<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission file number 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
British Virgin Islands N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
135 North Los Robles Avenue, Suite 800
Pasadena, California 91101
(Address of principal executive offices, including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
- ---
As of September 30, 1996, there were outstanding 30,806,505 shares of the
Registrant's Ordinary Shares, par value $0.01 per share.
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1996
and March 31, 1996.......................................... 1
Condensed Consolidated Statements of Operations -- Three
and Six Months Ended September 30, 1996 and 1995............ 2
Condensed Consolidated Statements of Cash Flows -- Six
Months Ended September 30, 1996 and 1995.................... 3
Notes to Condensed Consolidated Financial Statements......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 5
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 8
SIGNATURES...................................................... 10
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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September 30, March 31,
1996 1996
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents $57,313 $63,079
Marketable securities 15,164 -
Prepaid expenses and other current assets 2,686 3,734
------- -------
Total current assets 75,163 66,813
Property and equipment, net 3,198 3,040
Marketable securities 7,039 -
Other assets 14,492 8,587
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$99,892 $78,440
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,129 $ 9,205
Current portion of deferred revenue 8,546 3,074
------- -------
Total current liabilities 17,675 12,279
Deferred revenue, less current portion 2,042 2,546
Other liabilities 2,522 2,392
Shareholders' equity:
Ordinary Shares, par value $.01 per share. Authorized 500,000,000
shares; issued and outstanding 30,806,505 shares at September 30,
1996 and 30,461,505 shares at March 31, 1996 308 305
Additional paid-in capital 46,877 38,961
Retained earnings 30,529 22,012
Cumulative translation adjustments (61) (55)
------- -------
Net shareholders' equity 77,653 61,223
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$99,892 $78,440
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
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GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
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<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues $13,120 $11,190 $26,199 $22,309
Operating costs and expenses:
Selling and marketing 3,107 3,792 6,148 6,444
Research and development 2,473 1,897 4,959 3,782
General and administrative 2,797 2,586 5,501 5,169
------- ------- ------- -------
Earnings from operations 4,743 2,915 9,591 6,914
Other income, net 1,158 311 2,071 491
------- ------- ------- -------
Earnings before income tax expense 5,901 3,226 11,662 7,405
Income tax expense 1,590 817 3,145 1,862
------- ------ ------- -------
Net earnings $ 4,311 $ 2,409 $ 8,517 $ 5,543
======= ======= ======= =======
Earnings per share $ 0.13 $ 0.09 $ 0.25 $ 0.20
======= ======= ======= =======
Weighted average shares outstanding 33,506 27,684 33,524 27,684
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
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Six Months Ended
September 30,
---------------------
1996 1995
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Cash flows from operating activities:
Net earnings $ 8,517 $ 5,543
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 961 792
Deferred income taxes 195 115
Changes in assets and liabilities:
Prepaid expenses and other assets 1,048 (482)
Accounts payable, accrued expenses and other liabilities (141) 3,597
Deferred revenue 4,968 2,416
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Net cash provided by operating activities 15,548 11,981
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Cash flows from investing activities:
Decrease in due from related parties - 2,414
Net purchases of marketable securities (18,684) -
Additions to property and equipment (566) (881)
Increase in intangible assets (534) (405)
Increase in other assets (5,924) (963)
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Net cash (used in) provided by investing activities (25,708) 165
-------- -------
Cash flows from financing activities:
Dividend paid - (5,000)
Proceeds from secondary offering of Ordinary Shares 7,919 -
-------- -------
Net cash provided by (used in) financing activities 7,919 (5,000)
-------- -------
Effect of exchange rate changes on cash and cash equivalents (6) 58
-------- -------
Net (decrease) increase in cash and cash equivalents (2,247) 7,204
Cash and cash equivalents at beginning of period 59,560 12,735
-------- -------
Cash and cash equivalents at end of period $ 57,313 $19,939
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
Consolidated Financial Statements and related Notes included in the Company's
Annual Report on Form 20-F for the year ended March 31, 1996.
The Condensed Consolidated Financial Statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows for such periods. The results of operations for the
period ended September 30, 1996 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 1997.
2. Earnings Per Share
Earnings per share for all periods presented is based on the weighted
average number of Ordinary Shares and dilutive Ordinary Share equivalents
outstanding during the period.
3. Subsequent Events
On December 12, 1996, the Company completed its merger of VideoGuide, Inc.
(VideoGuide) by acquiring all of the outstanding capital stock of VideoGuide.
The merger will be accounted for under the pooling of interests method.
VideoGuide developed and introduced the VideoGuide Information System, which
includes both a consumer electronics product sold through retail stores and an
information service that provides users with an interactive television program
schedule.
On December 23, 1996, the Company announced that it signed a definitive
merger agreement with StarSight Telecast, Inc., a company that designs an easy
to use and accurate method of identifying, selecting and recording television
programming. Closing of the transaction is subject to customary conditions,
including approval by shareholders of each company and the satisfaction of
regulatory requirements. If completed, the merger will be accounted for under
the pooling of interests method.
4
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the Consolidated
Financial Statements and related Notes and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 20-F for the year ended March
31, 1996. This analysis is not intended to serve as a basis for projections of
future events.
Overview
The Company develops, markets and licenses propriety technologies and systems
aimed at making technology user-friendly for consumers. The Company's VCR
Plus+(R) instant-programming system was introduced in 1990 and to date there
have been more than 50 million VCR Plus+ systems sold worldwide. VCR Plus+
allows a user to record a television show simply by entering a number--the
PlusCode(R) number--printed in television program guides. The PlusCode numbers
are published in more than 1,500 newspapers and television guides worldwide,
with a combined circulation of over 300 million. The VCR Plus+ system has been
licensed to virtually every major television and VCR manufacturer and is
available in over 30 countries.
The Company has introduced two new technologies this year, INDEX Plus+(R), a
video tape indexing system built into new VCRs which features an on-screen
directory of video tape content by titles automatically captured from the
broadcast; and TV GUIDE Plus+(TM), as subscription-free on-screen interactive
television guide to be built into new televisions.
On April 16, 1996, the Company raised approximately $8 million, net of
expenses, through the issuance of 345,000 new shares as part of a public
offering, which also included 2,645,000 shares of secondary stock.
On December 12, 1996, the Company completed its merger of VideoGuide, Inc.
(VideoGuide) by acquiring all of the outstanding capital stock of VideoGuide.
The merger will be accounted for under the pooling of interests method.
VideoGuide developed and introduced the VideoGuide Information System, which
includes both a consumer electronics product sold through retail stores and an
information service that provides users with an interactive television program
schedule.
On December 23, 1996, the Company announced that it signed a definitive merger
agreement with StarSight Telecast, Inc., a company that designs an easy to use
and accurate method of identifying, selecting and recording television
programming. Closing of the transaction is subject to customary conditions,
including approval by shareholders of each company and the satisfaction of
regulatory requirements. If completed, the merger will be
5
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accounted for under the pooling of interests method.
Quarterly operating results are affected by changes in the market acceptance
of existing products sold by licensees incorporating the Company's propriety
technologies in their products. There can be no assurance that new products will
be introduced by licensees in a timely manner, will achieve any significant
degree of market acceptance or that such acceptance will be sustained for any
significant period. The operating results for any quarter are not necessarily
indicative of results for any future period.
Results of Operations
6
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Revenues for the second quarter increased 17% to $13.1 million, compared to
$11.2 million for the same quarter last year. For the six months ended September
30, 1996, revenues were $26.2 million compared to $22.3 million for the same
period last year, an increase of 17%. The increase in revenues resulted
primarily from continued increases in the incorporation of the Company's VCR
Plus+ system by manufacturers of VCRs and televisions worldwide.
Selling and marketing expenses for the second quarter were $3.1 million
compared to $3.8 million for the same quarter last year, a decrease of 18%. For
the six months ended September 30, 1996, selling and marketing expenses were
$6.1 million compared to $6.4 million for the same period last year, a decrease
of 5%. This decrease is attributable to the timing of the Company's marketing
and promotional activities.
Research and development expenses for the second quarter were $2.5 million
compared to $1.9 million for the same quarter last year, an increase of 32%. For
the six months ended September 30, 1996, research and development expenses were
$5.0 million compared to $3.8 million for the same period last year, an increase
of 32%. This increase resulted primarily from increased activities associated
with the development and testing of the INDEX Plus+ and TV GUIDE Plus+ systems.
General and administrative expenses for the second quarter were $2.8 million
compared to $2.6 million for the same quarter last year. For the six months
ended September 30, 1996, general and administrative expenses were $5.5 million
compared to $5.2 million for the same period last year.
The effective tax rate for the second quarter and for the six months ended
September 30, 1996 was 27% compared to 25% for the same periods last year. This
increase in the effective tax rate was primarily attributable to the mix of
license revenues subject to foreign withholding taxes. Foreign withholding taxes
are based on license revenues from certain tax jurisdictions and, accordingly,
do not vary based on the level of pretax income.
Liquidity and Capital Resources
Cash and cash equivalents and investments in marketable securities totaled
$79.5 million at September 30, 1996 compared to cash and cash equivalents of
$63.1 million at March 31, 1996. This increase was due primarily to the net
proceeds from the Company's secondary offering in April 1996 and positive cash
flow from operations. The Company uses its working capital ($57.5 million at
September 30, 1996) to finance ongoing operations and to fund expansion and
development of new technologies. Net cash provided by operating activities was
$15.5 million for the six months ended September 30, 1996, as compared to net
cash provided by operating activities of $12.0 million, for the six months ended
September 30, 1995. Net cash used in investing activities was $25.7 million,
which was primarily attributable to the purchase of marketable securities. Net
cash provided by financing activities was $7.9 million, which was comprised of
the net proceeds from the Company's secondary offering of Ordinary Shares.
Management believes the existing cash balances and cash generated from
operations will be sufficient to meet the Company's liquidity and capital needs
for the next twelve months.
7
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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3.1(a)* Amended and Restated Memorandum of Association of the Company.
3.1(b)* Amended and Restated Articles of Association of the Company.
10.1* Patent Assignment Agreement, dated as of March 15, 1994, between
Gemstar Development Corporation and Roy Mankovitz. (Confidential
treatment requested).
10.2* Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Development Corporation. (Confidential treatment requested).
10.3* Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Holdings Limited. (Confidential treatment requested).
10.4* Contract Engineering Agreement (undated) between Hilite, Inc. and
Index Systems, Inc. (Confidential treatment requested).
10.5* Form of Option Exercise and Assignment Agreement, dated March 16,
1994, between Gemstar Development Corporation and each of Henry Yuen,
Wilson Cho and Daniel Kwoh.
10.6(a)* Exclusive Representation Agreement, dated July 30, 1990, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).
10.6(b)* Exclusive Representation Agreement, dated May 20, 1991, between
Gemstar Development Corporation and United Feature Syndicate, Inc.,
together with First Amendment to Exclusive Representation Agreement,
dated March 4, 1994 (Confidential treatment requested).
10.6(c)* Exclusive Representation Agreement, dated March 21, 1994 between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).
10.7* Registration Rights Agreement, dated August 16, 1995, between Gemstar
International Group Limited and the Shareholders of E Guide, Inc.
23.1** Consent of KPMG Peat Marwick LLP.
27.1*** Financial Data Schedule.
99.1* 1994 Stock Incentive Plan, as amended.
99.2* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Henry Yuen, as amended. (Confidential
treatment requested).
99.3* Employment Agreement, dated August 1995, between Gemstar
International Group Limited and Thomas Lau.
99.4* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Daniel Kwoh, as amended. (Confidential
treatment requested).
99.5* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Roy Mankovitz, as amended. (Confidential
treatment requested).
</TABLE>
8
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99.6* Employment Agreement, dated August 16, 1995, between Pros Technology
Limited and Wilson Cho. (Confidential treatment requested).
99.7* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Elsie Leung, as amended.
99.8* Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Larry Goldberg, as amended.
</TABLE>
- --------------------------
* Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016), which was declared effective on October 10, 1995, and incorporated
herein by reference.
** Previously filed as part of Form 6-K of the Company, which was filed on or
about January 16, 1997, and incorporated herein by reference.
*** Filed herewith.
(b) Reports on Form 8-K
None.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
Date: February 10, 1998 By: /s/ Henry C. Yuen
-------------------
Henry C. Yuen
Chief Executive Officer
By: /s/ Elsie Leung
-------------------
Elsie Leung
Chief Financial Officer
10
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 57,313
<SECURITIES> 22,203
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 75,163
<PP&E> 5,291
<DEPRECIATION> 2,093
<TOTAL-ASSETS> 99,892
<CURRENT-LIABILITIES> 17,675
<BONDS> 0
0
0
<COMMON> 47,185
<OTHER-SE> 30,468
<TOTAL-LIABILITY-AND-EQUITY> 99,892
<SALES> 0
<TOTAL-REVENUES> 26,199
<CGS> 0
<TOTAL-COSTS> 16,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,662
<INCOME-TAX> 3,145
<INCOME-CONTINUING> 8,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,517
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
