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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C>
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, including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of September 30, 1999, there were outstanding 100,354,000 shares of the
registrant's Ordinary Shares, par value $0.01 per share.
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GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Page
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Condensed Consolidated Balance Sheets -- September 30, 1999 and March 31, 1999............ 1
Condensed Consolidated Statements of Operations -- Three and Six Months Ended
September 30, 1999 and 1998............................................................... 2
Condensed Consolidated Statements of Cash Flows -- Six Months Ended September 30, 1999
and 1998.................................................................................. 3
Notes to Condensed Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders....................................... 11
Item 6. Exhibits and Reports on Form 8-K.......................................................... 12
SIGNATURE......................................................................................... 15
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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<CAPTION>
September 30, March 31,
1999 1999
------------ ---------
(unaudited)
ASSETS
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Current assets:
Cash and cash equivalents........................ $186,639 $184,334
Marketable securities............................ 71,946 29,711
Prepaid expenses and other current assets........ 14,412 12,899
-------- --------
Total current assets.......................... 272,997 226,944
Property and equipment, net........................ 3,236 2,719
Intangible assets, net............................. 17,780 16,978
Marketable securities and other investments........ 34,372 4,002
Other assets....................................... 2,980 2,521
-------- --------
$331,365 $253,164
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............ $ 21,816 $ 23,527
Current portion of deferred revenue.............. 25,561 13,476
-------- --------
Total current liabilities..................... 47,377 37,003
Deferred revenue, less current portion............. 381 550
Deferred income taxes.............................. 26,271 30,429
Other liabilities.................................. 1,502 1,211
Shareholders' equity:
Ordinary Shares.................................. 1,017 1,005
Additional paid-in capital....................... 261,473 231,799
Retained earnings (accumulated deficit).......... 21,699 (20,166)
Accumulated other comprehensive income (loss).... 84 (228)
Treasury stock, at cost.......................... (28,439) (28,439)
-------- --------
Net shareholders' equity...................... 255,834 183,971
-------- --------
$331,365 $253,164
======== ========
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See accompanying Notes to Condensed Consolidated Financial Statements.
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
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Three Months Ended Six Months Ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
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Revenues................................................. $ 47,207 $ 37,032 $ 90,303 $ 70,931
Operating costs and expenses:
Selling and marketing.................................. 10,545 8,018 20,044 15,715
Research and development............................... 3,629 3,511 7,247 6,892
General and administrative............................. 5,938 5,743 11,788 10,688
Nonrecurring expenses.................................. -- 1,851 -- 1,851
-------- -------- -------- --------
Operating income......................................... 27,095 17,909 51,224 35,785
Other income, net........................................ 3,354 2,258 6,122 4,276
-------- -------- -------- --------
Income before income taxes............................... 30,449 20,167 57,346 40,061
Income taxes............................................. 8,221 5,848 15,481 11,616
-------- -------- -------- --------
Net income............................................... $ 22,228 $ 14,319 $ 41,865 $ 28,445
======== ======== ======== ========
Basic earnings per share................................. $0.22 $0.15 $0.42 $0.29
======== ======== ======== ========
Diluted earnings per share............................... $0.19 $0.13 $0.35 $0.26
======== ======== ======== ========
Weighted average shares outstanding...................... 100,279 97,500 99,915 97,210
Dilutive effect of:
Stock options.......................................... 19,673 12,618 19,510 12,672
Warrants............................................... -- 845 -- 854
-------- -------- -------- --------
Weighted average shares outstanding, assuming dilution... 119,952 110,963 119,425 110,736
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
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Six Months Ended
September 30,
---------------------------
1999 1998
---------- -----------
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Cash flows from operating activities:
Net income.......................................................................... $ 41,865 $ 28,445
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................................... 2,461 2,305
Deferred income taxes............................................................ (4,158) 4,058
Tax benefit associated with stock options........................................ 16,370 4,100
Changes in assets and liabilities................................................ 8,612 (11,134)
-------- --------
Net cash provided by operating activities...................................... 65,150 27,774
-------- --------
Cash flows from investing activities:
Net (purchases) maturities of marketable securities and other investments........... (72,448) 443
Additions to property and equipment................................................. (1,352) (201)
Additions to intangible assets...................................................... (2,428) (692)
-------- --------
Net cash used in investing activities.......................................... (76,228) (450)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options............................................. 13,316 8,027
Purchases of treasury stock......................................................... -- (4,543)
-------- --------
Net cash provided by financing activities...................................... 13,316 3,484
-------- --------
Effect of exchange rate changes on cash and cash equivalents.......................... 67 (122)
-------- --------
Net increase in cash and cash equivalents............................................. 2,305 30,686
Cash and cash equivalents at beginning of period...................................... 184,334 153,517
-------- --------
Cash and cash equivalents at end of period............................................ $186,639 $184,203
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The Condensed Consolidated Financial Statements of Gemstar International Group
Limited and subsidiaries (the "Company") have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999.
The Condensed Consolidated Financial Statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows for such periods. The results of operations for the
period ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 2000.
(2) Acquisition of TV Guide, Inc.
In October 1999, the Company and TV Guide, Inc. ("TV Guide") entered into a
merger agreement under which TV Guide will become a wholly owned subsidiary of
the Company. Under the merger agreement, TV Guide shareholders will receive
0.6573 shares of Gemstar common stock for each share of TV Guide Class A and B
common stock. The exchange ratio is not subject to adjustment. The transaction
will be accounted for as a purchase. Closing of the transaction is anticipated
in the first half of next year and is subject to approval by shareholders of
each company and the satisfaction of customary regulatory requirements.
(3) Earnings Per Share
Basic earnings per share is computed using the weighted average number of
Ordinary Shares outstanding during the period. Diluted earnings per share
includes the dilutive effect of stock options and warrants using the treasury
stock method.
(4) Stock Split
In April 1999, the Company's Board of Directors approved a two-for-one stock
split in the form of a stock dividend which was paid in May 1999 to shareholders
of record as of April 30, 1999. All share and per share amounts herein have been
adjusted for the stock split.
(5) Comprehensive Income
The Company's comprehensive income consisted of net income and the equity
adjustment from foreign currency translation. Comprehensive income was
$22,510,000 and $14,250,000 for the three months ended September 30, 1999 and
1998, respectively, and was $42,177,000 and $28,323,000 for the six months ended
September 30, 1999 and 1998, respectively. Accumulated other comprehensive
income (loss) presented on the accompanying condensed consolidated balance
sheets consists of cumulative translation adjustments.
(6) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") which establishes accounting
and reporting standards for derivative instruments and hedging activities. In
July 1999, the
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FASB issued Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS No. 137"). As amended by SFAS No. 137, SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. The Company
does not have any derivative instruments or hedging activities and accordingly,
believes that adoption of SFAS No. 133 will not have a significant effect on its
consolidated financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section contained
in the Company's Annual Report on Form 10-K for the year ended March 31, 1999.
Overview
The Company develops, markets and licenses proprietary technologies and
systems that simplify and enhance consumers' interaction with electronics
products and other platforms that deliver video, programming information and
other data. The Company seeks to have its technologies widely licensed,
incorporated and accepted as the technologies and systems of choice by consumer
electronics manufacturers; service providers such as owners or operators of
cable systems, telephone networks, Internet service providers, direct broadcast
satellite providers, wireless systems and other multi-channel video programming
distributors; software developers; and consumers.
The Company's first proprietary system, VCR Plus+, was introduced in 1990 and
is widely accepted as a de facto industry standard for programming VCRs and is
currently incorporated into virtually every major brand of VCR sold worldwide.
VCR Plus+ enables consumers to record a television program by simply entering a
PlusCode Number (a proprietary one to eight digit number) into a VCR or
television equipped with the VCR Plus+ technology. PlusCode Numbers are printed
next to television program listings in over 1,800 publications worldwide, with a
combined circulation of over 330 million.
The Company has also developed and acquired a large portfolio of technologies
and intellectual property necessary to implement interactive program guides (the
"Gemstar Guide Technology"), which enable consumers to navigate through, sort,
select and record television programming. The Gemstar Guide Technology has been
licensed for, or incorporated into, televisions, VCRs, TV-VCR combination units,
cable set top boxes, integrated satellite receiver decoders, personal computers,
PCTVs and Internet appliances and interactive services provided thereon. The
Company believes that with the increase in programming content and number of
accessible channels, the Gemstar Guide Technology will become an increasingly
important tool for assisting consumers in sorting, selecting, and recording
television programming. The Company further believes that its interactive
program guides will provide an attractive vehicle for the delivery of
advertising and other content to consumers.
The Company pursues a licensing strategy for its VCR Plus+ system and Gemstar
Guide Technology wherein the Company is paid on-going per unit license fees and,
in certain instances, up-front license fees. In addition, the Company pursues a
recurring revenue model for its proprietary Gemstar Guide Technology wherein the
Company receives revenues from the delivery of advertising and promotion
displayed on the guides, from sponsorship of guide pages and from data services
and interactive transactions accessed through the guide. To date the Company has
not realized significant revenues from advertising and sponsorship.
Revenues from up-front license fees and annual license fees are recognized
ratably over the term of the particular license. Revenues from on-going per unit
license fees are recognized when payments are due, and generally, when payments
are actually received from licensees. Revenues from nonrecurring engineering
fees are generally recognized ratably as the work is performed. Revenues from
advertising will be recognized generally when delivered on an "impression" based
program or ratably over the term of the agreement, in the case of charter
sponsorships.
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Results of Operations
Revenues for the quarter ended September 30, 1999 were $47.2 million, an
increase of 27% when compared with revenues for the year-ago period of $37.0
million. Revenues for the six months ended September 30, 1999 were $90.3
million, an increase of 27% when compared with revenues for the year-ago period
of $70.9 million. The increase in revenues was due primarily to the continued
growth in worldwide licensing income from the Company's proprietary technologies
and intellectual property in the electronic program guide and VCR Plus+ fields.
Total operating expenses for the quarter ended September 30, 1999 were $20.1
million, comprised of selling and marketing expenses of $10.5 million, research
and development expenses of $3.6 million, and general and administrative
expenses of $5.9 million. Compared with the year-ago period, excluding
nonrecurring expenses, total operating expenses for the current quarter
increased 16%. Total operating expenses for the six months ended September 30,
1999 were $39.1 million, comprised of selling and marketing expenses of $20.0
million, research and development expenses of $7.2 million, and general and
administrative expenses of $11.8 million. Compared with the year-ago period,
excluding nonrecurring expenses, total operating expenses for the six months
ended September 30, 1999 increased 17%. The increase in operating expenses was
due primarily to an increase in marketing and support costs associated with the
Gemstar Guide Technology, an increase in personnel cost to support the Company's
licensing business and an increase in legal expenses associated with various
litigation matters. Operating margins increased to 57% for the six months ended
September 30, 1999 from 53% for the year-ago period, excluding nonrecurring
expenses.
The Company recorded nonrecurring expenses totaling $1.9 million in the
quarter ended September 30, 1998, associated with defending the Company against
a hostile takeover attempt. These expenses were comprised primarily of fees for
financial advisors and attorneys.
Income taxes were $8.2 million and $5.8 million for the three months ended
September 30, 1999 and 1998, respectively. Income taxes were $15.5 million and
$11.6 million for the six months ended September 30, 1999 and 1998,
respectively. The Company's effective tax rate was 27% and 29% for the six
months ended September 30, 1999 and 1998, respectively. The overall effective
tax rate reported by the Company in any single period is impacted by, among
other things, the country in which earnings or losses arise, applicable
statutory tax rates and withholding tax requirements for particular countries,
and the availability of tax credits for taxes paid in certain jurisdictions.
Because of these factors, it is expected that the Company's future tax expense
as a percentage of income before income taxes may vary from year to year.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash, cash equivalents and short-term
marketable securities totaling $258.6 million. Net cash provided by operating
activities was $65.2 million and $27.8 million for the six months ended
September 30, 1999 and 1998, respectively. The increase in net cash provided by
operating activities was primarily the result of increases in net income, tax
benefits associated with stock options and deferred revenues. Net cash used in
investing activities was $76.2 million for the six months ended September 30,
1999, comprised of net purchases of marketable securities and other investments
of $72.4 million and additions to property and equipment and intangible assets
of $3.8 million. Net cash used in investing activities was $0.5 million for the
six months ended September 30, 1998, comprised of additions to property and
equipment and intangible assets of $0.9 million offset by net maturities of
marketable securities of $0.4 million. Proceeds from stock option exercises
totaled $13.3 million and $8.0 million for the six months ended September 30,
1999 and 1998, respectively. Purchases of treasury stock totaled $4.5 million
for the six months ended September 30, 1998.
In August 1998, the Company's Board of Directors authorized the repurchase by
the Company of up to $100 million of its Ordinary Shares. As of September 30,
1999, the Company has repurchased 1.4 million Ordinary Shares for $28.4 million.
The Company does not have any material commitments for capital expenditures.
The Company believes that the anticipated cash flows from operations, and
existing cash, cash equivalents and short-term marketable securities
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balances, will be sufficient to satisfy its expected working capital and capital
expenditure requirements in the foreseeable future.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in the Notes to Condensed
Consolidated Financial Statements.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with compliance.
Although the Company believes that its systems and products are Year 2000
compliant in all material respects, there can be no assurance that the Company's
current systems and products do not contain undetected errors or defects with
Year 2000 date functions that could result in a material adverse effect on the
Company's business, results of operations and financial condition. Although the
Company is not aware of any material operational issues or costs associated with
its internal systems for the Year 2000, there can be no assurances that the
Company will not experience unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems.
The Company's proprietary technologies and systems are licensed and
incorporated by third parties, such as consumer electronics manufacturers,
service providers and software developers into electronics products and
platforms that deliver video, programming information and other data. Failure of
such third party products, software or content to operate properly with regard
to the Year 2000 could require the Company to incur unanticipated expenses to
remedy any problems. There can be no assurance that the systems of other
companies on which the Company's products may rely will be Year 2000 compliant
or that such failure by other companies to become Year 2000 compliant would not
have an adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company utilizes third party equipment,
software and content that may not be Year 2000 compliant. Failure of such third
party equipment, software or content to operate properly with regard to the Year
2000 and thereafter, could require the Company to incur unanticipated expenses
to remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and other portions of this report on Form 10-Q
contain various "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events, including the following: the statement that
the Company believes that with the increase in programming content and number of
accessible channels, the Gemstar Guide Technology will become an increasingly
important tool for assisting consumers in sorting, selecting, and recording
television programming; the statement that the Company believes that its
interactive program guides will provide an attractive vehicle for the delivery
of advertising and other content to consumers; the statement that the Company
believes that the anticipated cash flows from operations, and existing cash,
cash equivalents and short-term marketable securities balances, will be
sufficient to satisfy its expected working capital and capital expenditure
requirements in the foreseeable future; and the statement that the Company's
systems and products are believed to be Year 2000 compliant in all material
respects. In addition, statements containing expressions such as "believes,"
"anticipates," "plans" or "expects" used in the Company's periodic reports on
Forms 10-K and 10-Q filed with the Securities and Exchange Commission are
intended to identify forward-looking statements. The Company cautions that these
and similar statements included in this report
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and in previously filed periodic reports including reports filed on Forms 10-K
and 10-Q are further qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statement,
including, without limitation, those referred to in the "Certain Factors
Affecting Business, Operating Results and Financial Condition" section of the
Company's Annual Report on Form 10-K for the year ended March 31, 1999. This
report on Form 10-Q should be read in conjunction with the "Certain Factors
Affecting Business, Operating Results and Financial Condition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections contained in the Company's Annual Report on Form 10-K for the year
ended March 31, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to the "Quantitative and Qualitative Disclosures About
Market Risk" section of the Company's Annual Report on Form 10-K for the year
ended March 31, 1999.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
On October 19, 1993, TV Guide, Inc. (formerly United Video Satellite Group,
Inc.) brought suit against StarSight Telecast, Inc. ("StarSight"), a now wholly
owned subsidiary of the Company, in the United States District Court for the
Northern District of Oklahoma, seeking a declaratory judgment that its
interactive program guide products do not infringe certain of StarSight's
patents. StarSight counterclaimed charging infringement of one of the patents.
Through subsequent procedural motions, the lawsuit expanded to include a total
of ten patents to which StarSight has rights and to federal antitrust claims.
The Court has deferred consideration of all of the other claims and
counterclaims pending the resolution of the infringement, validity and
enforceability issues of one of the patents. A phased bench trial began on May
8, 1996, with TV Guide essentially presenting its case in chief on the validity
and enforceability issues related to this patent. In subsequent proceedings,
StarSight presented witnesses relating to the validity, enforceability and
infringement of this patent. On February 19, 1999, the Court issued an
interlocutory decision finding this patent enforceable over TV Guide's claim
that this patent was obtained through inequitable conduct. The Court has not yet
ruled on the remaining issues of validity or infringement of this patent. The
Court also ordered the parties to participate in settlement discussions. It is
anticipated that the case will be stayed and, in connection with the merger
agreement between the Company and TV Guide, will be dismissed in due course upon
completion of the acquisition.
On May 17, 1997, StarSight filed a Demand for Arbitration with the American
Arbitration Association in San Francisco, California, and by such action
commenced an arbitration action against General Instrument Corporation ("GI").
The claims in the arbitration center upon GI's alleged delay in deploying
StarSight-capable set-top boxes and GI's development of a competing interactive
program guide which allegedly uses StarSight patented technology, confidential
information and technical information in violation of a License and Technical
Assistance Agreement executed by the parties on October 1, 1992. The
arbitration is bifurcated into two phases. The first phase generally covers
issues related to GI's manufacture and sale of analog cable set-top boxes, while
the second phase generally covers issues related to GI's manufacture and sale of
digital cable and satellite set-top boxes. The Arbitration Panel is required to
issue a separate decision for each of the two phases. In October 1999, in
connection with the first phase, the Arbitration Panel issued a ruling against
GI in favor of StarSight as a result of GI's breach of its contract with
StarSight and its misappropriation of StarSight's proprietary technology and
intellectual property in the electronic program guide area. The exact amount of
the multi-million dollar award is being calculated by StarSight and will be
submitted to the Arbitration Panel for approval. The hearing on the second phase
is expected to commence in approximately three months.
On July 24, 1998, the Company, together with SuperGuide Corporation and
StarSight, filed an action against TV Guide Networks, Inc. (formerly Prevue
Networks, Inc.) and, as amended, TCI Communications, Inc. in the U.S. District
Court for the Northern District of California. The suit seeks damages and
injunctive relief based upon the alleged infringement of two patents by
defendants' interactive program guide known as "TV Guide Interactive" (formerly
"Prevue Interactive"). This case was subsequently transferred to the U.S.
District Court for the Northern District of Oklahoma. On December 23, 1998, the
Company filed a motion with the Judicial Panel on Multi-district Litigation
requesting that this case be consolidated with the Scientific-Atlanta, GI and
Pioneer cases hereinafter described and transferred to a single court through
the discovery phase of these cases. A hearing on the motion was held and in
April 1999, the Judicial Panel ordered that all of the actions pending outside
the Northern District of Georgia, except the action against TV Guide Networks,
Inc., be transferred to the Northern District of Georgia for coordinated or
consolidated pretrial proceedings with the action pending in that district (the
"MDL Transfer Order"). The parties are presently awaiting a case management
order by the District Court in Georgia. The District Court in Oklahoma ordered
the parties in the action against TV Guide Networks, Inc. to participate in
settlement discussions. It is anticipated that the case will be stayed and, in
connection with the merger agreement between the Company and TV Guide, will be
dismissed in due course upon completion of the acquisition.
On November 30, 1998, the Company filed a patent infringement action against
GI in the U.S. District Court for the Northern District of California. The suit
seeks damages and injunctive relief based upon the alleged
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infringement of two patents by defendant's interactive program guide. This
action is subject to the MDL Transfer Order.
On December 1, 1998, the Company filed a patent infringement action against
Pioneer Electronic Corp., Pioneer North America, Inc. and Pioneer New Media
Technologies, Inc. (collectively "Pioneer") in the U.S. District Court for the
Central District of California. The suit seeks damages and injunctive relief
based upon the alleged infringement of two patents by defendants' interactive
program guide. This action is subject to the MDL Transfer Order.
On December 3, 1998, Scientific-Atlanta, Inc. ("SA") filed an action against
the Company in the U.S. District Court for the Northern District of Georgia.
The action alleges that the Company violated federal antitrust laws and misused
certain patents. SA seeks damages, injunctive relief and a declaration that the
certain patents are unenforceable, not infringed or invalid. This case is being
coordinated with the actions subject to the MDL Transfer Order.
On December 4, 1998, the Company filed a patent infringement action against SA
in the U.S. District Court for the Central District of California. The suit
seeks damages and injunctive relief based upon the alleged infringement of two
patents by defendant's interactive program guide. This action is subject to the
MDL Transfer Order.
On January 21, 1999, Personalized Media Communications, LLC ("PMC") filed an
action against StarSight in the U.S. District Court for the Southern District of
New York seeking to rescind a patent license agreement between the parties. PMC
also seeks recovery of damages for the value of certain services it alleges were
performed under the license. In April 1999, StarSight filed a motion to stay the
action in the District Court and to compel arbitration pursuant to the
agreement. The motion to stay the action and compel arbitration is currently
pending before the District Court.
On April 22, 1999, SA filed an action against the Company in the U.S. District
Court for the Northern District of Georgia, alleging infringement of three
patents and seeking damages and injunctive relief. On July 21, 1999, the Company
filed a motion seeking pretrial coordination of this action with the actions
subject to the MDL Transfer Order.
On May 6, 1999, StarSight filed an action against SA in the U.S. District
Court for the District of Colorado, seeking a declaratory judgment that SA
breached a license and settlement agreement between the parties. SA
counterclaimed for a declaratory judgment that StarSight breached the agreement
and for unjust enrichment. The parties are currently in pretrial proceedings.
On June 25, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, seeking a declaratory judgement of
invalidity and non-infringement of two patents. On August 2, 1999, StarSight
answered the complaint as to one of the patents and counterclaimed against SA
for infringement of this patent, seeking damages and injunctive relief.
StarSight also filed a motion to dismiss the complaint as to the other patent
for lack of subject matter jurisdiction. The parties are currently in pretrial
proceedings.
On July 23, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, alleging infringement of three
patents and seeking damages and injunctive relief. On August 4, 1999, SA filed a
motion seeking pretrial coordination between this case and SA's action against
the Company filed on April 22, 1999.
The U.S. Internal Revenue Service (the "IRS") has conducted an audit of the
federal tax returns for Gemstar Development Corporation ("GDC"), a U.S.
subsidiary of the Company, for the years ended March 31, 1991, 1992 and 1993.
The IRS has issued a 30-day letter to GDC in which it has proposed adjustments
to GDC's taxable income by reallocating income to GDC for revenue related to the
Company's VCR Plus+ technology. The Company has filed a protest with the IRS.
The Company believes that it has a reasonable basis for its tax position and
accordingly plans to vigorously defend its position. While there can be no
assurance as to the ultimate outcome of
10
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the audit, the Company believes that it has made adequate provision in its
consolidated financial statements with respect to the proposed adjustments.
The Company and its subsidiaries are from time to time also involved in
routine legal matters incidental to their businesses. In the opinion of the
Company, the resolution of such matters will not have a material effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1999 annual meeting of shareholders was held on September 17,
1999. The following actions were taken at this meeting:
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<CAPTION>
Votes Votes
For Withheld
--------- --------
<S> <C> <C>
(1) Election of three directors for terms to expire at the
2002 annual meeting.
Elsie Ma Leung 70,222,626 299,604
Douglas B. Macrae 70,222,626 299,604
Stephen A. Weiswasser 70,222,626 299,604
Additional directors, whose terms of office as directors
continued after the meeting, are as follows:
Terms expiring at the 2000 annual meeting:
George F. Carrier
James E. Meyer
Teruyuki Toyama
Terms expiring at the 2001 annual meeting:
Thomas L.H. Lau
Perry A. Lerner
Henry C. Yuen
</TABLE>
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<CAPTION>
Votes Votes Votes
For Against Abstained
---------- ------- ---------
<S> <C> <C> <C>
(2) Ratification of KPMG LLP as the Company's independent 70,510,030 2,299 9,901
auditors for the fiscal year ending March 31, 2000.
</TABLE>
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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<CAPTION>
Exhibit
Number Document Description
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
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)
2.2 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.(2)
3.1 Amended and Restated Memorandum of Association of the Company.(5)
3.2 Amended and Restated Articles of Association of the Company.(5)
10.1 Patent Assignment Agreement, dated as of March 15, 1994, between Gemstar Development Corporation and
Roy J. Mankovitz. (Confidential treatment requested).(1)
10.2 Contract Engineering Agreement (undated) between Hilite, Inc. and Gemstar Development Corporation.
(Confidential treatment requested).(1)
10.3 Contract Engineering Agreement (undated) between Hilite, Inc. and Gemstar Holdings Limited.
(Confidential treatment requested).(1)
10.4 Contract Engineering Agreement (undated) between Hilite, Inc. and Index Systems, Inc. (Confidential
treatment requested).(1)
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.(1)
10.6(a) Exclusive Representation Agreement, dated July 30, 1990, between Gemstar Development Corporation and
United Feature Syndicate, Inc. (Confidential treatment requested).(1)
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).(1)
10.6(c) Exclusive Representation Agreement, dated March 21, 1994 between Gemstar Development Corporation and
United Feature Syndicate, Inc. (Confidential treatment requested).(1)
10.7 Registration Rights Agreement, dated August 16, 1995, between Gemstar International Group Limited
and the Shareholders of E Guide, Inc.(1)
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.(2)
</TABLE>
12
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<TABLE>
<CAPTION>
<S> <C>
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.(2)
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.(2)
10.11 TDN, Inc., Stockholders Agreement, dated as of October 31, 1997,
by and among TDN, Inc., a Delaware corporation, Gemstar
Marketing, Inc., a California corporation, and Thomson Consumer
Electronics, Inc., a Delaware corporation.(3)
10.12 Cost and Reimbursement Support Agreement, dated as of October 31,
1997, by and among TDN, Inc., a Delaware corporation, and
Gemstar International Group Limited.(3)
10.13 Definitive Agreement, dated as of January 9, 1998, by and among
Gemstar International Group Limited, StarSight Telecast, Inc., a
California corporation, and Microsoft Corporation, a Washington
corporation.(3)
10.14 Rescission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation and Microsoft
Corporation, a Washington corporation.(3)
27 Financial Data Schedule.(8)
99.1 1994 Stock Incentive Plan, as amended.(1)
99.2 Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Henry C. Yuen, as amended.
(Confidential treatment requested).(1)
99.3 Employment Agreement, dated August 1995, between Gemstar
International Group Limited and Thomas L.H. Lau.(1)
99.4 Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Daniel S.W. Kwoh, as amended.
(Confidential treatment requested).(1)
99.5 Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Roy J. Mankovitz, as amended.
(Confidential treatment requested).(1)
99.6 Employment Agreement, dated August 16, 1995, between Pros
Technology Limited and Wilson K.C. Cho. (Confidential treatment
requested).(1)
99.7 Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Elsie Ma Leung, as amended.(1)
99.8 Employment Agreement, dated April 1, 1994, between Gemstar
Development Corporation and Larry Goldberg, as amended.(1)
99.9 Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as
amended.(1)
99.10 Amendment to 1994 Stock Incentive Plan, as amended, adopted on
March 12, 1998.(4)
99.11 Amended and Restated Employment Agreement, effective as of
January 7, 1998, among Gemstar International Group Limited,
Gemstar Development Corporation and Henry C. Yuen.(6)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
99.12 Amended and Restated Employment Agreement, dated as of March 31, 1998, among Gemstar International
Group Limited, Gemstar Development Corporation and Elsie Leung.(6)
99.13 Employment Agreement, dated as of July 22, 1999, by and between Gemstar International Group Limited,
Gemstar Development Corporation and Stephen A. Weiswasser.(7)
</TABLE>
- ----------------
(1) 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.
(2) 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.
(3) Previously filed as part of Form 8-K dated January 12, 1998, as amended on
June 11, 1998, and incorporated herein by reference. Certain information in
this exhibit has been omitted pursuant to a request for Confidential
Treatment granted by the Securities and Exchange Commission.
(4) Previously filed as part of Form 10-K for the fiscal year ended March 31,
1998, filed on June 29, 1998, and incorporated herein by reference.
(5) 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. Further amendments were filed in
connection with the Company's report on Form 8-K on July 13, 1998.
(6) Previously filed as part of Form 10-K/A for the fiscal year ended March 31,
1998, filed on November 17, 1998, and incorporated herein by reference.
Certain information in this exhibit has been omitted pursuant to a request
for Confidential Treatment which was filed with the Securities and Exchange
Commission.
(7) Previously filed as part of Form 10-Q for the quarterly period ended June
30, 1999, filed on August 16, 1999, and incorporated herein by reference.
(8) Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gemstar International Group Limited
(Registrant)
By: /s/ Elsie Ma Leung
------------------------
Elsie Ma Leung
Chief Financial Officer
Date: November 15, 1999
15
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER
30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 186,639
<SECURITIES> 71,946
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 272,997
<PP&E> 14,635
<DEPRECIATION> 11,399
<TOTAL-ASSETS> 331,365
<CURRENT-LIABILITIES> 47,377
<BONDS> 0
0
0
<COMMON> 1,017
<OTHER-SE> 254,817
<TOTAL-LIABILITY-AND-EQUITY> 331,365
<SALES> 0
<TOTAL-REVENUES> 90,303
<CGS> 0
<TOTAL-COSTS> 39,079
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 57,346
<INCOME-TAX> 15,481
<INCOME-CONTINUING> 41,865
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<NET-INCOME> 41,865
<EPS-BASIC> .42
<EPS-DILUTED> .35
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