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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 December 31, 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)
Delaware 95-4782077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 December 31, 1999, there were outstanding 201,262,000 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
Condensed Consolidated Balance Sheets -- December 31, 1999 and March 31, 1999............. 1
Condensed Consolidated Statements of Operations -- Three and Nine Months Ended
December 31, 1999 and 1998............................................................... 2
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended December 31,
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 6. Exhibits and Reports on Form 8-K.......................................................... 12
SIGNATURE.......................................................................................... 17
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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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December 31, March 31,
1999 1999
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(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 201,534 $ 184,334
Marketable securities..................................... 62,632 29,711
Receivables............................................... 36,516 11,415
Prepaid expenses and other current assets................. 1,409 1,484
------------- --------------
Total current assets................................... 302,091 226,944
Property and equipment, net................................. 3,334 2,719
Intangible assets, net...................................... 18,588 16,978
Marketable securities and other investments................. 57,055 4,002
Other assets................................................ 4,772 2,521
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$ 385,840 $ 253,164
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 26,057 $ 23,527
Current portion of deferred revenue....................... 14,763 13,476
------------- --------------
Total current liabilities.............................. 40,820 37,003
Deferred revenue, less current portion...................... 312 550
Deferred income taxes....................................... 29,416 30,429
Other liabilities........................................... 1,716 1,211
Shareholders' equity:
Ordinary Shares........................................... 2,041 2,010
Additional paid-in capital................................ 270,605 230,794
Retained earnings (accumulated deficit)................... 53,677 (20,166)
Accumulated other comprehensive income (loss)............. 15,692 (228)
Treasury stock, at cost................................... (28,439) (28,439)
------------- --------------
Net shareholders' equity............................... 313,576 183,971
------------- --------------
$ 385,840 $ 253,164
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
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Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
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Revenues.................................................. $ 61,820 $ 41,495 $ 152,123 $ 112,426
Operating costs and expenses:
Selling and marketing................................... 11,306 8,382 31,350 24,097
Research and development................................ 3,740 3,444 10,987 10,336
General and administrative.............................. 6,459 5,261 18,247 15,949
Nonrecurring expenses................................... -- -- -- 1,851
------------ ------------ ------------ ------------
Operating income.......................................... 40,315 24,408 91,539 60,193
Other income, net......................................... 3,491 2,070 9,613 6,346
------------ ------------ ------------ ------------
Income before income taxes................................ 43,806 26,478 101,152 66,539
Income taxes.............................................. 11,828 7,680 27,309 19,296
------------ ------------ ------------ ------------
Net income................................................ $ 31,978 $ 18,798 $ 73,843 $ 47,243
============ ============ ============ ============
Basic earnings per share.................................. $ 0.16 $ 0.10 $ 0.37 $ 0.24
============ ============ ============ ============
Diluted earnings per share................................ $ 0.13 $ 0.08 $ 0.31 $ 0.21
============ ============ ============ ============
Weighted average shares outstanding....................... 201,062 194,372 200,240 194,403
Dilutive effect of:
Stock options........................................... 42,976 31,292 40,339 27,327
Warrants................................................ -- 1,785 -- 1,734
------------ ------------ ------------ ------------
Weighted average shares outstanding, assuming dilution.... 244,038 227,449 240,579 223,464
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
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Nine Months Ended
December 31,
--------------------------------
1999 1998
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Cash flows from operating activities:
Net income.................................................................... $ 73,843 $ 47,243
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................... 3,690 3,275
Deferred income taxes....................................................... (1,013) 8,043
Tax benefit associated with stock options................................... 23,890 6,700
Changes in assets and liabilities........................................... (23,070) (22,506)
-------------- --------------
Net cash provided by operating activities................................. 77,340 42,755
-------------- --------------
Cash flows from investing activities:
Net purchases of marketable securities and other investments.................. (70,371) (25,325)
Additions to property and equipment........................................... (1,832) (377)
Additions to intangible assets................................................ (4,083) (1,536)
-------------- --------------
Net cash used in investing activities..................................... (76,286) (27,238)
-------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options....................................... 15,952 15,407
Purchases of treasury stock................................................... -- (28,439)
-------------- --------------
Net cash provided by (used in) financing activities....................... 15,952 (13,032)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents..................... 194 (120)
-------------- --------------
Net increase in cash and cash equivalents........................................ 17,200 2,365
Cash and cash equivalents at beginning of period................................. 184,334 153,517
-------------- --------------
Cash and cash equivalents at end of period....................................... $201,534 $155,882
============== ==============
</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 December 31, 1999 are not necessarily indicative of the results
that may be expected for the entire year ending March 31, 2000.
On February 9, 2000, the Company changed its place of incorporation from
the British Virgin Islands to the State of Delaware.
(2) Business Combinations
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 late April 2000 and is subject to approval by shareholders of each company
and the satisfaction of customary regulatory requirements.
In January 2000, the Company completed mergers of two electronic-book
companies, NuvoMedia Inc., maker of the Rocket eBook, and SoftBook Press Inc.,
maker of the SoftBook Reader. Both mergers are stock-for-stock transactions and
will be accounted for as poolings of interests. The total number of shares
issued for the two entities is less than 3 percent of the Company's fully
diluted shares.
(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 Splits
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. In November 1999, the Board of
Directors approved a two-for-one stock split in the form of a stock dividend
which was paid in December 1999 to shareholders of record as of November 29,
1999. All share and per share amounts herein have been adjusted for these stock
splits.
4
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(5) Comprehensive Income
The Company's comprehensive income consisted of net income, unrealized
gains on marketable securities and the equity adjustment from foreign currency
translation. Comprehensive income was $47,586,000 and $18,800,000 for the three
months ended December 31, 1999 and 1998, respectively, and was $89,763,000 and
$47,123,000 for the nine months ended December 31, 1999 and 1998, respectively.
Accumulated other comprehensive income (loss) presented on the accompanying
condensed consolidated balance sheets consists of unrealized gains on marketable
securities and 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 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.
5
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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.
Results of Operations
Revenues for the quarter ended December 31, 1999 were $61.8 million, an
increase of 49% when compared with revenues for the year-ago period of $41.5
million. Revenues for the nine months ended December 31, 1999 were $152.1
million, an increase of 35% when compared with revenues for the year-ago period
of $112.4 million. The increase in revenues is due to the continued growth in
worldwide licensing income derived from the Company's proprietary technologies
and intellectual property associated with the VCR Plus+ system and the
electronic program guide, including payments due from General Instrument
Corporation under a disputed contract following a favorable American Arbitration
Association panel ruling.
Total operating expenses for the quarter ended December 31, 1999 were $21.5
million, comprised of selling and marketing expenses of $11.3 million, research
and development expenses of $3.7 million, and general and administrative
expenses of $6.5 million. Compared with the year-ago period, total operating
expenses for the current quarter increased 26%. Total operating expenses for the
nine months ended December 31, 1999 were $60.6 million, comprised of selling and
marketing expenses of $31.4 million, research and development expenses of $11.0
million, and general and administrative expenses of $18.2 million. Compared with
the year-ago period, excluding nonrecurring expenses, total operating expenses
for the nine months ended December 31, 1999 increased 20%. The increase in
operating expenses was due primarily to an increase in marketing and support
costs associated with the electronic program guide and the VCR Plus+ system, 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 60% for the nine months ended December 31, 1999 from 55%
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.
6
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Income taxes were $11.8 million and $7.7 million for the three months
ended December 31, 1999 and 1998, respectively, and were $27.3 million and
$19.3 million for the nine months ended December 31, 1999 and 1998,
respectively. The Company's effective tax rate was 27% and 29% for the nine
months ended December 31, 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 December 31, 1999, the Company had cash, cash equivalents and short-term
marketable securities totaling $264.2 million. Net cash provided by operating
activities was $77.3 million and $42.8 million for the nine months ended
December 31, 1999 and 1998, respectively. The increase in net cash provided by
operating activities was primarily the result of increases in net income and tax
benefits associated with stock options. Net cash used in investing activities
was $76.3 million for the nine months ended December 31, 1999, comprised of net
purchases of marketable securities and other investments of $70.4 million and
additions to property and equipment and intangible assets of $5.9 million. Net
cash used in investing activities was $27.2 million for the nine months ended
December 31, 1998, comprised of net purchases of marketable securities of $25.3
million and additions to property and equipment and intangible assets of $1.9
million. Proceeds from stock option exercises totaled $16.0 million and $15.4
million for the nine months ended December 31, 1999 and 1998, respectively.
Purchases of treasury stock totaled $28.4 million for the nine months ended
December 31, 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 December 31,
1999, the Company has repurchased 2.8 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 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
As of February 11, 2000, the Company has not experienced any material
operational issues or costs associated with its internal systems for the Year
2000. However, 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.
7
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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. In addition, the Company utilizes third party equipment,
software and content that may not be Year 2000 compliant. The Company is not
aware that any of its licensees or third-party vendors have experienced
significant Year 2000 related problems.
The Company believes all of its critical systems are Year 2000 ready.
However, there can be no assurance that the Company discovered all possible
failure points. If the Company or third party licensees or vendors experience
Year 2000 related problems, it could have a material adverse effect on the
Company's financial condition or results of operations.
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 believes all of its critical systems are Year 2000 ready. 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 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. We are not aware of any changes necessary to those
disclosures.
8
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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. The
case has been administratively closed and, in connection with the merger
agreement between the Company and TV Guide, will be dismissed in due course upon
completion of the merger.
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. 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 pertaining to electronic
program guides incorporated in GI analog set top boxes. The arbitration award
also include punitive damages of an additional 50% of the amount due based on
the disputed contract. Certain details of the total amount due including
punitive damages are still being finalized by the Arbitration Panel. Revenues
for the quarter ended December 31, 1999, include a partial recognition of
previously owed fees from GI in the amount of $18 million. None of the punitive
damages have been recognized. The second phase of the arbitration, focusing on
digital set top boxes, is scheduled to proceed later this year .
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"). All cases subject to the MDL Transfer Order in the
Northern District of Georgia are now in pretrial proceedings. The District Court
in Oklahoma ordered the parties in the action against TV Guide Networks, Inc. to
participate in settlement discussions. The case has been administratively closed
and, in connection with the merger agreement between the Company and TV Guide,
will be dismissed in due course upon completion of the merger.
9
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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 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. This case has been
consolidated with the action filed by SA against StarSight on July 23, 1999, and
the parties are currently in pretrial proceedings.
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. This case has been
consolidated with the action filed by SA against the Company on April 22, 1999,
and the parties are currently in pretrial proceedings.
10
<PAGE>
On January 19, 2000, StarSight filed a patent infringement action against TiVo
Inc. ("TiVo") in the U.S. District Court for the Northern District of
California. The suit claims, among other matters, that TiVo willfully infringed
certain StarSight intellectual property by virtue of TiVo's deployment,
marketing, offers to sell and sale of personalized video recorder devices
containing an unlicensed interactive program guide. StarSight is seeking an
injunction and monetary damages.
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 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.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document Description
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<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 (Incorporated by reference to Form F-4 Registration Statement of Gemstar
International Group Limited (333-6790), which was declared effective on April 15, 1997)
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 (Incorporated by reference to
Form F-4 Registration Statement of Gemstar International Group Limited (333-6790), which was
declared effective on April 15, 1997)
2.3 Agreement and Plan of Merger dated as of October 4, 1999 among Gemstar International Group Limited,
G Acquisition Subsidiary Corp. and TV Guide, Inc., as amended on February 7, 2000 (Incorporated by
reference to Form S-4 Registration Statement of Gemstar International Group Limited (333-96407),
which was declared effective on February 8, 2000)
3.1 Amended and Restated Memorandum of Association of Gemstar International Group Limited (Incorporated
by reference to Form F-1 Registration Statement of Gemstar International Group Limited (33-79016),
which was declared effective on October 10, 1995) (Further amendments were filed in connection with
Gemstar's Form 8-K on July 13, 1998)
3.2 Amended and Restated Articles of Association of Gemstar International Group Limited (Incorporated by
reference to Form F-1 Registration Statement of Gemstar International Group Limited (33-79016),
which was declared effective on October 10, 1995) (Further amendments were filed in connection with
Gemstar's Form 8-K on July 13, 1998)
3.3 Certificate of Incorporation of Gemstar International Group Limited (Incorporated by reference to
Form S-4 Registration Statement of Gemstar International Group Limited (333-96407), which was
declared effective on February 8, 2000)
3.4 Bylaws of Gemstar International Group Limited (Incorporated by reference to Form S-4 Registration
Statement of Gemstar International Group Limited (333-96407), which was declared effective on
February 8, 2000)
4.1 Rights Agreement, dated as of July 10, 1998, between Gemstar International Group Limited and
American Stock Transfer & Trust Company, as Rights Agent (including as an exhibit thereto the terms
of the designated Junior Participating Preference Shares) (Incorporated by reference to Exhibit 2 to
the Registration Statement on Form 8-A, dated July 13, 1998)
4.2 Amended and Restated Rights Agreement, by and between Gemstar International Group Limited, a
Delaware corporation which is the continuation of Gemstar International Group Limited, a British
Virgin Islands corporation, and American Stock Transfer & Trust Company, a New York company
(Incorporated by reference to Form S-4 Registration Statement of Gemstar International Group Limited
(333-96407), which was declared effective on February 8, 2000)
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
4.3 Rights Amendments (Incorporated by reference to Exhibit 99/15 to Gemstar's Form 8-K, filed February
8, 2000)
10.1 Patent Assignment Agreement, dated as of March 15, 1994, between Gemstar Development Corporation and
Roy J. Mankovitz. (Confidential treatment requested) (Incorporated by reference to Form F-1
Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
10.2 Contract Engineering Agreement (undated) between Hilite, Inc. and Gemstar Development Corporation.
(Confidential treatment requested) (Incorporated by reference to Form F-1 Registration Statement of
Gemstar International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.3 Contract Engineering Agreement (undated) between Hilite, Inc. and Gemstar Holdings Limited.
(Confidential treatment requested) (Incorporated by reference to Form F-1 Registration Statement of
Gemstar International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.4 Contract Engineering Agreement (undated) between Hilite, Inc. and Index Systems, Inc. (Confidential
treatment requested) (Incorporated by reference to Form F-1 Registration Statement of Gemstar
International Group Limited (33-79016), which was declared effective on October 10, 1995)
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 (Incorporated by
reference to Form F-1 Registration Statement of Gemstar International Group Limited (33-79016),
which was declared effective on October 10, 1995)
10.6(a) Exclusive Representation Agreement, dated July 30, 1990, between Gemstar Development Corporation and
United Feature Syndicate, Inc. (Confidential treatment requested) (Incorporated by reference to Form
F-1 Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
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) (Incorporated by reference to Form F-1
Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
10.6(c) Exclusive Representation Agreement, dated March 21, 1994 between Gemstar Development Corporation and
United Feature Syndicate, Inc. (Confidential treatment requested) (Incorporated by reference to Form
F-1 Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
10.7 Registration Rights Agreement, dated August 16, 1995, between Gemstar International Group Limited
and the Shareholders of E Guide, Inc. (Incorporated by reference to Form F-1 Registration Statement
of Gemstar International Group Limited (33-79016), which was declared effective on October 10, 1995)
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. (Incorporated by reference to Form F-4 Registration
Statement of Gemstar International Group Limited (333-6790), which was declared effective on April
15, 1997)
</TABLE>
13
<PAGE>
<TABLE>
<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 (Incorporated by reference to Form F-4 Registration Statement of Gemstar International
Group Limited (333-6790), which was declared effective on April 15, 1997)
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 (Incorporated by reference to Form F-4 Registration Statement of Gemstar International
Group Limited (333-6790), which was declared effective on April 15, 1997)
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 (Incorporated by reference to Form 8-K dated January 12, 1998, as
amended on June 11, 1998) (Certain information in this exhibit has been omitted pursuant to a
request for Confidential Treatment granted by the Securities and Exchange Commission)
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 (Incorporated by reference to Form 8-K
dated January 12, 1998, as amended on June 11, 1998) (Certain information in this exhibit has been
omitted pursuant to a request for Confidential Treatment granted by the Securities and Exchange
Commission)
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 (Incorporated by reference to Form 8-K dated January 12, 1998, as amended on June 11,
1998) (Certain information in this exhibit has been omitted pursuant to a request for Confidential
Treatment granted by the Securities and Exchange Commission)
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 (Incorporated by
reference to Form 8-K dated January 12, 1998, as amended on June 11, 1998) (Certain information in
this exhibit has been omitted pursuant to a request for Confidential Treatment granted by the
Securities and Exchange Commission)
10.15 Voting Agreement dated as of October 4, 1999 among Liberty Media Corporation, certain of its
controlled affiliates and Gemstar International Group Limited (Incorporated by reference to Exhibit
7(i) to Schedule 13D/A, filed November 4, 1999, with respect to ownership of securities of TV Guide,
Inc.)
10.16 Voting Agreement dated as of October 4, 1999 among The News Corporation Limited, certain of its
controlled affiliates and Gemstar International Group Limited (Incorporated by reference to Exhibit
10.8 to Schedule 13D/A, filed November 4, 1999, with respect to ownership of securities of TV Guide,
Inc.)
10.17 Voting Agreement dated as of October 4, 1999 between TV Guide, Inc. and Henry C. Yuen (a stockholder
of Gemstar International Group Limited) (Incorporated by reference to Exhibit 1 to Schedule 13D/A,
filed January 5, 2000, with respect to ownership of securities of Gemstar International Group
Limited)
10.18 Voting Agreement dated as of October 4, 1999 between TV Guide, Inc. and Elsie Ma Leung (a
stockholder of Gemstar International Group Limited) (Incorporated by reference to Exhibit 99.4 to
Gemstar's Form 8-K, filed February 8, 2000)
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
10.19 Voting Agreement dated as of October 4, 1999 between TV Guide, Inc. and Dynamic Core Holdings
Limited (a stockholder of Gemstar International Group Limited) (Incorporated by reference Exhibit 1
to Schedule 13D/A, filed January 5, 2000, with respect to ownership of securities of Gemstar
International Group Limited)
10.20 Voting Agreement dated as of October 4, 1999 between TV Guide, Inc. and THOMSON multimedia S.A. (a
stockholder of Gemstar International Group Limited) (Incorporated by reference to Exhibit 99.6 to
Gemstar's Form 8-K, filed February 8, 2000)
10.21 Stockholders Agreement, dated as of October 4, 1999, by and among The News Corporation Limited, a
South Australia, Australia corporation, Liberty Media Corporation, a Delaware corporation, Henry C.
Yuen and Gemstar International Group Limited, a British Virgin Islands corporation (Incorporated by
reference to Exhibit 99.9 to Gemstar's Form 8-K, filed February 8, 2000)
10.22 Stock Option Agreement, dated as of October 4, 1999, between Gemstar International Group Limited, a
British Virgin Islands corporation and TV Guide, Inc., a Delaware corporation (Option on Gemstar
Stock) (Incorporated by reference to Exhibit 99.13 to Gemstar's Form 8-K, filed February 8, 2000)
10.23 Stock Option Agreement, dated as of October 4, 1999, between Gemstar International Group Limited, a
British Virgin Islands corporation and TV Guide, Inc., a Delaware corporation (Option on TV Guide
Stock) (Incorporated by reference to Exhibit 99.14 to Gemstar's Form 8-K, filed February 8, 2000)
10.24 1994 Stock Incentive Plan, as amended (Incorporated by reference to Form F-1 Registration Statement
of Gemstar International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.25 Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as amended (Incorporated by reference
to Form F-1 Registration Statement of Gemstar International Group Limited (33-79016), which was
declared effective on October 10, 1995)
10.26 Amendment to 1994 Stock Incentive Plan, as amended, adopted on March 12, 1998.(Incorporated by
reference to Annual Report on Form 10-K of Gemstar International Group Limited for the fiscal year
ended March 31, 1998, filed June 29, 1998)
10.27 Employment Agreement, dated April 1, 1994, between Gemstar Development Corporation and Henry C.
Yuen, as amended. (Confidential treatment requested) (Incorporated by reference to Form F-1
Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
10.28 Employment Agreement, dated August 1995, between Gemstar International Group Limited and Thomas L.H.
Lau (Incorporated by reference to Form F-1 Registration Statement of Gemstar International Group
Limited (33-79016), which was declared effective on October 10, 1995)
10.29 Employment Agreement, dated April 1, 1994, between Gemstar Development Corporation and Daniel S.W.
Kwoh, as amended. (Confidential treatment requested) (Incorporated by reference to Form F-1
Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
10.30 Employment Agreement, dated April 1, 1994, between Gemstar Development Corporation and Roy J.
Mankovitz, as amended. (Confidential treatment requested) (Incorporated by reference to Form F-1
Registration Statement of Gemstar International Group Limited (33-79016), which was declared
effective on October 10, 1995)
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
10.31 Employment Agreement, dated August 16, 1995, between Pros Technology Limited and Wilson K.C. Cho.
(Confidential treatment requested) (Incorporated by reference to Form F-1 Registration Statement of
Gemstar International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.32 Employment Agreement, dated April 1, 1994, between Gemstar Development Corporation and Elsie Ma
Leung, as amended (Incorporated by reference to Form F-1 Registration Statement of Gemstar
International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.33 Employment Agreement, dated April 1, 1994, between Gemstar Development Corporation and Larry
Goldberg, as amended (Incorporated by reference to Form F-1 Registration Statement of Gemstar
International Group Limited (33-79016), which was declared effective on October 10, 1995)
10.34 Employment Agreement, dated as of July 22, 1999, among Gemstar International Group Limited, Gemstar
Development Corporation and Stephen A. Weiswasser.(Incorporated by reference to Form 10-Q of Gemstar
International Group Limited for the fiscal quarter ended June 30, 1999, filed August 16, 1999)
10.35 Amended and Restated Employment Agreement, effective as of January 7, 1998, among Gemstar
International Group Limited, Gemstar Development Corporation and Henry C. Yuen (Incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year ended March 31, 1998, filed November
17, 1998) (Certain information in this exhibit has been omitted pursuant to a request for
Confidential Treatment which was filed with the Securities and Exchange Commission)
10.36 Amendment No. 1 to Amended and Restated Employment Agreement, dated as of October 4, 1999, by and
among Gemstar International Group Limited, Gemstar Development Corporation and Henry C. Yuen
(Incorporated by reference to Exhibit 99.10 to Gemstar's Form 8-K, filed February 8, 2000)
10.37 Amended and Restated Employment Agreement, dated as of March 31, 1998, among Gemstar International
Group Limited, Gemstar Development Corporation and Elsie Leung (Incorporated by reference to Annual
Report on Form 10-K/A for the fiscal year ended March 31, 1998, filed November 17, 1998) (Certain
information in this exhibit has been omitted pursuant to a request for Confidential Treatment which
was filed with the Securities and Exchange Commission)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
16
<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: February 14, 2000
17
<TABLE> <S> <C>
<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 DECEMBER 31,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 201,534
<SECURITIES> 62,632
<RECEIVABLES> 36,516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 302,091
<PP&E> 15,115
<DEPRECIATION> 11,781
<TOTAL-ASSETS> 385,840
<CURRENT-LIABILITIES> 40,820
<BONDS> 0
0
0
<COMMON> 2,041
<OTHER-SE> 311,535
<TOTAL-LIABILITY-AND-EQUITY> 385,840
<SALES> 0
<TOTAL-REVENUES> 152,123
<CGS> 0
<TOTAL-COSTS> 60,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 101,152
<INCOME-TAX> 27,309
<INCOME-CONTINUING> 73,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,843
<EPS-BASIC> .37
<EPS-DILUTED> .31
</TABLE>
