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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 PERIOD ENDED SEPTEMBER 30, 2000, 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 0-24218
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(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 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, 2000, there were outstanding 410,057,000 shares of the
registrant's Common Stock, par value $0.01 per share.
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GEMSTAR-TV GUIDE INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................... 1
Condensed Consolidated Statements of Operations................ 2
Condensed Consolidated Statements of Cash Flows................ 3
Notes to Condensed Consolidated Financial Statements........... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signature................................................................ 22
</TABLE>
Items 2, 3, 4 and 5 of PART II are not applicable and have been omitted.
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 350,793 $237,046
Marketable securities 58,235 49,145
Receivables, net 363,924 69,903
Deferred tax asset 15,665 -
Inventories and other current assets 42,529 2,248
----------- --------
Total current assets 831,146 358,342
Property, plant and equipment, net 88,304 5,169
Intangible assets, net 9,656,852 18,929
Marketable securities and other investments 224,568 74,814
Other assets 22,553 9,917
----------- --------
Total assets $10,823,423 $467,171
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 215,901 $ 41,004
Note payable and current portion of
capital lease obligations 3,521 -
Current portion of deferred revenue 301,045 3,421
----------- --------
Total current liabilities 520,467 44,425
Deferred tax liability 1,429,882 34,801
Capital lease obligations and long-term debt 661,969 -
Deferred revenue, less current portion 62,135 268
Other liabilities 7,150 2,020
Stockholders' equity:
Common stock, $.01 par value 4,128 2,105
Additional paid-in capital 8,253,199 333,667
(Accumulated deficit) retained earnings (46,027) 40,857
Accumulated other comprehensive
income, net of tax 38,471 37,467
Unearned compensation (79,512) -
Treasury stock, at cost (28,439) (28,439)
----------- --------
Total stockholders' equity 8,141,820 385,657
----------- --------
Total liabilities and stockholders' equity $10,823,423 $467,171
=========== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- --------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 309,821 $ 48,301 $373,051 $ 93,389
Operating expenses:
Operating expenses, excluding stock
compensation and depreciation
and amortization 216,401 25,786 243,204 50,524
Stock compensation 8,593 - 8,593 -
Depreciation and amortization 206,561 1,307 207,978 2,702
--------- -------- -------- --------
431,555 27,093 459,775 53,226
--------- -------- -------- --------
Operating (loss) income (121,734) 21,208 (86,724) 40,163
Interest expense (11,790) - (11,790) -
Other income, net 2,551 3,432 7,184 6,177
--------- -------- -------- --------
(Loss) income before income taxes (130,973) 24,640 (91,330) 46,340
(Benefit) provision for income taxes (15,150) 8,221 (4,446) 15,481
--------- -------- -------- --------
Net (loss) income $(115,823) $ 16,419 $(86,884) $ 30,859
========= ======== ======== ========
(Loss) earnings per share:
Basic $(0.30) $0.08 $(0.29) $0.15
========= ======== ======== ========
Diluted $(0.30) $0.07 $(0.29) $0.13
========= ======== ======== ========
Weighted average shares
outstanding 385,418 205,888 296,909 204,522
Dilutive effect of:
Stock options - 40,069 - 39,742
Warrants - 87 - 52
--------- -------- -------- --------
Weighted average shares
outstanding, assuming dilution 385,418 246,044 296,909 244,316
========= ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (86,884) $ 30,859
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 207,978 2,702
Deferred income taxes (45,303) (4,158)
Tax benefit associated with stock options 29,000 16,370
Stock compensation expense 8,593 -
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Receivables (9,494) (1,263)
Inventories and other assets 3,091 (2,431)
Accounts payable, accrued expenses
and other liabilities (42,443) (443)
Deferred revenue 12,926 11,339
--------- --------
Net cash provided by operating activities 77,464 52,975
--------- --------
Cash flows from investing activities:
Investments and acquisitions (30,735) (10,928)
Cash acquired in acquisitions 100,033 -
Additions to property, plant and equipment (10,455) (2,173)
Additions to intangible assets (5,488) (2,428)
Net purchases of marketable securities (7,171) (61,520)
--------- --------
Net cash provided by (used in) investing activities 46,184 (77,049)
--------- --------
Cash flows from financing activities:
Borrowings under bank credit facilities 313,448 -
Repayment of senior subordinated notes (331,864) -
Repayment of note payable and capital
lease obligations (713) -
Issuance of common stock 17,296 43,841
Other (7,849) -
--------- --------
Net cash (used in) provided by financing activities (9,682) 43,841
--------- --------
Effect of exchange rate changes on cash and
cash equivalents (219) 67
--------- --------
Net increase in cash and cash equivalents 113,747 19,834
Cash and cash equivalents at beginning of period 237,046 185,723
Adjustment for change in SoftBook Press, Inc. year end - (2,162)
--------- --------
Cash and cash equivalents at end of period $ 350,793 $203,395
========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2000
1. Organization and Basis of Presentation
Gemstar-TV Guide International, Inc. ("Gemstar" or the "Company") is a
leading global technology and media company focused on consumer entertainment.
On July 12, 2000, the Company completed its merger with TV Guide, Inc. ("TV
Guide"). The merger was accounted for as a purchase. Accordingly, the
consolidated financial statements include the results of operations of TV Guide
from July 12, 2000. Due to purchase accounting, the results of operations for
the three and six-month periods ended September 30, 2000, reflect significant
increases in depreciation and amortization of goodwill and other intangible
assets. Accordingly, the Company's business sectors are measured based on EBITDA
(operating income before stock compensation expense and depreciation and
amortization).
The Company has four major business sectors: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technology; the Interactive Platform
Sector, which owns, operates and derives recurring income from advertising,
interactive services, content sales and e-commerce on the Company's proprietary
technologies and platforms; the Media and Services Sector, which operates TV
Guide magazine, TV Guide Channel and other television media properties, and
which includes the media sales group that services all of the Company's media
platforms; and the Investments and Holdings Sector, which operates a variety of
non-core businesses and start-up operations. The Company's business sectors
represent strategic business units that offer different products and services
and compete in different industries.
The accompanying interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position of the Company and its results of operations and cash flows for such
periods. Operating results for any interim period are not necessarily indicative
of the results that may be expected for the full year.
Certain financial statement items for prior periods have been reclassified
to conform to the 2000 presentation.
These consolidated financial statements should be read in conjunction with
the historical consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended March 31, 2000.
4
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2. Segment Information
Effective July 12, 2000, the Company restructured its businesses into four
groups for financial reporting purposes: the Technology and Licensing Sector,
which is responsible for the development, licensing and protection of
intellectual property and proprietary technology (the Company's technology
includes the VCR Plus+ system, the interactive program guide ("IPG") marketed
under the GUIDE Plus+ and TV Guide Interactive brands and the electronic book
("eBook")); the Interactive Platform Sector, which owns, operates and derives
recurring income from advertising, interactive services, content sales and e-
commerce on the Company's proprietary technologies and platforms; the Media and
Services Sector, which operates TV Guide magazines, TV Guide Channel, and other
television media properties, as well as a media sales group that services all of
the Company's media platforms; and the Investments and Holdings Sector, which
operates a variety of non-core businesses including the start-up Television
Games Network. Segment information reported in prior years has been reclassified
to conform with the current year presentation.
The Company's reportable segments are strategic business units that offer
different products and services and compete in different industries. The
reportable segments are measured based on EBITDA (operating income before stock
compensation expense and depreciation and amortization). Eliminations include
inter-segment revenues and expenses. The Company accounts for inter-segment
sales as if the sales were made to third parties at market prices. Assets of the
reportable segments are not relevant for management of the businesses nor for
disclosure.
Segment information for each of the three and six-month periods ended
September 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 (1) 1999 2000 (1) 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Technology and Licensing Sector:
Revenues $ 62,460 $45,839 $ 120,617 $ 87,649
Expenses (2) 21,669 17,684 40,031 33,981
--------- ------- --------- --------
EBITDA (3) $ 40,791 $28,155 $ 80,586 $ 53,668
========= ======= ========= ========
Interactive Platform Sector:
Revenues $ 6,554 $ 449 $ 9,363 $ 706
Expenses (2) 17,784 7,248 25,979 13,242
--------- ------- --------- --------
EBITDA (3) $ (11,230) $(6,799) $ (16,616) $(12,536)
========= ======= ========= ========
Media and Services Sector:
Revenues $ 153,862 $ - $ 153,862 $ -
Expenses (2) 107,732 - 107,732 -
--------- ------- --------- --------
EBITDA (3) $ 46,130 $ - $ 46,130 $ -
========= ======= ========= ========
Investments and Holdings Sector:
Revenues $ 88,631 $ 2,013 $ 90,895 $ 5,034
Expenses (2) 70,902 854 71,148 3,301
--------- ------- --------- --------
EBITDA (3) $ 17,729 $ 1,159 $ 19,747 $ 1,733
========= ======= ========= ========
Consolidated (after eliminations)
Revenues $ 309,821 $48,301 $ 373,051 $ 93,389
Expenses (2) 216,401 25,786 243,204 50,524
--------- ------- --------- --------
EBITDA (3) 93,420 22,515 129,847 42,865
Stock compensation (8,593) - (8,593) -
Depreciation and amortization (206,561) (1,307) (207,978) (2,702)
Interet expense (11,790) - (11,790) -
Other income, net 2,551 3,432 7,184 6,177
--------- ------- --------- --------
(Loss) income before income taxes $(130,973) $24,640 $ (91,330) $ 46,340
========= ======= ========= ========
</TABLE>
5
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(1) Effective July 12, 2000, the Company's consolidated operating results
include the operating results of TV Guide, Inc. TV Guide was acquired in a
transaction accounted for as a purchase.
(2) Expenses means operating expenses, excluding stock compensation and
depreciation and amortization.
(3) EBITDA means operating income before noncash stock compensation expense and
depreciation and amortization. Due to purchase accounting related to the
Company's merger wtih TV Guide on July 12, 2000, the results of operations
for the three and six-month periods ended September 30, 2000, reflect
significant increases in depreciation and amortization of goodwill and
other intangible assets. Accordingly, the Company's business sectors are
measured based on EBITDA. EBITDA is presented supplementally as the Company
believes it is a standard measure commonly reported and widely used by
analysts, investors and others associated with its industry. However,
EBITDA does not take into account substantial costs of doing business, such
as income taxes and interest expense. While many in the financial community
consider EBITDA to be an important measure of comparative operating
performance, it should be considered in addition to, but not as a
substitute for, operating income, net income, cash flow provided by
operating activities and other measures of financial performance prepared
in accordance with generally accepted accounting principles that are
presented in the financial statements included in this report.
Additionally, the Company's calculation of EBITDA may be different than the
calculation used by other companies and, therefore, comparability may be
affected.
3. Investments and Acquisitions
eBook Acquisitions
In January 2000, the Company completed mergers with two electronic-book
companies, NuvoMedia, Inc. ("NuvoMedia") and SoftBook Press, Inc. ("SoftBook").
Both mergers were accounted for under the pooling of interests method and,
accordingly, the consolidated financial statements for periods prior to the
mergers have been restated to include the results of operations, financial
position and cash flows of NuvoMedia and SoftBook.
TV Guide Transaction
On July 12, 2000, the Company acquired all of the outstanding common stock
of TV Guide, Inc. by issuing 0.6573 shares of Gemstar common stock for each
share of TV Guide Class A and B common stock outstanding, or approximately 200
million shares of Gemstar common stock. The TV Guide Transaction was accounted
for as a purchase. Accordingly, the consolidated financial statements include
the results of operations of TV Guide from July 12, 2000.
The purchase price for the TV Guide Transaction was $7.9 billion,
consisting of the shares of Gemstar common stock issued to the TV Guide
stockholders at $38.21 per share, the average market price of the Company's
common stock for a few days before and after the agreement on the TV Guide
Transaction was reached and announced, and certain transaction costs.
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The purchase price was allocated to identifiable tangible and intangible
assets and liabilities as follows, with the excess of the purchase price over
such identifiable assets and liabilities allocated to goodwill (in thousands).
<TABLE>
<S> <C>
Assets:
Current assets $ 452,455
Property, plant and equipment 80,404
Intangible assets 9,820,460
Other assets 157,092
----------
10,510,411
Liabilities:
Current liabilities 573,889
Deferred tax liability 1,445,335
Other long-term liabilities 687,602
----------
7,803,585
Unearned compensation 88,105
----------
Net purchase price $7,891,690
==========
</TABLE>
Intangible assets relating to the TV Guide Transaction are comprised of the
following amounts and lives (in thousands):
<TABLE>
<S> <C> <C>
Customer subscriber lists $ 689,000 3-5 years
Contracts 1,942,000 5-10 years
Trademarks and patents 811,000 5-40 years
Publishing rights 340,000 15 years
Goodwill 6,038,460 5-15 years
</TABLE>
The above allocation of purchase price and the lives assigned to the assets
are based on preliminary information. The Company, with the assistance of
valuation consultants, is in the process of evaluating the fair value and the
lives of the assets acquired, and the final evaluation could differ
significantly from the amounts used in the September 30, 2000 consolidated
financial statements. Accordingly, the allocation of the purchase price and the
establishment of the lives of the assets acquired, which are based on
preliminary information, may differ from the final allocation and the final
lives assigned to the assets, and such differences could be material to the
results of operations of the Company.
The following unaudited pro forma financial information reflects the
Company's results of operations for the six months ended September 30, 2000 and
1999 as though the TV Guide Transaction had been completed as of April 1, 1999
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 686,917 $ 688,637
Net loss (288,041) (298,221)
Basic and diluted loss per share (0.70) (0.74)
</TABLE>
4. Credit Arrangements
TV Guide has a $300 million six-year revolving credit facility expiring in
February, 2005 and a $300 million 364-day revolving credit facility expiring in
February, 2001 with a group of banks. Borrowings under the credit facilities
bear interest (7.7% at September 30, 2000) either at the banks' prime rate or
LIBOR, both
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plus a margin based on a sliding scale tied to TV Guide's leverage ratio, as
defined in the facilities. The credit facilities are subject to prepayment or
reduction at any time without penalty. As of September 30, 2000, TV Guide had
available borrowing capacity under the six-year revolving credit facility of
approximately $16.3 million and no available borrowing capacity under the 364-
day revolving credit facility. Any outstanding borrowings under the 364-day
revolving credit facility on February 24, 2001 convert to a four-year amortizing
term loan. In addition, TV Guide has outstanding as of September 30, 2000, $71.4
million in 8 1/8% senior subordinated notes due 2009.
The indenture for the notes and TV Guide's bank credit facilities impose
certain operating and financial restrictions on the Company. These restrictions
include the designation of certain of TV Guide's subsidiaries as "restricted"
for certain financing and operating matters which may significantly limit the
ability of the Company to execute transactions, including the transfer of cash,
between subsidiaries in the restricted group and subsidiaries in the
unrestricted group or to transfer cash upstream to Gemstar. The subsidiaries in
the unrestricted group are not subject to certain covenants in the indenture for
the notes and may incur indebtedness, grant liens on their assets and sell all
or a portion of their assets, among other things, without complying with the
restrictions in the indenture.
On September 15, 2000, the Company repurchased for cash $328.6 million of
its outstanding $400 million in 8 1/8% senior subordinated notes at 101% of the
principal amount of the notes plus accrued interest. The offer to repurchase the
notes was required pursuant to the terms of the indenture governing the notes as
a result of the change in control of TV Guide by reason of its acquisition by
Gemstar. The repurchase was funded through a combination of available cash and
borrowings under the bank credit facilities.
5. Legal Proceedings
On May 17, 1997, StarSight Telecast, Inc. ("StarSight"), a wholly owned
subsidiary, 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 as well as StarSight's claim for brand damages. In
October 1999, in connection with the first phase, the Arbitration Panel issued a
ruling against GI in favor of StarSight. In general, the Arbitration Panel ruled
that GI breached its contract with StarSight pertaining to electronic program
guides incorporated in GI analog set-top boxes and misappropriated StarSight's
trade secrets. In March 2000, the Arbitration Panel provided the Company with
its findings of liability and damages for Phase I. The second phase of the
arbitration, focusing on digital set-top boxes, was scheduled to proceed in
October 2000.
On May 9, 2000, GI filed an action in the U.S. District Court for the
Eastern District of Pennsylvania under the Federal Arbitration Act seeking to
vacate or modify the Phase I arbitration award in favor of StarSight on the
grounds that the
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Arbitration Panel allegedly exceeded the scope of its authority and/or allegedly
disregarded the law in issuing its award. On June 12, 2000, StarSight answered
GI's complaint and counter-claimed for confirmation of the award and the
issuance of a judgment in its favor. StarSight also moved to transfer this
action to the U.S. District Court for the Northern District of California.
StarSight's motion to transfer was granted and the case was transferred to the
U.S. District Court for the Northern District of California.
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. On December 23, 1998,
the Company filed a motion with the Judicial Panel on Multi-District Litigation
requesting that this case be consolidated with, among others, the Pioneer and
Scientific-Atlanta 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 the GI, Pioneer and Scientific-
Atlanta federal lawsuits pending outside the Northern District of Georgia 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").
On October 16, 2000, the Company and GI (through its parent, Motorola Inc.)
announced that they had entered into a long-term make-and-sell license agreement
for Gemstar-TV Guide's interactive program guide ("IPG") technology and patents
to interface with Gemstar-TV Guide's IPGs. At the same time, the parties agreed
to dismiss all currently pending arbitration and litigation, including each of
the GI arbitration and litigation matters described above, each of which has now
been dismissed. In connection with the license agreement, the Company received
approximately $190 million relating to the settled arbitration and litigation
matters as well as future license fees.
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. Pioneer has recently filed a counter-claim in which it alleges
the Company violated federal antitrust laws and misused certain patents. 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
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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. In September 2000, the court stayed the action pending a resolution
through arbitration.
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 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. 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.
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 parties are now in pretrial proceedings.
On October 23, 2000, StarSight filed a patent infringement suit against
EchoStar Communications Corp., EchoStar Satellite Corp. and EchoStar Technology
Corp. (collectively "EchoStar") in the United States District Court for the
Western District of North Carolina. The suit claims, among other matters, that
EchoStar willfully infringed certain StarSight intellectual property by virtue
of EchoStar's deployment, marketing, offers to sell and sale of direct broadcast
satellite receivers containing an unlicensed interactive program guide and by
Echostar's operation of transmission systems to such receivers. StarSight, among
other relief, 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.
10
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The State of Illinois (the "State") has asserted that certain uplinking
services performed by SpaceCom Systems, Inc. (SpaceCom), now a wholly owned
subsidiary, at its Chicago teleport are subject to the State's
Telecommunications Excise Tax Act. The State contends that SpaceCom should have
collected excise taxes from its customers during the period August 1985 through
June 1994 and remitted such receipts to the State. In addition, the State has
assessed penalties and interest on such allegedly due excise taxes. The Company
believes it has a reasonable basis for its position and disagrees with the
State's position. However, pursuant to the State's Protest Money Act which stops
further accrual of interest during the appeals process, SpaceCom has paid into
the Illinois Court certain amounts, which represent the amount of the State's
claim applicable to the period August 1985 through June 1994. Also pursuant to
the State's Protest Money Act, SpaceCom filed a Verified Complaint for
Injunctive and Other Relief in the Cook County Chancery Court on February 28,
1995, and an Amended Verified Complaint on October 6, 1995. SpaceCom filed a
motion for summary judgment on August 29, 1996, asking the Court for summary
disposition of the case. Pursuant to this motion, SpaceCom received a partial
refund of funds paid on February 10, 1997. On March 13, 2000, SpaceCom was
awarded complete summary judgment in its favor. On May 5, 2000, the State
appealed that judgment to the Illinois Appellate Court, First Judicial District,
where the matter is pending.
On October 4, 1999, a former employee of ODS Technologies, L.P. ("ODS"),
now a subsidiary, filed a complaint against ODS in the Los Angeles Superior
Court asserting causes of action for breach of contract and declaratory relief
relating to the employee's employment agreement with ODS and seeking damages.
The trial commenced in November 2000. The Company believes the claims are
without merit and is vigorously defending the action in court.
On October 18, 1999, another former employee of ODS filed a complaint
against ODS and TV Guide in a Florida federal court, which complaint was amended
on November 12, 1999, asserting causes of action for violations of certain
federal statutes governing pension plans and for equitable estoppel. The amended
complaint seeks an unspecified amount of damages for benefits allegedly due to
the plaintiff under his employment agreement with ODS. ODS currently has pending
a motion for summary judgment to dismiss the lawsuit. Although discovery has not
been completed, the Company believes the claims are without merit and will
vigorously defend the action in court.
On May 3, 2000, a complaint was filed against Murdoch Magazines
Distribution, Inc. (now named TV Guide Distribution, Inc. and a wholly owned
subsidiary) and other parties by United Magazine Company, Inc. ("Unimag") and
its subsidiaries in the U.S. District Court for the Southern District of New
York. The complaint alleges claims against Murdoch Magazines for violation of
the Robinson-Patman Act, breach of implied covenants of good faith and fair
dealing, promissory estoppel, breach of fiduciary duty, misappropriation of
business property and trade secrets, tortious destruction of business, breach of
confidential relationship and violation of federal and state antitrust laws. The
complaint seeks monetary damages, plus treble and punitive damages, attorneys'
fees and costs. On August 31, 2000, Unimag filed an amended complaint, (i)
adding TV Guide Distribution, Inc. as a named defendant, (ii) adding six other
national distributors as defendants, and (iii) adding claims for unjust
enrichment and violation of the New York Franchise Sales Tax. Although this
lawsuit has just been filed and the claims are preliminary, the Company believes
the claims are without merit and will vigorously defend the action in court. The
Company has filed a motion to dismiss all of the claims asserted against it.
11
<PAGE>
During July and August 2000, TV Guide was served with more than twenty
class action complaints filed primarily in the United States District Court for
the Southern District of New York on behalf of magazine subscribers. The Company
has reason to believe that several additional lawsuits of similar legal claims
and allegations may possibly be served upon TV Guide. These complaints allege
that TV Guide, the Magazine Publishers Association ("MPA"), and twelve other
publishers of consumer magazines have violated federal antitrust laws by
conspiring to limit the discounting of magazine subscription prices by means of
rules adopted by the MPA and the Audit Bureau of Circulation. The plaintiffs
seek injunctive relief, unspecified damages (trebled), and attorneys' fees and
costs. Although these lawsuits have just been filed and the claims are
preliminary, the Company believes the claims are without merit and will
vigorously defend the action in court.
The Company is also a party to certain other claims, actions and
proceedings incidental to its business, none of which is expected to have a
material adverse effect on the business, financial position or results of
operations of the Company.
6. Comprehensive Income
Comprehensive income comprises net income, unrealized holding gains and
losses on available-for-sale securities, net of related tax effects, and the
equity adjustment from foreign currency translation. Comprehensive income (loss)
for the three months ended September 30, 2000 and 1999 was $(123.9) million and
$16.7 million, respectively, and for the six months ended September 30, 2000 and
1999 was $(85.9) million and $31.2 million, respectively.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On July 12, 2000, the Company completed its merger with TV Guide. The
merger was accounted for as a purchase. Accordingly, the consolidated financial
statements include the results of operations of TV Guide from July 12, 2000. To
enhance comparability, certain financial information presented below on the
Company's business sectors is presented on a pro forma basis and reflects the
merger with TV Guide as though it had occurred on April 1, 1999. Due to purchase
accounting, the results of operations for the three and six-month periods ended
September 30, 2000, reflect significant increases in depreciation and
amortization of goodwill and other intangible assets. Accordingly, the Company's
business sectors are measured based on EBITDA (operating income before stock
compensation expense and depreciation and amortization).
The Company categorizes its businesses into four groups for financial
reporting purposes: the Technology and Licensing Sector, which is responsible
for the development, licensing and protection of intellectual property and
proprietary technology (the Company's technology includes the VCR Plus+ system,
the interactive program guide ("IPG") marketed under the GUIDE Plus+ and TV
Guide Interactive brands and the electronic book ("eBook")); the Interactive
Platform Sector, which owns, operates and derives recurring income from
advertising, interactive services, content sales and e-commerce on the Company's
proprietary technologies and platforms; the Media and Services Sector, which
operates TV Guide magazines, TV Guide Channel, and other television media
properties, as well as a media sales group that services all of the Company's
media platforms; and the Investments and Holdings Sector, which operates a
variety of non-core businesses including the start-up Television Games Network.
The Company's business sectors represent strategic business units that offer
different products and services and compete in different industries.
The following table sets forth certain unaudited financial information for
the Company during the three months and six months ended September 30, 2000 and
1999. Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in this report should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2000.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 (1) 1999 2000 (1) 1999
--------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated revenues $ 309,821 $ 48,301 $373,051 $ 93,389
Consolidated operating income (loss) (121,734) 21,208 (86,724) 40,163
Net cash provided by (used in):
Operating activities 67,214 4,643 77,464 52,975
Investing activities 60,593 (50,126) 46,184 (77,049)
Financing activities (14,845) 30,984 (9,682) 43,841
Consolidated depreciation and
amortization 206,561 1,307 207,978 2,702
Other data - EBITDA (2) 93,420 22,515 129,847 42,865
</TABLE>
13
<PAGE>
(1) Effective July 12, 2000, the Company's consolidated operating results
include the operating results of TV Guide. TV Guide was acquired in a
transaction accounted for as a purchase.
(2) EBITDA means operating income before noncash stock compensation expense and
depreciation and amortization. Due to purchase accounting related to the
Company's merger with TV Guide on July 12, 2000, the results of operations
for the three and six-month periods ended September 30, 2000, reflect
significant increases in depreciation and amortization of goodwill and
other intangible assets. Accordingly, the Company's business sectors are
measured based on EBITDA. EBITDA is presented supplementally as the Company
believes it is a standard measure commonly reported and widely used by
analysts, investors and others associated with its industry. However,
EBITDA does not take into account substantial costs of doing business, such
as income taxes and interest expense. While many in the financial community
consider EBITDA to be an important measure of comparative operating
performance, it should be considered in addition to, but not as a
substitute for, operating income, net income, cash flow provided by
operating activities and other measures of financial performance prepared
in accordance with generally accepted accounting principles that are
presented in the financial statements included in this report.
Additionally, the Company's calculation of EBITDA may be different than the
calculation used by other companies and, therefore, comparability may be
affected.
Results of Operations
Consolidated
Revenues for the three months ended September 30, 2000 were $309.8 million,
an increase of $261.5 million compared to the same period in 1999. For the six
months ended September 30, 2000, revenues were $373.1 million, an increase of
$279.7 million over the corresponding 1999 period. The increase in revenues for
both the three and six-month periods was primarily due to $243.6 million of
additional revenues attributable to TV Guide, which was acquired by the Company
on July 12, 2000, coupled with continued growth in worldwide licensing income
derived from the Company's proprietary technologies and intellectual property
associated with interactive program guides.
Operating expenses, excluding stock compensation and depreciation and
amortization, were $216.4 million for the quarter ended September 30, 2000, an
increase of $190.6 million when compared to the same period in 1999. For the six
months ended September 30, 2000, operating expenses, excluding stock
compensation and depreciation and amortization, were $243.2 million, an increase
of $192.7 million over the corresponding 1999 period. The increase in operating
expenses for both the three and six-month periods was primarily due to increased
operating costs of $189.6 million attributable to TV Guide.
Stock compensation expense reflects amortization of the portion of the
purchase price of TV Guide assigned to unearned compensation expense for
unvested TV Guide stock options assumed by the Company in the TV Guide
transaction.
Depreciation and amortization during the second quarter of 2000 was $206.6
million, an increase of $205.3 million compared to the second quarter of 1999.
For the six months ended September 30, 2000, depreciation and amortization was
$208.0 million, an increase of $205.3 million over the corresponding 1999
period. The increase in depreciation and amortization for both the three and
six-month periods
14
<PAGE>
was primarily a result of amortization of intangible assets and other
depreciation resulting from the acquisition of TV Guide.
Interest expense was $11.8 million for both the three and six months ended
September 30, 2000, respectively, compared to none for the same periods in 1999.
The increase in interest expense during both the three and six-month periods was
attributable to the assumption of debt and capital lease obligations in the TV
Guide transaction.
Pro Forma Results of Operations
On July 12, 2000, the Company completed its merger with TV Guide. The
merger was accounted for as a purchase. Accordingly, the consolidated financial
statements include the results of operations of TV Guide only for periods after
July 12, 2000. To enhance comparability, certain financial information below on
the Company's business sectors is presented on a pro forma basis and reflects
the merger with TV Guide as though it had occurred on April 1, 1999. The Company
believes pro forma results represent a better comparative standard for assessing
revenues, expenses and EBITDA trends, as the pro forma presentation includes the
results of operations of TV Guide for all periods presented.
The following table sets forth certain unaudited pro forma financial
information for the Company as though the merger with TV Guide had occurred on
April 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Technology and Licensing Sector:
Revenues $ 63,033 $ 47,821 $122,108 $ 91,184
Expenses(1) 21,961 21,368 43,766 40,601
-------- -------- -------- --------
EBITDA(2) $ 41,072 $ 26,453 $ 78,342 $ 50,583
======== ======== ======== ========
Interactive Platform Sector:
Revenues $ 6,647 $ 803 $ 10,060 $ 1,458
Expenses(1) 18,972 13,321 35,145 25,016
-------- -------- -------- --------
EBITDA(2) $(12,325) $(12,518) $(25,085) $(23,558)
======== ======== ======== ========
Media and Services Sector:
Revenues $171,794 $174,983 $351,037 $356,103
Expenses(1) 122,233 130,872 255,839 264,793
-------- -------- -------- --------
EBITDA(2) $ 49,561 $ 44,111 $ 95,198 $ 91,310
======== ======== ======== ========
Investments and Holdings Sector:
Revenues $ 98,168 $118,718 $207,436 $241,194
Expenses(1) 77,487 100,508 161,339 196,161
-------- -------- -------- --------
EBITDA(2) $ 20,681 $ 18,210 $ 46,097 $ 45,033
======== ======== ======== ========
Consolidated (after eliminations)
Revenues $337,683 $341,023 $686,917 $688,637
Expenses(1) 238,694 264,767 492,365 525,269
-------- -------- -------- --------
EBITDA(2) $ 98,989 $ 76,256 $194,552 $163,368
======== ======== ======== ========
</TABLE>
15
<PAGE>
(1) Expenses means operating expenses, excluding stock compensation and
depreciation and amortization.
(2) EBITDA means operating income before noncash stock compensation expense and
depreciation and amortization. Due to purchase accounting related to the
Company's merger with TV Guide on July 12, 2000, the results of operations
for the three and six-month periods ended September 30, 2000, reflect
significant increases in depreciation and amortization of goodwill and
other intangible assets. Accordingly, the Company's business sectors are
measured based on EBITDA. EBITDA is presented supplementally as the Company
believes it is a standard measure commonly reported and widely used by
analysts, investors and others associated with its industry. However,
EBITDA does not take into account substantial costs of doing business, such
as income taxes and interest expense. While many in the financial community
consider EBITDA to be an important measure of comparative operating
performance, it should be considered in addition to, but not as a
substitute for, operating income, net income, cash flow provided by
operating activities and other measures of financial performance prepared
in accordance with generally accepted accounting principles that are
presented in the financial statements included in this report.
Additionally, the Company's calculation of EBITDA may be different than the
calculation used by other companies and, therefore, comparability may be
affected.
The following discussion of each of the Company's segments is based on the
pro forma financial information provided above.
Technology and Licensing Sector - Pro Forma
The Technology and Licensing Sector is responsible for the development,
licensing and protection of intellectual property and proprietary technology.
The Company's technology includes the VCR Plus+ system, the interactive program
guide ("IPG") marketed under the GUIDE Plus+ and TV Guide Interactive brands and
the electronic book ("eBook"). Revenue streams for this sector are composed of
technology and licensing fees earned through the provision of technology to
service providers and users. Operating expenses are comprised primarily of
research and development costs and costs incurred with respect to the creation,
protection and licensing of the Company's intellectual property and proprietary
technology.
Pro forma revenues for the three months ended September 30, 2000 were $63.0
million, an increase of $15.2 million, or 32%, compared to the same period in
1999. For the six months ended September 30, 2000, pro forma revenues were
$122.1 million, an increase of $30.9 million, or 34%, over the corresponding
1999 period. The increase in pro forma revenues for both the three and six-month
periods was primarily due to continued growth in worldwide licensing income
derived from the Company's proprietary technologies and intellectual property
associated with interactive program guides.
Pro forma operating expenses, excluding stock compensation and depreciation
and amortization, were $22.0 million for the quarter ended September 30, 2000,
an increase of $593 thousand, or 3%, when compared to the same period in 1999.
For the six months ended September 30, 2000, pro forma operating expenses,
excluding stock compensation and depreciation and amortization, were $43.8
million, an increase of $3.2 million, or 8%, over the corresponding 1999 period.
The increase in pro forma operating expenses for both the three and six-month
periods was primarily due to increased research and development costs associated
with interactive program guides and eBooks.
Margins for these pro forma operating results were 65% for the three-month
period in 2000 compared to 55% for the same period in 1999.
16
<PAGE>
Interactive Platform Sector - Pro Forma
The Interactive Platform Sector owns, operates and derives recurring income
from advertising, interactive services, content sales and e-commerce on the
Company's proprietary technologies and platforms. Operating expenses are those
costs incurred to construct and operate the infrastructure for the delivery of
services and advertising to the interactive platforms, media research, and
trafficking, tracking and billing advertising.
Pro forma revenues for the three months ended September 30, 2000 were $6.6
million, an increase of $5.8 million, or 728%, compared to the same period in
1999. For the six months ended September 30, 2000, pro forma revenues were $10.1
million, an increase of $8.6 million, or 590%, over the corresponding 1999
period. The increase in pro forma revenues for both the three and six-month
periods was primarily due to revenues derived from the Company's advertising
enabled platforms.
Pro forma operating expenses, excluding stock compensation and depreciation
and amortization, were $19.0 million for the quarter ended September 30, 2000,
an increase of $5.7 million, or 42%, when compared to the same period in 1999.
For the six months ended September 30, 2000, pro forma operating expenses,
excluding stock compensation and depreciation and amortization, were
$35.1 million, an increase of $10.1 million, or 40%, over the corresponding 1999
period. The increase in pro forma operating expenses for both the three and six-
month periods was primarily due to the operating expenses associated with
operating an expanding platform base.
Media and Services Sector - Pro Forma
The Media and Services Sector operates the TV Guide magazines, TV Guide
Channel, and other television media properties, as well as a media sales group
that services all of the Company's media platforms. Revenues are earned
primarily in the form of subscription fees and advertising revenues from the TV
Guide magazines and TV Guide Channel. Expenses incurred within this sector are
those to develop and distribute the products and services.
Pro forma revenues for the three months ended September 30, 2000 were
$171.8 million, compared to $175.0 million in the same period in 1999. For the
six months ended September 30, 2000, pro forma revenues were $351.0 million,
compared to $356.1 million in the corresponding 1999 period. The decline in
revenues is primarily attributed to a 12% decrease in circulation for the TV
Guide magazines, partially offset by an increase in revenues from the TV Guide
Channel.
Pro forma operating expenses, excluding stock compensation and depreciation
and amortization, were $122.2 million for the quarter ended September 30, 2000,
a decrease of $8.6 million, or 7%, when compared to the same period in 1999. For
the six months ended September 30, 2000, pro forma operating expenses, excluding
stock compensation and depreciation and amortization, were $255.8 million, a
decrease of $9.0 million, or 3%, from the corresponding 1999 period. The
decrease in pro forma operating expenses for both the three and six-month
periods was primarily due to cost reductions resulting from reduced circulation
of the TV Guide magazines coupled with other cost cutting measures.
Margins for these pro forma operating results were 29% for the three-month
period in 2000 compared to 25% for the same period in 1999.
17
<PAGE>
Investments and Holdings Sector - Pro Forma
The Investments and Holdings Sector operates the Company's other satellite-
delivered video services, including Superstar/Netlink Group, LLC, a provider of
programming packages to consumers in the C-band industry, UVTV, a distributor of
superstations and other distant signal networks to programming service providers
and TVG Network, a channel devoted to the horse racing industry. Revenues in
this sector are derived primarily from subscription and affiliate fees charged
to consumers and distributors of programming packages. Operating expenses
consist primarily of programming and distribution costs as well as customer
solicitation and servicing costs.
Pro forma revenues for the three months ended September 30, 2000 were $98.2
million, a decrease of $20.6 million, or 17%, compared to the same period in
1999. For the six months ended September 30, 2000, pro forma revenues were
$207.4 million, a decrease of $33.8 million, or 14%, from the corresponding 1999
period. The decrease in pro forma revenues for both the three and six-month
periods was primarily due to subscriber declines in the C-band industry coupled
with acceleration of those declines resulting from an arrangement with Echostar
to actively convert subscribers to Echostar's services. These conversions
reduced the Company's gross revenue dollars as well as certain operating
expenses reported in this sector. The Company receives commissions and residual
royalties as a result of these conversions.
Pro forma operating expenses, excluding stock compensation and depreciation
and amortization, were $77.5 million for the quarter ended September 30, 2000, a
decrease of $23.0 million, or 23%, when compared to the same period in 1999. For
the six months ended September 30, 2000, pro forma operating expenses, excluding
stock compensation and depreciation and amortization, were $161.3 million, a
decrease of $34.8 million, or 18%, from the corresponding 1999 period. The
decrease in pro forma operating expenses for both the three and six-month
periods was primarily due to reduced programming costs and customer management
costs resulting from the decline in the C-band market described above.
Margins for these pro forma operating results were 21% for the three-month
period in 2000 compared to 15% for the same period in 1999.
Liquidity and Capital Resources
For the six months ended September 30, 2000, net cash flows from operating
activities were $77.5 million. This cash flow, plus existing cash resources,
cash acquired as part of the TV Guide transaction, borrowings of $313.4 million
under TV Guide's revolving bank credit facilities and proceeds from the exercise
of stock options of $17.3 million were used to fund the Company's repurchase of
$331.9 million (purchased at 101% of the principal amount of the notes plus
accrued interest) of TV Guide's 8 1/8% senior subordinated notes, capital
expenditures of $10.5 million and other investments.
At September 30, 2000, the Company's cash, cash equivalents and marketable
securities classified as current assets aggregated $409.0 million, an increase
of $122.8 million from that as of March 31, 2000.
The Company's wholly owned subsidiary, TV Guide, has a $300 million six-
year revolving credit facility expiring in February, 2005 and a $300 million
364-day revolving credit facility expiring in February, 2001 with a group of
banks.
18
<PAGE>
Borrowings under the credit facilities bear interest (7.7% at September 30,
2000) either at the banks' prime rate or LIBOR, both plus a margin based on a
sliding scale tied to TV Guide's leverage ratio, as defined in the facility. The
credit facilities are subject to prepayment or reduction at any time without
penalty. As of September 30, 2000, TV Guide had available borrowing capacity
under the six-year revolving credit facility of $16.3 million and no available
borrowing capacity under the 364-day revolving credit facility. Any outstanding
borrowings under the 364-day revolving credit facility on February 24, 2001
convert to a four-year amortizing term loan. In addition, TV Guide has
outstanding as of September 30, 2000, $71.4 million in 8 1/8% senior
subordinated notes due 2009.
The bank credit facilities and the indenture governing the notes impose
significant operating and financial restrictions on the Company. These
restrictions may significantly limit or prohibit TV Guide and certain of its
subsidiaries from engaging in certain transactions, including the following:
borrowing additional money, paying dividends or other distributions to the
Company, allowing TV Guide and its restricted subsidiaries to guarantee other
debt, limiting the ability of TV Guide and its restricted subsidiaries to make
payments to the Company, creating liens on assets, selling assets, entering into
transactions with affiliates, and engaging in certain mergers or consolidations.
In addition, the indenture limits TV Guide's ability and the ability of
restricted subsidiaries to make investments, but only if the credit ratings on
the notes fall below certain levels. Although the Company has not assumed these
obligations or become subject to their provisions, these restrictions could
affect the Company's ability to actively manage its businesses or limit its
ability to obtain financing for working capital, capital expenditures,
acquisitions and other purposes.
The Company's ability to meet debt service obligations and specified
financial ratios and tests will depend on future performance. The Company's
future performance, in turn, will be subject to general economic conditions and
to financial, business and other factors affecting operations, many of which are
beyond its control. In the event of a default under the bank credit facilities,
the lenders could terminate their commitments and declare all amounts borrowed,
together with accrued interest and other fees, to be due and payable. Borrowings
under other debt instruments that contain cross-acceleration or cross-default
provisions may also be accelerated and become due and payable. If any of these
events should occur, the Company may not be able to pay such amounts.
The Company collects in advance a majority of its TV Guide magazine
subscription fees, Superstar/Netlink Group subscription fees and certain of its
UVTV superstation and TV Guide Channel revenues. As of September 30, 2000, the
unearned portion of all prepayments (including non current portion) totaled
$363.2 million, of which approximately $253.5 million, or 70%, was attributable
to TV Guide magazine and approximately $96.1 million, or 26%, was attributable
to Superstar/Netlink Group. The Company's liability for prepaid magazine
subscriptions is limited to the unearned prepayments in the event customers
cancel their subscriptions. The Company's liability for other prepayments is
limited to a refund of unearned prepayments in the event that the Company is
unable to provide service. No material refunds have been paid to date.
In April 2000, the Company's Board of Directors authorized a stock
repurchase plan to deal with certain elements of the TV Guide merger agreement,
among other matters, but no shares have been repurchased pursuant to it, and it
is not expected that any shares will be repurchased.
19
<PAGE>
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. 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, 2000 and the "Risk Factors"
section of the Company's Report on Form 8-K/A filed on August 11, 2000. The
cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on the Company's behalf may issue.
The Company undertakes no obligation to review or confirm analysts' expectations
or estimates or to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments. The Company's exposure to market rate
risk for changes in interest rates relates primarily to its investment portfolio
and variable rate debt issued under TV Guide's $300 million six-year revolving
credit facility and $300 million 364-day revolving credit facility. The Company
has not used derivative financial instruments in its investment portfolio or to
hedge for interest rate fluctuations on its debt. The Company invests its excess
cash in debt instruments of the U.S. Government and its agencies, and in high-
quality corporate issuers and, by policy, limits the amount of credit exposure
to any one issuer. The Company protects and preserves its invested funds by
limiting default, market and reinvestment risk. Investments in both fixed rate
and floating rate interest earning instruments carry a degree of interest rate
risk. Fixed rate securities may have their fair market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less
income than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates. Because the interest rates on the credit facilities are variable, based
upon the banks' prime rate or LIBOR, the Company's interest expense and cash
flow are impacted by interest rate fluctuations. At September 30, 2000, the
Company had $583.7 million in outstanding borrowings under the credit
facilities. If interest rates were to increase or decrease by 100 basis points,
the result, based upon the existing outstanding debt, would be an annual
increase or decrease of $5.8 million in interest expense and a corresponding
decrease or increase of $5.8 million in the Company's cash flow.
20
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit
No. Exhibit Description
--- -------------------
27 Financial Data Schedule (Filed herewith)
b. Reports on Form 8-K
The Company filed a report on Form 8-K on July 24, 2000, which was further
amended on August 11, 2000 and September 6, 2000, reporting that it had
completed its acquisition of TV Guide, Inc. and containing disclosures relative
to that transaction.
21
<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 - TV Guide International, Inc.
(Registrant)
Date: November 14, 2000 By: /s/ Elsie Ma Leung
--------------------------------------
Elsie Ma Leung
Chief Financial Officer
22
