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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, 1997
[_] 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
COMMISSION FILE NUMBER 0-26878
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)
(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)
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: NONE
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. [X]
As of March 31, 1997, there were 31,273,253 of the Registrant's Ordinary
Shares outstanding.
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FORWARD-LOOKING STATEMENTS
This Form 10-K contains, and incorporates by reference, certain forward-
looking statements (as such term is defined in the rules promulgated pursuant
to the Securities Act of 1933, as amended) that are based on the 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 created by the Private Securities
Litigation Reform Act of 1995. When used in this document and in the documents
incorporated herein by reference, the words "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. 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 below in Item 1, "Business", as well as those
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.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
Gemstar International Group Limited (the "Company" or "Gemstar") develops,
markets and licenses proprietary technologies and systems that simplify and
enhance the viewing and recording of video and television programming. The
Company's first proprietary system, VCR Plus+, was introduced in 1990. 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,
television or handset equipped with the VCR Plus+ technology. PlusCode Numbers
are printed in television program listings in over 1,500 newspapers and
magazines worldwide, with a combined circulation of over 300 million. Gemstar
believes that the large and growing installed base of VCR Plus+ represents an
important platform from which to launch related technologies and services. The
Company also has two new technologies, Index Plus+, a proprietary technology
that simplifies the playback of videotapes, and Guide Plus+, an interactive
electronic on-screen television guide. The Company's primary source of
revenues to date has been license fees paid by manufacturers and publications
for the licensing of the VCR Plus+ technology and the right to print the
PlusCode Numbers, respectively.
On December 23, 1996, the Company and StarSight Telecast, Inc., a California
corporation ("StarSight"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which a wholly-owned subsidiary of the
Company will merge with and into StarSight, whereby, among other things,
StarSight will survive the merger and become a wholly-owned subsidiary of the
Company (the "Merger"). If completed, the Merger will be accounted for as a
pooling of interests. StarSight designs and markets an easy-to-use electronic
program guide (the "StarSight EPG") for identifying, selecting and recording
television programming. StarSight's customers subscribe to the StarSight EPG
directly from StarSight, for use with StarSight-capable televisions, VCRs,
TVCRs, satellite integrated receiver descramblers ("Satellite Receivers") and
stand-alone StarSight receivers. A limited number of StarSight customers are
able to subscribe to the StarSight EPG through service providers such as local
cable operators or local telephone companies. In addition, StarSight licenses
its intellectual property for non-StarSight-capable products which provide
guide features based on StarSight's proprietary technology and patented
inventions. StarSight was incorporated as InSight Technology Corp. under the
laws of California in May 1986. In March 1989, StarSight changed its name to
InSight Telecast, Inc. and in June 1993 to StarSight Telecast, Inc. See
"Proposed Merger with StarSight" below for further information regarding the
Merger.
On December 12, 1996, VideoGuide, Inc., a Delaware corporation
("VideoGuide"), became a wholly-owned subsidiary of the Company (the
"VideoGuide Merger") pursuant to the terms of an Agreement and Plan of Merger
dated as of July 18, 1996, as amended by an Amendment No. 1 to Agreement and
Plan of Merger dated as of October 24, 1996 (as amended, the "VideoGuide
Merger Agreement"), by and among VideoGuide, the Company and G/V Acquisition
Subsidiary, a wholly-owned subsidiary of the Company, and, solely with respect
to Articles III, VII and IX of the VideoGuide Merger Agreement, certain former
shareholders of VideoGuide. The VideoGuide Merger has been accounted for as a
pooling of interests. VideoGuide pioneered a set top product featuring
subscription-based, on-screen interactive television guide, news and sports
services using data broadcast over a paging network. VideoGuide has
engineering expertise in designing low-cost, high resolution and high
performance on-screen displays and user interface.
The Company continually evaluates media and consumer electronics
applications where its existing industry relationships, proprietary technology
and patent positions, and capability of worldwide implementation could provide
opportunities for expansion.
PRODUCTS
VCR PLUS+
VCR Plus+ was introduced in 1990 to simplify the programming of VCRs for
consumers. VCR Plus+ permits the user to record a program simply by entering a
proprietary one to eight digit number, called a
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PlusCode Number, via a handset into a VCR or television. PlusCode Numbers are
generated through a patented process developed by the Company and are printed
next to television program listings in participating newspapers and television
program guides worldwide. Licensed manufacturers incorporate the Company's
proprietary software, which decodes PlusCode Numbers, into the microprocessors
of their VCRs or televisions (or in certain cases, remote control devices).
Central to the VCR Plus+ system are the Company's proprietary PlusCode Numbers
that encode in a compressed and encrypted form the essential elements of
programming information: date, time, channel and length of the desired
program. When the user enters a PlusCode Number, the VCR Plus+ system causes
the VCR to turn on, record at the appropriate time and on the appropriate
channel, and shut off.
The VCR Plus+ technology has been widely accepted by virtually every major
VCR and television manufacturer, each of which pays the Company a license fee
based on the number of units shipped incorporating the technology. Magnavox,
Hitachi and Sony have committed to incorporate the VCR Plus+ feature in
substantially all of their VCR models shipped in North America beginning in
mid to late 1996. Zenith began to offer the VCR Plus+ feature in certain
television models beginning in late 1996.
The Company continues to develop and introduce additional VCR Plus+ features
that manufacturers can choose to license to enhance the functionality of VCR
Plus+. Manufacturers are required to pay an additional license fee for each
unit incorporating an enhanced feature. These features include CallSet and V-
Set, systems which automate the set up for VCR Plus+, V-chip Plus+, which
augments the V-chip system that has recently been mandated by the
Telecommunications Act of 1996, and Cable Box Changer, which automatically
changes the channel on a cable box to the appropriate channel for recording.
The Cable Box Changer feature is the subject of a lawsuit between StarSight
and the Company. See Item 3, "Legal Proceedings."
Licensing and Publishing Agreements
License agreements with manufacturers have terms which typically range from
three to seven years and require per unit royalty payments. Some agreements
require an additional one-time payment. These agreements do not require the
manufacturer to incorporate the VCR Plus+ feature into a specific number of
VCR units and may be terminated by the manufacturer without substantial
financial penalty. Certain of these agreements, however, require a minimum
royalty payment each year for the duration of the agreement in order to
continue licensing the technology.
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. There
can be no assurance that any of the Company's agreements with newspapers and
magazines will be renewed, or, if renewed, will be on terms favorable to the
Company. 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.
INDEX PLUS+
The Index Plus+ system is a proprietary technology that simplifies the
playback and management of videotapes for consumers by automating the
recording, indexing and accessing of programs and program titles. The Index
Plus+ system automatically captures titles of programs as consumers record
from television broadcasts. The titles of the recorded programs are then
stored in a directory which can be displayed on-screen. In order to play back
an Index Plus+ recorded videotape, the user selects a program from the on-
screen directory, and the Index Plus+ VCR will rewind or fast forward to the
start of the program and play. The Index Plus+ system also creates a library
containing the directory of each Index Plus+ recorded videotape. The Index
Plus+ system enables the user to search the library either by tape number or
program title in order to quickly view on-screen the directory of a specific
tape or the number of the tape containing a desired program. Pre-recorded
tapes also can be encoded to allow consumers to quickly view on-screen a
directory of programs or segments contained
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on the pre-recorded tape when the tape is inserted into an Index Plus+ VCR.
The Index Plus+ system also automatically sets and updates the VCR's clock and
provides information to the users as to whether the tape inserted has enough
space to record programs which the VCR has been programmed to record.
Program Information
The Index Plus+ system uses the vertical blanking interval ("VBI") to
transmit textual information to VCRs incorporating the Index Plus+ system. The
VBI is the unused air time between television picture frames. Television
images are made by an electron gun behind the screen that moves a beam of
electrons rapidly back and forth from the top to the bottom of the screen.
When the beam reaches the bottom it is shut off and returns to the top of the
screen to begin again. During the VBI, or the time when the electronic beam is
shut off and returns to the top of the screen, the air time can be used by
broadcasters to send other information to the television, such as closed
captions. The Index Plus+ system accesses the VBI and automatically captures
the titles of recorded programs for inclusion in the directory and library
when such titles are inserted into the VBI by broadcasters.
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, for the Index Plus+ and Guide Plus+ systems. Index Plus+ utilizes
the VCR Plus+ system for program identification, data encryption and data
compression. After the program information is reformatted, it is broadcast
under agreements with local television stations, cable broadcasters and
national television networks (the "Gemstar Data Delivery System"). The Gemstar
Data Delivery System presently includes over 375 local television stations,
three national cable networks (WGN Superstation, The Family Channel and A&E),
the ABC Television Network, Fox Broadcasting Co. ("Fox"), CBS, Inc. ("CBS")
and United Paramount Network ("UPN") which combine to cover 98% of all U.S.
television households with multiple redundancy in most areas. These television
stations and cable companies broadcast the information through the VBI, both
over the air and through local cable television operators, to their viewers.
In each of its agreements with broadcasters, the Company has agreed to
supply without charge the equipment required to insert data into the VBI. 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 ("NORPAK"), a Canadian based company and leading
manufacturer of broadcast data insertion equipment. NORPAK presently supplies
major broadcasters such as the ABC, CBS and Turner Broadcasting Systems.
Local cable operators have the technological capability to remove VBI data
transmitted through their systems. Although the Company expects the cable
operators to pass through the program data (since it is a free service to
their subscribers who have purchased Index Plus+--enabled VCRs), there can be
no assurance that cable operators will do so. If the program data is removed
from the VBI by a cable operator, it would make it less convenient or even
impossible for its subscribers to receive the program data, hence limiting the
functionality and reducing the attractiveness of the Index Plus+ system.
In addition, digital broadcast satellite technology broadcasts information
in a digital form and does not involve a VBI. If digital broadcast satellite
technology increases in popularity as a method of communicating program
information, the Company's Index Plus+ system would have to be modified to
permit it to receive program data in digital form. There can be no assurances,
however, that Index Plus+ could be modified in a commercially acceptable
manner.
Licensing Agreements
The Company has developed its Index Plus+ system in cooperation with
Hitachi, JVC and Matsushita, with whom the Company has cross-licensing
arrangements. The Company also has licensed Index Plus+ to LG Electronics,
Mitsubishi, Orion, Philips, Sanyo, Sharp, Sony, Thomson, and Zenith. There can
be no assurances, however, that any other television or VCR manufacturers will
license the Index Plus+ system. As a result of lower licensing revenues
resulting from cross-licenses and the time lag between the licensing of the
technology
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and the receipt of licensing revenues, licensing revenues from Index Plus+ are
not expected to be a significant portion of the Company's overall revenues
during the next three years.
Licensed manufacturers incorporate Index Plus+ into their VCRs through
microprocessors that have been programmed with the Company's proprietary
software. License agreements with manufacturers have terms that typically
range from three to seven years and require a per unit royalty payment. Some
agreements require an additional one-time payment. These agreements do not
require the manufacturer to incorporate the Index Plus+ feature into a
specific number of VCR units. However, some of these agreements require a
minimum royalty payment each year for the duration of the agreement.
In order to obtain access to VBI lines for the Gemstar Data Delivery System,
the Company has entered into lease agreements with approximately 40
broadcasting companies that give the Company access to approximately 80 local
television stations and several national cable networks. The lease agreements
typically have a term of three years and require the Company to pay an annual
rental fee based upon the number of stations covered by the agreement. In
addition, the Company has obtained access to VBI lines under license
agreements which require the Company to provide data insertion equipment to
ABC, Fox, CBS and UPN networks in exchange for the participation of their
network-owned and operated stations and network-affiliated stations in the
carrying of Index Plus+ and Guide Plus+ data.
GUIDE PLUS+
Guide Plus+ is an interactive, electronic on-screen television guide
designed to simplify consumer access to broadcast and cable programming
schedules without interrupting viewing of the program currently being aired.
The Guide Plus+ on-screen television guide can be accessed by viewers free of
charge through color-coded function keys incorporated into a manufacturer's
remote control. Guide Plus+ users are initially presented with the SURF guide,
a screen which provides information on all programs currently being aired. The
design of the SURF screen includes not only channel listings and textual
descriptions of each program, but also picture-in-guide technology that allows
a user to view the actual program with its textual description. Using the
channel up/down key on a remote control, a viewer can move a highlight cursor
to review any program currently being aired. As each channel is highlighted,
the picture window will be tuned to that channel and the textual description
will change accordingly to correspond to the window. An additional remote
control function key allows the user to view additional textual data, if
available.
Other features of Guide Plus+ include the NEXT guide, which provides
programming information for a specific channel. Using the channel up/down key,
the viewer can scan information on programs scheduled within a 24-hour to 48-
hour time period. The SCAN guide, another Guide Plus+ feature, provides
descriptions of programs scheduled to be aired at a specific future time on
all channels. The SORT feature allows the user to select a category, such as
sports, movies or specials, and view a list of all programs within that
category. When using the NEXT, SCAN and SORT features, the original program
which was being watched by the user prior to accessing Guide Plus+ remains
visible without interruption using picture-in-guide technology. This picture-
in-guide feature is designed to appeal not only to consumers, but also to
broadcasters and advertisers who desire uninterrupted consumer viewing of both
programming and advertising content. While using any of the foregoing Guide
Plus+ features, the user can record a program at any time by selecting it and
choosing once, daily or weekly recording options.
The Company believes that Guide Plus+ has a number of unique features that
distinguish it from other existing or announced interactive guides. First,
Guide Plus+ integrates the television picture into the guide screen using
picture-in-guide technology so that television viewing is not interrupted.
Second, Guide Plus+ will provide broadcasters with a continuous updating
capability so that program descriptions and related information can be kept
current. Third, Guide Plus+ adopts a user-friendly TV-like operation, using
the channel up/down keys and color-coded remote control function keys for
selection rather than using a more cumbersome computer-like grid design.
Fourth, the cost effective design of Guide Plus+ facilitates its incorporation
into popularly priced television and VCR models with large sales volumes.
Finally, Guide Plus+ will not require consumers to pay
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any connection or subscription fee for an on-screen guide. In November 1995,
the Company entered into an agreement with News Corp., publisher of TV Guide,
to market and promote the Guide Plus+ feature in the U.S. under the name TV
Guide Plus+ using the familiar TV Guide logo. The Company intends to leverage
the TV Guide brand name to market its TV Guide Plus+ features. In addition,
the Company intends to offer to viewers of TV Guide Plus+ value-added features
based on the information found in the TV Guide print magazine.
Program Information
As with Index Plus+, Guide Plus+ program information will be transmitted in
the VBI through the Gemstar Data Delivery System. Guide Plus+ utilizes the VCR
Plus+ system for program identification, data encryption and data compression.
As with Index Plus+, local cable operators will have the technological
capability to remove any VBI data transmitted through their systems. In
addition, increased demand by consumers for direct broadcast satellite
technology, which does not involve a VBI, would require the Guide Plus+ system
to be modified to allow receipt of program data in digital form, and there can
be no assurances that Guide Plus+ could be so modified in a commercially
acceptable manner. See "Index Plus+--Program Information" in Item 1.
Licensing Relationships
For Guide Plus+, the Company intends to pursue a licensing strategy similar
to VCR Plus+ with license fees based on units shipped that incorporate the
Guide Plus+ technology. The Company has entered into license agreements
relating to the Guide Plus+ technology with Hitachi, JVC, Thomson, Matsushita,
Mitsubishi, Philips, Sanyo, Sharp, Sony and Zenith. The license agreements
have terms which range from three to seven years and require a per unit
royalty payment. Some agreements require an additional one-time payment. These
agreements do not require the manufacturer to incorporate the Guide Plus+
feature into a specific number of televisions. Some of the agreements,
however, require a minimum royalty payment each year for the duration of the
agreement. In late 1996, Philips began including the TV Guide Plus+ system in
certain of its televisions sold in the United States under the Magnavox brand.
Further, in late 1996, JVC began including the TV Guide Plus+ system in
certain of its televisions sold in the U.S. and Canada.
RELATED APPLICATIONS AND SERVICES
The Company is seeking to extend its technologies into new markets and
introduce new applications that build on the Company's VCR Plus+ installed
base, technologies, brand name recognition, and relationships with publishers,
broadcasters and manufacturers. For example, the Company's iPlus+ service
draws on the strengths of the Company's established VCR Plus+ system and
worldwide customer base. iPlus+ is a unique interactive advertising service
that utilizes the VCR Plus+ system to assign PlusCode Numbers to advertisers
and sponsors to deliver long-form information videos ("information videos").
Advertisers use a broad-reach advertisement through television, newspaper or
other media as a "lead" in which a PlusCode Number is made available. An
interested consumer enters this PlusCode Number and an information video
containing additional information on the product or service is automatically
recorded when aired and is ready for viewing as early as the next day. The
information videos are expected to be recorded by the user's VCR within 24
hours of the PlusCode Number entry. The information videos are expected to be
aired late at night to take advantage of lower programming rates. In exchange
for providing PlusCode Numbers for the information videos, the Company intends
to charge a license fee that captures a percentage of the cost of the
advertising campaign.
In 1994, the Company entered into a five-year joint-marketing agreement with
CBS to offer SpotPlus, an iPlus+ package for linking prime-time advertising
spots on CBS with long-form video brochures aired at off-peak hours using
PlusCode Numbers. Under the terms of the non-exclusive arrangement, CBS will
provide non-preemptable time blocks in all of its owned-and-operated stations
(including New York, Los Angeles and Chicago) to advertisers for linking with
prime-time commercials. CBS also has agreed to actively market the iPlus+
concept. The Company has agreed to share a portion of its licensing revenues
generated by SpotPlus with CBS. As part of its effort to market and promote
the iPlus+ concept, the Company has provided promotional and publicity support
to the iPlus+ campaigns. To date, the Company has not derived significant
revenues from iPlus+.
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In addition to iPlus+, the Company believes its technologies may enable it
to create additional value added services for broadcasters and consumers. For
example, the Company has created Instant Info, a service that builds on Index
Plus+ and Guide Plus+ technologies and the Gemstar Data Delivery System to
enable broadcasters or advertisers to transmit in encrypted form selected
textual data on VBI lines. Through Instant Info, consumers can view on-screen
textual information related to a program or commercial. Such information may
include, for example, statistics for a baseball game, stock quotations for a
financial program, or the recipes used in a cooking show. Advertisers also
will be able to utilize the feature to provide product and service purchase
information, telephone numbers, retailer addresses or other textual
information.
In addition to extending its technologies into new markets and introducing
new applications, from time to time, the Company evaluates business
opportunities and potential strategic relationships.
PROPOSED MERGER WITH STARSIGHT
On December 23, 1996, the Company and StarSight entered into the Merger
Agreement which provides for the Company's acquisition of StarSight. Subject
to the satisfaction of certain conditions, the Merger is expected to close in
May 1997. The Merger becomes effective upon the filing of a merger agreement
and any other required documentation with the California Secretary of State
(the "Effective Time"). The Merger Agreement provides that consummation of the
Merger is subject to, among other things, (i) approval of the Merger Agreement
by StarSight's shareholders, (ii) approval of the issuance of the Company's
Ordinary Shares, $0.01 par value ("Ordinary Shares") in connection with the
Merger by the holders of the Company's Ordinary Shares, (iii) certain
government regulatory approvals, (iv) the filing and effectiveness of a
registration statement for the Company's Ordinary Shares to be issued in the
Merger with the Securities and Exchange Commission (the "Commission"), and (v)
the satisfaction or waiver of certain other customary conditions to closing of
the Merger. All applicable waiting periods regarding the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), have expired.
The Merger Agreement provides that in connection with the Merger, (i) each
share of StarSight's Common Stock issued and outstanding as of the time the
Merger becomes effective, which will occur upon the filing of a Merger
Agreement and any other required documentation with the California Secretary
of State (the "Effective Time"), will be converted into 0.6062 shares (the
"Exchange Ratio") of Ordinary Shares; (ii) each stock option to purchase
shares of the StarSight's Common Stock (the "StarSight Stock Options")
outstanding immediately prior to the Effective Time under StarSight's 1989
Stock Incentive Program (the "StarSight Stock Option Plan") which has not been
exercised in accordance with its terms, will be assumed by Gemstar such that
each Stock Option will be deemed to constitute an option to acquire, on
substantially the same terms and conditions as were applicable under such
StarSight Stock Option, the number, rounded down to the nearest whole integer,
of full shares of Gemstar Ordinary Shares the holder of such StarSight Stock
Option would have been entitled to receive pursuant to the Merger had such
holder exercised such StarSight Stock Option in full, including as to unvested
shares, immediately prior to the Effective Time, at a price per share equal to
(y) the exercise price per share for the shares of StarSight Common Stock
otherwise purchasable pursuant to such StarSight Stock Option divided by (z)
the Exchange Ratio, with such exercise price per share rounded up to the
nearest whole cent; and (iii) each stock purchase warrant issued by StarSight
to purchase shares of StarSight Common Stock (collectively, the "StarSight
Warrants"), will in accordance with its terms, be adjusted (an "Adjusted
Warrant") to become exercisable for, or exchangeable for a new warrant (on
substantially the same terms) that would be exercisable for, the number of
shares of Gemstar Ordinary Shares equal to the Warrant Conversion Number (as
defined below). The exercise price of any Adjusted Warrant (the "Adjusted
Exercise Price") will be an amount equal to the exercise price of the Warrant
related to such Adjusted Warrant as of the date of the Merger Agreement
divided by the Exchange Ratio. The "Warrant Conversion Number" for any
Adjusted Warrant will be equal to the number of shares purchasable pursuant to
the StarSight Warrant related to such Adjusted Warrant as of the date of the
Merger agreement multiplied by the Exchange Ratio. See Note 11 to Notes to
Consolidated Financial Statements.
Related Agreements
Company Option Agreement. Concurrently with the execution of the Merger
Agreement, StarSight and the Company entered into a Company Option Agreement,
dated as of December 23, 1996 (the "Company Option
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Agreement"), pursuant to which StarSight granted Gemstar an irrevocable option
to purchase up to 5,276,034 shares of StarSight Common Stock at a purchase
price of $10.46 per share (the "Company Stock Option"). The Company Stock
Option is exercisable, in whole or in part, at any time and from time to time
following the occurrence of a Company Purchase Event (as defined below) and
prior to termination of the Company Option Agreement. A "Company Purchase
Event" means any termination of the Merger Agreement pursuant to
Section 7.1(h), (j) or (l) thereof. The Company Stock Option will terminate
and be of no further force and effect upon the earliest to occur of (i) the
consummation of the transactions contemplated by the Merger Agreement, (ii)
the later to occur of (a) June 23, 1998, (b) the closing date of any Company
Takeover Proposal (as such term is defined below) plus 30 days, or (iii) the
payment by StarSight and the receipt by Gemstar of a termination fee equal to
$15 million (the "Company Termination Fee"); provided, however, that the
repurchase and registration rights provisions described below shall terminate
in accordance with their respective terms and not when the Company Stock
Option terminates. A "Company Takeover Proposal" means any proposal (whether
or not in writing and whether or not delivered to StarSight's shareholders
generally) regarding (i) a merger, consolidation, purchase of assets (other
than purchases of assets or inventory in the ordinary course of business),
tender offer, share exchange or other business combination or similar
transaction involving StarSight or any of its subsidiaries, (ii) any proposal
or offer to acquire in any manner, directly or indirectly, any equity interest
in or any voting securities of StarSight or any of its subsidiaries which
constitutes 10% or more of the total of such equity interests or voting
securities, or a substantial portion of the assets of StarSight or any of its
subsidiaries, (iii) the acquisition by any person of beneficial ownership or a
right to acquire beneficial ownership of, or the formation of any "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) which beneficially owns, or has the right to acquire beneficial
ownership of 10% or more of the then outstanding shares of StarSight's capital
stock, or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
Upon any Company Purchase Event, or upon the failure of any of the StarSight
Significant Shareholders to vote in favor of the Merger at a duly held meeting
of StarSight's shareholders or at any adjournment or postponement thereof and,
in connection with such vote, the Merger is not approved by the shareholders
of StarSight, Gemstar, in lieu of exercising the Company Stock Option, may
elect to receive the Company Termination Fee in accordance with the terms of
the Merger Agreement.
If a Company Purchase Event occurs, upon five business days' prior written
notice (the "Company Put Notice") to StarSight, Sub will have the right to
cause StarSight (or any successor in interest to StarSight by merger, sale of
all or substantially all of the assets, or otherwise) to pay, (and StarSight
and any such successor, jointly and severally, will be obligated to pay) an
aggregate cancellation price (the "Company Cancellation Price") to Sub in
consideration for the cancellation of the Company Stock Option. The Company
Cancellation Price shall be equal to the product of (x) the number of shares
of StarSight Common Stock for which the Company Stock Option remains
exercisable multiplied by (y) the excess of (i) the average per share closing
price of shares of StarSight Common Stock as quoted on The Nasdaq National
Market (or if not then quoted thereon, on such other quotation system or
exchange on which the StarSight Common Stock is quoted) for the period of five
trading days ending on the trading day immediately prior to the occurrence of
the Company Put Notice over (ii) $10.46.
Subject to certain conditions, if requested by Gemstar at any time and from
time to time within three years of the first exercise of the Company Stock
Option, StarSight shall use its reasonable best efforts to prepare and file up
to two registration statements under the Securities Act if such registration
is necessary to permit the sale or other disposition of any or all shares of
StarSight Common Stock or other securities that have been acquired by or are
issuable to Gemstar upon exercise of the Company Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
StarSight effects a registration under the Securities Act of any StarSight
Common Stock for its own account or for any other shareholders of StarSight
(other than on Form S-4 or Form S-8, or any successor form thereto), StarSight
shall allow Gemstar to participate in such registration; provided, that
Gemstar's participation in such a registration statement shall not satisfy the
obligation of StarSight to effect the two registration statements at Gemstar's
request as set forth above.
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Parent Option Agreement. Concurrently with the execution of the Merger
Agreement, StarSight and Gemstar entered into a Parent Option Agreement, dated
as of December 23, 1996 (the "Parent Option Agreement," together with the
Company Option Agreement, the "Stock Option Agreements"), pursuant to which
Gemstar granted StarSight an irrevocable option to purchase up to 6,341,824
shares of Gemstar Ordinary Shares at a purchase price of $17.25 per share (the
"Parent Stock Option"). The Parent Stock Option is exercisable, in whole or in
part, at any time and from time to time following the occurrence of a Purchase
Event (as defined below) and prior to termination of the Parent Option
Agreement. A "Purchase Event" means any termination of the Merger Agreement
pursuant to Section 7.1(i), (k) or (m) thereof. The Parent Stock Option will
terminate and be of no further force and effect upon the earliest to occur of
(i) the consummation of the transactions contemplated by the Merger Agreement,
(ii) the later to occur of (a) June 23, 1998, (b) the closing date of any
Parent Takeover Proposal (as such term is defined below) plus 30 days, or
(iii) the payment by Gemstar and the receipt by StarSight of a termination fee
equal to $15 million (the "Parent Termination Fee"); provided, however, that
the repurchase and registration rights provisions described below shall
terminate in accordance with their respective terms and not when the Parent
Stock Option terminates. A "Parent Takeover Proposal" means any proposal
(whether or not in writing and whether or not delivered to Gemstar's
shareholders generally) regarding (i) a merger, consolidation, purchase of
assets (other than purchases of assets or inventory in the ordinary course of
business), tender offer, share exchange or other business combination or
similar transaction involving Gemstar or any of its subsidiaries, (ii) any
proposal or offer to acquire in any manner, directly or indirectly, any equity
interest in or any voting securities of Gemstar or any of its subsidiaries
which constitutes 10% or more of the total of such equity interests or voting
securities, or a substantial portion of the assets of Gemstar or any of its
subsidiaries, (iii) the acquisition by any person of beneficial ownership or a
right to acquire beneficial ownership of, or the formation of any "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) which beneficially owns, or has the right to acquire beneficial
ownership of 10% or more of the then outstanding shares of Gemstar's capital
stock, or (iv) any public announcement of a proposal, plan or intention to do
any of the foregoing or any agreement to engage in any of the foregoing.
Upon any termination of the Merger Agreement pursuant to Section 7.1(i), (k)
or (m) thereof, or upon the failure of any of the Gemstar Significant
Shareholders to vote in favor of the Merger at a duly held meeting of
Gemstar's shareholders or at any adjournment or postponement thereof and, in
connection with such vote, the Merger is not approved by the shareholders of
Gemstar, StarSight, in lieu of exercising the Parent Stock Option, may elect
to receive the Parent Termination Fee in accordance with the terms of the
Merger Agreement.
If a Purchase Event occurs, upon five business days' prior written notice
(the "Parent Put Notice") to Gemstar, StarSight will have the right to cause
Gemstar (or any successor in interest to Gemstar by merger, sale of all or
substantially all of the assets, or otherwise) to pay (and Gemstar and such
successor, jointly and severally, will be obligated to pay) an aggregate
cancellation price (the "Parent Cancellation Price") to StarSight in
consideration for the cancellation of the Parent Stock Option. The Parent
Cancellation Price shall be equal to the product of (x) the number of shares
of Gemstar Ordinary Shares as to which the Parent Stock Option remains
exercisable multiplied by (y) the excess of (i) the average per share closing
price of shares of Gemstar Ordinary Shares as quoted on The Nasdaq National
Market for the period of five trading days ending on the trading day
immediately prior to the occurrence of the Parent Put Notice over (ii) $17.25.
Subject to certain conditions, if requested by StarSight at any time and
from time to time within three years of the first exercise if the Parent Stock
Option, Gemstar shall use reasonable best efforts to prepare and file up to
two registration statements under the Securities Act if such registration is
necessary to permit the sale or other disposition of any or all shares of
Gemstar Ordinary Shares or other securities that have been acquired by or are
issuable to StarSight upon exercise of the Parent Stock Option. In addition,
subject to certain conditions, in the event that during such three year period
Gemstar effects a registration under the Securities Act of any Gemstar
Ordinary Shares for its own account or for any other shareholders of Gemstar
(other than on Form S-4 or Form S-8, or any successor form), Gemstar shall
allow StarSight to participate in such registration; provided, that
StarSight's participation in such a registration statement shall not satisfy
the obligation of Gemstar to effect the two registration statements at
StarSight's request as set forth above.
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Representations, Warranties and Covenants
Under the Merger Agreement, StarSight and the Company made a number of
representations regarding their respective capital structures, operations,
financial condition and other matters. Each party agreed as to itself and its
subsidiaries that, until consummation of the Merger or the earlier termination
of the Merger Agreement, it will, among other things, maintain its business,
conduct its operations in the ordinary course, provide the other with
reasonable access to its financial, operating and other information, and use
all reasonable efforts to consummate the Merger.
Conditions to the Merger
The Merger Agreement provides that the obligations of the Company and
StarSight to consummate the Merger will be subject to the satisfaction of a
number of conditions, including (i) the approval of the issuance of Gemstar
Ordinary Shares as contemplated by the Merger Agreement by the Company's
shareholders and the approval of the Merger Agreement and the transactions
contemplated thereby by the StarSight shareholders; (ii) the approval for
listing on The Nasdaq National Market of the shares of Gemstar Ordinary Shares
issuable to StarSight's shareholders and option and warrant holders pursuant
to the Merger Agreement; (iii) the absence of any litigation or proceedings
brought by a governmental entity which seeks to enjoin or prohibit the
consummation of the Merger; (iv) the declaration by the Commission that the
Form F-4 is effective; (v) the absence of any stop orders or proceedings
initiated or threatened by the Commission for that purpose with respect to the
Form F-4; (vi) the expiration of the applicable waiting period under the HSR
Act; and (vii) the receipt of all authorizations, permits, consents, waivers,
orders or approvals that may be required by regulatory authorities.
Each party's obligations under the Merger Agreement will also be conditioned
upon the accuracy in every material respect of the representations and
warranties made by the other party, and upon the other party's performance or
compliance in all material respects with all agreements and covenants required
by the Merger Agreement. Each party's obligations are further conditioned upon
(i) each of Gemstar and StarSight receiving an opinion letter from their
respective counsel to the effect that the Merger will be treated for federal
income tax purposes as a reorganization qualifying under the provisions of
Section 368(a) of the Code; and (ii) each of Gemstar and StarSight receiving
an opinion letter from their respective accounting firms, in form and
substance reasonably acceptable to Gemstar and StarSight, regarding the
appropriateness of "pooling of interests" accounting treatment under generally
accepted accounting principles.
Gemstar's obligation to consummate the Merger is further conditioned upon
StarSight obtaining the consent or approval of each person whose consent or
approval will be required in connection with the Merger under all loan or
credit agreements, notes, mortgages, indentures, leases, or other agreements
or instruments to which it or any of its subsidiaries is a party, except those
for consents and approvals which, if not obtained, would not have a material
adverse effect on StarSight or Gemstar after the Effective Time. In addition,
no event shall have occurred which had a material adverse effect on StarSight,
provided however, that the following will not be deemed to have a material
adverse effect on StarSight: (A) changes in the prices of StarSight Common
Stock traded on The Nasdaq National Market; (B) developments in the litigation
between Gemstar and StarSight; and (C) the failure of StarSight to execute a
definitive settlement agreement with Scientific Atlanta, Inc. regarding
(i) the receipt by StarSight of an outstanding arbitration award, (ii)
settlement of pending litigation between StarSight and Scientific-Atlanta,
Inc., (iii) the terms of a multi-year license of StarSight's technology to
Scientific Atlanta, Inc., and (iv) other related matters.
StarSight's obligation to consummate the Merger is further conditioned upon
Gemstar obtaining the consent or approval of each person whose consent or
approval will be required in connection with the Merger under all loan and
credit agreements, notes, mortgages, indentures, leases or other agreements or
instruments to which it or any of its subsidiaries is a party, except for
consents and approvals whose failure to obtain would not have a material
adverse effect on StarSight or Gemstar after the Effective Time, and there not
having occurred, from and including the date of the Merger Agreement, any
event which has had a material adverse effect on Gemstar and its subsidiaries
taken as a whole; provided, however, that neither (i) changes or fluctuations
in the price of Gemstar Ordinary Shares on The Nasdaq National Market (the
"Nasdaq Stock Market"), nor (ii) developments in pending litigation between
Gemstar and StarSight will be deemed to have such a material adverse effect.
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Regulatory Approvals
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger could not be consummated until
notifications were given and certain information was furnished to the FTC and
the Antitrust Division of the Department of Justice (the "Antitrust Division")
and specific waiting period requirements were satisfied. All applicable
waiting periods under the HSR Act regarding the Merger have expired.
Termination
The Merger Agreement may be terminated by the mutual written agreement of
the parties. The Merger Agreement may also be terminated by either party if
(i) any governmental entity enjoins or prohibits consummation of the Merger;
(ii) the Merger has not occurred by June 30, 1997, provided that if the Merger
shall not have been consummated due to the waiting period under the HSR Act
not having expired, or due to an action having been instituted by the
Antitrust Division or FTC challenging or seeking to enjoin the consummation of
the Merger, then such date shall be extended to August 31, 1997; (iii) any
requisite shareholder approval is not obtained; (iv) the other party breaches
any representation, warranty, covenant or other agreement set forth in the
Merger Agreement; (v) prior to the consummation of the Merger, StarSight
accepts or recommends to its shareholders a Company Superior Proposal, as that
term is defined in Section 4.2 (b) of the Merger Agreement; or (vi) prior to
the consummation of the Merger, Gemstar accepts or recommends to its
shareholders a Parent Superior Proposal, as that term is defined in Section
4.3(b) of the Merger Agreement. The Merger Agreement may be terminated by
Gemstar if StarSight's Board fails to recommend, withdraws or modifies
adversely its recommendation of the Merger or StarSight fails to comply with
its obligations under Section 5.1 of the Merger Agreement following a Company
Takeover Proposal, as that term is defined in Section 4.2(a) of the Merger
Agreement. The Merger Agreement may be terminated by StarSight if the Gemstar
Board fails to recommend or withdraws or modifies adversely its recommendation
of the Merger or Gemstar fails to comply with its obligations under Section
5.1 of the Merger Agreement following a Parent Takeover Proposal, as that term
is defined in Section 4.3 (a) of the Merger Agreement.
Amendment
The Merger Agreement may be amended prior to the Effective Time by the
parties at any time before or after approval by Starsight's shareholders,
except that, after such approval, no amendment may be made that by law
requires the further approval of the shareholders of the Company or StarSight.
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of StarSight and the Company.
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.
THE REORGANIZATION
The Company was organized in April 1992 as a British Virgin Islands
corporation. Initially, the Company engaged in the sale and distribution of
handsets incorporating the VCR Plus+ technology, which allowed consumers to
use VCR Plus+ with their existing VCRs. Later, the Company began licensing the
VCR Plus+
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technology to manufacturers for incorporation into their VCRs and televisions.
From fiscal 1992 to fiscal 1995, the Company conducted both VCR Plus+ handset
manufacturing and distribution operations (the "Handset Business") and
licensing operations through its various subsidiaries, which were organized
under the jurisdictions of several different countries. In early fiscal 1995,
the Company elected to discontinue its Handset Business and to limit its
operations solely to licensing activities. In connection with this decision,
the Company transferred all of its Handset Business to Gemstar Manufacturing
Holding Limited ("Holdings"), its then wholly-owned subsidiary, and
distributed the shares of Holdings to the Company's shareholders (the "Spin-
Off"). See "Products-VCR Plus+" in Item 1 and Item 13, "Certain Relationships
and Related Transactions."
Historically, the Company's licensing operations in the U.S. 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
U.S. In June 1995, the Company consolidated its domestic and international
licensing operations by exchanging 3,518,501 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. See
Item 13, "Certain Relationships and Related Transactions."
In August 1995, the Company also effected an exchange (the "E Guide
Exchange") of 3,511,494 Ordinary Shares for all of the outstanding stock of E
Guide, Inc. ("E Guide"). E Guide owns certain intellectual property rights
connected with the Company's Guide Plus+ technology, as well as other rights
associated with the Company's Guide Plus+ and Index Plus+ technologies. The
Company acquired such rights by effecting the E Guide Exchange. In connection
with the E Guide Exchange, the E Guide shareholders were granted registration
rights by the Company with respect to the Ordinary Shares received by them in
the E Guide Exchange. The Spin-Off, the GDC Exchange and the E Guide Exchange
are collectively referred to as the "Reorganization." See Item 13, "Certain
Relationships and Related Transactions."
Subsequent to fiscal 1995, the Company's Board of Directors approved a one-
for-two reverse stock split of all of the Company's outstanding Ordinary
Shares. The one-for-two reverse stock split was effected in September 1995
under British Virgin Islands law through a pro rata redemption, for no value,
of one-half of all outstanding Ordinary Shares.
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CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
This Annual Report contains forward-looking statements which involve risks
and uncertainties. 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.
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
manufacturers have incorporated VCR Plus+ technology into an increasing number
of models, the Company's license revenues have displayed a seasonality typical
of those of consumer electronics products manufacturers. Shipments by
manufacturers of VCRs and televisions in general, and therefore VCRs and
televisions incorporating the VCR Plus+ technology, 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 VCR or television
incorporating its technology is shipped, licensing revenues are typically
higher during the Company's third and fourth quarters. In addition,
manufacturers' shipments vary from quarter to quarter depending on a number of
factors, including retail inventory levels and retail promotional activities.
As a result, the Company may experience variability in its quarterly license
revenues affecting period to period comparability and performance. The
Company's license revenues are also affected by the volume of shipments by
manufacturers. The Company's license agreements provide for volume discounts
based on the shipment volume in each calendar year by a given manufacturer,
which can lower the average per unit license fee for a manufacturer over the
course of a year. The Company has experienced declining average per unit VCR
Plus+ license fees and expects this trend to continue. 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 such as Index Plus+
and Guide Plus+. There can be no assurance that Index Plus+, Guide Plus+ or
other future systems developed by the Company will ever result in significant
revenues or profits. Further, if these new systems achieve market acceptance,
the timing of manufacturers' implementation and shipments is uncertain and may
result in greater variability of the Company's quarterly and annual operating
results.
Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's
third fiscal quarter during the fall holiday season. The Company's planned
operating expenditures each quarter are based, in part, on the Company's
expectation as to future revenues in the quarter. In addition, many of the
Company's expenditures are fixed costs. If revenues do not meet expectations
in any given quarter, operating results for the quarter may be materially
adversely affected. In addition, the Company's annual and quarterly results
may be affected by competition, general economic downturns and the mix of
licensing revenues. As a result, the Company believes that period to period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. There can be
no assurance that the Company's historic revenue growth or its profitability
will continue on a quarterly or annual basis. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SINGLE PRODUCT CATEGORY
The Company's historical revenues are almost entirely derived from the VCR
Plus+ technology, consisting of license fees from VCR and television
manufacturers, newspapers and other publications. The life cycle of VCR Plus+
is difficult to estimate due in large measure to uncertainties regarding the
effect of new products, applications or product enhancements, technological
changes and the emergence of new industry standards and future competition.
Growth in VCR Plus+ license revenues will come primarily from further
penetration of existing markets because virtually all major VCR and television
manufacturers have licensed the VCR Plus+
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technology, and the Company has expanded into most major markets worldwide.
With increasing penetration of the VCR Plus+ technology among major VCR and
television manufacturers, volume discounts relating to the VCR Plus+ license
fees take effect. As a result, the Company has experienced declining average
per unit VCR Plus+ license fees and expects this trend to continue. The
Company has launched new systems (e.g., Index Plus+ and Guide Plus+) and is
incurring, and will continue to incur, significant research and development,
sales and marketing and general and administrative expenses relating to these
new technologies and systems. There can be no assurance, however, that Index
Plus+, Guide Plus+ or any other new system will be successful or result in
revenues. As a result, the Company remains dependent on revenues from the VCR
Plus+ technology, and a decline in revenues from licensing the VCR Plus+
technology would have a material adverse effect on the Company's business,
operating results and financial condition.
NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapidly changing
technologies, short product life cycles, the frequent introduction of new
products and evolving industry standards. Accordingly, the Company's future
performance will be dependent on its ability to (i) identify emerging
technological trends in its market, (ii) identify changing consumer needs,
(iii) develop and maintain competitive technology, (iv) enhance its technology
by adding innovative features that differentiate its technology from that of
its competitors and (v) bring technology to market quickly at cost-effective
prices. The Company has developed two systems, Index Plus+ and Guide Plus+,
and entered into license agreements with manufacturers to permit incorporation
of those two systems into VCRs and televisions. Although the Company launched
Index Plus+ and Guide Plus+ in mid and late 1996, respectively, there can be
no assurance that such systems will gain market acceptance. In addition, the
Company has entered into cross license agreements with the co-developers of
the Index Plus+ technology and will not receive any net revenues as a result
of the co-developers' incorporation of the technology into their VCRs and
televisions. If the Index Plus+ and Guide Plus+ systems do not achieve
consumer acceptance, the Company's business, operating results and financial
condition could be materially adversely affected. In addition to the risks
inherent in the launch and market acceptance of Index Plus+ and Guide Plus+,
there can be no assurance that the Company will successfully complete the
development of any future technology or that such technology will be
compatible with or incorporated into 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. There can be no assurance that
the level of consumer interest in or demand for VCRs and televisions will
continue or that other forms of entertainment delivery systems that decrease
the demand for VCRs and televisions will not be introduced. The reduction in
the demand for VCRs or televisions could also adversely affect the Company's
business, operating results and financial condition.
RELIANCE ON THIRD PARTIES
The Company's business relies, and will continue to rely in the future, on
third-party manufacturers, publications and media services. Revenues from the
Company's VCR Plus+ system are derived from license revenues received from
manufacturers and publications. The Company has executed VCR Plus+ licensing
agreements with virtually every major television and VCR manufacturer. None of
these agreements requires the inclusion of the VCR Plus+ system into VCRs
manufactured by the licensees, and only a few of these agreements guarantee a
minimum licensing fee to the Company over their term. All of these agreements
may be terminated by the manufacturer without substantial financial penalty.
The Company's Index Plus+ and Guide Plus+ licensing agreements with television
and VCR manufacturers are structured similarly to the Company's VCR Plus+
licensing agreements and are generally subject to the conditions and
qualifications described above.
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
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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. See "Business--Products"
in Item 1.
Consumer acceptance of the Index Plus+ and Guide Plus+ systems depends on
the cooperation of both cable and television broadcasters. The Company has
entered into agreements with cable and television broadcasters and independent
television stations to broadcast the information used in Index Plus+ and Guide
Plus+ through the VBI. There can be no assurance, however, that local cable
operators will not "strip" information required by Index Plus+ and Guide Plus+
from the VBI, so that such information would not be available to some
consumers. In such a case, additional hardware would have to be purchased by
the consumer to receive the data required for the Index Plus+ and Guide Plus+
systems, thereby decreasing the attractiveness of these systems, or the
Company would have to enter into agreements with local cable operators to
ensure retransmission of required information. There can be no assurance that
such agreements could be reached or that, if reached, they would be on terms
acceptable to the Company. In addition, increased use of digital broadcast
satellite technology, which does not involve a VBI, would require the
Company's Index Plus+ and Guide Plus+ systems to be modified to allow receipt
of program data in digital form, and there can be no assurances that such
systems could be so modified in a commercially acceptable manner. See
"Business--Products" in Item 1.
The Company has no control over the number of VCRs and televisions that will
be manufactured incorporating the Company's systems, and there can be no
assurances with respect to the quantity of VCRs and televisions that will
include the Company's systems or the amount of licensing revenues the Company
will receive as a result of inclusion by manufacturers of the Company's
systems.
COMPETITION
The Company's systems compete with systems offered by other companies. Many
of the Company's present and potential 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 based primarily on the speed of its technological developments,
uniqueness of its designs, ease of use, system features and price, proprietary
technology, quality of marketing and ability to identify and meet consumer
needs. There can be no assurance that based on these factors the Company will
be competitive with the existing or future products or services of its
competitors.
Several products on the market that compete with VCR Plus+ offer point-and-
click VCR programming functions that enable a subscriber to select a program
from the screen and instruct the unit (a special VCR, television or a decoder
box) to record. For example, in mid 1994, StarSight Telecast, Inc.
("StarSight") introduced an on-screen electronic guide with point-and-click
recording capability. In addition, there have been several announcements of
planned interactive electronic television guide services (including United
Video's Prevue Express), some of which contain a point-and-click recording
feature.
Indexing systems currently built into VCRs that require the user to manually
enter program stops and titles will compete with the Index Plus+ technology.
Many companies, including some of the major VCR manufacturers, have introduced
or are developing new indexing systems. In the area of pre-recorded video
materials, digital video disc players with random access capabilities may also
compete with Index Plus+ in the future.
The interactive electronic television guides that may compete with VCR
Plus+, whether existing now or developed in the future, may also compete with
the Company's Guide Plus+ system. Digital satellite system products either
being offered or expected to be offered by a number of manufacturers,
including Thomson, Sony, Panasonic and others include an on-screen electronic
guide of programming offered by such systems. Scientific Atlanta, Inc. also
has developed a program guide for use in its cable boxes, and the Company
expects that other cable box and satellite receiver manufacturers may develop
program guides that would compete with the
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Company's Guide Plus+ system. Guide Plus+ will also face competition from
traditional published television guides and from non-interactive, or passive,
on-screen electronic guides.
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. 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. See Item 10, "Directors
and Executive Officers of the Registrant."
PATENT AND PROPRIETARY INFORMATION; LITIGATION
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.
There can be no assurance, however, that the Company's intellectual property
rights will be adequate to ensure the Company's competitive position, or that
competitors will not be able to produce a non-infringing competitive product
or service. In addition, there can be no assurances that in the future third
parties will not assert patent infringement claims against the Company, or
that if required to obtain any third party licenses as a result of an
infringement dispute, the Company will be able to obtain such licenses.
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 currently has a number of
issued U.S. and foreign patents. The Company also has numerous pending U.S.
and foreign patent applications, issued and pending trademark registrations
(some of which have been opposed by third parties) and computer program
copyrights in the U.S. and other countries. The Company has also acquired the
exclusive right to several patents broadly covering various aspects of
interactive, electronic on-screen television guides. The Company intends to
vigorously protect its intellectual property rights. There can be no
assurance, however, 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. Successful challenges to certain of the Company's
patents would materially adversely affect the Company's business, operating
results and financial condition.
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.
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. There
can be no assurance, however, that these agreements will not be breached, that
the Company will have adequate remedies for any breach or that the Company's
trade secrets will not otherwise become known or be independently developed by
competitors.
The Company has from time to time received communications from third parties
asserting that features of certain of the Company's technologies may infringe
upon intellectual property rights of such parties. There can
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be no assurance that third parties will not assert infringement claims against
the Company in the future. 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. In
addition, if any of the Company's licensees determine that any additional
third party licenses are required as a result of any such dispute, there can
be no assurance that any such licenses would be available on terms acceptable
to the Company, if at all.
The Company is currently engaged in a lawsuit with StarSight in which the
Company has alleged that StarSight has infringed three patents covering
various aspects of the interactive, electronic on-screen television guide to
which the Company has certain exclusive rights. The Company is also seeking a
declaration that certain of StarSight's patents are unenforceable and that
StarSight's actions violate federal and state antitrust laws. StarSight has
alleged that the VCR Plus+ handset's Cable Box Changer feature has infringed
one of StarSight's patents. StarSight has also filed a counterclaim seeking,
among other things, determinations that it does not infringe certain patents
of the Company and that such patents are invalid and unenforceable. In the
Merger Agreement, the Company and StarSight agreed that all activity with
respect to the pending litigation between them will be held in abeyance until
the earlier of the termination of the Merger Agreement, or the effective time
of the Merger. See Item 3, "Legal Proceedings."
The following is a summary of the intellectual property protection afforded
to each of the Company's major technologies:
VCR Plus+ System
In the U.S., the Company currently has 13 issued patents and 37 pending
patent applications, representing more than 500 claims relating to the
technology underlying the VCR Plus+ system. The patents and patent
applications generally cover the use of compressed programming numbers for the
programming of VCRs and other electronic equipment and also include other
novel features such as the VCR Plus+ Cable Channel Changer and CallSet remote
initialization. The Company's issued U.S. patents have more than 400 claims.
In addition, the Company has been notified by the U.S. Patent and Trademark
Office that two of its pending applications are allowable. The Company also
has nine issued foreign patents and multiple foreign patent applications
pending for the VCR Plus+ technology. The Company holds eight issued U.S. and
22 issued foreign design patents covering various designs of products which
contain or are used with VCR Plus+ technology.
The Company has U.S. copyright registrations for the encoding and decoding
computer programs at the heart of the VCR Plus+ compression and encryption
technology. The Company considers portions of the VCR Plus+ encryption
technology to be a protectable trade secret and has undertaken considerable
efforts to maintain its secrecy.
With respect to the VCR Plus+ system, 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 VCR
Plus+, PlusCode, CallSet, iPlus+, SpotPlus, Video Plus+, ShowView, G-Code,
Instant Programmer, Control Tower and C/3/. 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.
Index Plus+ System
The Company currently has five issued U.S. patents and 15 pending U.S.
patent applications, representing more than 150 claims on the technology
related to the Index Plus+ system. The Company has been notified by the U.S.
Patent and Trademark Office that one of its pending patent applications is
allowable. In general, the patent and patent applications cover the method and
apparatus used to create a directory of the taped segments of a videotape and
to effect the rapid and accurate retrieval of those segments, as well as
certain other novel
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features. The Company has cross licensing agreements with Matsushita, JVC and
Hitachi. The Company also has four issued foreign patents and multiple foreign
patent applications pending for the Index Plus+ technology in those countries
where the system is expected to be launched. The Company has several trademark
applications pending for marks related to the Index Plus+ system, including
the mark Index Plus+.
Guide Plus+ System
The Company has expended significant efforts to strengthen its intellectual
property rights in the electronic television guide area. The Company has four
issued U.S. patents and 21 U.S. patent applications pending with over 130
claims, relating to Guide Plus+-related technology. The Company has also been
notified by the U.S. Patent and Trademark Office that one of its pending
patent applications is allowable. The Company has also acquired exclusive
licensing rights to several fundamental issued patents in the area of
electronic television guides: the relevant portion of U.S. Patent No.
4,908,713, filed in 1981 and issued with 18 guide related claims in 1990, U.S.
Patent No. 5,568,272 and U.S. Patent No. 5,508,815 ("Levine patents"); U.S.
Patent No. 5,038,211, filed in 1989 and issued with 34 claims in 1991
("Hallenbeck patent"); and U.S. Patent No. 4,751,578, filed in 1985 and issued
with 19 claims in 1988 ("Reiter patent"). The Company believes that these
issued patents, the continuation claims in process, and the patent
applications filed by the Company provide it with a competitive advantage.
The Company intends to protect vigorously its intellectual property rights.
The Company believes that certain claims of the Levine patent, if upheld to be
valid, cover the operation of on-screen television guides utilizing local
storage and retrieval of electronic television guide data, as used by
StarSight and other existing and announced interactive on-screen guides. The
Company believes that certain claims of the Hallenbeck patent, if upheld to be
valid, cover a means of data delivery and selective retrieval that
significantly decrease the cost of an interactive television guide system. The
Company also believes that certain claims of the Reiter patent, which cover
the concept of sorting television programs by theme (such as sports, movies,
specials, etc.), if upheld to be valid, represent a valuable user- interface
feature without which an electronic guide's utility and ease-of-use would be
greatly reduced. The Company is presently suing StarSight for patent
infringement of claims in three of these patents. The Company believes that if
it is successful in these legal proceedings, the Company will be able not only
to prevent StarSight from infringing on the Company's intellectual property
rights by further distributing or servicing its StarSight system, but also to
establish the validity and coverage of these patents by passing a critical
legal test. However, there is no assurance that the Company will prevail in
any or all of these patent infringement claims. See Item 3, "Legal
Proceedings."
Other Related Applications
Because the iPlus+ service relies on PlusCode Numbers and the VCR Plus+
system, intellectual property protection of the iPlus+ service relies
primarily on the rights obtained with respect to the VCR Plus+ system. In
addition, trademark registrations have been obtained or applications made in
the U.S. and foreign countries for the mark iPlus+.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company operates on a multinational basis, and, as a result, the Company
is subject to various risks, including a greater difficulty of administering
business globally, regulatory requirements such as tariff regulations, export
control restrictions, overlapping or differing tax structures, differences in
intellectual property protections, political and economic instability or
general trade restrictions. If any of these risks materialize, it could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company generates a substantial amount of its income
outside the United States, and the Company and its subsidiaries generally are
taxed at rates substantially lower than U.S. tax rates. If the Company or its
subsidiaries were no longer able to qualify for such tax rates or if the tax
laws were rescinded or changed, the Company's operating results could be
materially adversely affected. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Item 5, "Market
for Registrant's Common Equity and Related Stockholder Matters" and Note 4 of
the Notes to Consolidated Financial Statements.
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CONTROL BY MANAGEMENT
At March 31, 1997, Thomas L. H. Lau, Henry C. Yuen, Daniel S. W. Kwoh,
Wilson K. C. Cho, Elsie Ma Leung and Roy J. Mankovitz, each members of the
Company's management, collectively owned approximately 62% of the outstanding
Ordinary Shares and voting power of the Company. In addition, Mary Lau, Thomas
Lau's sister, and Thomas Lau together own approximately 39%. Accordingly, the
Company's management is able to control the election of the Board of Directors
of the Company, and thus the direction and future operations of the Company,
including decisions regarding acquisitions and other business opportunities
and the declaration of dividends and the issuance of additional Ordinary
Shares and other securities, in each case without the supporting vote of any
other shareholder of the Company. See Item 12, "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases facilities in Pasadena, California, Bedford,
Massachusetts and Kanata, Canada covering in excess of 50,000 square feet. The
Company's leases expire in the year 2000 for the California facility, 1998 for
the Massachusetts facility and in 2001 for the Canadian facility. 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.
The Company is currently a party in a consolidated lawsuit in which the
adverse party is StarSight. In this case, StarSight Telecast, Inc. v. Gemstar
Development Corporation and Michael R. Levine, filed October 15, 1993 in the
Northern District of California (hereinafter "StarSight Litigation"),
StarSight is seeking, among other relief, a determination that the VCR Plus+
handset's Cable Box Changer feature infringes a patent issued to StarSight.
StarSight also seeks a determination that it has not infringed the Levine
patent, that the patent is invalid and that the Company violated federal
antitrust laws. As a result of a motion by the Company, the court dismissed
the antitrust claim with prejudice. The Company has counterclaimed against
StarSight for infringement of the Levine patent. In successive lawsuits
coordinated with this case, the Company has also charged StarSight with
infringement of the Hallenbeck and Reiter patents and has sought injunctions
restraining StarSight from infringing these patents. The Company is also
seeking a declaration that certain of StarSight's patents are unenforceable
and that StarSight's actions violate federal and state antitrust laws.
StarSight filed a counterclaim seeking, among other things, determinations
that its technologies do not infringe the Hallenbeck and Reiter patents and
that such patents are invalid and unenforceable. See "Patent and Proprietary
Information; Litigation" in Item 1.
In the Merger Agreement, the Company and StarSight agreed that all activity
with respect to the pending litigation between them will be held in abeyance
until the earlier of the termination of the Merger Agreement or the Effective
Time of the Merger. Following the effective date of the Merger, the litigation
between the Company and Starsight will be dismissed by all parties. If the
Merger Agreement is terminated, the Company plans to vigorously pursue its
claims against StarSight in order to protect and enhance the Company's
intellectual property rights. The Company does not believe that the ultimate
outcome of the lawsuit involving StarSight will have a material adverse effect
on the financial condition or results of operations of the Company.
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.
For a discussion of recent matters submitted to a vote of security holders,
see Item 1, "Business--Overview," and "--Proposed Merger with StarSight."
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
GENERAL
Since the initial public offering of the Company's Ordinary Shares at $12.00
per share on October 11, 1995, the Ordinary Shares have been traded on the
Nasdaq Stock Market under the symbol GMSTF. Prior to that time there was no
public trading market for the Ordinary Shares.
The sole market for the Company's Ordinary Shares is 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 periods indicated 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, 1996
Third Quarter (from October 11, 1995)..................... $41 3/4 $13 1/8
Fourth Quarter............................................ 38 1/2 21 1/4
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
</TABLE>
As of March 31, 1997, there were 31,273,253 Ordinary Shares outstanding and
132 holders.
EXCHANGE CONTROLS
There are currently no exchange control restrictions on remittances of
dividends on the Ordinary Shares or on the conduct of the Company's operations
in the British Virgin Islands, where it is incorporated.
DESCRIPTION OF ORDINARY SHARES AND PREFERENCE SHARES
The following is a brief description of the rights of holders of fully paid
Ordinary Shares and the authorized but unissued Preference Shares, par value
$0.01 per share, of the Company (the "Preference Shares"). This description
does not purport to be complete and is qualified in its entirety by reference
to the Memorandum of Association, as amended ("Memorandum of Association") and
Articles of Association, as amended ("Articles of Association") of the Company
and to the relevant provisions of the British Virgin Islands International
Business Companies Ordinance (Cap. 291), as amended.
Ordinary Shares
The Company's Memorandum of Association authorizes the issuance of an
aggregate of 500,000,000 Ordinary Shares. All of the issued Ordinary Shares
are, for purposes of the issue, credited as fully paid and nonassessable
(except that in the case of Ordinary Shares issued for a promissory note or
other written obligation for payment of a debt, the holder of such Ordinary
Shares is liable for the amount unpaid on the promissory note, and such
Ordinary Shares may be subject to forfeiture), and accordingly no further
contribution of capital may be required by the Company from holders of
Ordinary Shares. Under British Virgin Islands law, nonresidents of British
Virgin Islands may freely hold, vote and transfer Ordinary Shares in the same
manner as British Virgin Islands residents.
The shareholders of E Guide, who received an aggregate of 3,511,494 Ordinary
Shares of the Company in the E Guide Exchange (see Item 1, "Business--The
Reorganization"), were also granted certain registration rights, including
demand registration rights and piggyback registration rights, with respect to
the Ordinary Shares they received in the E Guide Exchange.
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Preference Shares
The Company's Memorandum of Association authorizes the issuance of an
aggregate of 50,000,000 Preference Shares. The Board of Directors has the
authority, without shareholder action, to establish or increase the number of
shares of any series of Preference Shares, and to establish the dividend
rights and rates, voting rights, redemption provisions and liquidation
preference with respect to any such Preference Shares, all of which may take
precedence over comparable rights of the existing Ordinary Shares. Any
variance in the terms of Preference Shares after initial issuance thereof
which affects the holders of Ordinary Shares must be approved by a majority of
the holders of Ordinary Shares. As a condition to the Merger Agreement, the
Company has agreed not to issue or authorize any new shares of its capital
stock, including Preference Shares, until the Effective Time of the Merger or
termination of the Merger Agreement, whichever comes first.
Rights of Shareholders under British Virgin Islands Law May Be Less Protected
than those of Shareholders of a Corporation Incorporated in U.S.
Jurisdictions
The Company is incorporated under the laws of the British Virgin Islands,
and its corporate affairs are governed by its Memorandum of Association and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of the Company's
management, directors and controlling shareholders and the rights of the
Company's shareholders differ from those that would apply if the Company were
incorporated in a jurisdiction within the U.S. Further, the rights of
shareholders under British Virgin Islands law are not as clearly established
as the rights of shareholders under legislation or judicial precedent in
existence in most U.S. jurisdictions. Thus, the public shareholders of the
Company may have more difficulty in protecting their interests in the face of
actions by the management, directors or controlling shareholders than they
might have as shareholders of a corporation incorporated in a U.S.
jurisdiction. In addition, there is doubt that the courts of the British
Virgin Islands would enforce, either in an original action or in an action for
enforcement of judgments of U.S. courts, liabilities that are predicated upon
the securities laws of the U.S.
Dividends
During fiscal 1993, the Company paid a $3,000,000 cash dividend. During
fiscal 1994, the Company's Board of Directors declared an $8,000,000 cash
dividend, which was paid on June 1, 1994. During fiscal 1995, the Company's
Board of Directors declared a $5,000,000 cash dividend which was paid
subsequent to March 31, 1995. The Company's Board of Directors, however, 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. For a
discussion of taxation of dividends for shareholders, see "Taxation Issues"
below.
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.
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Voting Rights
Every shareholder who is present in person or by proxy at a meeting of the
Company shall have one vote for each Ordinary Share held by such shareholder.
In addition, holders of Preference Shares shall have such voting rights, if
any, as determined by the Board of Directors. The Articles of Association of
the Company make no provision for cumulative voting.
Directors
Under the Company's Articles of Association, the number of directors of the
Company may not be less than three nor more than fifteen, and are divided into
three classes. Directors may be appointed by the shareholders or by the
directors to fill a vacancy or as an addition to the existing directors.
Directors may be removed, with cause, by a resolution of the shareholders of
the Company or by a resolution of the other directors.
Quorum
The quorum required to constitute a valid general meeting of shareholders
consists of shareholders present in person or by proxy together holding not
less than 50% of all shares entitled to vote at the meeting. If a meeting is
adjourned for lack of a quorum, it will stand adjourned to the next business
day at the same time and place or to such other day at such other time and
place as the directors may determine, and if at the adjourned meeting there
are present in person or by proxy within one hour from the time appointed for
the meeting at least one-third of the shares entitled to vote at the meeting,
the shareholder or shareholders present shall be a quorum. Meetings may also
be called upon the written request of shareholders holding more than 50% of
the outstanding voting shares of the Company. A meeting convened upon the
written request of shareholders shall be dissolved if a quorum is not present
at the first meeting.
Resolutions
Resolutions of shareholders may be adopted at shareholders' meetings by the
affirmative vote of a simple majority of the shares entitled to vote thereon
that are represented at the meeting and voted. In addition, shareholders may
act by written consent without a meeting by the consent of the holders of an
absolute majority of the outstanding shares entitled to vote on such matters,
provided that notice of any such actions is subsequently furnished to all
shareholders. Resolutions of directors may be adopted at meetings of the
Company's Board of Directors by the affirmative vote of a simple majority of
the directors present at the meeting who voted and did not abstain. In
addition, directors may act by written consent without a meeting by the
consent of all directors.
The Company may amend its Memorandum of Association and its Articles of
Association by a resolution of shareholders or by a resolution of directors;
provided, however, that certain provisions in the Articles of Association
relating to the election of directors may be amended only by the shareholders
upon an affirmative vote of not less than 75 percent of the outstanding shares
entitled to vote thereon. Accordingly, directors of the Company have the power
to amend most of the provisions of the Articles of Association and to take
many actions without shareholder approval. For example, the Company's
directors may amend the Company's Memorandum of Association to increase or
reduce the Company's authorized capital, an action which would typically
require shareholder approval under the laws of most U.S. jurisdictions.
Rights in a Winding-Up
Holders of Ordinary Shares are entitled to participate in proportion to
their holdings in any distribution of assets in a winding-up after
satisfaction of liabilities to creditors and holders of Preference Shares, if
any.
Additional Issuances of Ordinary Shares
As of March 31, 1997 there were 468,726,747 authorized but unissued Ordinary
Shares, including 5,600,000 Ordinary Shares reserved for issuance under the
1994 Stock Incentive Plan, as amended. See Item 12, "Security
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Ownership of Certain Beneficial Owners and Management." Additional authorized
but unissued Ordinary Shares may be utilized for a variety of corporate
purposes, including future public or private offerings to raise additional
capital. Subject to the Company's Articles of Association and any resolution
of shareholders, the Board of Directors is authorized to exercise the power of
the Company to offer, allot, grant options over or otherwise dispose of all of
the remaining unissued Ordinary Shares of the Company. The Board of Directors
may, without shareholder action, increase the number of authorized Ordinary
Shares. See Item 1, "Business--Proposed Merger with StarSight" for a
discussion of the company's plans to issue additional Ordinary Shares in
connection with the Merger. Other than issuing shares in connection with the
Merger, the Company does not currently have any plans to issue additional
Ordinary Shares, except in connection with the 1994 Stock Incentive Plan, as
amended.
Transfers of Ordinary Shares
The Company's Memorandum of Association and Articles of Association do not
include any restrictions on the transferability of Ordinary Shares other than
those restrictions set forth in the 1994 Stock Incentive Plan, as amended.
Merger; Dissenters' Rights
British Virgin Islands law provides for mergers whereby either one company
absorbs another company and the absorbed company simultaneously dissolves, or
a new company is formed and absorbs the two merging companies, which
automatically dissolve. British Virgin Islands law provides for compulsory
acquisition (if the holders of 90% or more of the company's voting shares
instruct the company to do so) or appraisal of the interests of a shareholder
who objects to the transfer of the ownership or assets of a company. A
shareholder objecting to a merger is not, however, entitled to appraisal of
his shares if the company is the surviving corporation in the merger and the
shareholder continues to hold the same or similar shares following
consummation of the merger.
Transfer Agent and Registrar
ChaseMellon Shareholder Services is the Transfer Agent and Registrar for the
Ordinary Shares.
TAXATION ISSUES
The following discussion is a summary of certain anticipated U.S. federal
income tax consequences and British Virgin Islands tax consequences of an
investment in the Ordinary Shares under current law and is based on the advice
of O'Melveny & Myers LLP with respect to U.S. federal income taxes and Harney,
Westwood & Riegels with respect to British Virgin Islands taxes. This
discussion does not deal with all possible tax consequences relating to an
investment in the Ordinary Shares and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which (such as
dealers in securities, insurance companies, individual retirement and other
tax deferred accounts and other tax-exempt entities) may be subject to special
rules. In particular, the discussion does not address the tax consequences
under state, local and other national (i.e., non-U.S. and non-British Virgin
Islands) tax laws. The laws discussed below may change at any time and such
changes may be retroactive to a date preceding the date of this Annual Report.
Accordingly, each prospective investor should consult its own tax advisor
regarding the particular tax consequences to it of an investment in the
Ordinary Shares. The following discussion is based upon laws and relevant
interpretations thereof in effect as of April 15, 1997, all of which are
subject to change.
U.S. Federal Income Taxation
The following discussion only addresses the U.S. federal income taxation of
a U.S. Investor (as defined below) making an investment in the Ordinary
Shares. It does not address the tax consequences to any person,
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whether a U.S. resident or not, who holds (or will hold), directly or
indirectly, 10% or more of the Ordinary Shares (a "10% Shareholder"). Non-U.S.
Investors and 10% Shareholders are advised to consult their own tax advisors
regarding the tax considerations incident to an investment in the Ordinary
Shares.
For purposes of this discussion, the term "U.S. Investor" means a holder of
Ordinary Shares who is a citizen or resident of the U.S., a U.S. corporation
or partnership (including an entity treated as a corporation or partnership
for U.S. tax purposes) or other entity created or organized under the laws of
the U.S. or any political subdivision thereof, an estate or trust the income
of which is subject to U.S. federal income taxation regardless of its source,
and any other holder whose ownership of Ordinary Shares is effectively
connected with the conduct of a trade or business in the U.S.
A U.S. Investor receiving a distribution with respect to the Ordinary Shares
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from earnings and profits of
the Company as determined under U.S. federal income tax principles. Any
distributions in excess of the earnings and profits of the Company will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital to the extent of the U.S. Investor's basis in the Ordinary Shares, and
then as gain from the sale or exchange of a capital asset, provided that the
Ordinary Shares constitute capital assets in the hands of the U.S. Investor.
U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Ordinary Shares.
Gain or loss on the sale or exchange of Ordinary Shares will be treated as
capital gain or loss if the Ordinary Shares are held as a capital asset by the
U.S. Investor. Such capital gain or loss will be long-term capital gain or
loss if the U.S. Investor has held the Ordinary Shares for more than one year
at the time of the sale or exchange.
Various provisions contained in the Code impose special taxes in certain
circumstances on non-U.S. corporations and their shareholders. The following
is a summary of certain provisions which could have an adverse impact on the
Company and the U.S. Investors.
Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of certain
companies (including foreign corporations) as personal holding companies
("PHCs") and the consequent taxation of such corporations on their
undistributed personal holding company income to the extent amounts at least
equal to such income are not distributed to their shareholders. A PHC is a
corporation (i) more than 50% of the stock of which is owned, directly or
indirectly, by five or fewer individuals (without regard to their citizenship
or residence) at any time during the last half of the taxable year, and (ii)
which receives 60% or more of gross income, as specifically adjusted, from
certain passive sources, such as dividends, interest and royalties. (In
determining whether a foreign corporation satisfies the gross income test,
only its U.S. source income is taken into account.) A PHC does not include a
corporation that is a foreign personal holding company or a passive foreign
investment company, as described below. If the Company or Gemstar Development
Corporation ("GDC"), its U.S. subsidiary, were classified as a PHC, a tax
would be imposed at the rate of 39.6% on such corporation's undistributed
personal holding company income.
At March 31, 1997, more than 50% of the Company's Ordinary Shares were
owned, directly or indirectly, by five or fewer individuals. In addition,
through application of constructive stock ownership rules, the subsidiaries of
the Company were also owned, directly or indirectly by five or fewer
individuals at March 31, 1997. Therefore, the Company and GDC will be
classified as PHCs if they satisfy the 60% gross income test. The Company,
however, does not expect GDC to have personal holding company income in any of
its tax years through the period ending March 31, 1998. If GDC were classified
as a PHC it would be subject to the PHC tax unless it pays a dividend to the
Company in an amount sufficient to eliminate its undistributed personal
holding company income. In that event, the Company would have to pay a
dividend to its shareholders in the same amount as the dividend it received
from GDC to eliminate undistributed personal holding company income at
23
<PAGE>
the Company level. Any such dividend would be subject to a 30% U.S.
withholding tax to the extent paid out of current or accumulated earnings and
profits of GDC. If the Company receives a dividend from GDC, the dividend
would constitute U.S. source passive income, and the Company would be a PHC
and would be subject to the PHC tax unless such amounts were paid out to its
shareholders. The Company intends to manage the affairs of GDC (which may
include making dividend distributions) so as to minimize the imposition of
such tax on GDC, to the extent consistent with its other business goals. The
Company should be able to avoid taxation as a PHC if dividends received from
GDC are distributed to the Company's shareholders.
Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to U.S. persons who are shareholders of such corporations. The
Company will be classified as a FPHC if (i) at any time during the taxable
year, five or fewer individuals, who are U.S. citizens or residents, directly
or indirectly own more than 50% of the Company's Ordinary Shares (measured
either by voting power or value) (the "shareholder test") and (ii) the Company
receives at least 60% (50% if it was a FPHC in a prior year) of its gross
income (regardless of source), as specially adjusted, from certain passive
sources such as dividends, interest and royalties (the "income test").
The Company does not believe that at March 31, 1997 it or any of its foreign
subsidiaries satisfies the shareholder test so as to be classified as a FPHC.
It is possible, however, that events subsequent to March 31, 1997 may cause
the Company to satisfy the shareholder test in future years. In addition,
since the Company will derive most of its income from dividends paid by its
subsidiaries, the Company believes that it meets, and expects that it will
continue to meet, the income test.
If the Company or any of its foreign subsidiaries were classified as a FPHC,
a portion of its undistributed income would be imputed to those shareholders
who are U.S. Investors (including U.S. corporations) who held the Company's
stock on the last day of its taxable year, which is March 31. Such income
would be taxable to such persons as a dividend, even if no cash dividend is
actually paid. U.S. Investors who dispose of their Ordinary Shares prior to
such date would not be subject to a tax under these rules. If the Company
becomes a FPHC, U.S. persons who acquire Ordinary Shares from decedents would
be denied the step-up of the income tax basis for such Ordinary Shares to fair
market value at the date of death which would otherwise have been available
and instead would have a tax basis equal to the lower of fair market value or
the decedent's basis. If the Company concludes that it or any of its
subsidiaries is a FPHC, it intends to manage its affairs (which may include
making dividend distributions) so as to avoid or minimize having income that
would be imputed to its U.S. Investors under these rules, to the extent
consistent with its other business goals.
Passive Foreign Investment Companies
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 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. Passive income also includes interest
income derived from funds raised in the Company's public offerings.
The Company does not believe that it is currently a PFIC or will be a PFIC,
because, based on the substantial management and operational functions of its
subsidiaries in connection with the creation and
24
<PAGE>
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, in the future, the Company is a CFC, as described below, it would
be required to value its assets at their adjusted tax basis for purposes of
the assets test, which could increase the risk of the Company becoming a PFIC.
If the Company were a PFIC, a U.S. Investor would be subject to increased tax
liability upon the sale of Ordinary Shares at a gain or upon the receipt of
certain dividends, unless such U.S. Investor 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. Investor 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 fund 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. Investors 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.
Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and require that certain U.S. shareholders
include in gross income certain income of a CFC regardless of whether the CFC
has actually distributed such income. The CFC provisions only apply if U.S.
Investors who own at least 10% of the voting stock of the Company, own, in the
aggregate, more than 50% (measured by vote or value) of the shares of a
foreign corporation. The Company does not believe that at March 31, 1997 it is
a CFC. It is possible, however, that events subsequent to March 31, 1997 may
cause the Company to satisfy the shareholder test in future years. If the
Company were ever to become classified as a CFC, the income imputation rules
referred to for CFCs above would only apply with respect to such 10% U.S.
Investors.
U.S. Backup Withholding
Treasury regulations currently in effect do not require backup withholding
with respect to dividends paid by a foreign corporation such as the Company.
However, the U.S. Treasury Department is considering whether to extend the
backup withholding rules to dividends from certain foreign corporations.
The payment of proceeds from the disposition of Ordinary Shares by a holder
to or through the U.S. office of a broker generally will be subject to
information reporting and backup withholding at a rate of 31%, unless the
holder either certifies its status as a non-U.S. holder under penalties of
perjury or otherwise establishes an exemption. The payment of proceeds from
the disposition by a holder of Ordinary Shares to or through a non-U.S. office
of a broker will generally not be subject to backup withholding and
information reporting. However, information reporting (but not backup
withholding) may apply to such a holder who sells a beneficial interest in
Ordinary Shares through a non-U.S. branch of a U.S. broker, or through a non-
U.S. office of a U.S. Controlled Person, in either case unless the holder
establishes an exemption or the broker has documentary evidence in its files
of the holder's status as a non-U.S. person.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that the required information is furnished to
the U.S. Internal Revenue Service.
25
<PAGE>
Changes in Law
The United States Congress is considering several proposals for changing
U.S. tax laws. These changes, if enacted, may affect the rules and rates of
tax described above, and some or all of the changes may be retroactive to a
date preceding the date of this Annual Report.
BRITISH VIRGIN ISLANDS TAXATION
Under the laws of the British Virgin Islands as currently in effect, a
holder of Ordinary Shares who is not a resident of the British Virgin Islands
is (i) exempt from British Virgin Islands income tax on dividends paid with
respect to the Ordinary Shares and (ii) is not liable for British Virgin
Islands income tax on gains realized on sale or disposition of such Ordinary
Shares. In addition, the British Virgin Islands does not impose a withholding
tax on dividends paid by the Company. A company incorporated under the
International Business Companies Act is deemed not to be a resident for this
purpose.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands. In addition, the Ordinary Shares are not subject to any
transfer taxes, stamp duties or similar charges. In addition, there is no
income tax treaty or convention currently in effect between the U.S. and the
British Virgin Islands.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data at March 31, 1996 and
1997 and for the years ended March 31, 1995, 1996 and 1997 have been derived
from the Company's audited Consolidated Financial Statements included in Item
18. The selected consolidated financial data at March 31, 1993, 1994 and 1995
and for the years ended March 31, 1993 and 1994 have been derived from audited
consolidated financial statements not included herein. The information should
be read in conjunction with Item 8, "Financial Statements and Supplementary
Data" and related Notes thereto, and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
---------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Revenues.......................... $ 9,189 $27,025 $41,744 $ 53,869 $71,121
Operating costs and expenses:.....
Selling and marketing............ 3,112 9,308 11,598 31,397 22,756
Research and development......... 1,968 5,023 9,769 13,923 12,483
General and administrative....... 4,035 6,711 10,992 12,434 13,501
Nonrecurring expenses (1)........ -- -- 1,710 19,526 --
------- ------- ------- -------- -------
Total operating expenses......... 9,115 21,042 34,069 77,280 48,740
Earnings (loss) from operations... 74 5,983 7,675 (23,411) 22,381
Other income, net................. 82 786 696 2,076 4,073
------- ------- ------- -------- -------
Earnings (loss) from continuing
operations before income tax
expense.......................... 156 6,769 8,371 (21,335) 26,454
Income tax expense................ 419 2,238 3,681 5,497 8,369
------- ------- ------- -------- -------
Earnings (loss) from continuing
operations....................... (263) 4,531 4,690 (26,832) 18,085
Earnings from discontinued
operations (2)................... 9,977 6,726 5,197 -- --
------- ------- ------- -------- -------
Net earnings..................... $ 9,714 $11,257 $ 9,887 $(26,832) $18,085
======= ======= ======= ======== =======
PER SHARE DATA:
Earnings (loss) from continuing
operations....................... $ (0.01) $ 0.16 $ 0.17 $ (0.85) $ 0.54
Earnings from discontinued
operations....................... 0.36 0.24 0.18 -- --
------- ------- ------- -------- -------
Net earnings..................... $ 0.35 $ 0.40 $ 0.35 $ (0.85) $ 0.54
======= ======= ======= ======== =======
Weighted average shares
outstanding (3).................. 27,684 28,159 28,159 31,458 33,378
======= ======= ======= ======== =======
<CAPTION>
MARCH 31,
---------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital................... $22,654 $20,834 $ 1,761 $ 21,980 $46,754
Total Assets...................... 27,612 42,157 23,626 80,597 96,758
Debt (4).......................... -- 9,812 -- -- --
Shareholders' equity (5).......... 19,137 23,466 5,737 26,320 52,290
</TABLE>
- --------
(1) Nonrecurring expenses in fiscal 1995 consist of professional fees and
related costs associated with the Company's initial public offering that
were incurred prior to the October 1994 postponement of the offering.
Fiscal 1996 continuing operations included nonrecurring expenses of $19.5
million for inventory related losses.
(2) Fiscal 1995 discontinued operations included a nonrecurring tax benefit of
$8.1 million. See "The Reorganization" and Note 3 of the Notes to
Consolidated Financial Statements for a discussion of discontinued
operations.
(3) See Note 1 of the Notes to Consolidated Financial Statements for a
description of the calculation of the weighted average shares
outstanding.
(4) Amounts are included in current net assets and non-current net
liabilities related to discontinued operations in the consolidated
balance sheets of the Consolidated Financial Statements.
(5) Cash dividends of $0.11, $0.29 and $0.18 per Ordinary Share were declared
in the fiscal years ended March 31, 1993, 1994 and 1995, respectively.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Since the launch of the VCR Plus+ system in November 1990 in the United
States, the Company has continued to focus on its mission of providing
innovative technologies to make life easier for consumers all over the world.
As of March 1997, the VCR Plus+ system is available in over 30 countries, and
the combined worldwide circulation of publications publishing the PlusCode
numbers increased to over 300 million. During fiscal 1997, the Company
introduced two new technologies, Index Plus+, an indexing system built into
new VCRs featuring an interactive on-screen directory of video-tape content by
titles automatically captured from the broadcast; and TV Guide Plus+, a
subscription-free interactive on-screen program guide built into new
televisions and VCRs. Both technologies are aimed at enhancing television or
video viewing by automating the finding, selecting, tuning and recording of
programs.
During fiscal 1997, the Company made a strategic acquisition and is in the
process of completing a second strategic acquisition. On December 12, 1996,
the Company acquired VideoGuide. See Item 1, "Business--Overview." VideoGuide
develops and markets the VideoGuide Information System which provides a
subscription-based service including an interactive program guide, electronic
news and sports scores using data broadcast over the 900 MHz wireless paging
network. On December 23, 1996, the Company entered into a definitive agreement
to acquire StarSight. StarSight develops and markets the StarSight system,
which is a subscription-based interactive program guide available in set-top
boxes, televisions, VCRs and cable boxes. StarSight also holds extensive
intellectual property rights which it licenses to major companies such as
Sony, Thomson, Scientific Atlanta, Microsoft and Compaq. The transaction has
satisfied all regulatory requirements and has been approved by the
shareholders of both companies. The Merger is expected to be completed in May
1997. See Item 1, "Business--Proposed Merger with StarSight."
28
<PAGE>
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto. The acquisition of VideoGuide
has been accounted for as a pooling of interests, and accordingly, the
Company's consolidated financial statements have been restated to include
VideoGuide for all periods presented. However, a more meaningful measure of
the Company's financial performance is the information presented on a pro
forma basis which excludes VideoGuide prior to the completion of the merger in
December 1996. The pro forma results consist of the Company's as reported
results, excluding VideoGuide's results through the second fiscal quarter of
1997. The following discussion, unless otherwise indicated, is based primarily
on these pro forma results.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED) EXCLUDING
AS REPORTED VIDEOGUIDE PRIOR TO THE MERGER
FISCAL YEAR ENDED MARCH 31, FISCAL YEAR ENDED MARCH 31,
---------------------------------------- -------------------------------------
1995 1996 1997 1995 1996 1997
----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $41,744 100% $ 53,869 100 % $71,121 100% $41,744 100% $53,436 100% $70,367 100%
Operating costs and
expenses
Selling and marketing.. 11,598 28 31,397 58 22,756 32 11,003 26 15,496 29 20,661 30
Research and
development........... 9,769 24 13,923 26 12,483 18 7,104 17 8,428 16 10,699 15
General and
administrative........ 10,992 26 12,434 23 13,501 19 10,182 25 9,957 19 12,160 17
Nonrecurring expenses.. 1,710 4 19,526 36 -- -- 1,710 4 -- -- -- --
------- --- -------- --- ------- --- ------- --- ------- --- ------- ---
Total operating costs
and expenses.......... 34,069 82 77,280 143 48,740 69 29,999 72 33,881 64 43,520 62
------- --- -------- --- ------- --- ------- --- ------- --- ------- ---
Earnings (loss) from
operations............. 7,675 18 (23,411) (43) 22,381 31 11,745 28 19,555 36 26,847 38
Other income, net...... 696 2 2,076 3 4,073 6 755 2 2,025 4 4,162 6
------- --- -------- --- ------- --- ------- --- ------- --- ------- ---
Earnings (loss) from
continuing operations
before income tax
expense................ 8,371 20 (21,335) (40) 26,454 37 12,500 30 21,580 40 31,009 44
Income tax expense..... 3,681 9 5,497 10 8,369 12 3,681 9 5,497 10 8,369 12
------- --- -------- --- ------- --- ------- --- ------- --- ------- ---
Earnings (loss) from
continuing operations.. $ 4,690 11% $(26,832) (50)% $18,085 25% $8,819 21% $16,083 30% $22,640 32%
======= === ======== === ======= === ======= === ======= === ======= ===
</TABLE>
Fiscal 1997 Compared to Fiscal 1996 (pro forma and as reported)
Revenues. Pro forma revenues in fiscal 1997 were $70.4 million, an increase
of 32%. This increase was due primarily to the continued increased shipment of
units incorporating the VCR Plus+ technology worldwide. As reported revenues
for fiscal 1997 were $71.1 million, an increase of 32%. Revenues attributable
to VideoGuide were not significant.
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
Index Plus+ and TV Guide Plus+ data content services. Pro forma selling and
marketing expenses in fiscal 1997 were $20.7 million, an increase of 33%. The
increase was due primarily to the operational costs required to support the
Index Plus+ and TV Guide Plus+ systems, as well as advertising and marketing
expenses associated with the launch of the two systems. As reported selling
and marketing expenses in fiscal 1997 were $22.8 million, a decrease of 28%.
This decrease is attributable mainly to VideoGuide's marketing, promotional
and product launch activities related to the VideoGuide Information System
during fiscal 1996.
Research and Development Expenses. Pro forma research and development
expenses in fiscal 1997 were $10.7 million, an increase of 27%. The increase
in research and development was due primarily to increased activities
associated with the development and testing of Index Plus+ and TV Guide Plus+.
As reported research
29
<PAGE>
and development expenses in fiscal 1997 were $12.5 million, a decrease of 10%,
which reflects lower development costs incurred related to the VideoGuide
Information System in fiscal 1997 when compared to fiscal 1996.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel cost for administration, finance, information
systems, human resources and general management, as well as professional fees
including legal and accounting services. Pro forma general and administrative
expenses in fiscal 1997 were $12.2 million, an increase of 22%. The increase
was due primarily to an increase in personnel cost to support the Company's
licensing business on a worldwide basis, costs associated with VideoGuide's
operations, as well as legal expenses associated with the patent litigation
with StarSight. As reported general and administrative expenses in fiscal 1997
were $13.5 million, an increase of 9%.
Income Tax Expense. As reported income tax expense was $8.4 million in
fiscal 1997 compared to $5.5 million in fiscal 1996, an increase of $2.9
million. The overall effective tax rate reported by the Company in any single
period is impacted by, among other things, the country in which earnings or
losses arise, applicable statutory tax rates and withholding tax requirements
for particular countries, and the availability of tax credits for taxes paid
in certain jurisdictions. Because of these factors, it is expected that the
Company's future tax expense as a percentage of earnings before income taxes
may vary from year to year. See Note 4 of the Notes to Consolidated Financial
Statements.
Fiscal 1996 Compared with Fiscal 1995 (as reported)
Revenues. As reported revenues in fiscal 1996 were $53.9 million, an
increase of 29%. This increase was due primarily to increased shipment of
units incorporating the VCR Plus+ technology worldwide.
Selling and Marketing Expenses. As reported selling and marketing expenses
in fiscal 1996 were $31.4 million, an increase of 171%. The increase was due
primarily to VideoGuide's marketing, promotional and product launch activities
related to the VideoGuide Information System during fiscal 1996.
Research and Development Expenses. As reported research and development
expenses in fiscal 1996 were $13.9 million, an increase of 43%. The increase
in research and development was due primarily to increased activities
associated with the development and testing of the VideoGuide Information
System as well as the Index Plus+ and TV Guide Plus+ systems.
General and Administrative Expenses. As reported general and administrative
expenses in fiscal 1996 were $12.4 million, an increase of 13%. The increase
is due mainly to increased costs associated with VideoGuide's operations.
Nonrecurring Expenses. During fiscal 1996, VideoGuide revalued its inventory
of VideoGuide set-top receivers on-hand to net realizable value. Accordingly,
VideoGuide recorded a charge to nonrecurring expenses of approximately $7.0
million. In addition, VideoGuide recorded a $12.5 million charge to reserve
for units on order with the manufacturer under a fixed purchase commitment.
Nonrecurring expenses in fiscal 1995 consist of professional fees and related
costs associated with the Company's initial public offering that were incurred
prior to the October 1994 postponement of the offering.
Income Tax Expense. Income tax expense was $5.5 million in fiscal 1996
compared to $3.7 million in fiscal 1995, an increase of $1.8 million. The
expected tax benefit for fiscal 1996 was limited due to uncertainty regarding
realization of net operating loss carryforwards, tax credit carryforwards, and
temporary differences between the tax basis of assets and liabilities and
their reported amounts. See Note 4 of the Notes to Consolidated Financial
Statements.
Income from Discontinued Operation. In fiscal 1995, consistent with the
Company's strategy to focus on the licensing of its technologies and systems,
the Company discontinued the Handset Business effective
30
<PAGE>
January 1, 1995. Income from discontinued operations reflected the Handset
Business from April 1, 1994 through December 31, 1994. During such period, the
Handset Business had a loss of $2.9 million, which was offset by a one-time
tax gain of $8.1 million from the final settlement of previously assessed and
accrued taxes with the Hong Kong Inland Revenue Department. See Note 3 of the
Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had cash and cash equivalents totaling $50.1
million, and working capital of $46.8 million. The increase in cash and cash
equivalents and working capital is due primarily to positive cash flow from
operations and net proceeds of $7.9 million from the Company's secondary
offering in April 1996.
Net cash provided by continuing operations amounted to $11.6 million for
fiscal 1997, as compared to $10.9 million for fiscal 1996. The increase in net
cash provided by continuing operations was primarily the result of increased
license revenues.
The Company's investing activities from continuing operations in fiscal 1997
primarily consisted of net purchases of marketable securities totaling $27.2
million and property and equipment expenditures and capitalized patent costs
of $1.8 million. Such expenditures were financed by existing cash and cash
equivalents.
On December 12, 1996, the Company acquired all of the capital stock of
VideoGuide for 475,000 Ordinary Shares of the Company. The merger was
accounted for as a pooling of interests. The Company did not incur any
material amount of costs associated with the merger. See Note 2 of the Notes
to Consolidated Financial Statements.
In August 1995, the Company exchanged 3,511,494 Ordinary Shares for all of
the outstanding stock of E Guide. See Note 2 of the Notes to Consolidated
Financial Statements.
In connection with the Spin-Off, the Company distributed to shareholders
$7.1 million in cash included in the net assets of the companies engaged in
the Handset Business during fiscal 1995. During fiscal 1995, the Company also
repaid amounts due to companies engaged in the Handset Business totaling $6.8
million. See Note 3 of the Notes to Consolidated Financial Statements.
The Company does not have any material commitments for capital expenditures.
However, the Company expects to incur significant marketing expenditures to
launch new systems and to market new services and expects to incur significant
research and development, and general and administrative expenses relating to
these new systems and services over the next two to three years.
The Company believes that the anticipated cash flow from operations, and
existing cash and cash equivalent balances, will be sufficient to meet cash
requirements at least through fiscal 1998.
CURRENCY FLUCTUATION AND EXCHANGE RATES
The Consolidated Financial Statements of the Company are prepared in U.S.
dollars in accordance with U.S. generally accepted accounting principles. The
Company's transactions predominately occur in U.S. dollars. Gains and losses
on currency transactions were immaterial for all periods presented.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There is nothing to report with regard to this Item.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information called for by this Item is set forth in the Company's
Consolidated Financial Statements and related Notes herein as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 33
Consolidated Balance Sheets as of March 31, 1996 and 1997................. 34
Consolidated Statements of Operations for each of the years in the three-
year period ended March 31, 1997......................................... 35
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended March 31, 1996............................... 36
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended March 31, 1997......................................... 37
Notes to Consolidated Financial Statements for the years ended March 31,
1995, 1996 and 1997...................................................... 38
</TABLE>
32
<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 1996,
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,
1997. 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 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, 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 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
May 2, 1997
33
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 60,578 $50,054
Marketable securities..................................... 3,519 29,141
Prepaid expenses and other current assets................. 6,865 5,489
-------- -------
Total current assets.................................... 70,962 84,684
Property and equipment, net................................. 4,042 4,148
Marketable securities....................................... -- 1,535
Intangible assets, net...................................... 4,227 3,928
Other assets................................................ 1,366 2,463
-------- -------
$ 80,597 $96,758
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 44,769 $33,176
Current portion of deferred revenue....................... 4,213 4,754
-------- -------
Total current liabilities............................... 48,982 37,930
Deferred revenue, less current portion...................... 2,860 1,377
Other liabilities........................................... 2,435 5,161
Shareholders' equity:
Preference shares, par value $.01 per share. Authorized
50,000,000 shares, none issued........................... -- --
Ordinary shares, par value $.01 per share. Authorized
500,000,000 shares; issued and outstanding 30,928,285
shares at March 31, 1996 and 31,273,253 shares at
March 31, 1997........................................... 310 313
Additional paid-in capital................................ 52,619 60,536
Accumulated deficit....................................... (26,554) (8,469)
Cumulative translation adjustments........................ (55) (90)
-------- -------
Net shareholders' equity................................ 26,320 52,290
Commitments and contingencies (note 9)
-------- -------
$ 80,597 $96,758
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Revenues............................................. $41,744 $ 53,869 $71,121
Operating costs and expenses:
Selling and marketing.............................. 11,598 31,397 22,756
Research and development........................... 9,769 13,923 12,483
General and administrative......................... 10,992 12,434 13,501
Nonrecurring expenses.............................. 1,710 19,526 --
------- -------- -------
Earnings (loss) from operations.................. 7,675 (23,411) 22,381
Other income, net.................................... 696 2,076 4,073
------- -------- -------
Earnings (loss) from continuing operations before
income tax expense.............................. 8,371 (21,335) 26,454
Income tax expense................................... 3,681 5,497 8,369
------- -------- -------
Earnings (loss) from continuing operations........... 4,690 (26,832) 18,085
------- -------- -------
Earnings from discontinued operations, net of tax.... 5,197 -- --
------- -------- -------
Net earnings (loss).............................. $ 9,887 $(26,832) $18,085
======= ======== =======
Per share data:
Earnings (loss) from continuing operations......... $ 0.17 $ (0.85) $ 0.54
Earnings from discontinued operations.............. 0.18 -- --
------- -------- -------
Net earnings (loss).............................. $ 0.35 $ (0.85) $ 0.54
======= ======== =======
Weighted average shares outstanding.................. 28,159 31,458 33,378
======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORDINARY RETAINED
SHARES ADDITIONAL EARNINGS CUMULATIVE NET
------------- PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1994................... 23,736 $237 $ 3,829 $ 19,027 $ 373 $ 23,466
Net earnings.......... -- -- -- 9,887 -- 9,887
Dividend.............. -- -- -- (5,000) -- (5,000)
Distribution to
shareholders......... -- -- -- (22,545) -- (22,545)
Issuance of Ordinary
Shares............... 82 1 390 -- -- 391
Equity adjustment from
foreign currency
translation.......... -- -- -- -- (462) (462)
------ ---- ------- -------- ----- --------
Balances at March 31,
1995................... 23,818 238 4,219 1,369 (89) 5,737
Net loss.............. (26,832) (26,832)
Sale of Ordinary
Shares in initial
public offering...... 3,450 35 36,124 -- -- 36,159
Acquisition of common
stock of E Guide,
Inc.................. 3,511 35 8 -- -- 43
Issuance of Ordinary
Shares............... 149 2 12,268 -- -- 12,270
Adjustment for change
in VideoGuide, Inc.
year end............. -- -- -- (1,091) -- (1,091)
Equity adjustment from
foreign currency
translation.......... -- -- -- -- 34 34
------ ---- ------- -------- ----- --------
Balances at March 31,
1996................... 30,928 310 52,619 (26,554) (55) 26,320
Net earnings.......... -- -- -- 18,085 -- 18,085
Sale of Ordinary
Shares in secondary
public offering...... 345 3 7,917 -- -- 7,920
Equity adjustment from
foreign currency
translation.......... -- -- -- -- (35) (35)
------ ---- ------- -------- ----- --------
Balances at March 31,
1997................... 31,273 $313 $60,536 $ (8,469) $ (90) $ 52,290
====== ==== ======= ======== ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Continuing operations:
Earnings (loss) from continuing operations... $ 4,690 $(26,832) $ 18,085
Adjustments to reconcile earnings (loss) to
net cash provided by continuing operations:
Depreciation and amortization.............. 1,418 1,932 1,980
Deferred income taxes...................... 117 1,547 2,754
Changes in assets and liabilities:
Prepaid expenses and other assets........ 636 (5,617) 1,376
Accounts payable and accrued expenses.... 3,656 37,270 (11,593)
Deferred revenue......................... 22 2,497 (942)
Other liabilities........................ 126 76 (28)
-------- -------- --------
Net cash provided by continuing
operations.............................. 10,665 10,873 11,632
-------- -------- --------
Discontinued operations:
Earnings from discontinued operations, net of
tax......................................... 5,197 -- --
Adjustments to reconcile earnings to net cash
provided by discontinued operations:
Depreciation and amortization.............. 659 -- --
Decrease in receivable and revenue
allowances................................ (374) -- --
Deferred income taxes...................... (8,100) -- --
Changes in working capital and other, net
of spin-off of subsidiaries............... 11,549 -- --
-------- -------- --------
Net cash provided by discontinued
operations.............................. 8,931 -- --
-------- -------- --------
Net cash provided by operating
activities.............................. 19,596 10,873 11,632
-------- -------- --------
Cash flows from investing activities:
Continuing operations:
Cash payments of amounts due to related
parties..................................... (6,759) -- --
Decrease (increase) in due from related
parties..................................... (2,414) 2,414 --
Purchase of marketable securities ........... -- (3,637) (35,870)
Proceeds from sale of marketable securities.. -- 118 8,713
Additions to property and equipment.......... (1,157) (3,108) (918)
Increase in intangible assets................ (1,007) (826) (869)
Decrease (increase) in other assets.......... 807 (368) (1,097)
Discontinued operations:
Cash advanced under loans and advances to
related parties............................. (2,093) -- --
Additions to property and equipment.......... (472) -- --
Increase in other assets..................... (66) -- --
-------- -------- --------
Net cash used in investing activities.... (13,161) (5,407) (30,041)
-------- -------- --------
Cash flows from financing activities:
Continuing operations:
Dividends paid............................... (8,000) (5,000) --
Proceeds from issuance of Ordinary Shares.... 1,066 12,270 --
Proceeds from public offerings of Ordinary
Shares...................................... -- 36,159 7,920
Discontinued operations:
Net repayments under notes payable to banks.. (217) -- --
Payments of long-term debt................... (980) -- --
Cash included in net assets distributed to
shareholders related to spin-off............ (7,095) -- --
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. (15,226) 43,429 7,920
-------- -------- --------
Effect of exchange rate changes on cash.......... (462) 34 (35)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. (9,253) 48,929 (10,524)
Cash and cash equivalents at beginning of year... 21,993 12,740 60,578
Adjustment for change in VideoGuide, Inc. year
end............................................. -- (1,091) --
-------- -------- --------
Cash and cash equivalents at end of year......... $ 12,740 $ 60,578 $ 50,054
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest..................................... $ 605 $ -- $ --
Income taxes................................. 4,653 3,807 6,128
======== ======== ========
Noncash investing and financing activities:
</TABLE>
During the year ended March 31, 1995, the Company spun off Gemstar
Manufacturing Holding Limited and its wholly owned subsidiaries to its
shareholders. The book value of the net noncash assets of these companies
was $15,450 (note 3).
During the year ended March 31, 1996, the Company exchanged 3,511,494
Ordinary Shares for all of the outstanding common stock of E Guide, Inc.
(note 2).
Effective 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).
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(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 aimed at making
technology user-friendly for consumers.
As more fully discussed in Note 2, effective December 12, 1996, the Company
acquired all of the outstanding capital stock of VideoGuide, Inc.
("VideoGuide"). The merger has been accounted for as a pooling of interests
and, accordingly, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of VideoGuide.
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
Cash equivalents of $60,578,000 and $50,054,000 at March 31, 1996 and 1997,
respectively, consist of highly liquid investments, such as certificates of
deposit and commercial paper with an original maturity of three months or
less. For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents.
Marketable Securities
The Company accounts for its investments in commercial paper and corporate
bonds 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 marketable
securities 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 commercial paper and corporate bonds as held-to-
maturity securities.
Inventories
Inventories included in prepaid expenses and other current assets consist of
VideoGuide set-top receivers. Inventories, all of which are finished goods,
are stated at the lower of cost or market. Cost is determined on a first-in,
first-out "FIFO" basis. VideoGuide revalued its inventories to net realizable
value. See note herein regarding Nonrecurring Expenses.
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.
38
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(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................ 5 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 seven to ten years, which is the
expected useful life. Goodwill, which represents the excess of cost over net
assets acquired, is amortized on a straight line basis over five years. The
Company regularly assesses the recoverability of these intangible assets by
determining whether the amortization of the balance over their remaining life
can be recovered through undiscounted future operating cash flows of the
assets.
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. This
Statement 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 this Statement 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 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.
39
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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.
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 (Note 8).
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.
Nonrecurring Expenses
Nonrecurring expenses in fiscal 1996 represent a $7,064,000 charge recorded
by VideoGuide to revalue its inventories to net realizable value. In addition,
VideoGuide recorded a $12,462,000 charge to nonrecurring expenses to reserve
for set-top receivers on order with a manufacturer under a fixed purchase
commitment.
Nonrecurring expenses in fiscal 1995 consist of professional fees and
related costs associated with the Company's initial public offering that were
incurred prior to the October 1994 postponement of the offering.
Net Interest Income
Net interest income, included in other income, net, totaled $627,000,
$2,027,000 and $4,001,000 for each of the years in the three-year period ended
March 31, 1997.
40
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS No. 109") for all periods presented. 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
Earnings (loss) per share are based on the weighted average number of
Ordinary Shares outstanding as adjusted for the reverse stock split (note 5)
for all periods presented. The difference between primary and fully diluted
earnings per share is immaterial for all periods presented.
Pursuant to the requirements of the Securities and Exchange Commission,
Ordinary Shares and stock options issued by the Company during the twelve
months immediately preceding the Company's initial public offering date have
been included in the calculation of the weighted average shares outstanding as
if they were outstanding for all periods presented using the treasury stock
method.
Reclassifications
Certain reclassifications have been made to prior years financial
information to conform with the current year presentation.
(2) BUSINESS COMBINATIONS
Merger with VideoGuide
Effective 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 stock options which converted into options to
purchase 16,529 Ordinary Shares of the Company. VideoGuide pioneered a set-top
product featuring subscription-based, on-screen interactive television guide,
news and sports services using data broadcast over a paging network.
The merger has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of
operations of VideoGuide.
Information concerning Ordinary Shares, employee stock options and per share
data has been restated on an equivalent stock basis. Prior to the combination,
VideoGuide's fiscal year ended on December 31. In recording the business
combination, VideoGuide's financial statements for the year ended March 31,
1996 were combined with the Company's consolidated financial statements for
the same period and VideoGuide's financial statements for the year ended
December 31, 1994 were combined with the Company's consolidated financial
statements for the year ended March 31, 1995. The retained earnings charge for
VideoGuide's quarter ended March 31, 1995, to conform year ends, included a
net loss of $1,091,000. VideoGuide had no revenues during the quarter ended
March 31, 1995.
41
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(2) BUSINESS COMBINATIONS (CONTINUED)
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 SIX MONTHS
31, ENDED
----------------- SEPTEMBER 30,
1995 1996 1996
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gemstar International Group............. $41,744 $ 53,436 $26,199
VideoGuide.............................. -- 433 754
------- -------- -------
Combined.................................. $41,744 $ 53,869 $26,953
======= ======== =======
Net earnings (loss):
Gemstar International Group............. $14,016 $ 16,083 $ 8,517
VideoGuide.............................. (4,129) (42,915) (4,555)
------- -------- -------
Combined.................................. $ 9,887 $(26,832) $ 3,962
======= ======== =======
</TABLE>
There were no significant transactions between the Company and VideoGuide
prior to the combination, which required elimination, and no adjustments were
required to conform accounting policies.
Acquisition of E Guide
In August 1995, the Company issued 3,511,494 Ordinary Shares to the
shareholders of E Guide, Inc. ("E Guide") in exchange for all of the
outstanding capital stock of E Guide. E Guide owns certain intellectual
property rights connected with the Company's Guide Plus+ technology as well as
other rights associated with the Company's Guide Plus+ and Index Plus+
technologies.
(3) DISCONTINUED OPERATIONS
Effective January 1, 1995, the Company elected to discontinue the marketing
and distribution of the VCR Plus+ technology through the sale of handsets (the
"Handset Business") 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 "Spin-Off").
In light of the independence of the Handset Business and its dissimilarity
to the Company's continuing licensing business, the operations of the Handset
Business have been reported as discontinued operations in the consolidated
statements of operations for all periods presented.
42
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(3) DISCONTINUED OPERATIONS (CONTINUED)
Net assets of Holdings and its subsidiaries distributed to the shareholders
as a result of the Spin-Off were as follows (in thousands):
<TABLE>
<S> <C>
Cash and cash equivalents...................................... $ 7,095
Noncash current assets......................................... 11,866
Due from Gemstar International Group Limited and its
subsidiaries.................................................. 6,759
Long term assets............................................... 15,520
Total liabilities.............................................. (18,695)
--------
Net assets distributed to the shareholders..................... $ 22,545
========
</TABLE>
The results of the Handset Business have been reported separately as a
component of discontinued operations on the accompanying consolidated
statements of operations. Summarized results of the Handset Business to the
Spin-Off effective date, January 1, 1995, included in the consolidated
statements of operations for the year ended March 31, 1995 were as follows (in
thousands):
<TABLE>
<S> <C>
Net sales........................................................ $13,124
=======
Loss before income taxes......................................... $(2,903)
Income tax benefit............................................... (8,100)
-------
Earnings, net of tax........................................... $ 5,197
=======
</TABLE>
During 1995, the Company reached a final settlement of certain taxes
previously assessed by the Hong Kong Inland Revenue Department (IRD). The
taxes assessed by the IRD relate to the discontinued operations of a company
included in the Spin-Off for fiscal years 1991 through 1994. The amount of the
final settlement with the IRD was substantially less than both the amount
previously assessed by the IRD and accrued by the Company. Accordingly, the
Company recognized a tax benefit of approximately $8,100,000 in the
discontinued operations of the Handset Business for 1995.
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 $136,000 for the three months
ended March 31, 1995, and $112,000 and $1,446,000 for the years ended March
31, 1996 and 1997, respectively.
The Company continues to maintain service relationships with certain
Holdings subsidiaries. Pursuant to 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. The Company renegotiated the compensation provisions of the
Service Agreements to provide for quarterly payments for services rendered
based on a "cost plus" basis. Service fees paid to these companies totaled
$1,458,000 for the three months ended March 31, 1995 and $7,100,000 and
$8,300,000 for the years ended March 31, 1996 and 1997, respectively.
43
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(4) 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 foreign withholding taxes.
The provision for income tax expense for continuing operations consists of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current.............................................. $3,564 $3,950 $5,615
Deferred............................................. 117 1,547 2,754
------ ------ ------
Total.............................................. $3,681 $5,497 $8,369
====== ====== ======
</TABLE>
The significant components of deferred income taxes attributable to earnings
from continuing operations before income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Deferred tax expense (benefit)................... $(1,777) $ (90) $1,004
Change in valuation allowance for deferred tax
assets.......................................... 1,894 1,637 1,750
------- ------ ------
Total.......................................... $ 117 $1,547 $2,754
======= ====== ======
</TABLE>
A reconciliation of the expected U.S. Federal tax rate to the effective tax
rate for continuing operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Expected U.S. Federal tax rate................. 35% 35% 35%
Foreign withholding taxes...................... 28 18 11
Foreign earnings not subject to taxation....... (49) (61) (21)
Change in the valuation allowance.............. 32 8 7
Other.......................................... (2) -- --
------ ------ ------
Actual effective tax rate.................... 44% --% 32%
====== ====== ======
</TABLE>
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements.
44
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(4) INCOME TAX EXPENSE (CONTINUED)
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,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred revenue........................................ $ 652 $ 740
Tax credits available for carryforward to future
periods................................................ 3,635 4,052
Tax losses available for carryforward to future periods. 3,239 --
Accrued expenses........................................ 628 739
Start-ups costs......................................... -- 4,120
------- -------
Gross deferred tax assets............................. 8,154 9,651
Valuation allowance....................................... (5,986) (7,736)
------- -------
Deferred tax assets, net of valuation allowance....... 2,168 1,915
Deferred tax liability--taxes provided on intercompany
income................................................... (3,713) (6,214)
------- -------
Net deferred tax liability............................ $(1,545) $(4,299)
======= =======
</TABLE>
Net deferred tax liability is included in other liabilities in the
accompanying consolidated balance sheets. 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.
At March 31, 1997, the Company had available foreign tax credit
carryforwards aggregating $4,052,000 to offset future United States income
taxes expiring through 2002. The 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.
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,
1997, net of reserves established.
The United States Internal Revenue Service is currently examining the
Company's Federal income tax returns for the years ended March 31, 1991, 1992
and 1993. While the ultimate outcome of the examination cannot be determined
with assurance at the present time, the Company believes that tax liabilities
have been adequately accrued in the accompanying consolidated financial
statements and that the impact of audit assessments, if any, will not have a
significant impact upon the Company's financial position or results of
operations.
45
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(5) SHAREHOLDERS' EQUITY
In August 1995, the Company's Board of Directors authorized a one-for-two
reverse stock split of all the Company's outstanding Ordinary Shares. The
reverse stock split was effected in September 1995 under British Virgin
Islands law through a pro rata redemption, for no value, of one-half of all
outstanding Ordinary Shares. For financial statement purposes, all references
to share information for all periods presented have been adjusted to give
effect to the reverse stock split.
During 1995, the Company's Board of Directors declared a $5,000,000 cash
dividend which was paid on April 7, 1995.
On April 16, 1996, the Company completed the sale of 345,000 Ordinary Shares
in a secondary public offering.
Effective December 12, 1996, the Company acquired all of the outstanding
capital stock of VideoGuide for 475,000 Ordinary Shares of the Company (Note
2).
(6) 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.
As of March 31, 1997, the number of Ordinary Shares reserved for issuance
under the Plan was 5,600,000 Ordinary Shares. At the Company's Annual Meeting
on May 1, 1997, the Company's shareholders approved and adopted an amendment
to increase the number of shares reserved for issuance by 3,500,000 to
9,100,000 Ordinary Shares.
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.
At March 31, 1997, there were 687,971 additional shares available for grant
under the Plan. The per share weighted-average fair value of stock options
granted during fiscal 1996 and 1997 was $10.25 and $15.57, 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
---------- ----------
<S> <C> <C>
Expected dividend yield............................ --% --%
Risk-free interest rate............................ 6.5% 5.5%
Expected volatility................................ 81% 81%
Expected life (years).............................. 10 10
</TABLE>
46
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(6) STOCK INCENTIVE PLAN (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Net earnings (loss)
As reported......................................... $ (26,832) $ 18,085
Pro forma........................................... (41,106) 4,955
Net earnings (loss) per share.........................
As reported......................................... (0.85) 0.54
Pro forma........................................... (1.31) 0.15
</TABLE>
Pro forma net earnings (loss) reflects only options granted in fiscal 1996
and 1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above because compensation cost is reflected
over the options' vesting period of 3 years and compensation cost for options
granted prior to April 1, 1996 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------
1996 1997
------------------------ ------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year........................ -- -- 4,511,737 $11.93
Granted.................... 4,511,737 $11.93 500,292 $18.31
Exercised.................. -- -- -- --
Forfeited.................. -- -- -- --
Expired.................... -- -- -- --
--------- ---------
Outstanding at end of year... 4,511,737 $11.93 5,012,029 $12.57
========= =========
Options exercisable at end of
year........................ 1,564,286 $11.90 3,028,746 $11.91
========= =========
</TABLE>
At March 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $11.90-$24.00 and 7.4
years, respectively.
(7) 401(K) PLAN
During fiscal 1997, the Company established a 401(k) benefit plan ("401(k)
Plan") allowing an employee to contribute up to a maximum of 15% gross salary
or $9,500, whichever is less. The Company will match the employee's
contributions based on certain percentages of the employee's contributions, as
defined, up to IRS applicable limits. The Company made contributions of
$77,000 to the 401(k) Plan during the year ended March 31, 1997.
47
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(8) 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,
--------------
1996 1997
------ -------
<S> <C> <C>
U.S. Treasury securities................................... $ -- $ 8,638
Corporate debt securities.................................. 3,519 22,038
------ -------
$3,519 $30,676
====== =======
</TABLE>
The amortized cost of the marketable securities approximated fair value at
March 31, 1996 and 1997. Marketable securities at March 31, 1997 due after one
year through five years amounts to $1,535,000. No realized gains or losses
were included in income in 1996 and 1997 as all investments were held to
maturity.
Property and equipment, at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Machinery and equipment.................................. $ 2,665 $ 3,076
Office furniture and equipment........................... 2,658 3,149
Property and leasehold improvements...................... 707 723
------- -------
6,030 6,948
Less accumulated depreciation and amortization........... (1,988) (2,800)
------- -------
Property and equipment, net............................ $ 4,042 $ 4,148
======= =======
Intangible assets consist of the following (in thousands):
<CAPTION>
MARCH 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Patents and trademarks................................... $ 6,098 $ 6,967
Goodwill................................................. 1,025 1,025
------- -------
7,123 7,992
Less accumulated amortization............................ (2,896) (4,064)
------- -------
Intangible assets, net............................... $ 4,227 $ 3,928
======= =======
</TABLE>
Amortization expense charged to continuing operations for each of the years
in the three-year period ended March 31, 1997 was $950,000, $1,081,000 and
$1,168,000, respectively.
48
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(8) SELECTED BALANCE SHEET ACCOUNTS (CONTINUED)
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Accounts payable and accrued expenses.................... $30,032 $15,216
Accrued purchase commitments............................. 12,462 14,436
Accrued payroll and related benefits..................... 2,275 3,524
------- -------
Total.................................................. $44,769 $33,176
======= =======
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company leases various facilities under long-term noncancelable
operating leases. Future minimum lease payments are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ended March 31:
1998........................................................... $ 942
1999........................................................... 811
2000........................................................... 613
2001........................................................... 428
2002........................................................... 150
------
$2,944
======
</TABLE>
Rent expense related to continuing operations under operating leases for
each of the years in the three-year period ended March 31, 1997 was $993,000
$1,077,000, and $1,165,000, respectively.
The Company has an agreement to purchase transmission services. This
agreement is cancelable without material financial penalty; however, if the
agreement is canceled, the Company would have to find alternative providers
for such services. Future minimum payments under such agreement are as follows
(in thousands):
<TABLE>
<S> <C>
Fiscal year ended March 31:
1998.......................................................... $ 2,784
1999.......................................................... 2,784
2000.......................................................... 2,784
2001.......................................................... 1,160
-------
$ 9,512
=======
</TABLE>
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 condition or results of operations.
49
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(10) BUSINESS SEGMENT REPORTING
Customers constituting 10% or more of revenues are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
----------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A................................................. -- -- 11%
Customer B................................................. 10% 10% --
</TABLE>
A summary of the Company's revenues and earnings (loss) from continuing
operations before taxes by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Revenues:
United States................................. $15,267 $ 19,990 $25,548
Foreign (1)................................... 26,477 33,879 45,573
------- -------- -------
Total....................................... $41,744 $ 53,869 $71,121
======= ======== =======
Earnings (loss) from operations (2):
United States................................. $(9,546) $(41,562) $(7,114)
Foreign....................................... 17,221 18,151 29,495
------- -------- -------
Total....................................... $ 7,675 $(23,411) $22,381
======= ======== =======
</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.
A summary of the Company's identifiable assets by geographic area which
represents those assets used in the Company's operations in each area are as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Identifiable assets:
United States...................................... $ 6,720 $14,844 $20,111
Foreign............................................ 16,906 65,753 76,647
------- ------- -------
Total............................................ $23,626 $80,597 $96,758
======= ======= =======
</TABLE>
(11) MERGER WITH STARSIGHT TELECAST, INC.
On December 23, 1996, the Company and StarSight Telecast, Inc. ("StarSight")
entered into a merger agreement which provides for the Company's acquisition
of StarSight. Upon the close of the merger, each share of StarSight common
stock will be converted into 0.6062 shares of the Company's Ordinary Shares.
The Company also assumed options and warrants to purchase StarSight stock that
remain outstanding as options or warrants to purchase the Company's Ordinary
Shares.
50
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(11) MERGER WITH STARSIGHT TELECAST, INC. (CONTINUED)
If completed, the merger will be accounted for as a pooling-of-interests,
and, accordingly, the Company's historical consolidated financial statements
presented in future reports will be restated to include the accounts and
results of operations of StarSight. The merger is expected to be completed in
May 1997.
The following unaudited pro forma data summarizes the combined results of
operations of the Company and StarSight as if the combination had been
consummated on March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.......................................... $41,814 $55,782 $79,819
Loss from continuing operations................... (27,270) (58,612) (7,676)
Loss from continuing operations per share......... (0.67) (1.32) (0.16)
</TABLE>
There were no significant transactions between the Company and StarSight
prior to consummation of the business combination which require elimination,
and no adjustments are anticipated to conform accounting policies.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There is nothing to report with regard to this Item.
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, 1997:
<TABLE>
<CAPTION>
DIRECTOR EXECUTIVE
NAME AGE POSITION AND OFFICE SINCE OFFICER SINCE
---- --- ------------------- ------------ -------------
<C> <C> <S> <C> <C>
Thomas L. H. Lau.. 42 Chairman of the Board and
Director April, 1992 --
Henry C. Yuen..... 48 Chief Executive Officer
and Director April, 1992 August, 1994
Daniel S. W. Kwoh. 48 Senior Vice President--
Technology -- August, 1994
Wilson K. C. Cho.. 47 Senior Vice President--
Engineering and
Operations -- August, 1994
Elsie Ma Leung.... 50 Chief Operating Officer,
Chief Financial Officer
and Director April, 1994 August, 1994
Roy J. Mankovitz.. 56 Assistant Secretary,
Corporate Counsel--
Intellectual Property
and Director August, 1994 August, 1994
Larry Goldberg.... 49 Secretary, Corporate
Counsel and Director August, 1994 August, 1994
George F. Carrier. 78 Director August, 1994 --
Teruyuki Toyama... 66 Director August, 1994 --
</TABLE>
Mr. Thomas Lau has been a Director of the Company since April 1992 and
currently serves as Chairman of the Board. Mr. Lau has also served as
Executive Director of Chinese Estates Holdings Limited since 1986 and as
Executive Director of Evergo International Holdings Co. since 1985.
Dr. Henry Yuen's principal occupation for the past five years has been Chief
Executive Officer of the Company. Dr. Yuen has been a Director of the Company
since April, 1994. Prior to his employment with the Company, Dr. Yuen worked
at TRW as a research scientist.
Dr. Daniel Kwoh has served as Senior Vice President--Technology of the
Company since August, 1994. He has also served as head of the Company's
Research and Development Department since 1989.
Dr. Wilson Cho has served as Senior Vice President--Engineering and
Operations of the Company since August, 1994. Since 1990, Dr. Cho has also
served as Director and General Manager of Gemstar Development Ltd. (an
affiliated company) and his duties include responsibility for research and
development.
Ms. Elsie Ma Leung joined the Company in August 1994. Ms. Leung currently
serves as Chief Financial Officer, Chief Operating Officer and Director. Prior
to joining the Company, Ms. Leung was the founder and managing partner of
Leung Kaufman & Co., an accounting firm where she worked from 1983 to 1993,
Ms. Leung was the Chief Financial Officer of American Plant Growers Inc. from
1978 to 1983.
Mr. Roy Mankovitz has served the Company as Assistant Secretary and
Corporate Counsel--Intellectual Property and as a Director since August, 1994.
Previously, Mr. Mankovitz was Consultant and Corporate Counsel to GDC. Mr.
Mankovitz was a member of the law firm Christie, Parker & Hale from 1990 to
1991. Mr. Mankovitz also served as of counsel to the same law firm from 1991
to 1993.
Mr. Larry Goldberg has served as Secretary, Corporate Counsel and Director
of the Company since August, 1994. From 1991 to 1993, Mr. Goldberg was a
consultant to Gemstar Development Corporation ("GDC"). Mr. Goldberg was a
partner of the law firm Schneider, Goldberg, Rohataner & Yuen from 1985 to
1993 and currently is of counsel to the firm.
Dr. George Carrier has served as an outside director of the Company since
1995. Dr. Carrier's principal occupation is as a consultant relating to
engineering sciences and glass furnace design.
52
<PAGE>
Mr. Teruyuki Toyama has served as an outside director of the Company since
August, 1994. Mr. Toyama's occupation since 1994 has been Representative
Director of Overseas Courier Service Co. Ltd. Prior to his employment with
Overseas Courier Service Co., Ltd., Mr. Toyama was the Senior Managing
Director and Representative Director of Ashahi Shimbun Co. Ltd.
The Board of Directors is divided into three classes: Class I, Class II, and
Class III. The Class I directors consist of Messrs. Mankovitz and Goldberg;
the Class II directors consist of Dr. Carrier and Mr. Toyama; 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,
1997 and 1998, respectively. The appointment of all officers is subject to the
discretion of the Board of Directors.
If the Merger with StarSight is consummated the Company's Board of Directors
will be expanded to ten persons, seven of whom shall have served on the
Company's board of directors immediately prior to the Effective Time, and
three of whom shall have served on the StarSight board of directors
immediately prior to the Effective Time. The former Starsight directors who
will serve on the Company's Board of directors are (i) George Smith, who will
serve as a Class I director of the Company, (ii) James Meyer, who will serve
as a Class II director of the Company, and (iii) Ajit Dalvi, who will serve as
a Class III director of the Company, and whose terms on the Company's board of
director shall expire at the time of the Company's 1999, 2000, and 1998 Annual
Meetings of the shareholders, respectively. If, prior to the Effective Time,
any of the above named persons shall decline or be unable to serve as a
director, then the party that designated such director, either the Company or
StarSight, shall designate another person, which person shall be reasonably
satisfactory to the other party, to serve as director in lieu of the original
designee.
53
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation awarded to, earned by, or
paid to the Company's principal executive officer and the four most highly
compensated executive officers whose salary and bonuses exceeded $100,000 for
services rendered to the Company in all capacities for fiscal years ended
1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION(1)(2) AWARDS
------------------------ ------------
SECURITIES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR ($) ($) OPTIONS(#) ($)(3)
- ---------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Henry C. Yuen............... 1997 $648,000 $518,400 -- 495,681
Chief Executive Officer and
President 1996 540,000 432,000 2,600,000 495,681
1995 450,000 360,000 --
Elsie Ma Leung.............. 1997 475,000 190,000 -- 4,076
Chief Operating Officer and
Chief Financial Officer 1996 326,875 130,750 410,000
1995 231,250 92,500 --
Roy J. Mankovitz............ 1997 423,000 169,200 -- 4,658
Asst. Secretary, Corporate
Counsel--Intellectual 1996 352,500 141,000 372,500
Property 1995 293,750 117,500 --
Larry Goldberg.............. 1997 324,000 129,600 -- 4,427
Secretary and Corporate
Counsel 1996 270,000 108,000 372,500
1995 225,000 90,000 --
Thomas L. H. Lau............ 1997 360,000 -- --
Chairman of the Board 1996 270,000 -- 230,000
1995 225,000 240,000 --
Daniel S. W. Kwoh........... 1997 396,000 158,400 -- 4,338
Senior Vice President--
Technology 1996 330,000 132,000 115,000
1995 275,000 110,000 --
</TABLE>
- --------
(1) 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.
(2) The salary paid to each of the listed 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 Gemstar Development Corporation ("GDC"). The
bonuses paid to Dr. Yuen represent the aggregate amounts of Dr. Yuen's
merit bonus and annual incentive bonus for each of the indicated fiscal
years, calculated pursuant to the applicable formula under the Employment
Agreement between the Company and Dr. Yuen. The bonuses paid to each of
Messrs. Lau, Kwoh, 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.
(3) GDC provides 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 GDC 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, GDC 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
54
<PAGE>
compensation in excess of $16,667 contributed as elective deferrals up to
applicable limits under the Code. During fiscal 1997, GDC's matching
contributions were $4,076, 4,338, 4,658 and 4,427 for Ms. Leung, Mr. Kwoh,
Mr. Mankovitz and Mr. Goldberg, respectively.
(b) Represents premiums paid for split dollar life insurance policies.
EMPLOYMENT AGREEMENTS
Employment Agreement with Dr. Yuen
Dr. Yuen has entered into an employment agreement with Gemstar Development
Corporation ("GDC") dated as of April 1, 1994 and amended on August 16, 1995
(the "Yuen Employment Agreement"). The Yuen Employment Agreement provides for
an initial term ending on March 31, 1998, with two automatic two-year renewals
unless terminated sooner at least six months prior to the expiration of the
initial term or any renewal term.
Dr. Yuen's initial base salary under the Yuen Employment Agreement is
$450,000 per year, subject to an annual adjustment based upon the Consumer
Price Index and the Company's revenues and net earnings. The Yuen Employment
Agreement also provides for the payment to Dr. Yuen of an annual incentive
bonus, based upon the growth of the Company. Dr. Yuen is also entitled to a
$1,000 a month automobile allowance and other benefits, including, without
limitation, health insurance and participation in bonus, incentive and stock
option or extra compensation plans.
Under the Yuen Employment Agreement, all inventions, patents, copyrights and
other intellectual property which (i) are developed by Dr. Yuen while
performing his duties for GDC or using the 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, provided GDC can show
by clear and convincing evidence that such property is GDC's property.
Other Agreements
GDC has entered into employment agreements with Ms. Leung and with Messrs.
Kwoh Goldberg and Mankovitz and the Company has entered into an employment
agreement with Dr. Lau, all of which contain substantially similar provisions
(hereinafter, these employment agreements 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,
Kwoh, Goldberg, and Mankovitz is from April 1, 1994 to March 31, 2001, with no
provision for renewal. The term of the employment agreement with Ms. Leung
runs through March 31, 1999, at which time her agreement will be automatically
renewed for an additional two-year term unless, at least six months prior to
the expiration of the term of the agreement, either Ms. Leung or GDC gives
written notice to terminate the agreement.
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 or her
employment agreement to an annual incentive bonus based upon the growth of the
Company.
The employment agreements with Ms. Leung and Messrs. Lau, Kwoh, Goldberg and
Mankovitz 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 and participation in bonus,
incentive, stock option or extra compensation plans, to which they would
otherwise be entitled by virtue of their employment with the Company (or GDC).
55
<PAGE>
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 and Kwoh employment agreements) provide that all
inventions, patents, copyrights and other intellectual 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 and Kwoh employment agreements, 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 trhe 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.
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 1994 Stock Incentive Plan. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
1994 STOCK INCENTIVE PLAN
The Company and its subsidiaries established the 1994 Stock Incentive Plan
(as amended, the "Plan") to attract, reward and retain personnel and to
provide long-term incentives to those key employees (including executive
officers and directors of the Company and its subsidiaries) and certain other
eligible persons, including non-employee directors, certain consultants,
advisors and agents who render or have rendered bona fide services to the
Company or a subsidiary (collectively, "Eligible Persons"). The Plan is
administered by the Company's Compensation Committee (the "Compensation
Committee"). The Compensation Committee is empowered to grant options to
purchase Ordinary Shares ("Options") to any Eligible Person, interpret the
Plan and make other determinations thereunder.
An Option is the right to purchase Ordinary Shares at a future date at a
specified price ("Option Price") equal to the fair market value on the date of
the grant as determined by the Compensation Committee. The Option Price will
generally be the closing price for one Ordinary Share reported on the Nasdaq
Stock Market ("fair market value") on the date of grant or such lesser amount
as may be determined by the Compensation Committee. Typically, the only
consideration received by the Company for the grant of an Option under the
Plan will be the rendering of services by the optionee to or for the benefit
of the Company.
Ordinary Shares Issuable Upon the Exercise of Options Granted Under the Plan
As of March 31, 1997, the number of Ordinary Shares reserved for issuance
under the Plan was 5,600,000 Ordinary Shares. On December 22, 1996, the
Company's board of directors approved an amendment to the Plan which would
increase the number of shares reserved for issuance under the Plan by
3,500,000 Gemstar Ordinary Shares bringing the total number of Ordinary Shares
reserved for issuance to 9,100,000. (the "Amendment to the Plan"). The
Company's board of directors approved the Amendment to the Plan, in part, in
order to provide for sufficient Ordinary Shares to accommodate the assumption
of the Starsight Stock Options in accordance with the Merger Agreement and to
increase the number of Ordinary Shares available for future grant.
56
<PAGE>
Shares relating to Options which are not exercised or which expire or are
cancelled will again become available for grant under the Plan to the extent
permitted by law. The maximum number of Ordinary Shares that may be delivered
pursuant to Options granted during any one-year term to any individual
Eligible Person under the Plan may not exceed 6,000,000 shares, subject to
certain adjustments.
Grants of Options
In addition to the Options and Adjusted Warrants to be granted in the Merger
in accordance with the Merger Agreement (see Item 1 "Business--Proposed Merger
with StarSight"), on December 22, 1996, the Board agreed to grant to certain
employees of StarSight, upon the Effective Time, options to purchase in the
aggregate 211,000 shares of Ordinary Shares, each with an exercise price equal
to the fair market value of Gemstar Ordinary Shares at the effective time of
the Merger. Such options are to become exercisable as to 1/48th of the shares
subject to the Option each month, provided that the Option may not be
exercised for one year following the Effective Time. These Options are 10-year
Options, subject to earlier termination in certain events.
On December 17, 1996, the Compensation Committee granted options under the
Plan to employees relating to 350,000 Ordinary Shares. Certain of these
options vest in annual, one-fifth installments over a five-year period and
others in annual, one-third installments over a three-year period. All of
these options are exercisable at a price of $17.75 per Ordinary Share.
On December 12, 1996, each stock option to purchase shares of VideoGuide
outstanding immediately prior to the effective time of the VideoGuide Merger
under VideoGuide's stock option plan which had not been exercised in
accordance with its terms, was assumed under the Plan by the Company on
substantially the same terms and conditions as were applicable under the
VideoGuide stock option plan. The number of full Ordinary Shares of the
Company the holder of such stock option is entitled to receive and the
exercise price were adjusted based on the exchange ratio provided for in the
Merger Agreement. The VideoGuide stock options converted into Options to
purchase in the aggregate 16,529 Ordinary Shares. These Options vest in
annual, one-third installments over a three-year period from their original
VideoGuide grant date, and are exercisable at a price of $16.11 per Ordinary
Share.
On November 8, 1996, the Compensation Committee granted options under the
Plan to non-executive employees relating to 125,000 Ordinary Shares. These
options vest in annual, one-third installments over a three year period and
are exercisable at a price of $18.75 per Ordinary Share.
On August 1, 1996, the Compensation Committee granted options under the Plan
to one non-executive employee to acquire 25,000 Ordinary Shares. The Options
vest at the end of one year and are exercisable at a price of $24.00 per
Ordinary Share.
On January 22, 1996, the Compensation Committee granted Options under the
Plan to one non-executive employee to acquire 10,000 Ordinary Shares. The
Options vest at the end of a three-year period and are exercisable at a price
of $19.98 per Ordinary Share.
On August 16, 1995, the Board granted 10-year Options relating to 4,485,500
Ordinary Shares to 12 Eligible Persons under the Plan. These Options are
exercisable at a price of $11.90 per Ordinary Share.
57
<PAGE>
The table below sets forth, with respect to the Company's directors and
executive officers, the Options granted under the Plan as of March 31, 1997
and the number of Ordinary Shares subject to such Options. The options in the
following table were granted under the Plan as previously approved by the
shareholders:
PLAN BENEFITS TO GEMSTAR OFFICERS AND DIRECTORS
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
NUMBER OF VESTING SCHEDULE
GEMSTAR -------------------
OUTSTANDING AMOUNT OF
NAME AND POSITION OPTIONS(1) DATE GRANTED EXERCISE PRICE DATE SHARES
----------------- ----------- ------------- -------------- ---- ---------
<S> <C> <C> <C> <C> <C>
Thomas L. H. Lau
Chairman.............. 230,000 Aug. 16, 1995 $11.90 8/16/96 - 86,250
8/16/97 - 57,500
8/16/98 - 86,250
Henry C. Yuen
Chief Executive
Officer.............. 2,600,000 Aug. 16, 1995 $11.90 2/16/96 - 1,114,286
8/16/96 - 835,714
8/16/97 - 650,000
Elsie Ma Leung
Chief Financial
Officer.............. 410,000 Aug. 16, 1995 $11.90 2/16/96 - 175,000
8/16/96 - 117,500
8/16/97 - 117,500
Roy J. Mankovitz
Assistant Secretary,
Corporate Counsel--
Intellectual
Property............. 372,500 Aug. 16, 1995 $11.90 2/16/96 - 137,500
8/16/96 - 117,500
8/16/97 - 117,500
Larry Goldberg
Secretary and
Corporate Counsel.... 372,500 Aug. 16, 1995 $11.90 2/16/96 - 137,500
8/16/96 - 117,500
8/16/97 - 117,500
Daniel S. W. Kwoh
Senior Vice
President--
Technology........... 115,000 Aug. 16, 1995 $11.90 8/16/96 - 40,250
8/16/97 - 34,500
8/16/98 - 40,250
Wilson K. C. Cho
Senior Vice
President--
Engineering and
Operations........... 115,000 Aug. 16, 1995 $11.90 8/16/96 - 40,250
8/16/97 - 34,500
8/16/98 - 40,250
George F. Carrier
Director.............. 6,000 Aug. 16, 1995 $11.90 8/16/96 - 6,000
Teruyuki Toyama
Director.............. 6,000 Aug. 16, 1995 $11.90 8/16/96 - 6,000
All Directors and
Executive Officers as a
group (9 persons)...... 4,227,000
</TABLE>
- --------
(1) The Options granted under the Stock Incentive Plan expire on the tenth
anniversary of their award date. The option agreements pursuant to which
the initial Options were granted include different vesting and post-
employment termination schedules.
58
<PAGE>
Subject to early termination or acceleration provisions, an 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 an Option exercisable prior
to six months, or more than ten years, after its date of grant. See Note 6 of
the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
NUMBER OF
ORDINARY
SHARES AS
TO WHICH
OPTIONS ARE
DATE ON WHICH OPTIONS MAY BE EXERCISED EXERCISABLE
-------------------------------------- -----------
<S> <C>
Six months after the award date.................................. 1,564,285
First anniversary of the award date.............................. 1,459,048
Second anniversary of the award date............................. 1,209,334
Third anniversary of the award date.............................. 252,833
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following persons were beneficial owners of at least 5% of the Company's
Outstanding Ordinary Shares as of March 31, 1997, including directors and
executive officers:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY OF SHARES
NAME AND POSITION OWNED(1) OUTSTANDING
----------------- ------------ -----------
<S> <C> <C>
Dynamic Core Holdings Limited (2).................. 11,522,575 37.4%
Thomas L. H. Lau................................... 11,608,825 37.5
Henry C. Yuen (3).................................. 5,011,990 15.3
Daniel S. W. Kwoh (4).............................. 2,408,890 7.8
Wilson K. C. Cho (5)............................... 2,217,407 7.1
Elsie Ma Leung (6)................................. 342,499 1.1
Roy L. Mankovitz (7)............................... 448,702 1.4
Larry Goldberg (8)................................. 255,000 *
George F. Carrier (9).............................. 6,000 *
Teruyuki Toyama (10)............................... 6,000 *
Executive Group (6 persons)........................ 10,736,488 34.3
Non-Executive Director Group (3 persons)........... 11,620,825 37.1
Executive Officers and Directors as a group (9
persons) ......................................... 22,357,313 71.4
</TABLE>
- --------
* Less than 1%
(1) Applicable percentage of ownership is based on 31,280,092 shares of
Gemstar Ordinary Shares outstanding as of March 17, 1997 together with
applicable options or warrants for such shareholder. Beneficial ownership
is determined in accordance with the rules of the 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 March 17, 1997 are deemed outstanding. However,
such shares are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(2) The sole shareholder of Dynamic Core Holdings Limited is Thomas Lau, who
is the brother of Mary Lau. Includes 86,250 Ordinary Shares issuable upon
exercise of currently exercisable options. Does not include
143,750 options that are not currently exercisable and do not become
exercisable within 60 days following March 31, 1997.
(3) Includes 1,950,000 shares issuable upon exercise of currently exercisable
options. Does not include 650,000 options that are not currently
exercisable and do not become exercisable within 60 days following March
17, 1997.
59
<PAGE>
(4) The total number of shares includes 59,245 Ordinary Shares held by Dr.
Kwoh as custodian for Leslie Y. Kwoh and 40,250 shares issuable upon
exercise of currently exercisable options. Does not include
74,750 options that are not currently exercisable and do not become
exercisable within 60 days following March 17, 1997.
(5) Of the shares held by Dr. Cho, 1,470,225 are owned by Creative Assets
Limited, the sole shareholder of which is Dr. Cho. The total number of
shares held by Dr. Cho also includes 40,250 shares issuable upon exercise
of currently exercisable options. Does not include 74,750 options that
are not currently exercisable and do not become exercisable within 60
days following March 17, 1997.
(6) Includes 292,500 shares issuable upon exercise of currently exercisable
options. Does not include 117,500 options that are not currently
exercisable and do not become exercisable within 60 days following
March 17, 1997.
(7) Includes 255,000 shares issuable upon exercise of currently exercisable
options. Does not include 117,500 options that are not currently
exercisable and do not become exercisable within 60 days following
March 17, 1997.
(8) Includes 255,000 shares issuable upon exercisable options. Does not
include 117,500 options that are not currently exercisable and do not
become exercisable within 60 days following March 17, 1997.
(9) Includes 6,000 shares issuable upon exercise of currently exercisable
options.
(10) Includes 6,000 shares issuable upon exercise of currently exercisable
options.
60
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As part of the Reorganization that was effected in 1995, the former
shareholders of Gemstar Development Corporation, who included Dynamic Core
Holdings Limited (the sole shareholder of which is Thomas L. H. Lau), Henry C.
Yuen and Daniel S. W. Kwoh, entered into a Subscription and Exchange Agreement
with the Company pursuant to which the GDC shareholders received 3,518,501
Ordinary Shares of the Company in exchange for all of their shares of GDC. In
connection with the GDC Exchange, Dynamic Core Holdings Limited and Drs. Yuen
and Kwoh received 1,840,601, 355,917 and 252,914 Ordinary Shares of the
Company, respectively. See "Item 1 Business--The Reorganization."
Also as part of the Reorganization, all of the former shareholders of E
Guide, who included Drs. Yuen, Kwoh and Cho, Messrs. Mankovitz and Goldberg
and Ms. Leung, entered into an Acquisition and Exchange Agreement with the
Company pursuant to which the E Guide shareholders received 3,511,494 Ordinary
Shares of the Company in exchange for all of their shares of E Guide. E Guide
owns certain intellectual property rights connected with the Company's Guide
Plus+ technology, as well as other rights associated with the Company's Guide
Plus+ and Index Plus+ technologies. The E Guide shareholders also entered into
a Registration Rights Agreement with the Company pursuant to which the E Guide
shareholders received certain demand and piggyback registration rights in
connection with the Ordinary Shares of the Company issued in the E Guide
Exchange. In connection with the E Guide Exchange, Drs. Yuen, Kwoh and Cho,
Messrs. Mankovitz and Goldberg and Ms. Leung received 872,151, 716,151,
967,454, 271,551, 69,879 and 69,879 Ordinary Shares of the Company,
respectively. See "Item 1, Business--The Reorganization."
In addition to the GDC Exchange and the E Guide Exchange, the Reorganization
also included the transfer by the Company of all the Handset Business to
Holdings. Following the transfer of these operations to Holdings, the Company
effected the Spin-Off, which consisted of distributing all of the shares of
Holdings to the Company's existing shareholders on a pro rata basis. In
connection with the Spin-Off, the Company, Holdings and its subsidiaries
involved in the Handset Business entered into an Indemnification Agreement.
Pursuant to the Indemnification Agreement, the Company will indemnify Holdings
and its subsidiaries against any liabilities arising out of the conduct of the
Company's operations or businesses, and Holdings and its subsidiaries will
indemnify the Company against any liabilities arising out of the conduct of
their respective operations or businesses. In each case, the indemnifying
party will undertake its obligations regardless of whether the event giving
rise to the indemnifiable liability occurred prior to, subsequent to, or in
connection with the Spin-Off. See "Item 1, Business--The Reorganization."
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 earned aggregated $136,000 for the three
months ended March 31, 1995 and $112,000 and $1,446,000 for the years ended
March 31, 1996 and 1997, respectively.
The Company continues to maintain Services Agreements with certain Holdings
subsidiaries. Pursuant to the Services Agreements, the Holdings subsidiaries
provide certain management services in their respective territories to the
Company in connection with the VCR Plus+ system. These services include
promoting the VCR Plus+ system, monitoring and servicing existing VCR Plus+
license agreements and promoting and monitoring the publication of the
PlusCode Numbers. The Company renegotiated the compensation provisions under
the Services Agreements to provide for quarterly payments from the Company
calculated on a "costs plus" basis. Service fees paid to these companies
totaled $1,458,000 for the three months ended March 31, 1995 and $7,100,000
and $8,300,000 for the years ended March 31, 1996 and 1997, respectively. 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 Index Plus+ and Guide Plus+ systems overseas. Compensation
under any such agreement is expected to be calculated on a "costs plus" basis.
61
<PAGE>
The Company has from time to time loaned money to various shareholders and
directors. Most of such loans were unsecured and generally bore interest at
the prime rate as in effect from time to time. At March 31, 1996, and 1997,
there was one loan of $185,000 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.
The employment agreements between the Company and certain of its executive
officers and key management personnel (including Henry C. Yuen, Daniel S. W.
Kwoh and Roy J. Mankovitz) will generally give the Company ownership of
inventions or discoveries (i) that are developed during the term of the
agreements while the inventor was performing duties for the Company or using
the Company's facilities or trade secret information (unless such usage is not
substantial), (ii) that relate at the time of conception or reduction to
practice to the Company's business or research and development or (iii) that
result from any work performed by the inventor for the Company. The Company's
business or research and development refers to itemized current activities of
the Company that may be modified or augmented from time to time; provided,
however, that any changes to such definition in Dr. Yuen's agreement must be
approved by the non-management directors of the Company. To the extent the
Company wishes to utilize these excluded inventions or intellectual property
rights in future technologies or systems, it would be required to negotiate
with the inventor to obtain rights thereto on a case by case basis. There can
be no assurance that the Company would be able to reach agreement with the
inventor concerning any such inventions or intellectual property rights.
Larry Goldberg remains of counsel to the law firm of Schneider, Goldberg,
Rohatiner 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 continues to receive compensation from
Schneider, Goldberg, but no part of such compensation relates, directly or
indirectly, to services rendered by such firm for the Company. 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
Included in Part II, Item 8, of this Report. See Index to Financial
Statements on page 32.
(a)(2) Exhibits
The exhibits listed on the accompanying Exhibit Index, starting on page 64,
are filed as part of, or incorporated by reference into this Report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the quarter
ended March 31, 1997.
62
<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 9th of February, 1998.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
Dated February , 1998 By: /s/ Henry C. Yuen
__________________________________
Henry C. Yuen
Chief Executive Officer and
Director (Principal Executive
Officer)
Dated February , 1998 By: /s/ Elsie Leung
__________________________________
Elsie Leung
Chief Financial Officer, Chief
Operating 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 9th day of February, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
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
Director
____________________________________
Teruyuki Toyama
Director
____________________________________
James E. Meyer
Director
____________________________________
George Smith
/s/ Brian Klosterman Director
____________________________________
Brian Klosterman
/s/ Douglas Macrae Director
____________________________________
Douglas Macrae
</TABLE>
63
<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).
11.1**** Calculation of per share earnings (contained in Financial
Statements, Part II, Item 8 of this Report).
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
21** Material Subsidiaries of Gemstar.
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 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.
</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 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.
**** Filed herewith.
65
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997, 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-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 50,054
<SECURITIES> 30,676
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,684
<PP&E> 6,948
<DEPRECIATION> 2,800
<TOTAL-ASSETS> 96,758
<CURRENT-LIABILITIES> 37,930
<BONDS> 0
<COMMON> 60,849
0
0
<OTHER-SE> (8,559)
<TOTAL-LIABILITY-AND-EQUITY> 96,758
<SALES> 0
<TOTAL-REVENUES> 71,121
<CGS> 0
<TOTAL-COSTS> 48,740
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,454
<INCOME-TAX> 8,369
<INCOME-CONTINUING> 18,085
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,085
<EPS-PRIMARY> .54
<EPS-DILUTED> 0
</TABLE>
