have the meanings
ascribed thereto in the attached Amended and Restated
Employment Agreement)
(a) In the event it is determined (pursuant to (b) below) or finally
determined (as defined in (c)(iii) below) that any payment, distribution,
transfer, benefit or other event with respect to the GIGL, the Company or a
predecessor, successor, direct or indirect subsidiary or affiliate of
either the Company or GIGL (or any predecessor, successor of affiliate of
any of them, and including any benefit plan of any of them), to or for the
benefit of Employee or Employee's dependents, heirs or beneficiaries
(whether such payment, distribution, transfer, benefit or other event
occurs pursuant to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this Schedule II)
(each a "Payment" and collectively the "Payments") is or was subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, and any successor provision or any comparable provision of state
or local income tax law (collectively, "Section 4999"), or any interest,
penalty or addition to tax is or was incurred by Employee with respect to
such excise tax (such excise tax, together with any such interest, penalty,
addition to tax, and costs (including professional fees) hereinafter
collectively referred to as the "Excise Tax"), then, within 10 days after
such determination or final determination, as the case may be, the Company
shall pay to Employee an additional cash payment (hereinafter referred to
as the "Gross-Up Payment") in an amount such that after payment by Employee
of all taxes, interest, penalties, additions to tax and costs imposed or
incurred with respect to the Gross-Up Payment (including, without
limitation, any income and excise taxes imposed upon the Gross-Up Payment),
Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon such Payment or Payments. This provision is intended to put
Employee in the same position as Employee would have been had no Excise Tax
been imposed upon or incurred as a result of any Payment.
(b) Except as provided in subsection (c) below, the determination that
a Payment is subject to an Excise Tax shall be made in writing by a
certified public accounting firm selected by Employee ("Employee's
Accountant"). Such determination shall include the amount of the Gross-Up
Payment and detailed computations thereof, including any assumptions used
in such computations (the written determination of the Employee's
Accountant, hereinafter, the "Employee's Determination"). The Employee's
Determination shall be reviewed on behalf of the Company by a certified
public accounting firm selected by the Company (the "Company's
Accountant"). The Company shall notify Employee within 10 business days
after receipt of the Employee's Determination of any disagreement or
dispute therewith, and failure to so notify within that period shall be
considered an agreement by the Company with the Employee's Determination,
obligating the Company to make payment as provided in subsection (a) above
within 10 days from the expiration of such 10 business-day period. In the
event of an objection by the Company to the Employee's Determination, any
amount not in dispute shall be paid within 10 days following the 10
business-day period referred to herein, and with respect to the amount in
dispute the Employee's Accountant and the Company's Accountant shall
jointly select a third nationally recognized certified public accounting
firm to resolve the dispute and the decision of such third firm shall be
final, binding and conclusive upon the Employee and the
II-1
<PAGE>
Company. In such a case, the third accounting firm's findings shall be
deemed the binding determination with respect to the amount in dispute,
obligating the Company to make any payment as a result thereof within 10
days following the receipt of such third accounting firm's determination.
All fees and expenses of each of the accounting firms referred to in this
Schedule II shall be borne solely by the Company.
(c) (i) Employee shall notify the Company in writing of any claim by
the Internal Revenue Service (or any successor thereof) or any state or
local taxing authority (individually or collectively, the "Taxing
Authority") that, if successful, would require the payment by the Company
of a Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than 30 days after Employee receives written
notice of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid; provided,
however, that failure by Employee to give such notice within such 30-day
period shall not result in a waiver or forfeiture of any of Employee's
rights under this Schedule II except to the extent of actual damages
suffered by the Company as a result of such failure. Employee shall not
pay such claim prior to the expiration of the 15-day period following the
date on which Employee gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes, interest, penalties or
additions to tax with respect to such claim is due). If the Company
notifies Employee in writing prior to the expiration of such 15-day period
that it desires to contest such claim (and demonstrates to the reasonable
satisfaction of Employee its ability to make the payments to Employee which
may ultimately be required under this section before assuming
responsibility for the claim), Employee shall:
(A) give the Company any information reasonably requested by the
Company relating to such claim;
(B) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by the Company that is
reasonably acceptable to Employee;
(C) cooperate with the Company in good faith in order effectively
to contest such claim; and
(D) permit the Company to participate in any proceedings relating
to such claim; provided, however, that the Company shall bear and pay
directly all attorneys fees, costs and expenses (including additional
interest, penalties and additions to tax) incurred in connection with
such contest and shall indemnify and hold Employee harmless, on an
after-tax basis, for all taxes (including, without limitation, income
and excise taxes), interest, penalties and additions to tax imposed in
relation to such claim and in relation to the payment of such costs
and expenses or indemnification. Without limitation on the foregoing
provisions of this Schedule II, and to the extent its actions do not
unreasonably interfere with or prejudice Employee's disputes with the
Taxing Authority as to other issues, the Company shall control all
proceedings taken in connection with such contest and, in its
reasonable discretion, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either
direct Employee to
II-2
<PAGE>
pay the tax, interest or penalties claimed and sue for a refund or
contest the claim in any permissible manner, and Employee agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however,
that if the Company directs Employee to pay such claim and sue for a
refund, the Company shall advance an amount equal to such payment to
Employee, on an interest-free basis, and shall indemnify and hold
Employee harmless, on an after-tax basis, from all taxes (including,
without limitation, income and excise taxes), interest, penalties and
additions to tax imposed with respect to such advance or with respect
to any imputed income with respect to such advance, as any such
amounts are incurred; and, further, provided, that any extension of
the statute of limitations relating to payment of taxes, interest,
penalties or additions to tax for the taxable year of Employee with
respect to which such contested amount is claimed to be due is limited
solely to such contested amount; and, provided, further, that any
settlement of any claim shall be reasonably acceptable to Employee and
the Company's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder, and
Employee shall be entitled to settle or contest, as the case may be,
any other issue.
(ii) If, after receipt by Employee of an amount advanced by the
Company pursuant to paragraph (c)(i), Employee receives any refund with
respect to such claim, Employee shall (subject to the Company's complying
with the requirements of this Schedule II) promptly pay to the Company an
amount equal to such refund (together with any interest paid or credited
thereon after taxes applicable thereto), net of any taxes (including
without limitation any income or excise taxes), interest, penalties or
additions to tax and any other costs incurred by Employee in connection
with such advance, after giving effect to such repayment. If, after the
receipt by Employee of an amount advanced by the Company pursuant to
paragraph (c)(i), it is finally determined that Employee is not entitled to
any refund with respect to such claim, then such advance shall be forgiven
and shall not be required to be repaid and the amount of such advance shall
be treated as a Gross-Up Payment and shall offset, to the extent thereof,
the amount of any Gross-Up Payment otherwise required to be paid.
(iii) For purposes of this Schedule II, whether the Excise Tax is
applicable to a Payment shall be deemed to be "finally determined" upon the
earliest of: (A) the expiration of the 15-day period referred to in
paragraph (c)(i) above if the Company has not notified Employee that it
intends to contest the underlying claim, (B) the expiration of any period
following which no right of appeal exists, (C) the date upon which a
closing agreement or similar agreement with respect to the claim is
executed by Employee and the Taxing Authority (which agreement may be
executed only in compliance with this Schedule II), (D) the receipt by
Employee of notice from the Company that it no longer seeks to pursue a
contest (which notice shall be deemed received if the Company does not,
within 15 days following receipt of a written inquiry from Employee,
affirmatively indicate in writing to Employee that the Company intends to
continue to pursue such contest).
(d) As a result of uncertainty in the application of Section 4999
that may exist at the time of any determination that a Gross-Up Payment is
due, it may be possible that in making the calculations required to be made
hereunder, the parties or their accountants shall determine that a Gross-Up
Payment need not be made (or shall make no determination with respect to a
Gross-Up Payment) that properly should be made ("Underpayment"), or that a
Gross-Up
II-3
<PAGE>
Payment not properly needed to be made should be made ("Overpayment"). The
determination of any Underpayment shall be made using the procedures set
forth in paragraph (b) above and shall be paid to Employee as an additional
Gross-Up Payment. The Company shall be entitled to use procedures similar
to those available to Employee in paragraph (b) to determine the amount of
any Overpayment (provided that the Company shall bear all costs of the
accountants as provided paragraph (b)) . In the event of a determination
that an Overpayment was made, any such Overpayment shall be treated for all
purposes as a loan to Employee with interest at the applicable Federal rate
provided for in Section 1274(d) of the Code; provided, however, that the
amount to be repaid by Employee to the Company shall be subject to
reduction to the extent necessary to put Employee in the same after-tax
position as if such Overpayment were never made.
II-4
LC973100.078
<PAGE>
EXHIBIT 99.13
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is entered
into as of March 31, 1998, by and among Gemstar International Group Limited, a
British Virgin Islands corporation ("GIGL"), Gemstar Development Corporation, a
California corporation ("Company"), and Elsie Leung ("Employee").
WITNESSETH:
WHEREAS, Company and Employee are parties to an Employment Agreement,
entered into as of April 1, 1994, as amended August 16, 1995 and September 1,
1996 (collectively, the "Predecessor Agreement"), pursuant to which Employee has
served Company as Chief Financial Officer; and
WHEREAS, GIGL and Company desire to obtain the benefit of continued service
by Employee to Company and GIGL, and Employee desires to render services to
Company and GIGL; and
WHEREAS, Employee possesses expertise in the financial and operational
areas of Company, which expertise has been and is expected to continue to be
critical to public offerings of stock of GIGL, acquisitions by Company and the
integration of acquired products and workforces into Company, the continued
maintenance of the public company status by GIGL and the future operations of
Company; and
WHEREAS, the Board of Directors of Company (the "Company Board") and the
Board of Directors of GIGL (the "GIGL Board") have determined that because of
Employee's substantial experience and expertise in connection with the financial
and operational matters of Company, it is in the best interest of Company and
GIGL, Company's sole shareholder, to retain the services of Employee and to
provide Employee certain additional benefits; and
WHEREAS, GIGL, Company and Employee desire to set forth in this Agreement
the terms and conditions of Employee's future employment with Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties agree to terminate in its entirety the Predecessor
Agreement, and the parties further agree as follows:
1
<PAGE>
1. Term and Renewals; Shareholder Approval.
---------------------------------------
(a) Initial Term.
------------
Company agrees to employ Employee and Employee agrees to serve
Company, in accordance with the terms of this Agreement, for an initial term
commencing with an effective date of April 1, 1998 and ending December 31, 2003
(the "Initial Term"), unless this Agreement is earlier terminated in accordance
with the provisions which follow.
(b) Renewal.
-------
Upon expiration of the Initial Term, this Agreement shall be
automatically renewed for a term of three additional years (the "Renewal Term"),
unless either party gives notice, in writing, at least twelve (12) months prior
to the expiration of the Initial Term of its desire to terminate this Agreement.
If Company delivers to Employee the written termination notice
contemplated by this Section 1(b), or if the Renewal Term expires without GIGL,
Company and Employee having reached an agreement for the continued employment of
Employee by GIGL and Company that is satisfactory to GIGL, Company and Employee
(in their sole and absolute discretion), such termination or expiration shall be
treated as a termination Without Cause pursuant to Section 4(d) of this
Agreement, and the date of such termination or expiration shall be deemed the
date of notice of termination for purposes of Section 4(d).
(c) Compensation Period; Current Term.
---------------------------------
Each June 1- May 31 annual period (or portion thereof) during the term
of this Agreement and during any period following termination of Employee's
employment hereunder during which Company has ongoing obligations hereunder
shall be a distinct and separate compensation period ("Compensation Period").
The then-current term of this Agreement, whether it is the Initial Term
(together with the Renewal Term if the termination deadline under Section 1(b)
has passed without delivery of the termination notice contemplated thereunder)
or the Renewal Term, shall be known as the "Current Term."
2. Specific Position; Duties and Responsibilities.
----------------------------------------------
Company and Employee agree that, subject to the provisions of this
Agreement, Company will employ Employee and Employee will serve Company as Chief
Operating Officer and Chief Financial Officer of Company, and Employee shall
have such other additional duties and responsibilities befitting the foregoing
positions as Company Board shall determine from time to time. GIGL and Employee
agree that, subject to the provisions of this Agreement, GIGL will employ
Employee as Chief Financial Officer of GIGL, and Employee shall have such other
additional duties and responsibilities befitting the foregoing positions as the
GIGL Board shall determine from time to time. GIGL and Company also agree that
Employee shall serve as a
2
<PAGE>
director of GIGL, Company and StarSight Telecast, Inc. ("StarSight") during the
entire term of this Agreement.
Employee agrees to devote substantially all of her time, energy and
ability to the business of Company and GIGL. Nothing herein shall prevent
Employee, upon approval of the GIGL Board, from serving as a director,
consultant or trustee of other corporations or businesses that are not in
competition with the business of GIGL or in competition with any affiliate of
GIGL. Such approval of the GIGL Board shall not be unreasonably withheld.
Nothing herein shall prevent Employee from (i) investing in real estate for her
own account, (ii) becoming a partner or a shareholder in any privately-held
corporation, partnership or other venture not in competition with the business
of GIGL or any affiliate of GIGL or (iii) becoming a partner or a shareholder
with an equity interest of not more than ten percent (10%) in any corporation,
partnership or other venture whose equity securities are publicly traded,
whether or not such corporation, partnership or other venture is in competition
with the business of GIGL or any affiliate of GIGL. Nothing in this Agreement
shall restrict the GIGL Board from paying and granting to Employee additional
cash compensation and/or grants of stock or stock options from entities created
as joint ventures between GIGL (or any of its affiliates) and third parties as a
means of providing further incentives for Employee.
For the term of this Agreement, Employee shall report to the Chief
Executive Officer of Company and the Chief Executive Officer of GIGL. For
purposes of this Agreement, the termination of Employee's employment by Company
shall also constitute termination of Employee's employment by GIGL.
3. Compensation.
------------
(a) Base Compensation and Adjustments.
---------------------------------
(i) Until March 31, 1997, Company agrees to pay Employee her current
base salary of Five Hundred Seventy Thousand Dollars (US$570,000.00) per year.
Beginning April 1,1998 and during the remaining term of this Agreement, Company
agrees to pay Employee a base salary at the rate of Seven Hundred Thousand
Dollars (US$700,000.00) per year, as adjusted as hereinafter provided (as in
effect from time to time, the "Base Salary"). Such salary shall be earned
monthly and shall be payable in periodic installments no less frequently than
monthly in accordance with Company's customary practices. Amounts payable shall
be reduced by standard withholding and other authorized deductions.
(ii) On June 1 of each Compensation Period, commencing June 1, 1999,
if "R" or "P" (as defined below) for the fiscal year ending on the immediately
preceding March 31 is positive, the Base Salary for such Compensation Period and
each Compensation Period thereafter shall be adjusted by adding to the Base
Salary for the previous Compensation Period the amount obtained by multiplying
the Base Salary for the previous Compensation Period by the positive percentage,
if any, equal to the Adjusted Percentage (as defined below); provided, however,
that
3
<PAGE>
in no event should the Adjusted Percentage applicable to any one Compensation
Period exceed thirty percent (30%).
For purposes of this Section 3(a)(ii), the "Adjusted Percentage" means
the percentage equal to the product of (1) the sum of "R" plus "P," multiplied
by (2) twenty-five hundredths (0.25), where "R" is the percentage increase, if
any, from the previous fiscal year in GIGL's consolidated revenues, as shown on
the consolidated financial statements of GIGL (the "Financial Statements"); and
"P" is the percentage increase, if any, from the previous fiscal year in GIGL's
consolidated positive net earnings, if any, as shown on the Financial
Statements.
(b) Annual Incentive Bonus.
----------------------
Company shall pay to Employee in respect of each fiscal year of
Company ("Fiscal Year") (or portion thereof) during the term of this Agreement,
the incentive bonus compensation benefits described in, and in accordance with
the terms of, Schedule I to this Agreement (the "Annual Incentive Bonus"), which
is incorporated herein by reference as though set forth in full;
(c) Stock Options.
-------------
(i) Concurrently with the execution of this Agreement, GIGL shall
grant to Employee, subject to the vesting provisions described in this
Agreement, options to acquire one million two hundred thousand (1,200,000)
Ordinary Shares (the "Option Grant"). Options to acquire two hundred thousand
(200,000) Ordinary Shares shall vest and become exercisable immediately upon
execution of this Agreement; and subject to other accelerated vesting provisions
of this Agreement, options to acquire two hundred thousand (200,000) Ordinary
Shares shall vest and become immediately exercisable on each March 31, beginning
March 31, 1999, that follows the date of this Agreement. The exercise price per
Ordinary Share under the Option Grant shall equal the Market Price per Ordinary
Share as of the date of this Agreement. As used herein, the "Market Price" per
Ordinary Share as of any date shall equal the most recent closing price per
Ordinary Share on the principal securities exchange or market on which Ordinary
Shares are traded. Each of the options issued under the Option Grant shall be
exercisable through the tenth (10th) anniversary of the date of its grant. Such
options shall be granted under GIGL's employee stock option plan previously
approved by GIGL's shareholders. GIGL represents that sufficient shares are
available under such plan for issuance of the Option Grant and that the Option
Grant is permissible under such plan. On before May 31, 2001 Employee, Company
and GIGL shall attempt to agree on an additional number of options that would
vest during the Renewal Term.
(d) Additional Benefits.
-------------------
Employee shall also be entitled to all rights and benefits for which
Employee is otherwise eligible under any bonus, incentive, participation, stock
option or extra compensation plan, pension plan, profit-sharing plan, life,
medical, dental, disability, or insurance plan or
4
<PAGE>
policy or other plan or benefit that Company its subsidiaries or affiliates may
provide for Employee or (provided Employee is eligible to participate therein)
for employees of Company generally, as from time to time in effect, during the
term of this Agreement. In order to maximize Employee's time availability to
Company, Company shall also promptly reimburse Employee for the Grossed-Up Value
(as defined below) of all professional fees and expenses incurred by Employee in
connection with (A) the negotiation and documentation of this Agreement and any
amendment thereto, (B) income tax planning and preparation, and (C) income tax
audits and the defense of income tax claims. All of the benefits described in
this Section 3(d) are collectively referred to herein as the "Additional
Benefits." The Additional Benefits shall be provided at the level commensurate
with the office held at the time and shall recognize for vesting and eligibility
purposes (but not for purposes of calculating Employee's age or for benefit
accrual purposes) Employee's prior service with Company to the extent (if any)
that such prior service is recognized under any such plans.
As used in this Agreement, the "Grossed-Up Value" of an amount shall
equal the result obtained by dividing (A) such amount by (B) the difference of
one (1) minus the sum of the highest marginal federal and state personal income
tax rates, the highest Medicare tax rate (expressed as a decimal), the
additional effective income tax rate (expressed as a decimal) resulting from the
receipt of such amount reducing available deductions of Employee, and any other
income, payroll or similar rate of tax (expressed as a decimal) imposed on the
receipt by Employee of such amount.
(e) Vacation.
--------
In each Compensation Period, Employee shall be entitled to an amount
of paid vacation equal to the sum of four (4) weeks plus an additional three (3)
days for each Compensation Period (or portion thereof) previously completed
during the term of this Agreement. Up to sixty (60) unused vacation days may be
carried over from any Compensation Period to the ensuing Compensation Period,
and Employee shall be paid in cash, on the last day of each Compensation Period,
for any unused vacation days that cannot be carried over to the ensuing
Compensation Period at a rate per day equal to the quotient of Employee's Base
Salary for the just-completed Compensation Period divided by two hundred twenty
(220) (the number of working days in the year).
(f) Professional Organizations and Education.
----------------------------------------
Company shall promptly reimburse Employee for the Grossed-Up Value of
(A) the professional and membership fees and dues incurred by Employee to
maintain a membership in, or to belong to, such professional organizations and
societies as may be designated by Employee from time to time and one (1) social
or country club; and (B) the fees and costs incurred by Employee in attending
professional education courses selected by Employee.
5
<PAGE>
(g) Automobile Allowance.
--------------------
Company shall provide Employee with a car allowance of seven hundred
and fifty dollars (US$750.00) per month to be used for the purchase, lease and
maintenance of an appropriate automobile for her use during the term of
Employee's employment hereunder. If Company leases or purchases an automobile
for Employee's use, Employee shall have the ability to assume the lease at the
end of the term thereof or purchase the automobile at its residual or
depreciated value upon termination of her employment.
(h) Disability Insurance. During the Initial Term and any Renewal Term,
--------------------
Company agrees to purchase and keep in effect, or reimburse Employee for the
cost of, one or more policies of disability insurance reasonably satisfactory to
Employee and Company, with maximum annual premiums not to exceed Twenty-Two
Thousand Dollars (US$22,000.00). Such purchase or reimbursement shall include
payment to Employee of such amount as is necessary to ensure that Employee
receives the Grossed-Up Value of the premiums on such disability policy (less
any amounts paid directly by Company to the carrier). Such policy will contain
a feature permitting Employee to continue the policy at her cost (subject to
other provisions in this Agreement requiring Company to fund such amounts
following termination of employment) following any termination of Employee's
employment.
(i) Life Insurance. During the Initial Term and any Renewal Term, Company
--------------
agrees to purchase and keep in effect, or reimburse Employee for the cost of, a
policy of life insurance reasonably satisfactory to Employee and Company, with
maximum annual premiums not to exceed Ten Thousand Dollars (US$10,000.00). Such
purchase or reimbursement shall include payment to Employee of such amount as is
necessary to ensure that Employee receives the Grossed-Up Value of the premiums
on such life insurance policy (less any amounts paid directly by Company to the
carrier). Such policy will contain a feature permitting Employee to continue
the policy at her cost (subject to other provisions in this Agreement requiring
Company to fund such amounts following termination of employment) following any
termination of Employee's employment.
(j) Other Benefits.
--------------
Employee will, from time to time, receive such other benefits as she
may reasonably request that are commensurate with Employee's position and
facilitate performance of her duties under this Agreement.
4. Termination. The compensation and other benefits provided to Employee
-----------
pursuant to this Agreement, and the employment of Employee by Company, shall be
terminated prior to expiration of the term of this Agreement only as provided in
this Section 4:
6
<PAGE>
(a) Disability.
----------
In the event that Employee shall fail, because of illness, incapacity
or injury which is determined to be total and permanent by a physician selected
by Company or its insurers and acceptable to Employee or Employee's legal
representative (such agreement as to acceptability not to be withheld
unreasonably) to render for three consecutive months or for shorter periods
aggregating seventy five (75) or more business days in any twelve (12) month
period, the services contemplated by this Agreement, Employee's employment
hereunder may be terminated by written notice of termination from Company to
Employee. Thereafter, Company shall pay Employee all of her previously earned
Base Salary and Additional Benefits and shall continue for twenty four (24)
months after the date of such notice or until expiration of the Current Term,
whichever period is longer, to pay Base Salary to Employee at a rate and time
and in an amount and manner equal to one hundred percent (100%) of the Base
Salary payable immediately prior to the termination. Thereafter, no further
salary shall be paid except to the extent otherwise expressly provided in
Section 4(b). Upon any such employment termination pursuant to this Section
4(a), all previously vested options to acquire Ordinary Shares shall remain
fully exercisable for their full term, all options to acquire Ordinary Shares
granted to Employee which would become vested and exercisable for the then
current Compensation Period and the next Compensation Period (and which would
not otherwise become vested and exercisable) shall immediately vest in full and
shall become fully exercisable for their full term, and any remaining options
that have not otherwise become vested or exercisable shall be forfeited.
(b) Death.
-----
In the event of Employee's death during the term or during the
extended benefit period contemplated by Section 4(a), Company shall pay to such
person or persons as Employee shall have directed in writing or, in the absence
of a designation, the estate of Employee (the "Beneficiary") all of Employee's
previously earned Base Salary and Additional Benefits and shall continue for
twenty four (24) months after the date of Employees death or until expiration of
the Current Term, whichever period is longer, to pay Employee's Base Salary to
the Beneficiary at a rate and time and in an amount and manner equal to one
hundred percent (100%) of the Base Salary payable immediately prior to death.
If Employee's death occurs while receiving payments under Section 4(a) above,
such payments shall cease and the Beneficiary shall be entitled only to payments
and benefits under this Section 4(b) at one hundred percent (100%) of the rate
of Base Salary in effect immediately prior to the disability. Upon Employee's
death, all previously vested options to acquire Ordinary Shares shall remain
fully exercisable for their full term, any options that would have vested on a
date within one year following Employees death (assuming Employee had satisfied
the other vesting conditions of such options) shall vest as to that percentage
equal to the percentage of the one-year period ending on such date prior to
Employee's death, and any remaining options that did not otherwise become vested
or exercisable shall be forfeited. This Agreement in all other respects will
terminate upon the death of Employee except as otherwise expressly provided.
7
<PAGE>
(c) For Cause, Right to Appeal.
--------------------------
Employee's employment hereunder shall be terminated, and all of her
unearned rights to receive Base Salary and (subject to the terms of any plans
relating thereto) Additional Benefits hereunder in respect of any period after
such termination shall immediately terminate upon a reasonable determination by
the GIGL Board, acting in good faith based upon actual knowledge at such time
and following the meeting described in the immediately succeeding paragraph,
that Employee (i) is engaging or has engaged in acts of fraud, material
dishonesty or other acts of willful misconduct that have had a material adverse
effect on the business of Company, (ii) has repeatedly and willfully refused to
perform her significant duties hereunder after notice, (iii) has habitually
abused any substance (such as narcotics or alcohol) and such abuse has had a
material adverse effect on the business of Company or (iv) has been convicted
of, or plead guilty to, an act constituting a felony that has a material adverse
effect on the business of Company (any of the conduct described in the foregoing
clauses being referred to in this Agreement as "Cause").
Notwithstanding the foregoing, Employee's employment hereunder shall
not be terminated for Cause pursuant to this Section 4(c) unless and until
Employee has received notice of a proposed termination for Cause and Employee
has had an opportunity to be heard before at least a majority of the members of
the GIGL Board. Employee shall be deemed to have had such opportunity if given
written notice by any director acting on behalf of the GIGL Board at least
seventy two (72) hours in advance of a meeting if scheduled in California or
ninety six (96) hours in advance if such meeting is scheduled outside
California. Any actions or proceedings by Company pursuant to this subparagraph
4(c) shall be conducted in a confidential manner and all steps shall be taken to
prevent any harm to Employee's reputation.
Upon any such employment termination pursuant to this Section 4(c),
all options to acquire Ordinary Shares previously granted to Employee and then
remaining unvested shall be forfeited, and all previously vested options to
acquire Ordinary Shares shall remain fully exercisable for their full term.
(d) Without Cause.
-------------
Notwithstanding any other provision of this Section 4, the GIGL Board
shall have the right to terminate Employee's employment with Company at any
time, but in the event of any such termination, other than as expressly provided
in Section 4(a), (b) or (c) herein, or in the event Company elects not to renew
the term of this Agreement by giving notice of termination under Section 1(b)
hereof, (any such termination of Employee's employment under this Section 4(d)
being referred to in this Agreement as a termination "Without Cause"), Company
shall thereafter pay and grant to Employee, in addition to any other amounts due
under this Agreement, on the last day of Employee's employment, an amount equal
to the greater of (a) the product of Employee's then-current Base Salary
multiplied by a factor of three (3), and (b) the product of Employee's then-
current Base Salary multiplied by the number of years, rounded up, remaining in
the Current Term, and Company shall thereafter continue to provide to Employee
8
<PAGE>
the Additional Benefits for sixty (60) months from such last day of employment.
Upon any such employment termination pursuant to this Section 4(d), all options
to acquire Ordinary Shares previously granted to Employee shall immediately vest
in full and shall become fully exercisable for their full term, and all
previously vested options to acquire Ordinary Shares shall remain fully
exercisable for their full term.
(e) Limited Succession of Additional Benefits Upon Termination.
----------------------------------------------------------
If Employee's services are terminated hereunder pursuant to Sections
4(a) or 4(b) and Employee is no longer eligible for Additional Benefits (under
the terms of any plans relating thereto) because of such termination Employee
(or in event of death, the Beneficiary) shall be entitled to and Company shall
provide the Grossed-Up Value of benefits substantially equivalent to those
benefits in the nature of health and welfare type benefits to which Employee was
entitled immediately prior to such termination for the period (if any) during
which Employee (or Beneficiary, as the case may be) remains entitled to receive
the Base Salary under such sections. During such period, however, Employee
shall not be entitled to option, equity, appreciation, profit sharing, deferred
compensation, savings, bonus, participation, pension, extra compensation and
other incentive plan benefits (except to the extent otherwise expressly provided
in any then outstanding awards to such Employee).
(f) Constructive Termination.
------------------------
A Constructive Termination (defined below) shall be treated as a
termination Without Cause pursuant to Section 4(d) of this Agreement.
For purposes of this Agreement, "Constructive Termination" means the
change of Employee's position, without Employee's written consent, so that
Employee is neither the Chief Operating Officer nor the Chief Financial Officer
of Company and GIGL, or the removal from her position as a director of GIGL or
Company, assignment to Employee of duties or responsibilities inconsistent with
the positions of Chief Operating Officer or Chief Financial Officer of Company
and GIGL, relocation of Employee's principal office to another geographic
location without Employee's written consent, in any case other than as a result
of grounds for termination of employment for Cause under Section 4(c), for
disability under Section 4(a) or because of death or retirement, or the
requirement that Employee to report to any person or entity other than the
current (as of the date of this Agreement) Chief Executive Officer of GIGL or
the current (as of the date of this Agreement) Chief Executive Officer of
Company, or the removal, termination (including constructive termination) or
resignation, reduction in duties or responsibilities of such current Chief
Executive Officer of GIGL or the Company.
(g) Termination by Employee.
-----------------------
Subject to Section 4(h), Employee shall have the right, in her sole
discretion, to terminate her employment under this Agreement at any time after
expiration of the period ending eighteen (18) months after the date of this
Agreement, by providing notice, in writing, at least six
9
<PAGE>
(6) months prior to Employee's termination of employment, but in the event of
any such termination Company shall thereafter pay and grant to Employee, in
addition to any other amounts due under this Agreement, on the last day of
Employee's employment, an amount equal to the Employee's then-current Base
Salary. Upon termination by Employee, all options to acquire Ordinary Shares
previously granted to Employee and then remaining unvested shall be forfeited,
and all previously vested options to acquire Ordinary Shares shall remain fully
exercisable for their full term.
(h) [*]
- - ------------
[*] Omitted, confidential treatment requested
10
<PAGE>
[*]
5. Business Expenses.
-----------------
During the term of this Agreement, Company shall reimburse Employee
promptly for reasonable business expenditures, whether or not Company can fully
deduct such expenses according to federal income tax laws.
6. Inventions and Patents.
----------------------
Subject to exceptions under Section 2870 of the California Labor Code, all
inventions, designs, improvements, patents, copyrights, and discoveries
conceived by Employee during the term of this Agreement which are competitive
with or related to existing products or services of Company or its affiliates or
products or services under active development by Company or its affiliates,
shall be assigned to Company. Exhibits A and B attached hereto contain a
description of Company's business and the products and services currently under
active development by Company and its affiliates. Employee will promptly and
fully disclose to Company all such inventions, designs, improvements, and
discoveries (whether developed individually or with other persons) and shall
take all reasonable steps necessary and required to assure Company's
___________
[*] Omitted, confidential treatment requested
11
<PAGE>
ownership thereof and to assist Company in protecting or defending Company's
proprietary rights therein.
Employee acknowledges hereby receipt of written notice from Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply to an invention that qualifies fully under California
Labor Code Section 2870.
7. Indemnity.
---------
To the maximum extent permitted by applicable law, Company shall
indemnify Employee and hold Employee harmless from and against any and all
claims, liabilities, judgments, fines, penalties, costs and expenses (including,
without limitation, reasonable attorneys' fees, costs of investigation and
experts, settlements and other amounts actually incurred by Employee in
connection with the defense of any action, suit or proceeding, and in connection
with any appeal thereon) incurred by Employee in any and all threatened, pending
or completed actions, suits or proceedings, whether civil, criminal,
administrative or investigative (including, without limitation, actions, suits
or proceedings brought by or in the name of Company), arising, directly or
indirectly, by reason of Employee's status, actions or inaction as a director,
officer, employee or agent of Company or of an affiliate of Company so long as
Employee's conduct was in good faith. Company shall promptly advance to
Employee upon request any and all expenses incurred by Employee in defending any
and all such actions, suits or proceedings to the maximum extent permitted by
applicable law.
8. GIGL Agreement.
--------------
GIGL agrees to perform, and to cause Company to perform, their
respective obligations under this Agreement so as to give full force and effect
to the provisions hereof.
9. Miscellaneous.
-------------
(a) Succession; Survival.
--------------------
This Agreement shall inure to the benefit of and shall be binding upon
Company and GIGL and their respective successors and assigns, but without the
prior written consent of Employee this Agreement may not be assigned other than
in connection with a merger or sale of substantially all the assets of Company
or GIGL or a similar transaction in which the successor or assignee assumes
(whether by operation of law or express assumption) all obligations of Company
or GIGL hereunder. The obligations and duties of Employee hereunder are
personal and otherwise not assignable.
(b) Notices.
-------
Any notice or other communication provided for in this Agreement shall
be in writing and sent, if to GIGL or Company, to its office at:
12
<PAGE>
Gemstar Development Corp.
Suite 800
135 North Los Robles Ave.
Pasadena, California 91101
Facsimile: (818) 792-4051
Attention: General Counsel
or at such other address as GIGL or Company may from time to time in writing
designate, and, if to Employee, at such address as Employee may from time to
time in writing designate (or Employee's business address of record in the
absence of such designation). Each such notice or other communication shall be
effective (i) if given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 9(b) and an appropriate
answerback is received, (ii) if given by mail, three days after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (iii) if given by any other means, when actually
delivered at such address.
(c) Entire Agreement; Amendments.
----------------------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof and it supersedes any prior agreements,
undertakings, commitments and practices relating to Employee's employment by
Company or its affiliates except for any and all other agreements necessary to
give effect to the provisions of this Agreement or the Predecessor Agreement (to
the extent not modified by this Agreement), including, without limitation, stock
option agreements, and agreements relating to Additional Benefits. No amendment
or modification of the terms of this Agreement shall be valid unless made in
writing and signed by Employee and, on behalf of Company and GIGL, by the Chief
Executive Officer or authorized representatives of the respective boards of
directors.
(d) Waiver.
------
No failure on the part of any party to exercise or delay in exercising
any right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.
(e) Choice of Law.
-------------
This Agreement, the legal relations between the parties and any
action, whether contractual or non-contractual, instituted by any party with
respect to matters arising under or growing out of or in connection with or in
respect of this Agreement, the relationship of the parties or the subject matter
hereof shall be governed by and construed in accordance with the laws of the
State of California applicable to contracts made and performed in such State and
without regard to conflicts of law doctrines.
13
<PAGE>
(f) Arbitration.
-----------
Any controversy or claim arising out of or relating to this Agreement,
its enforcement or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of its provisions, shall be submitted
to arbitration, to be held in Los Angeles County, California in accordance with
California Code of Civil Procedure Sections 1282-1284.2. In the event either
party institutes arbitration under this Agreement, the party prevailing in any
such arbitration shall be entitled, in addition to all other relief, to
reasonable attorneys' fees relating to such arbitration. The nonprevailing
party shall be responsible for all costs of the arbitration, including but not
limited to, the arbitration fees, court reporter fees, etc.
(g) Confidentiality, Proprietary Information.
----------------------------------------
Employee agrees to not make use of, divulge or otherwise disclose,
directly or indirectly, any trade secret or other confidential or proprietary
information concerning the business (including, but not limited to its products,
employees, services, practices or policies) of Company or any of its affiliates
of which Employee may learn or be aware as a result of Employee's employment
during the term of this Agreement or prior thereto as shareholder, employee,
officer or director of or consultant to Company and its predecessors, except to
the extent such use or disclosure is (i) necessary to the performance of this
Agreement and in furtherance of Company's best interests, (ii) required by
applicable law, (iii) lawfully obtainable from other sources, or (iv) authorized
in writing by Company. The provisions of this Section 9(g) shall survive the
expiration, suspension or termination, for any reason, of this Agreement.
(h) Trade Secrets.
-------------
Employee, prior to and during the term of employment, has had and will
have access to and become acquainted with various trade secrets, consisting of
software, plans, formulas, patterns, devices, secret inventions, processes,
customer lists, contracts, and compilations of information, records and
specifications that are owned by Company or by its affiliates and regularly used
in the operation of their respective businesses and that may give Company an
opportunity to obtain an advantage over competitors who do not know or use such
trade secrets. Employee agrees and acknowledges that Employee has been granted
access to these valuable trade secrets only by virtue of the confidential
relationship created by Employee's employment and Employee's prior relationship
to, interest in and fiduciary relationships to Company and its predecessors.
Employee shall not disclose any of the aforesaid trade secrets, directly or
indirectly, or use them in any way, either during the term of this Agreement or
at any time thereafter, except as required in the course of employment by
Company and for its benefit.
All records, files, documents, drawings, specifications, software,
equipment, and similar items relating to the business of Company or its
affiliates, including without limitation all records relating to customers (the
"Documents"), whether prepared by Employee or otherwise coming into Employee's
possession, shall remain the exclusive property of Company or such
14
<PAGE>
affiliates and shall not be removed from the premises of Company or its
affiliates under any circumstances whatsoever without the prior consent of a
senior executive officer of Company. Upon termination of employment, Employee
agrees to promptly deliver to Company all Documents in the possession or under
the control of Employee.
(i) Severability.
------------
If any provision of this Agreement is held invalid or unenforceable,
the remainder of this Agreement shall nevertheless remain in full force and
effect, and if any provision is held invalid or unenforceable with respect to
particular circumstances, it shall nevertheless remain in full force and effect
in all other circumstances, to the fullest extent permitted by law.
(j) Withholding; Deductions.
-----------------------
All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.
(k) Section Headings.
----------------
Section and other headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(l) Counterparts.
------------
This Agreement and any amendment hereto may be executed in several
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.
(m) Representation By Counsel; Interpretation.
-----------------------------------------
Each party hereto acknowledges that it or she has been represented by
counsel in connection with this Agreement and the matters contemplated by this
Agreement. Accordingly, any rule of law, including but not limited to Section
1654 of the California Civil Code, or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement against the party
that drafted it has no application and is expressly waived. The provisions of
this Agreement shall be interpreted in a reasonable manner to effect the intent
of the parties.
(n) Antidilution Adjustments.
------------------------
All amounts of shares, options and option exercise prices referred to
in this Agreement shall be subject to appropriate adjustment for stock splits,
reverse stock splits, stock dividends, restructurings and recapitalizations
occurring after the date hereof.
15
<PAGE>
(o) No Duty to Mitigate.
-------------------
All amounts payable pursuant to this Agreement shall be paid without
regard to whether Employee has taken actions to mitigate damages.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
"GIGL"
GEMSTAR INTERNATIONAL GROUP LIMITED
By: /s/ HENRY C. YUEN
-------------------------------------
Henry C. Yuen, President and CEO
By: /s/ LARRY GOLDBERG
-------------------------------------
Larry Goldberg, Secretary
"Company"
GEMSTAR DEVELOPMENT CORPORATION
By: /s/ HENRY C. YUEN
------------------------------------
Henry C. Yuen, President and CEO
By: /s/ LARRY GOLDBERG
------------------------------------
Larry Goldberg, Assistant Secretary
"Employee"
ELSIE MA LEUNG
/s/ ELSIE MA LEUNG
----------------------------------------
16
<PAGE>
EXHIBIT A
COMPANY'S BUSINESS
(for purposes of this exhibit Company
shall include [*])
[*]
[*]Includes the following disclosures, patent applications, patents,
continuations, continuations-in-part and foreign counterparts thereto:
<TABLE>
<S> <C>
[*] [*]
PATENT NO. 5,335,079 PATENT NO. 5,382,983
[*] [*]
PATENT NO. 5,307,173
[*]
</TABLE>
___________
[*] Omitted, confidential treatment requested
1
<PAGE>
EXHIBIT B
ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR
DEVELOPMENT OF GEMSTAR
[*]
___________
[*] Omitted, confidential treatment requested
C-2
<PAGE>
SCHEDULE I
ANNUAL INCENTIVE BONUS COMPENSATION
(a) Subject to the terms and conditions of this Agreement, and in
addition to the Base Salary and other Additional Benefits to which Employee may
otherwise be entitled from Company, at the end of each Fiscal Year (or portion
thereof) during the term of this Agreement, Employee shall be deemed to have
earned a bonus (the "Annual Incentive Bonus" or "B"), payable by Company to
Employee on the last day of the Compensation Period in which such Fiscal Year
ends (or such sooner date as of which this Agreement terminates), commencing
with the Compensation Period ending May 31, 1998, calculated according to the
following formula:
(i) if C/E is less than or equal to 1.00, then B = 0.00;
(ii) if C/E = (1.35)(to the power of n), or more, then B = 0.40 x S
(iii) if 1 is less than C/E less than (1.35)(to the power of n), then B is
calculated pro-rata using the appropriate multiple between 0.00 x S,
and 0.40 x S
Where:
C = The sum of GIGL's consolidated earnings per share for each of the
four (4) fiscal quarters in such Fiscal Year (or, if this
Agreement terminates prior to the end of a Fiscal Year, the
portion of such Fiscal Year preceding the date of such
termination) as reflected, with respect to the first three (3) of
such quarters, in the respective quarterly reports on Form 10-Q
filed by GIGL with the SEC and, with respect to the fourth
quarter, in the annual report on Form 10-K filed by GIGL with the
SEC, in each case excluding the effect of one-time charges
("EPS");
E = EPS of GIGL for the Fiscal Year ended March 31, 1997 (or, if this
Agreement terminates prior to the end of a Fiscal Year, the
portion of the Fiscal Year ended March 31, 1997 comparable to the
portion of such Fiscal Year preceding the date of such
termination);
n = the number of the then-completed Fiscal Years, numbering them
consecutively considering the Fiscal Year ended March 31, 1997 as
n=0, determined as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
Fiscal Year Ending March 31, n
- - ----------------------------------------------------------------------------
<S> <C>
1998 n=1
- - ----------------------------------------------------------------------------
1999 n=2
- - ----------------------------------------------------------------------------
2000 n=3
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
2004 n=7
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
2010 n=13
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
</TABLE>
I-1
<PAGE>
S = Base Salary as of the last day of such Fiscal Year.
(b) In the event that Employee's employment with Company terminates during
a Fiscal Year and it is impracticable to calculate "C" or "E" for a portion of a
Fiscal Year, Employee's Annual Incentive Bonus shall be calculated based on what
would have been payable for a full Fiscal Year and prorating that amount based
upon the number of days during the Fiscal Year that Employee was employed by
Company.
(c) The Annual Incentive Bonus amount due for each Fiscal Year shall be
paid by Company to Employee at the end of each Compensation Period (or such
sooner date as of which this Agreement terminates) (the "Due Date"). Employee
may, at her own expense, audit the applicable records at the place where Company
maintains the same in order to verify the calculation of the Annual Incentive
Bonus. Any such audit shall be conducted only by a reputable public accountant
during reasonable business hours in such manner as not to interfere with
Company's normal business activities. In no event shall an audit with respect
to the calculation of the Annual Incentive Bonus commence later than twelve (12)
months after the Due Date.
If any audit of Company's records by Employee reveals that Company has
failed to properly account for and pay Employee the Annual Incentive Bonus that
should have been paid for that Fiscal Year, and the amount of any Annual
Incentive Bonus which Company has failed to properly account and pay for in
respect of any Fiscal Year exceeds by at least three percent (3%) the amount of
Annual Incentive Bonus actually accounted for and paid to Employee for such
Fiscal Year, Company shall, in addition to paying Employee such overdue amount
of Annual Incentive Bonus, reimburse Employee for her direct, reasonable out-of-
pocket expenses incurred in conducting such audit.
(d) The provisions of this Schedule I shall not be deemed to restrict in
any way any rights of GIGL or the GIGL Board, acting in good faith, during the
term of this Agreement to dissolve, reorganize or take any other action or make
any other change (fundamental or otherwise) affecting the structure, existence,
organization, operations or business of Company or any of its subsidiaries. If
at any time during any Fiscal Year Company shall be dissolved, the right to
Annual Incentive Bonus payments pursuant to this Agreement shall terminate. If
at any time during any Compensation Period, Company shall be a party to a merger
or sale of all or substantially all of its assets to another entity, Company
shall (or shall cause a successor to) provide for adjustment as nearly
equivalent as practicable to preserve to Employee the benefits of this Agreement
relating to payment of Annual Incentive Bonus amounts in respect of the business
of Company or such successor. Such adjustments by the GIGL Board made in good
faith shall be conclusive.
(e) All accounting terms or concepts used herein have the meanings
assigned or applied under generally accepted accounting principles, consistently
applied.
I-2
<PAGE>
SCHEDULE II
Excise Tax Gross-Up
(Capitalized terms not defined herein have the meanings
ascribed thereto in the attached Amended and Restated
Employment Agreement)
(a) In the event it is determined (pursuant to (b) below) or finally
determined (as defined in (c)(iii) below) that any payment, distribution,
transfer, benefit or other event with respect to the GIGL, Company or a
predecessor, successor, direct or indirect subsidiary or affiliate of
either Company or GIGL (or any predecessor, successor of affiliate of any
of them, and including any benefit plan of any of them), to or for the
benefit of Employee or Employee's dependents, heirs or beneficiaries
(whether such payment, distribution, transfer, benefit or other event
occurs pursuant to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this Schedule II)
(each a "Payment" and collectively the "Payments") is or was subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended, and any successor provision or any comparable provision of state
or local income tax law (collectively, "Section 4999"), or any interest,
penalty or addition to tax is or was incurred by Employee with respect to
such excise tax (such excise tax, together with any such interest, penalty,
addition to tax, and costs (including professional fees) hereinafter
collectively referred to as the "Excise Tax"), then, within 10 days after
such determination or final determination, as the case may be, Company
shall pay to Employee an additional cash payment (hereinafter referred to
as the "Gross-Up Payment") in an amount such that after payment by Employee
of all taxes, interest, penalties, additions to tax and costs imposed or
incurred with respect to the Gross-Up Payment (including, without
limitation, any income and excise taxes imposed upon the Gross-Up Payment),
Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon such Payment or Payments. This provision is intended to put
Employee in the same position as Employee would have been had no Excise Tax
been imposed upon or incurred as a result of any Payment.
(b) Except as provided in subsection (c) below, the determination that
a Payment is subject to an Excise Tax shall be made in writing by a
certified public accounting firm selected by Employee ("Employee's
Accountant"). Such determination shall include the amount of the Gross-Up
Payment and detailed computations thereof, including any assumptions used
in such computations (the written determination of the Employee's
Accountant, hereinafter, the "Employee's Determination"). The Employee's
Determination shall be reviewed on behalf of Company by a certified public
accounting firm selected by Company (the "Company's Accountant"). The
Company shall notify Employee within 10 business days after receipt of the
Employee's Determination of any disagreement or dispute therewith, and
failure to so notify within that period shall be considered an agreement by
Company with the Employee's Determination, obligating Company to make
payment as provided in subsection (a) above within 10 days from the
expiration of such 10 business-day period. In the event of an objection by
Company to the Employee's Determination, any amount not in dispute shall be
paid within 10 days following the 10 business-day period referred to
herein, and with respect to the amount in dispute the Employee's Accountant
and Company's Accountant shall jointly select a third nationally recognized
certified public accounting firm to resolve the dispute and the decision of
such third firm shall be final, binding and conclusive upon the Employee
and Company. In such a case, the third accounting firm's findings shall be
deemed the binding determination with
II-1
<PAGE>
respect to the amount in dispute, obligating Company to make any payment as
a result thereof within 10 days following the receipt of such third
accounting firm's determination. All fees and expenses of each of the
accounting firms referred to in this Schedule II shall be borne solely by
Company.
(c) (i) Employee shall notify Company in writing of any claim by the
Internal Revenue Service (or any successor thereof) or any state or local
taxing authority (individually or collectively, the "Taxing Authority")
that, if successful, would require the payment by Company of a Gross-Up
Payment. Such notification shall be given as soon as practicable but no
later than 30 days after Employee receives written notice of such claim and
shall apprise Company of the nature of such claim and the date on which
such claim is requested to be paid; provided, however, that failure by
Employee to give such notice within such 30-day period shall not result in
a waiver or forfeiture of any of Employee's rights under this Schedule II
except to the extent of actual damages suffered by Company as a result of
such failure. Employee shall not pay such claim prior to the expiration of
the 15-day period following the date on which Employee gives such notice to
Company (or such shorter period ending on the date that any payment of
taxes, interest, penalties or additions to tax with respect to such claim
is due). If Company notifies Employee in writing prior to the expiration
of such 15-day period that it desires to contest such claim (and
demonstrates to the reasonable satisfaction of Employee its ability to make
the payments to Employee which may ultimately be required under this
section before assuming responsibility for the claim), Employee shall:
(A) give Company any information reasonably requested by Company
relating to such claim;
(B) take such action in connection with contesting such claim as
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by Company that is
reasonably acceptable to Employee;
(C) cooperate with Company in good faith in order effectively to
contest such claim; and
(D) permit Company to participate in any proceedings relating to
such claim; provided, however, that Company shall bear and pay
directly all attorneys fees, costs and expenses (including additional
interest, penalties and additions to tax) incurred in connection with
such contest and shall indemnify and hold Employee harmless, on an
after-tax basis, for all taxes (including, without limitation, income
and excise taxes), interest, penalties and additions to tax imposed in
relation to such claim and in relation to the payment of such costs
and expenses or indemnification. Without limitation on the foregoing
provisions of this Schedule II, and to the extent its actions do not
unreasonably interfere with or prejudice Employee's disputes with the
Taxing Authority as to other issues, Company shall control all
proceedings taken in connection with such contest and, in its
reasonable discretion, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either
direct Employee to pay the tax, interest or penalties claimed and sue
for a refund or contest the claim in any permissible manner, and
Employee agrees to prosecute such contest to a determination before
any
II-2
<PAGE>
administrative tribunal, in a court of initial jurisdiction and in one
or more appellate courts, as Company shall determine; provided,
however, that if Company directs Employee to pay such claim and sue
for a refund, Company shall advance an amount equal to such payment to
Employee, on an interest-free basis, and shall indemnify and hold
Employee harmless, on an after-tax basis, from all taxes (including,
without limitation, income and excise taxes), interest, penalties and
additions to tax imposed with respect to such advance or with respect
to any imputed income with respect to such advance, as any such
amounts are incurred; and, further, provided, that any extension of
the statute of limitations relating to payment of taxes, interest,
penalties or additions to tax for the taxable year of Employee with
respect to which such contested amount is claimed to be due is limited
solely to such contested amount; and, provided, further, that any
settlement of any claim shall be reasonably acceptable to Employee and
Company's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder, and
Employee shall be entitled to settle or contest, as the case may be,
any other issue.
(ii) If, after receipt by Employee of an amount advanced by Company
pursuant to paragraph (c)(i), Employee receives any refund with respect to
such claim, Employee shall (subject to Company's complying with the
requirements of this Schedule II) promptly pay to Company an amount equal
to such refund (together with any interest paid or credited thereon after
taxes applicable thereto), net of any taxes (including without limitation
any income or excise taxes), interest, penalties or additions to tax and
any other costs incurred by Employee in connection with such advance, after
giving effect to such repayment. If, after the receipt by Employee of an
amount advanced by Company pursuant to paragraph (c)(i), it is finally
determined that Employee is not entitled to any refund with respect to such
claim, then such advance shall be forgiven and shall not be required to be
repaid and the amount of such advance shall be treated as a Gross-Up
Payment and shall offset, to the extent thereof, the amount of any Gross-Up
Payment otherwise required to be paid.
(iii) For purposes of this Schedule II, whether the Excise Tax is
applicable to a Payment shall be deemed to be "finally determined" upon the
earliest of: (A) the expiration of the 15-day period referred to in
paragraph (c)(i) above if Company has not notified Employee that it intends
to contest the underlying claim, (B) the expiration of any period following
which no right of appeal exists, (C) the date upon which a closing
agreement or similar agreement with respect to the claim is executed by
Employee and the Taxing Authority (which agreement may be executed only in
compliance with this Schedule II), (D) the receipt by Employee of notice
from Company that it no longer seeks to pursue a contest (which notice
shall be deemed received if Company does not, within 15 days following
receipt of a written inquiry from Employee, affirmatively indicate in
writing to Employee that Company intends to continue to pursue such
contest).
(d) As a result of uncertainty in the application of Section 4999
that may exist at the time of any determination that a Gross-Up Payment is
due, it may be possible that in making the calculations required to be made
hereunder, the parties or their accountants shall determine that a Gross-Up
Payment need not be made (or shall make no determination with respect to a
Gross-Up Payment) that properly should be made ("Underpayment"), or that a
Gross-Up Payment not properly needed to be made should be made
("Overpayment"). The determination of any Underpayment shall be made using
the procedures set forth in paragraph (b) above and
II-3
<PAGE>
shall be paid to Employee as an additional Gross-Up Payment. The Company
shall be entitled to use procedures similar to those available to Employee
in paragraph (b) to determine the amount of any Overpayment (provided that
Company shall bear all costs of the accountants as provided paragraph (b)).
In the event of a determination that an Overpayment was made, any such
Overpayment shall be treated for all purposes as a loan to Employee with
interest at the applicable Federal rate provided for in Section 1274(d) of
the Code; provided, however, that the amount to be repaid by Employee to
Company shall be subject to reduction to the extent necessary to put
Employee in the same after-tax position as if such Overpayment were never
made.
II-4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 153,517
<SECURITIES> 4,343
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 163,440
<PP&E> 13,588
<DEPRECIATION> 9,819
<TOTAL-ASSETS> 186,078
<CURRENT-LIABILITIES> 52,994
<BONDS> 0
<COMMON> 197,695
0
0
<OTHER-SE> (94,213)
<TOTAL-LIABILITY-AND-EQUITY> 186,078
<SALES> 0
<TOTAL-REVENUES> 126,552
<CGS> 0
<TOTAL-COSTS> 63,058
<OTHER-EXPENSES> 11,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 59,140
<INCOME-TAX> 20,433
<INCOME-CONTINUING> 38,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,707
<EPS-PRIMARY> .81
<EPS-DILUTED> .76
</TABLE>
