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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 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 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4782077
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
</TABLE>
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of May 31, 2000, there were 208,480,000 shares of the registrant's Common
Stock outstanding. As of May 31, 2000, the aggregate market value of Common
Stock held by non-affiliates of the registrant was approximately $6.1 billion,
based on the closing sale price of $42.44 per share as reported by the Nasdaq
National Market System. Shares of Common Stock held by officers, directors,
and 5% holders have been excluded from this calculation because such persons
may be deemed to be affiliates. The determination of affiliate status is not a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement related to the 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after March 31, 2000, are incorporated by reference
into Part III of this Annual Report.
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PART I
ITEM 1. BUSINESS.
General
Gemstar International Group Limited (the "Company" or "Gemstar") 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 ("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+(R), was introduced in
1990, 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(R) Number (a proprietary one to eight digit number)
into a VCR or television equipped with the VCR Plus+ technology ("Plus Code
Numbers"). PlusCode Numbers are printed next to television program listings in
over 1,800 publications worldwide, with a combined circulation of over 330
million. VCR Plus+ is licensed through long-term licensing agreements with a
large number of VCR manufacturers, including Sony Corporation ("Sony") and
Thomson Consumer Electronics, Inc. ("Thomson"), and is offered internationally
in more than 40 counties.
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, Internet appliances and
interactive services providing television thereon. The Company believes that
with the increase in programming content and in the number of accessible
television channels, the Gemstar Guide Technology is becoming an increasingly
important and ubiquitous tool for assisting consumers in sorting, selecting
and recording television programming and will become a portal for a range of
services and content.
In January 2000, Gemstar announced its plan to enter the electronic book
("eBook") publishing business through the acquisition of the two leading eBook
companies NuvoMedia(R), Inc., the maker of the Rocket eBook(R), and SoftBook
Press, Inc. maker of the SoftBook(R) Reader. The electronic book publishing
business, another application of Gemstar's strategy of developing, marketing
and licensing proprietary technologies, supports the Company's strategy to
enhance consumer interactivity with electronic products and provide electronic
enhancements for traditional consumer activities. This business opportunity
will permit Gemstar to create a pre-eminent platform for the distribution and
sale, in a secure and protected distribution environment, of electronically
based reading material, using consumer-friendly state-of-the-art reading
devices, offering a broad range of books, magazines, newspapers and other
materials.
The Company's primary source of revenues to date has been license fees paid
by consumer electronics manufacturers and publications for the licensing of
the VCR Plus+ technology and the right to print the PlusCode Numbers,
respectively, and licensing of the Gemstar Guide Technology. The Company
pursues a licensing strategy for its VCR Plus+ system and Gemstar Guide
Technology whereby the Company is paid on-going per unit license fees and, in
certain instances, up-front and annual license fees. In addition, the Company
pursues a recurring revenue model for its proprietary Gemstar Guide Technology
whereby 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. The
Company does not charge consumers set-up or subscription fees for the use of
the guide and encourages its licensed Service Providers to
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similarly provide the guide without incremental cost to the consumer. To date,
the Company has not realized significant revenues from advertising and
sponsorship. See "Advertising."
During fiscal year 2000, the Company continued its plan to license the
Gemstar Guide Technology. In May 1999, the Company entered into a long-term
licensing agreement with America Online, Inc. ("AOL"), pursuant to which AOL
was granted a license to use the Gemstar Guide Technology to develop its own
customized interactive programming guides, in particular for AOL TV. In July
1999, the Company entered into a long-term licensing agreement with Corporate
Media Partners ("Americast"), a joint venture of BellSouth Corporation, GTE
Corporation, Ameritech and Southern New England Telephone (both now part of
SBC Communications) and The Walt Disney Company for the use of Gemstar Guide
Technology. By August 1999, the Company was able to announce that its
interactive program guides, sold under the GUIDE Plus+ and GUIDE Plus+ Gold
brands, were then available on multiple TV models sold by Thomson, Sony, JVC,
Zenith and Philips, brands that include the top four in the United States
commanding 60% of the U.S. TV market.
The Company believes that its interactive program guides are an attractive
vehicle for the delivery of advertising and other content to consumers and
over time expects to derive significant revenues not merely from licensing
proprietary technology, but also from recurring platform-based revenues, for
example from advertising. In April 1999, the Company entered into a long-term
agreement with Paging Network, Inc. ("PageNet") that will permit one and two-
way broadcasting of data on PageNet's 900 MHz wireless paging network. This
frequency band will, with the use of transceivers, support one and two-way
advertising services, near real-time content services, and an alternative
updating system for the distribution of electronic program guide scheduling
information to users. Under current technology, TDN, Inc. ("TDN"), a Joint
Venture of Gemstar, Thomson and NBC, has been the vehicle for the sale of
guide advertising. In January 2000, the Company and Thomson agreed to expand
their ability to offer guide-based interactive content and advertising
services through the 900 MHz paging technology by contributing their TDN
interests to a new venture named @TV Media which will be responsible for
exploiting the technology, creating two-way services, and providing an
expanded advertising business based on the new technology. In August 1999,
Gemstar received a key patent that supports the delivery (in text, graphics or
motion video) of advertising, promotional material and other content within
the interactive program guides through the use of interactive informational
areas (or "information panels"), as well as of additional information services
that can be accessed independent of the guide or program listings.
The Company believes that successful implementation of the Gemstar Guide
Technology in a broad range of platforms requires the Company to coordinate
the activities of companies in many industries. Accordingly, the Company seeks
long-term relationships with a broad range of consumer electronics and other
manufacturers, television broadcasters, cable companies and software
developers. In addition to those areas of expansion described elsewhere, the
Company historically has entered into important strategic relationships to
cover multiple interactive program guide ("IPG" or "EPG") platforms. For
example, in November 1997, the Company signed a multi-year agreement with
Thomson, in which the parties agreed, among other things, to cooperate in
establishing the Gemstar Guide Technology as the industry standard in North
and South America, and to jointly pursue a recurring revenue model in the
consumer electronics sector. That agreement was essentially expanded in
January 2000, with Thomson agreeing to deploy the Gemstar IPG into an
estimated 30 million Thomson devices over the next decade. In January 1998,
the Company entered into a cross-licensing agreement with Microsoft
Corporation ("Microsoft") pursuant to which Microsoft agreed to license the
Gemstar Guide Technology as part of its TV viewer feature in the Windows 98
operating system. Microsoft has also licensed the right to incorporate the
Gemstar Guide Technology in products worldwide that incorporate interactive
program guides, including its Web TV and Universal TV television products. In
September 1998, the Company entered into an agreement with Deutsche Telekom AG
to cooperate in the development and provision of an interactive program guide
and related services to digital cable television households throughout
Germany. In March 1999, the Company entered into a joint venture with Dentsu,
Inc., the largest international advertising public relations agency in the
world, and Tokyo News Service Limited, a leading Japanese publisher of
entertainment magazines. The joint venture, Interactive Program Guide, Inc.,
intends to pursue interactive services, including advertising, promotion,
sponsorship and transaction opportunities on Gemstar's interactive
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program guides. The Company owns a majority interest in the joint venture and
will receive a percentage of sales as royalty. In August 1999, the Company
announced an agreement with Axel Springer Verlags AG to collaborate in the
provision of guide services to Axel Springer Interactive subscribers in
Germany, and in January 2000, Gemstar and Thomson entered into a long-term
agreement to pursue opportunities for electronic program guides throughout
Europe with service to be launched as early as 2001.
In April 1999, the Company acquired Electronic TV Host, an online and web-
based electronic program guide service, from TVH, Inc., a leading provider of
printed cable television guides. Electronic TV Host is a dedicated online
interactive program guide provider.
On October 4, 1999, the Company announced that it had entered into an
agreement to acquire, by merger, TV Guide, Inc. ("TV Guide"). Under the
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. Upon
consummation, Gemstar shareholders will retain more than 50% of the shares of
the combined company. The merger was the subject of an Form S-4 Registration
Statement filed with the Securities and Exchange Commission on February 9,
2000 and was overwhelmingly approved by the Company's shareholders in a vote
held on March 17, 2000. Closing of the transaction awaits the approval of the
Department of Justice pursuant to its Hart-Scott Rodino procedures.
In March 2000, the Company entered into a long-term strategic agreement with
Thomson Multimedia to jointly pursue the eBook market worldwide. Under the
agreement, Thomson will license eBook technology from the Company, and commit
to a multi-year product shipment plan aimed at placing tens of millions of
eBook devices into consumers' hands. The Company will operate a secure
distribution system for the sale and delivery of eBook content to consumers,
and Thomson will receive a share of the revenues derived from the sale of this
content. Currently, the Company's two eBook devices receive retail
distribution through their respective web sites and through the web sites of
certain Internet booksellers. The new strategic alliance with Thomson will
greatly expand the distribution channels for the eBook readers so that
consumers will be able to additionally purchase eBook readers in the thousands
of familiar consumer electronics outlets that support the RCA, Proscan and GE
brands. In addition to traditional publishing, the Company's eBook strategy
also includes working with additional strategic partners to expand existing
eBook services and functions and to pursue such opportunities as publishing
electronic magazines, full-color catalogs, reference books, textbooks and
technical publications.
The Company was organized in April 1992 as a British Virgin Islands
corporation. Historically, the Company's licensing operations in the United
States were conducted through Gemstar Development Corporation ("GDC"), a
California corporation, and the Company operated internationally through its
various subsidiaries incorporated outside of the United States. As part of the
merger plan with TV Guide, and for independent tax reasons, in February 2000
the Company effected a domestication from the British Virgin Islands to the
State of Delaware, and it is now a corporation organized under that State's
laws.
On May 14, 1999, the Company effected a two-for-one stock split in the form
of a stock dividend to holders of record as of April 30, 1999. On December 13,
1999, the Company effected a two-for-one stock split in the form of a stock
dividend to holders of record as of November 29, 1999.
Information regarding business segments is contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
also in Note 1 of the Notes to Consolidated Financial Statements. Information
regarding revenues by geographical area is contained in Note 10 of the Notes
to Consolidated Financial Statements.
Industry Overview
Television
Television viewers today are faced with an increasing array of viewing
options. Expansion of analog cable television system capacity has increased
the number of available channels in many households to 100 or more. Direct
broadcast satellite systems now available in most areas of the U.S. can
deliver over 200 channels. The
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adoption of digital broadcasting technology and further improvement in
compression technologies promise an even greater increase in channel capacity
(300 to 500 channels) in digital cable systems. Further fueling the wealth of
consumer viewing choices is the rapid growth in the number of national
broadcast and cable networks in the past decade, as well as the widespread
availability of premium cable programming and pay-per-view options.
The Company believes that the proliferation of television programming
choices gives rise to the need for consumer electronics devices, including
televisions and VCRs, that provide effective interactive methods of sorting,
selecting and recording television shows which go beyond the limited utility
offered by printed program listings. At the same time, the experience of
consumer electronics manufacturers shows that customer tolerance for complex
and expensive functionalities in video entertainment devices is extremely
limited. To appeal to a broad range of consumers, the Company believes that
home video technology enhancements must be intuitive, cost-effective and easy
to use.
Accordingly, the Company has focused on developing a variety of cost-
effective interactive technologies which help viewers cope with the
proliferation of programming options in a straightforward, user-friendly
manner. The Company's first product, the VCR Plus+ system, simplified the task
of recording television programming. Traditional VCR programming required
users to input multiple data items for each program to be recorded, including
the date, beginning time, length and channel of the desired programs--a
difficult, tedious and error-prone process for many users. By simplifying the
program recording process to entering a single PlusCode number for a desired
program, VCR Plus+ eliminates the complexity and frustration attendant to
traditional VCR programming methods. VCR Plus+ obviates the need for consumers
to track complex and changing program schedules and channel line-ups.
Similarly, the Gemstar Guide Technology is designed to simplify a viewer's
navigation, selection and recording of broadcast, cable and satellite
programming. Gemstar Guide Technology allows users to easily sort, select and
record programming from all available sources, and to intuitively schedule
programs for viewing or recording.
VCR Plus+ is now widely accepted and incorporated into most major brands of
VCR, television and TV-VCR combination products. Similarly, the Gemstar Guide
Technology has been licensed by major manufacturers, Service Providers and
software developers in the consumer electronics, satellite, cable,
multichannel multipoint distribution service, and personal computer
industries.
According to the Bates Dorland's European Media Guide, in France, Germany,
Italy, United Kingdom and Spain, the percentage of television households
owning VCRs as of 1999, was 76%, 58%, 59%, 84% and 67%, respectively. The
Consumer Electronics Manufacturers Association, a sector of the Electronics
Industries Alliance, estimates that, as of 1999, approximately 92% of the
television households in the U.S. owned VCRs. The Electronic Industries
Alliance has estimated that consumer VCR sales in the U.S. were over 22.8
million in 1999, an increase of 26% percent over the previous year. The
Company believes that VCR sales in the U.S. are driven by the replacement of
older equipment and the purchase of multiple units for use within a single
household, and that VCR sales outside the U.S. are substantially greater than
those within the U.S. because of the greater percentage of television
households lacking VCRs. According to the Electronic Industry Association, in
1999 consumer portable and table color television sales in the U.S. were
approximately 23.2 million units. The Company estimates that the number of
hardware platforms shipped annually which are suitable for incorporating the
Gemstar Guide Technology may be as many as 60 million or more, and include
televisions (28.9 million units per year in the U.S., including TV-VCR
combination units), VCRs (22.8 million units per year in the U.S.), set-top
cable boxes (8.8 million units per year in the U.S.), integrated satellite
receivers and decoders (5.5 million per year in the U.S.) and tuner-equipped
personal computers.
The manufacture and sale of VCRs and televisions is highly competitive and
dominated by large consumer electronics companies such as Hitachi Corporation,
Ltd., Matsushita Electric Industrial Co., Ltd., Mitsubishi Electric
Corporation, Samsung Electronics Company, Ltd., Sony Corporation, Thomson,
Toshiba Corporation, Zenith Electronics Corporation and others. Manufacturers
of VCRs and televisions compete primarily on price and features. Innovations
such as remote control and on-screen programming were quickly adopted by major
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manufacturers. Innovations such as these initially permit a product model to
command a premium price and, if cost-effective for mass market implementation,
may become "must-have" features that are later incorporated into a broad range
of products. The Company believes that the size of the television and VCR
markets and the competitive pressures within the industry present an
opportunity for companies that can provide innovative technologies that both
appeal to consumers and are attractive to, and cost-effective for,
manufacturers.
Service Providers such as cable system owners and operators and direct
broadcast satellite broadcasters compete with other multi-channel video
programming distributors based on price, the breadth of programming choices
and other viewing features. Service Providers seek to differentiate themselves
from competitive programming distributors and to enhance potential revenues by
offering viewers premium services such as "pay-per-view" programming and other
subscription services. The Company believes that consumer demand for systems
and technologies that help to organize viewing choices, together with Service
Providers' desire to differentiate themselves from competitive programming
distributors and to enhance potential revenues, provide an opportunity for the
Gemstar Guide Technology.
Electronic Book Publishing
In the United States, sales of books to consumers produce revenues of
approximately $30 billion per year. Sales of magazines and newspapers total
$60 billion, with another $60 billion in advertising sold per year. The costs
of manufacturing, delivering and warehousing these materials are very
significant to the publishers of this material. Currently, there is growing
recognition that a sizeable portion of the consumer market for books and
periodicals may respond to devices that will allow the consumer to download
and store these materials, via the internet or ethernet, so long as the
devices are lightweight, provide lighting conducive to easy reading, have
sufficient memory to store a number of books, magazines and other materials,
and do not require excessive recharging--that is, offer sufficiently long
battery life. Such a product can be differentiated from the traditional print
product, and from devices in which retrieval of reading material is merely one
of a number of tasks the device will perform. The Company believes there is a
large potential market of serious readers interested in storing, downloading
and reading from a variety of selected books, periodicals and newspapers on
such user-friendly devices. Although hard-cover publishing in the traditional
form will remain available and viable for the foreseeable future, the Company
believes that its product both offers a platform for the serious reader and
can relieve content publishers of a significant portion of their production
costs.
Gemstar Strategy
The Company's objective is to strengthen its position as a worldwide leader
in developing, marketing and licensing proprietary technologies and systems
that simplify and enhance consumers' interaction with electronics products and
other platforms that deliver video, programming information and other data.
Key elements of the Company's strategy include the following:
Develop Solutions that Address Consumer Needs. The Company believes that
the development of solutions that address consumers' needs for user-
friendly video entertainment products is central to the success of its
technologies and systems. Due to the complexity of video entertainment
devices, consumers typically utilize only a portion of their available
features. To appeal to a broad range of consumers, the Company believes
that home video technology enhancements must be intuitive, cost-effective
and easy to use. Accordingly, the Company seeks to identify and develop
technologies and systems that simplify and enhance consumers' interaction
with electronics products and other platforms that deliver video,
programming information and other data, thereby providing significant value
to consumers. The Company also believes that the growth in available
viewing options has created a need for interactive program guides to assist
consumers in the sorting, selection and recording of programs, much like a
browser or a search engine facilitates the location of desired sites on the
Internet. The Company intends to continue to identify and address consumer
needs with value-added technologies, such as through its entry into the
still-nascent electronic book business.
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Protect Proprietary Solutions. The Company believes that significant
value lies in the intellectual property it has developed, acquired and
incorporated into its technologies and systems. The markets in
which the Company competes are extremely competitive, and it is critical to
the Company's success that it protect and enhance its competitive
advantages, including its intellectual property. Accordingly, the Company
has implemented an extensive intellectual property protection program,
including seeking patent protection where appropriate. In addition, where
the Company believes that others have infringed its intellectual property
rights, it has taken appropriate actions including litigation to protect
its rights. The Company intends to continue aggressively to protect its
intellectual property and other competitive advantages.
Establish and Maintain Cross-Industry Support. The successful
implementation of the Company's technologies and systems requires the
Company to coordinate the activities of companies in many industries that
have not historically worked closely together, including consumer
electronics product manufacturers, publishers, broadcasters, cable and
software companies. The Company has established long-term relationships
within these industries and has demonstrated an ability to understand their
varying business objectives and coordinate cross-industry efforts. The
Company believes that its ability to work closely with disparate industry
participants facilitated the success of VCR Plus+ and will contribute to
the successful adoption of the Gemstar Guide Technology and to the
successful launch of its new electronic book products. The Company believes
that its ability to understand and coordinate the business objectives of
multiple industry groups provides a significant competitive advantage.
Develop Multi-Platform Technologies and Systems. The Company seeks to
provide the technologies and systems through which video programming
information and other related data and services are obtained, irrespective
of the delivery platform. As a result, the Company is aggressively pursuing
a multi-platform strategy with respect to licensing its technologies and
systems. The Company has designed its technology to be adaptable to
multiple platforms so that its extensive feature sets can become de facto
industry standards. To date, the Company has licensed its technologies for
inclusion in a range of information delivery platforms that includes
televisions, VCRs, TV-VCR combination units, digital versatile disk
recorders ("DVD Recorders"), cable set-top boxes, integrated satellite
receiver decoders, personal computers, PCTVs and Internet appliances. The
Company intends to license its technologies for use on other platforms that
it believes may be widely adopted by consumers.
License Broadly to Create De Facto Standards. As noted, the Company's
strategy is to establish its technologies and systems as industry
standards. Accordingly, the Company strives to broadly license its
technologies non-exclusively within targeted industry groups. For example,
VCR Plus+, widely accepted as a de facto industry standard, is licensed to
virtually every major VCR manufacturer. Similarly, NuvoMedia and SoftBook
Press, acquired early this year by Gemstar, have developed an open standard
that establishes encryption and other standards to which members of the
industry can design. Additionally, the Company has licensed its Gemstar
Guide Technology to television manufacturers, cable operators, DSS service
providers, Internet service providers, manufacturers of satellite and
digital terrestrial set-top boxes, and intends to continue to aggressively
pursue additional licensees.
Pursue Recurring Revenue Model. The Company is pursuing recurring revenue
opportunities that may arise in connection with the implementation of the
Gemstar Guide Technology. In the future, the Company expects to be able to
augment its traditional license revenue business model with one based on
recurring revenues from its share of advertising, electronic commerce and
in particular television-based commerce both tied to and independent of the
EPG. Its two-way paging technology will permit both in-guide and outside-
of-the guide opportunities for electronic commerce in television, in whose
revenue streams the Company can significantly share.
VCR Plus+
As noted, VCR Plus+ was introduced in 1990 to simplify the programming of
VCRs for consumers and has been adopted as the standard VCR programming aid by
virtually every major consumer electronics manufacturer
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worldwide. VCR Plus+ is incorporated into VCRs and televisions by licensed
consumer electronics manufacturers and enables consumers to record a
television program by simply entering a proprietary one to eight digit
PlusCode Number, via a remote control, into a VCR or television. PlusCode
Numbers are printed next to television listings in participating newspapers
and television program guides. PlusCode Numbers are generated through a
patented process developed by the Company and are now carried by over 1,800
publications worldwide, including the New York Times, the Los Angeles Times,
TV Guide, the Asahi Shimbun (Japan), the Sun (U.K.), the Daily Mirror (U.K.)
and the South China Morning Post (Hong Kong). The Company estimates that in
1999 the combined worldwide circulation of all publications that contained
PlusCode Numbers was over 330 million.
The Company continues to develop and introduce additional VCR Plus+ features
that manufacturers can license from the Company to enhance the functionality
of VCR Plus+. These features include systems which are capable of automating
the setup for VCR Plus+, systems which control set-top boxes, systems which
update the clock information and cable channel lineup information, and systems
which enhance the functionality of the V-chip parental control system. The V-
chip parental control system became mandatory on at least half of each
manufacturer's TV models with a picture size of 13 inches or greater sold in
the United States after July 1, 1999, and on the remaining half of each
manufacturer's models by January 1, 2000. The V-chip is intended to give a
parent the flexibility and control to identify specific shows to block or
unblock from viewing. VCR Plus+ is also licensed for incorporation into DVD
Recorders.
Interactive Program Guides
The Gemstar Guide Technology was introduced by the Company to implement
interactive programming guides which enable consumers to navigate through,
sort, select and record television programming. The Gemstar Guide Technology
also allows broadcasters to disseminate program information, offers consumer
electronics manufacturers an additional television feature, and provides
Service Providers with an effective tool for marketing their video programming
content. The Gemstar Guide Technology has been licensed for, or incorporated
into, televisions, VCRs, TV-VCR combination units, cable set-top boxes,
satellite and digital terrestrial set-top boxes, integrated satellite receiver
decoders, personal computers, PCTVs and Internet appliances. The Company
believes that its interactive program guides provide an attractive vehicle for
the delivery of advertising and other content to consumers.
The following are major current and anticipated features of the Gemstar
Guide Technology:
Program Schedules. The Gemstar Guide Technology provides an up-to-date
and accurate on-screen program schedule listing all programs by title. The
program schedule covers all over-the-air broadcast and cable channels and
provides consumers with future schedule information from one to eight days.
Program Descriptions. In certain implementations, program descriptions
are provided. A program description for a movie, for example, may include
the title, year of release, leading actors/actresses, rating, star-rating,
plot description, black & white or color, stereo, closed captioning and
secondary audio information. Some implementations offer a dynamic program
description which is displayed as soon as the user highlights a program
title. Additionally, in certain implementations, two levels of descriptions
are presented, an abbreviated description, and a detailed description.
Sorting Functions. The Gemstar Guide Technology offers a variety of
sorting capabilities. Implemented features include sorting by category
(such as movies, sports, children's programming), sorting by theme within a
category (such as drama, action, horror, within the movie category, and
baseball, basketball, football, within the sports category), and sorting by
title. Other features that may be implemented are sorting by rating (in
conjunction with parental guidance and parental control), sorting by
actors/actresses and directors, and sorting by new or repeat showings.
Picture-in-Guide. The television picture is integrated into the guide
screen using picture-in-guide technology. This allows a viewer to continue
television viewing while using the guide. The picture window
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features full video and sound while a written description of the program is
presented. The viewer then has a choice of two modes of operation. Under
the first mode, the picture window changes channels automatically to
correspond with the channel highlighted in the guide by the viewer. This
mode permits full text and video surfing by the viewer. Under the second
mode, the picture window is locked on a selected channel. This mode permits
the viewer to continue watching the current program while reviewing other
program options.
Tuning by Title. The Gemstar Guide Technology allows a viewer, with the
push of a button, to tune to a selected program that is highlighted on the
interactive program guide.
One Button Recording. The Gemstar Guide Technology enables a viewer to
highlight a program on the guide and schedule it for recording by touching
a single button. The viewer has the choice of recording single episodes,
daily episodes for programs like soap operas or talk shows, or weekly
episodes for programs that are televised once each week. A review screen
displays all programs selected for recording. In some implementations, the
length of tape needed to record all of the scheduled programs within the
next 24 hours is displayed.
One Button Scheduling. The Gemstar Guide Technology is expected to enable
a viewer to highlight a future program and schedule it for viewing. At the
appropriate time, the television will change channels, or cause the channel
to be changed, to the scheduled program. If the television is turned off,
it is automatically turned on, and automatically turned off after the end
of the scheduled program.
Automatic Clock and Channel Setup. The Gemstar Guide Technology
automatically sets the VCR clock and the channel lineup (both broadcast and
cable) as soon as the user enters the zip code in which the unit is
located.
The Company currently markets and licenses the Gemstar Guide Technology to
consumer electronics manufacturers which incorporate the technology into TVs,
VCRs and TV-VCR combination units ("Consumer Electronics Guides"), and to
Service Providers and manufacturers that supply Service Providers with cable
set-top boxes ("Service Provider Guides"). In the consumer electronics sector,
the Gemstar Guide Technology enables licensed manufacturers to enhance the
functionality and appeal of their products and to realize additional revenue
through premium pricing. The Company believes that the additional costs to
manufacturers of incorporating its technologies into their products must be as
low as possible in order to encourage adoption of its technology by
manufacturers. The Company also believes that its systems' design must be
user-friendly and aesthetically appealing to consumers. The Company's research
and design team in Bedford, Massachusetts works closely with each licensed
manufacturer to achieve these implementation and design objectives. In the
Service Provider sector, the Gemstar Guide Technology enables Service
Providers to market additional services to subscribers. The Gemstar Guide
Technology allows Service Providers to customize certain elements of the guide
for subscribers and also allows subscribers to upgrade features and services
over time. The guide is compatible with the Service Provider's subscription
management and pay-per-view operations. In the computer and Internet sector,
the Company has licensed the Gemstar Guide Technology to Microsoft and AOL.
Microsoft has adopted the Gemstar Guide Technology as part of its TV Viewer
feature in the Windows' 98 operating system. In addition, AOL has signed a
long-term license agreement with the Company to use the Gemstar Guide
Technology to develop programming guides for AOL TV. Both Microsoft and AOL
have announced expansive plans for distribution of services via television
(Microsoft's Web-TV and Universal TV, and AOL's AOL-TV) with a number of
partners, and the licensed Gemstar Guide Technology will be used in connection
with the services and EPG's they will be offering.
Electronic Book Publishing
Entering the electronic book publishing market supports the Company's
strategy to make technology consumer-friendly. The Company believes that its
proprietary eBook devices will enhance the reading experience of serious book
and periodical consumers.
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Licensees and Licensing
The Company generates licensing revenue through licenses to consumer
electronics manufacturers, Service Providers, software developers and Internet
service providers, via a combination of one-time, non-refundable licensing
payments and per-unit license fees as well as to newspapers, magazines and
other publications via license fees for the right to print the PlusCode
Numbers. In some cases, the Company also charges a fee for the development and
transfer of relevant technologies.
VCR Plus+
The Company has licensed the VCR Plus+ technology to virtually every major
VCR manufacturer, including the following manufacturers and their associated
North American, European, Asian and South American brands:
<TABLE>
<S> <C> <C>
Mitsubishi Electric
Aiwa Company, Ltd. Corporation Sanyo Electric Co., Ltd.
Akai Electric Co., Ltd. North American Philips Sharp Corporation
Daewoo Electronics
Company, Corporation Shintom Co., Ltd.
Ltd. Orion Electric Company, Ltd. Sony Corporation
Funai Electric Co., Ltd. Philips Electronics N.V. Thomson Consumer Electronics
Goldstar Co., Ltd. Pioneer Electronics Corp. (Proscan, RCA, GE)
Hitachi Corporation,
Ltd. Samsung Electronics Company, Toshiba Corporation
Victor Company of Japan,
Matsushita Electric Ltd. Ltd.
Zenith Electronics
Industrial Co., Ltd. Corporation
</TABLE>
The licensed manufacturers which employ the Company's technology pay the
Company an ongoing per unit license fee based upon the number of units shipped
that incorporate the VCR Plus+ technology. In some cases, such manufacturers
have also paid the Company an up-front, one-time licensing fee. The Company
continues to develop and introduce additional VCR Plus+ features that
manufacturers can license from the Company to enhance the functionality of VCR
Plus+. Manufacturers are required to pay an additional license fee for each
unit incorporating an enhanced feature. License agreements with manufacturers
have terms which typically range from three to seven years.
The Company's license fees for the right to print its proprietary PlusCode
Numbers in publications are based on the circulation of each publication. The
Company's agreements with newspapers and magazines that publish PlusCode
Numbers have terms ranging from one to seven years and provide for modest
license fees to the Company. Agreements with certain publications require the
publications to provide substantial promotion of the VCR Plus+ system. The
Company has entered into an agency agreement with United Feature Syndicate,
Inc. to handle the licensing of PlusCode Numbers to newspapers in the U.S. and
other countries and to maintain certain ongoing relationships with existing
publishers.
Interactive Program Guides
The Company licenses the Gemstar Guide Technology to major consumer
electronics manufacturers, including the following manufacturers and their
associated North American, European, Asian and South American brands:
<TABLE>
<S> <C> <C>
Hitachi, Ltd. Philips Consumer Electronics Thomson Multimedia S.A.
Matsushita Electric
Industrial Co., Company (Proscan, RCA, GE)
Victor Company of Japan,
Ltd. (Panasonic) Sanyo Electric Company, Ltd. Ltd.
Mitsubishi Electric Zenith Electronics
Corporation Sharp Corporation Corporation
Sony Corporation
</TABLE>
The Company licenses the Gemstar Guide Technology to consumer electronics
manufacturers for a combination of a one-time non-refundable fee and
continuing license fees based on the number of units shipped
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incorporating the licensed technology. License agreements with such
manufacturers have terms which typically range from three to seven years.
The Company licenses the Gemstar Guide Technology to Service Providers,
manufacturers in the cable, satellite and set-top box industries and others,
including the following:
<TABLE>
<CAPTION>
Cable/Telecommunications Satellite and Set-Top Box
Operators Manufacturers Others
------------------------ ------------------------------- ---------------------
<S> <C> <C>
Americast Hitachi Corporation, Ltd. America Online, Inc.
Cox Cable Communications Hughes Network Systems ATI International SRL
GTE Communications Matsushita Consumer Electronics Microsoft Corporation
Systems
Quadravision Company
US West Sony Corporation
Toshiba Corporation
Thomson
Uniden America Corporation
</TABLE>
Advertising
During fiscal year 2000, the Company derived approximately $3.3 million in
revenue from the sale of advertising on its interactive program guides by its
TDN joint venture. In January 2000, Gemstar and Thomson (a partner in TDN)
agreed to contribute their TDN shares to a new entity, @TV Media, that will
expand the advertising prospects of the EPG in conjunction with the 900 MHz
two-way paging technology that will be used to deliver GUIDE Plus+ data to
consumers. As the number of television units that are GUIDE Plus+ enabled
increases from its current level, the availability of two-way capacity will
present instant e-commerce and television commerce possibilities with one
touch of the remote control--an opportunity never before available in the
television context. Gemstar estimates that the number of one-way and two-way
advertising and sales possibilities will soon be supported by the EPG's
ability to deliver billions of impressions per week, which will provide
consumers with an opportunity to use the seamless return path to both
participate in programming and make purchase decisions in ways unique to the
television experience.
The Company's proposed acquisition of TV Guide is also expected to enhance
its ability to serve and participate in this new advertising and commerce
environment. TV Guide's various properties and platforms reach millions of
U.S. consumers who have made television viewing an important part of their
daily lives. TV Guide Magazine has a circulation of approximately 11 million
and reaches approximately 34 million readers per week; its Cable Guides have
approximately 3 million subscribers and reach approximately 9 million readers;
its TV Guide scrolling channel (formerly "Prevue") reaches approximately 50
million cable homes and has weekly viewers totaling approximately 28 million;
and TV Guide.com, one of the most popular Internet sites, reaches
approximately 2.8 million unique viewers and has approximately 82 million page
views per month. In addition, TV Guide's strong brand, important relationships
in the Service Provider sector, and significant advertising expertise across
multiple platforms will serve to fill in areas where Gemstar has not
traditionally been as strong.
The merged Company will have an important opportunity to reach U.S.
consumers who care about television, to cross-promote the various platforms
and to sell advertising across platform lines. The Company believes that the
reach of TV Guide will help to create consumer awareness of and interest in
the electronic guide and the related advertising and interactive commerce
opportunities that the electronic guide technology will permit.
In May 1999, the Company entered into a long-term agreement with AOL
pursuant to which AOL was granted a license to use the Gemstar Guide
Technology to develop interactive program guides for AOL TV. AOL announced
that it intends to use the Gemstar Guide Technology to develop its own
customized programming guides in anticipation of its plans to bring its
Internet service to television in the year 2000. The Company had
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previously entered into a comparable agreement with Microsoft in January 1998.
In both cases, the Company will participate in advertising revenues created on
these platforms.
Technology
VCR Plus+
The Company's VCR Plus+ technology allows a user to record a program simply
by entering a proprietary PlusCode Number, via a remote control, into a VCR or
television. The PlusCode Numbers encode, in a compressed and encrypted form,
the essential elements of programming information, including date, time,
channel and length of program. The PlusCode Numbers are decoded by the
Company's proprietary software, which is embedded in a microprocessor in the
VCRs or televisions by licensed consumer electronics manufacturers.
Accordingly, when the user enters a PlusCode Number, the VCR Plus+ system
turns on the VCR, records the appropriate channel at the appropriate time and
then shuts off the VCR. The VCR Plus+ technology has also been incorporated
into televisions and is licensed to be incorporated into DVD Recorders. A
television incorporating the VCR Plus+ technology controls a VCR through
infrared signals.
Interactive Program Guides
In order to transmit programming information directly to end-users of its
interactive program guides, the Company has designed and implemented a data
delivery system (the "Gemstar Data Delivery System"). The Gemstar Data
Delivery System includes communication networks comprised of a central
computer which transmits program data via various means to the Company's
insertion equipment located in network headends, cable headends and broadcast
stations for inclusion in television signals, as well as proprietary methods
and technologies for assembling, editing, data encryption, data packaging,
data insertion, data distribution and data broadcasting of television program
listing information and other data. It also includes mirror sites, emergency
override systems and procedures, emergency recovery systems and procedures,
and data quality monitoring systems to ensure the successful transmission of
the Company's data.
The Company typically receives television program listing data from
commercial suppliers and applies quality control and editing procedures to
customize the data in a format suitable for the Company's interactive program
guides. The Company has entered into an agreement to purchase programming
information in electronic form from Tribune Media Service, Inc., a subsidiary
of the Tribune Company and a leading supplier of television program
information, as well as other commercial services. Once the data is received,
it is electronically converted into data packets ready for transmission. In
most cases, the data is encrypted. Consumer Electronic Guides utilize the VCR
Plus+ system for program identification, data encryption and data compression.
After the program information is reformatted, the data packets are transmitted
via a variety of transmission means, including land-line telephone link, NABTS
broadcast, and satellite link to the Company's insertion equipment located in
network headends, cable headends, and broadcast stations for inclusion in the
television signals. The data is then broadcast by the Company pursuant to
agreements with local television stations, cable broadcasters and national
television networks. The Gemstar Data Delivery System presently includes over
500 local television broadcast stations, three national cable networks, five
national broadcast networks (ABC, FOX, CBS, NBC, UPN and PBS) which combine to
cover virtually all U.S. television households with multiple redundancy in
most areas. Similar agreements have been reached with the Tokyo Broadcasting
System, the largest private television network in Japan, Canadian Broadcasting
Company, a national broadcaster in Canada, and RTL, a national broadcaster in
Germany. The Company also intends to seek similar agreements with other
broadcasters which will provide the Company with additional redundancy of
coverage and will provide broadcasters with the ability to update their own
program information. These television stations and cable companies broadcast,
both over the air and through local cable television operators, the television
program listing data for all channels (including information of other networks
or stations) through their vertical blanking interval which is the unused air
time between television picture frames.
In each of its agreements with broadcasters, the Company has the right to
install its insertion equipment required to insert data into the vertical
blanking interval without charge to the broadcasters. In order to ensure
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<PAGE>
the availability and quality of such equipment to its broadcasters, in 1993
the Company acquired a majority ownership interest in Norpak Corporation, a
Canadian based company and leading manufacturer of broadcast data insertion
equipment. Norpak Corporation presently supplies data-insertion equipment to
major broadcasters such as the ABC and CBS Television Networks and Turner
Broadcasting Systems.
The current design of the Company's Service Provider Guides includes a
software application that is downloaded and stored in flash memory in advanced
analog and digital converter boxes containing up to seven days of program
information. The application is supplied with data, updated daily, through the
Gemstar Data Delivery System to viewers through their Service Providers. The
Service Provider Guides store the infra-red code base of VCRs and cable set-
top boxes and control them by infra-red emission.
In November 1998, the Company received a patent for a 900 MHz, two-way
interactive system for televisions which is designed to allow a user to
execute purchase orders, receive confirmation, or access additional customized
information while watching television. The two-way interactive system
incorporates pager transmitters and receivers for communication between a
central information provider such as a head-end and a local unit, including
televisions, VCRs, cable boxes, or other analog or digital set-top boxes. The
patent additionally claims the integration of the two-way interactive system
with interactive program guides.
In April 1999, the Company entered into a long-term agreement with Paging
Network, Inc. ("PageNet") for broadcasting Gemstar's interactive program
guides and other data on PageNet's nationwide wireless communications network.
The Company intends to distribute interactive program guide data and other
time-sensitive information using 900 MHz wireless paging technology during
2000. The Company believes that the "always-on" nature of wireless paging will
allow the Company to augment the functionality of its interactive program
guides with near real-time information services including breaking news, up-
to-the-minute sport scores and stock quotes. In addition, the Company believes
that the wireless paging distribution network will provide an alternative
network to the Company's vertical blanking interval system for the
distribution of its interactive program guide data. The Company further
believes that the two-way paging technology will allow a viewer to respond to
television content with one "click" of the remote control. Wireless paging
transceivers built into televisions will require no telephone or other
connections. The Company expects one-way transmission to be available for
televisions equipped with the Company's interactive program guides in the year
2000, and two-way interactive communication to be available in the year 2001.
Electronic Book Publishing
The Company is the owner of proprietary content distribution systems, which
enable the sale and distribution of literary content to the Company's
proprietary secured eBook devices for storage and reading. The Company
protects the content from misappropriation or use on any device other than the
Company's eBook device (for which the literary work has been encrypted)
through a combination of encryption schemes and other security measures. In
its agreements with publishers, the Company obtains the right to transmit and
distribute the content using the Company's proprietary systems.
Strategic Relationships
In addition to its customary licensing arrangements with consumer
electronics manufacturers and Service Providers, the Company has entered into
relationships with parties that can offer strategic benefits. The Company
believes that the design and capabilities of the Gemstar Guide Technology will
allow the Company and the entities with which the Company enters into
strategic relationships to target advertisers, such as cable and broadcast
television networks and video and entertainment related product providers, to
generate advertising revenues. The Company intends to further exploit the
Gemstar Guide Technology through these strategic relationships.
Thomson. In November 1997, the Company signed an agreement with Thomson to
establish the Company's interactive program guide technologies in consumer
electronics. The first element has been a multi-
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<PAGE>
year, multi-million dollar license of the Gemstar Guide Technology to Thomson.
The second element provides for cooperation in establishing the Company's
interactive program guides as a standard for North and South America. The
third element provides for a long-term cooperative effort by the Company and
Thomson to explore opportunities presented by the interactive program guide
platform in the consumer electronics area, including advertising, promotion,
sponsorship and interactive services. In 1999 and 2000, the Company's
relationship with Thomson was significantly expanded by agreements to develop
the EPG in Europe; to develop guide content and advertising together through
the exploitation of 900 MHz paging technology; and to develop the electronic
book business through a licensing plan pursuant to which Thomson will develop
state-of-the art hardware modules.
Microsoft. In January 1998, the Company entered into a long-term, worldwide
agreement with Microsoft in which the two companies agreed to cross license
their respective intellectual property in the interactive program guide area.
Pursuant to the agreement, Microsoft purchased a non-exclusive license to
Gemstar's technology in the interactive program guide area and the Company
received a license to Microsoft's intellectual property in the program guide
area. Microsoft agreed to pay Gemstar a combination of up-front and per unit
license fees. The parties will also share in recurring revenues that may
result from an interactive program guide incorporated by Microsoft, including
advertising, promotion, sponsorship and linking. Microsoft has agreed to
license the Gemstar Guide Technology as a part of its TV viewer feature in the
Windows 98 operating system. Microsoft has also incorporated interactive
program guides under the license from the Company in current and future
versions of its Web TV and Universal TV services.
AOL. In May 1999, the Company entered into a long-term licensing agreement
with AOL pursuant to which AOL was granted a license to use the Gemstar Guide
Technology to develop and deploy interactive programming guides in its AOL TV
service. The license is designed to facilitate AOL's intentions to develop its
own customized electronic programming guides for AOL TV that incorporate
features of interactive navigation. These guides are intended to enable
subscribers to sort programs by themes or categories, and select shows for
viewing or recording. The AOL TV service was launched in June 2000 and offers
subscribers interactive services on the television platform.
Dentsu and Tokyo News Service. In March 1999, the Company entered into a
joint venture with Dentsu Inc., the largest international advertising and
public relations agency in the world, and Tokyo News Service Limited, a
leading Japanese publisher of entertainment magazines. The joint venture,
named Interactive Program Guide, Inc., was formed to pursue interactive
services, including advertising, promotion, sponsorship and transaction
opportunities on the Company's interactive program guide in Japan. Gemstar
owns a majority interest in Interactive Program Guide, Inc. and will
additionally receive a percentage of sales as royalty.
Sony. In November 1998, the Company entered into an agreement with Sony
pursuant to which Gemstar's interactive program guides will be the exclusive
guide incorporated into Sony televisions shipped in the United States and
Canada. In October 1998, the Company entered into a multi-year agreement with
Sony's Digital Network Solutions Co. division which agreed to incorporate the
Gemstar Guide Technology in all of its satellite and digital terrestrial set-
top boxes in the United States, Canada and Japan. Sony agreed to pay Gemstar a
per-unit license fee based on platform and territory, as well as an up-front
payment.
Deutsche Telekom. In September 1998, the Company entered into an agreement
with Deutsche Telekom AG pursuant to which parties agreed to cooperate in the
development and provision of an interactive program guide and related services
to digital cable television households throughout Germany. The parties agreed
to focus on Germany and, in its initial phase, will include joint technology
development, market research, pilot testing and user research.
Competition
The Company's technologies and systems compete with those of other
companies. Many of the Company's present and potential future competitors
have, or may have, substantially greater resources than the Company to
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<PAGE>
devote to further technological and new product developments. The Company
believes that it will compete effectively based primarily on the originality
of its concepts, the speed with which it can introduce such concepts to the
market, the uniqueness of its designs, the focus of its business approach, the
strength of its intellectual property portfolio, the extensiveness of its
business relationships, the quality and innovation of its technologies and its
ability to identify and meet consumer needs.
VCR Plus+ System
The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include on-screen program guides incorporating
point-and-click recording capability. In addition, some new products permit
consumers to record programs directly from air or cable for later viewing
through the use of memory chips and disc drives contained in the devices.
Certain of the Company's interactive program guides use the VCR Plus+ system.
As a result, licensees of such guides also license the Company's VCR Plus+
technology. To the extent that electronic program guides with recording
capability offered by companies other than Gemstar are widely adopted, such
guides may reduce the need for VCR Plus+. All electronic program guides,
including those that do not have a point-and-click recording feature, may
compete with the printed television guides, and may adversely affect the
Company's PlusCode Number coverage and publication license income.
Interactive Program Guides
Competition in the market for the delivery of television program schedule
information is intense. There are a number of companies with substantially
greater financial, sales and marketing resources than the Company which
produce and market television schedule information in various formats and
which compete or will compete with the Company's interactive program guides
products and services. These alternative formats currently include traditional
printed television guides, as well as non-interactive (passive) and
interactive on-screen electronic guide services, printed television guides in
newspapers and weekly publications, and local cable television guides.
Certain manufacturers of cable and satellite set-top boxes, including
Scientific-Atlanta and General Instrument, offer advanced analog and digital
set-top boxes which incorporate an interactive program guide with various
features similar to those offered by the Company's interactive program guides.
Many of such manufacturers have significantly greater resources than the
Company to devote to the development and commercialization of such products.
If the competing interactive on-screen guides are effectively developed and
promoted, and are not deemed to violate the Company's intellectual property
rights, they will present a significant competitive challenge to the Company's
interactive program guides. Improvements in software porting and in software
substitutability, together with government mandated introduction of so-called
Open Cable platforms, will increasingly permit the creation of new guides and
their quick placement in set-top boxes--both those purchased from service
providers and those purchased at retail. It is expected that a number of
entities (for example, satellite services, cable operators, box manufacturers
and others) may develop or acquire guide products that are competitive with
the Company's guides. The Company will take appropriate steps at the
appropriate times to ensure that such competing products are either not
infringing or are licensed under its patents.
Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels.
Several other companies have announced that they will provide on-screen
programming information in connection with pay-per-view and satellite
broadcasting. There can be no assurance that the producers of such
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<PAGE>
systems will not expand their products to include interactive access to
programming information that will be competitive with the Company's
interactive program guides.
Although the Company believes that its interactive program guides are in a
strong competitive position with respect to its known competitors,
particularly because of the strength of its intellectual property, there may
be competitors with additional strengths that are unknown to the Company. Such
potential competitors, which may include hardware manufacturers, software
developers, broadcasters or service providers, could be larger, more
established companies with greater resources in the program information
delivery market. The Company believes that its acquisition of TV Guide will
bring expertise and resources (e.g., branding, relationships and platforms)
that will assist the Company's competitive position.
Electronic Book Publishing
The market for electronic books is nascent, but there are signs that a
number of companies of size and strength (such as Microsoft and Hewlett
Packard) intend to compete in the field. The Company believes that its eBook
devices and its eBook business model are well-designed to compete in this
arena.
Intellectual Property Rights and Proprietary Information
The Company operates in an industry where innovation, investment in new
ideas and protection of its resulting intellectual property rights are
important for success. The Company relies on a variety of intellectual
property protections for its products and services, including patent,
copyright, trademark and trade secret laws, and contractual obligations, and
pursues a policy of vigorously enforcing such rights. In addition, because
much of the Company's technology relies on complex encryption methods, the
technology is inherently difficult for unauthorized persons to penetrate.
The Company follows a vigorous and aggressive patent and trademark policy,
both in the U.S. and internationally. The Company has a number of methods and
design patents and pending patent applications relating to the VCR Plus+
system and its related technologies. In the area of interactive program
guides, the Company has a large portfolio of patents and pending applications
including those originated by the Company prior to the StarSight acquisition,
those originated by StarSight prior to the StarSight acquisition, those
acquired from inventor Michael R. Levine (including patents covering the broad
principles used in storing television programming data in a television
receiving device and allowing a user to select and display television guide
information), and exclusive licensing rights in certain third-party patents.
The Company believes that with this combination of rights, it has one of the
world's most extensive portfolios of intellectual property in the area of
interactive program guides, which spans the fundamental concept of storage and
retrieval of television program information to specific user interfaces, and
the functionality and methods of implementation of interactive program guides.
Pursuant to an agreement entered into in 1997, the Company has acquired the
future invention rights of Mr. Levine in the audio-visual technology area. In
November 1998, the Company received a patent for a 900 MHz two-way interactive
system for televisions which will allow a user to execute purchase orders,
receive confirmation, or access additional customized information while
watching television. In August 1999, the Company received a patent covering an
electronic program guide with interactive panels for advertising and promoting
programs, products or services, which are simultaneously displayed with the
television listings. The Company also continues to develop and file additional
patent applications in a variety of areas in addition to the visual technology
area.
Most of the Company's licensing agreements contain a non-assertion provision
which prohibits the licensees from asserting patent infringement claims
against the Company's VCR Plus+ system or the Gemstar Guide Technology. The
Company generally takes advantage of the Patent Convention Treaty procedures
for patent protection in foreign countries. This procedure results in a delay
in the application and issuance of foreign patents, but if and when issued, is
more cost efficient and these foreign patents will enjoy the same priority
date as their U.S. counterparts.
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The Company holds extensive trademark registrations throughout the world and
has multiple trademark applications pending for a variety of marks. Marks for
which the Company has registrations or applications to register in the U.S. or
foreign countries include Gemstar, VCR Plus+ (VIDEO Plus+(R), ShowView(R) and
G-CODE(R) are marks used in place of the mark VCR Plus+ in certain countries
to avoid or minimize conflicts in those countries), GUIDE Plus+, ShowGuide,
ShowList, V-Chip Plus+, INDEX Plus+(R) and PlusCode. The Company has U.S.
copyright registrations for the encoding and decoding of computer programs
with respect to its compression and encryption technology. The Company
considers portions of its encryption technology to be a protectable trade
secret and has undertaken considerable efforts to maintain its secrecy.
The Company's policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of the Company's
proprietary information is disclosed. These agreements prohibit the disclosure
of confidential information to anyone outside the Company, both during and
subsequent to employment or the duration of the working relationship.
Research and Development
The market for the Company's services and products is subject to rapid and
significant changes in technology and frequent new service and product
introductions. The Company believes that its future success will depend on its
ability to enhance its existing technologies and to introduce new technologies
on a competitive basis. Accordingly, the Company will continue to engage in
significant research and development activities. There can be no assurance,
however, that the Company will successfully complete the development of any
future technology or that such technology will be compatible with, accepted by
or incorporated in the technology or products of third parties. Any
significant delay or failure to develop new or enhanced technology could have
a material adverse effect on the Company.
Employees
The Company employed 354 individuals as of March 31, 2000, of whom 53 were
employed outside the United States. None of the Company's employees is covered
by a collective bargaining agreement or is presently represented by a labor
union. The Company has not experienced any work stoppages and considers its
employee relations to be good.
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CERTAIN FACTORS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
This Form 10-K contains "forward-looking statements" within the meaning of
Section 27A of the United States Securities Act of 1933, as amended, and
Section 21E of the United States Securities Exchange Act of 1934, as amended,
which involve risks and uncertainties. Such forward-looking statements are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed
below. Such factors, together with the other information in this Annual
Report, should be considered carefully in evaluating an investment in the
Company's Common Stock.
Limited Growth of VCR Plus+ Revenues. While VCR Plus+ license fees have
increased annually since the Company's inception, future growth of revenues
derived from VCR Plus+ may be limited by the fact that virtually all major VCR
and television manufacturers have licensed the VCR Plus+ technology, the fact
that the Company has already expanded into most major markets worldwide, and
the fact that there are new entrants offering devices with recording features.
Any further growth in VCR Plus+ license revenues will thus come from further
penetration of increasingly saturated markets. Accordingly, the Company's
future success depends to a significant extent upon its ability to develop,
market and license emerging and new products and services including the
Gemstar Guide Technology.
Developing Market for Interactive Program Guides; Unproven Acceptance of
Gemstar's Interactive Program Guides. The market for Gemstar's interactive
program guides is only now developing, is rapidly evolving and is becoming
highly competitive. Demand and market acceptance for the Company's interactive
program guides are subject to a high level of uncertainty and risk. It is
difficult for Gemstar to predict whether, or how fast, this market will grow.
Nor can Gemstar predict whether growth in the Service Provider sector (where
it is seeking to license its EPG to cable operators, telephone companies and
satellite services) will match growth in the consumer electronics sector.
Gemstar cannot guarantee either that the markets for its interactive program
guides will continue to develop or that demand for the EPGs will be
sustainable. If the market develops more slowly than expected or becomes
saturated with competitors, or if its interactive program guides do not attain
market acceptance, its business, operating results, and financial condition
will be materially and adversely affected.
Rapid Technological Change. The life cycle of the Gemstar Guide Technology
and any future products and services developed by the Company may be limited
by the emergence of new entertainment products and technologies, changes in
consumer preferences and other factors. The Company's future performance will
depend on its ability to consistently (i) identify emerging technological
trends in its market, (ii) identify changing consumer needs, desires or
tastes, (iii) develop and maintain competitive technology, including new
product and service offerings, (iv) improve the performance, features and
reliability of its products and services, particularly in response to
technological change and competitive offerings, (v) bring technology to market
quickly at cost-effective prices, and (vi) protect its intellectual property.
There can be no assurance that the Company will be successful in developing
and marketing new products and services that respond to technological and
competitive developments and changing customer needs, or that such products
and services will gain market acceptance and be incorporated into the
technology or products of third parties. Any significant delay or failure to
develop new or enhanced technologies, including new product and service
offerings, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition for Advertising Expenditures. The Company expects to derive a
portion of its revenues from the sale of advertising on its interactive
program guides. But advertisers have limited experience with this medium. The
Company's continuing ability to generate advertising revenue will depend upon,
among other things, (i) such advertisers' acceptance of interactive program
guides as an effective and sustainable advertising medium; (ii) the
development of a large base of users of its interactive program guides
possessing demographic characteristics attractive to advertisers; and (iii)
its ability to continue to develop effective advertising delivery
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and measurement systems. No standards have yet been fully implemented for the
measurement of the effectiveness of advertising on interactive program guides.
The Company cannot be certain that such standards will develop sufficiently to
support advertising on interactive program guides as a significant advertising
medium. Nor can the Company be certain that advertisers will determine that
advertising on interactive program guides is effective. In addition, adverse
economic conditions can significantly impact advertisers' ability and
willingness to spend additional amounts on advertising generally. In that
regard, the Company competes with media such as television stations, radio and
print as well as web site operators and broadcast and cable networks for a
share of advertisers' total advertising budgets. Competition among current and
future suppliers of interactive informational and navigational services,
including current and future Internet suppliers, high-traffic web sites as
well as competition from other media for advertising placements could result
in significantly lower prices for advertising and reductions in advertising
revenues. Advertising revenue is subject to seasonal fluctuations.
Historically, advertisers have spent less in the first and third calendar
quarters.
Risks Associated with Strategic Relationships. Part of the Company's
business strategy is to enter into strategic or other similar collaborative
relationships with consumer electronics manufacturers, Service Providers,
software developers and other partners in order to offer products and services
to a larger customer base than could be reached through the Company's own
sales and marketing efforts. The Company believes that such strategic
relationships can accelerate the market penetration of the Company's products
and technologies, while limiting the Company's manufacturing exposure and
sales and marketing costs. However, there can be no assurance that the Company
will be able to expand or maintain its existing strategic relationships or
establish new strategic relationships on commercially reasonable terms, if at
all. If the Company is unable to maintain its existing strategic
relationships, or to establish similar strategic relationships with respect to
future products and services, it will be required to devote substantially more
resources to the distribution, sale and marketing of its products and
services. Any future inability of the Company to maintain its strategic
relationships or to enter into additional strategic relationships, or the
failure of one or more of the Company's strategic relationships to result in
the development and maintenance of a market for the Company's products and
services, could have a material adverse effect on the Company's business,
operating results and financial condition.
The TV Guide Merger. The Company believes that TV Guide will bring with it
significant platforms aligned to Gemstar's electronic program guide, as well
as a powerful brand and expertise with respect to advertising and cross-
platform promotion that can enhance the Company's prospects for success in the
increasingly competitive guide market. While the Company believes the
transaction to be pro-competitive, the Department of Justice has not yet
approved the merger, and there can be no assurance that it will or that, if it
does not, a court will agree that the merger should nonetheless be permitted.
Accordingly, the Company cannot yet count on obtaining the benefits of the
merger.
Anti-Takeover Defense Provisions. The Company's Articles of Incorporation
and By-Laws, and its merger agreement with TV Guide, contain certain
provisions that can make it more difficult for a third party to acquire, and
that discourage a third party from attempting to acquire, control of the
Company. In addition, the Company has a shareholder rights plan pursuant to
which holders of shares of Common Stock of the Company are entitled to one
preferred share purchase right for each outstanding share they hold,
exercisable under certain defined circumstances involving a potential change
of control. This plan will remain in place following the merger. The foregoing
provisions could limit the price that certain investors may be willing to pay
in the future for the Company's shares.
Risks Associated with Changes in Consumer Electronics Market. The Company
derives a substantial majority of its revenues from manufacturer license fees
for its VCR Plus+ technology and Gemstar Guide Technology, and it expects to
derive such fees as well in the electronic books sector. Such fees are largely
assessed based on unit shipment volume of televisions, VCRs and other devices
incorporating the Company's technologies. Accordingly, the Company's future
operating results are dependent on continued growth in the entertainment
products category (particularly video), and any decline in sales of consumer
electronics products employing the Company's technologies would have an
adverse impact on the Company's operating results.
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Demand for new VCRs and televisions may be adversely affected by increasing
market saturation, a decline in consumer interest due to a lack of desirable
new product features, and a decreased need for unit replacement as the
durability of consumer electronics products improves. Moreover, sales of
consumer electronics devices incorporating the Company's technologies may be
adversely impacted by the emergence of new product categories and consumer
entertainment options. For instance, even though the Company's VCR Plus+
technology has been licensed to be incorporated into DVD Recorders, increased
sales of non-recording DVD Recorders or other non-recording video
entertainment devices and widespread availability of video on demand or near-
video on demand services from cable service providers may reduce demand for
the Company's VCR Plus+ technology. The availability of alternative home
entertainment options such as the Internet may also reduce consumer spending
on VCRs and televisions. A decline in demand for VCRs, televisions and other
consumer electronics devices employing the Company's technologies could have a
material adverse effect on the Company's business, operating results and
financial condition. As to electronic books, the market is nascent, and it is
impossible to measure the degree to which consumers will accept eBook
products.
Seasonality and Variability of Results. The Company experiences variability
in its revenues and operating results on a quarterly basis as a result of many
factors. Most importantly, as consumer electronics manufacturers have
incorporated the Company's systems into an increasing numbers of products and
models, the Company's license revenues have displayed seasonality typical of
the operating results of consumer electronics manufacturers. Shipments by
manufacturers of consumer electronics devices tend to be higher in the third
and fourth calendar quarters, or the Company's second and third fiscal
quarters. However, because the Company generally receives license revenues
within 90 days after the end of the quarter in which the consumer electronics
devices incorporating its technology are shipped, licensing revenues are
typically higher during the Company's third and fourth fiscal quarters. In
addition, manufacturers' shipments vary from quarter to quarter depending on a
number of factors, including retail inventory levels and retail promotional
activities. As a result, the Company may experience variability in its
quarterly license revenues affecting period to period comparability and
performance. The Company's license revenues are also affected by the volume of
shipments by manufacturers. The Company's license agreements provide for
volume discounts based on the shipment volume in each year by a given
manufacturer, which can lower the average per unit license fee for a
manufacturer over the course of a year. The Company anticipates that its
revenues and operating results will also be affected by the timing of market
introductions and market acceptance of new systems. There can be no assurance,
however, that future systems developed by the Company, including the Company's
interactive program guide and electronic books, will ever result in
significant revenues or profits. Further, if new systems achieve market
acceptance, the timing of manufacturers' implementation and shipments is
uncertain and may result in greater variability of the Company's quarterly and
annual operating results.
Another factor contributing to the variability in the Company's quarterly
operating results is the increase in the Company's marketing and advertising
expenditures in preparation for new product launches and in the Company's
third fiscal quarter during the fall holiday season. The Company's planned
operating expenditures each quarter are based, in part, on the Company's
expectation as to future revenues in the same quarter. In addition, many of
the Company's expenditures are fixed costs. If revenues do not meet
expectations in any given quarter, operating results for the quarter may be
materially adversely affected. As a result, the Company believes that period
to period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that the Company's historic revenue growth or its
profitability will continue on a quarterly or annual basis.
Reliance on Third-Party Manufacturers. The Company depends on the
cooperation of third-party consumer electronics manufacturers that incorporate
the Company's technology into their products. The Company does not manufacture
such hardware itself. Many of the Company's license agreements do not require
the inclusion of the Company's technology into any specific number or
percentage of units shipped by the licensees, and only a few of these
agreements guarantee a minimum licensing fee to the Company over their term.
Accordingly, the Company cannot control or predict the number of models or
units shipped by any manufacturer employing the Company's technology. Many of
the above-described license agreements may be terminated by the manufacturer
without substantial financial penalty.
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Further, there can be no assurance that the Company's interactive program
guides, and related technologies and services will achieve market acceptance
or that manufacturers, service providers and software developers will devote
resources adequate to achieve such market acceptance. In addition, there can
be no assurance that such entities will in fact incorporate the Company's
technologies into their products, that licensing agreements will not be
terminated and, if terminated, that the Company would be able to negotiate
alternative relationships on commercially acceptable terms. The Company has
little control over the number of TVs, VCRs, DVD Recorders, TVCRs, cable set-
top boxes or other products incorporating the Company's technologies that will
be manufactured, and there can be no assurances with respect to the quantity
thereof that will include the Company's technologies or the amount of
licensing revenues the Company will receive as a result of inclusion by
manufacturers licensing or incorporating the Company's systems.
The incorporation of the Gemstar Guide Technology into televisions, VCRs,
TVCRs, DVD Recorders, set-top boxes, integrated satellite receiver decoders,
and other hardware currently requires Company-designed Application Specific
Integrated Circuits ("ASIC"). The Company currently outsources the production
of ASICs. The development of, or the identification of alternative sources
for, ASICs could require significant lead time. An inability to provide for
sufficient quantities of ASICs could delay the incorporation of the Gemstar
Guide Technology into products, which would have a materially adverse effect
on the Company's business. Furthermore, there can be no assurance that
suppliers of such ASICs will successfully produce sufficient volumes of the
ASICs to ensure the timely availability of products incorporating the Gemstar
Guide Technology in commercial quantities. A failure in any one of the steps
leading to the successful incorporation of the Company's technologies into
products could have a material adverse effect on the Company's business. The
Company believes that the cost of the hardware required to support the Gemstar
Guide Technology must be significantly reduced in order for consumer
electronics manufacturers to incorporate the Company's interactive program
guides in a broader range of consumer electronics devices, including low-to-
mid range televisions and VCRs. Although the Company is currently attempting
to reduce the number and complexity of chips required to support its
interactive program guides and realize additional manufacturing efficiencies,
no assurance can be given that the cost of the required chip sets can be
significantly reduced. Moreover, the semiconductor industry is highly cyclical
and ASICs and memory chips are subject to unanticipated and dramatic price
volatility. Neither the Company nor, to its knowledge, any of the Company's
licensed manufacturers, have long-term supply agreements. As a result, a
significant increase in the cost of ASICs and memory chips could significantly
impede adoption of the Company's interactive program guide technologies by
manufacturers.
Dependence on the Cooperation of Cable, Television Broadcasters and
Publications. The Gemstar Data Delivery System, which broadcasts data
necessary to operate the Company's interactive program guides as well as
certain advanced features of VCR Plus+, depends on the cooperation of both
cable operators and television broadcasters. The Company has entered into
agreements with television broadcast networks (including ABC, FOX, CBS, NBC,
UPN and PBS), cable program providers (including WGN Superstation, The Family
Channel and A&E) and over 500 local television stations to broadcast data
needed to support the Gemstar Guide Technology and the other features through
the vertical blanking interval ("VBI"), the unused air time between television
picture frames. There can be no assurance that these broadcasters, program
providers, or local broadcast stations will broadcast the data without error.
There also can be no assurance that these agreements will not be terminated,
or upon expiration, be renewed on terms acceptable to the Company or at all.
The Company's data broadcast through the VBI can be, and has been in certain
markets, deleted or modified by some of the local cable systems of one large
cable company, Time Warner Cable, so that such data are degraded or
unavailable to some consumers. The Company believes that Time Warner's
practice violates the rules and regulations of the Federal Communications
Commission and it has filed a petition with the FCC seeking a ruling that
would prohibit Time Warner from doing so. Gemstar cannot predict what action
the FCC might take, or when it will act. Meanwhile, the Company incurs
additional expense to activate alternative measures to broadcast and allow
end-users to receive such data, and if the FCC acts adversely the Company may
have to enter into further agreements with local cable operators to ensure
retransmission of required information. The Company is, as noted, planning to
use 900 MHz paging frequencies as a substitute for the VBI beginning later
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this year. But while the technology has been shown to work, it will require
new modules in television receivers, will take time to achieve wide-spread
distribution and will not free up the need for VBI delivery to legacy
receivers and to receivers located in places where 900 MHz frequencies are not
available. There can be no assurance that agreements with Time Warner (or
other cable operators) could be reached or reached on terms acceptable to the
Company. In addition, increased use of digital broadcast satellite or digital
cable technology, which does not involve a vertical blanking interval, would
require the Gemstar Data Delivery System to be modified to allow receipt of
program data in digital form.
The Company purchases television program listing information from various
commercial vendors for insertion into, and dissemination through, the Gemstar
Data Delivery System. There can be no assurance that the quality, accuracy or
timeliness of such data will meet, or continue to meet, the standard required
to provide interactive program guides satisfactory to the end user.
The Gemstar Guide Technology that is integrated into set-top boxes requires
Service Providers to order new set-top boxes from manufacturers for
distribution to new and existing customers. While this market is now
accelerating, many Service Providers have in the past deferred purchases of
new set-top boxes partly because of their high cost and the capital spending
constraints of many cable operators. As a result, the deployment of Gemstar
Guide Technology capable hardware has been and could be further delayed. There
can also be no assurance that Service Providers will accept the Gemstar Guide
Technology, and there is reason to believe that they are seeking alternatives
or to develop their own guides.
The Company's VCR Plus+ system relies on consumer access to PlusCode Numbers
through licensed publications that carry the PlusCode Numbers. The Company
presently licenses the PlusCode Numbers to newspapers and major television
guides in VCR Plus+ markets worldwide. The license agreements call for royalty
payments to the Company and have initial terms ranging from one to seven
years. There is no assurance that these agreements will be renewed upon
expiration or, if renewed, that they will be on terms as favorable to the
Company as existing license agreements. In addition, the Company will be
dependent on the cooperation and support of publications in countries in which
it is not presently doing business in order to continue to expand the
international availability of the VCR Plus+ system.
Competition. The Company operates in highly competitive and rapidly evolving
markets. To compete successfully, the Company must produce and provide
products and services which are relatively low in cost and easy for consumers
to use. There are a number of companies with substantially greater financial,
sales and marketing resources than the Company who produce and market
television schedule information in various formats which compete or will
compete with the Company's interactive program guides products and services.
These alternative formats currently include traditional printed television
guides, as well as non-interactive (passive) and interactive on-screen
electronic guide services, printed television guides in newspapers and weekly
publications, and local cable television guides.
Certain manufacturers of cable and satellite set-top boxes, including
Scientific Atlanta and General Instrument, offer advanced analog and digital
set-top boxes which incorporate an interactive program guide with various
features similar to those offered by the Company's interactive program guides.
There are multiple entities offering guides that operate on the Scientific
Atlanta or General Instrument boxes. If the competing interactive on-screen
guides are effectively developed and promoted, and are not deemed to violate
the Company's intellectual property rights, they will present a significant
competitive challenge to the Company's interactive program guides.
Viewers who receive television programming via C-band satellite have access
to a subscription service called SuperGuide offered by Satellite Service
Company. SuperGuide provides satellite subscribers with an interactive on-
screen program guide using a remote control. SuperGuide presents a service
competitive to the Company's service in the satellite distribution channel and
would present an additional competitive challenge if extended to other
distribution channels. Several other companies have announced that they will
provide on-screen programming information in connection with pay-per-view and
satellite broadcasting. There can be no assurance
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that the producers of such systems will not expand the products to include
interactive access to programming information that will be competitive with
the Company's interactive program guides.
The TV Guide Channel and other passive on-screen electronic guides with
which the Company's interactive program guides currently compete are typically
offered to cable television subscribers at no cost. There can be no assurance
that the passive guides, which do not require a set-top box to deploy, will
not continue to command greater market share than the interactive guides, or
that the producers of the passive guides will not develop new products that
will offer features similar to those found in the Company's interactive
program guides system.
As suggested elsewhere, several entities have announced PC- and Internet-
based guide products which have many features similar to the Company's
interactive program guides; guides that are otherwise server-based; and other
guides that are local-storage based and that offer features similar to the
Company's guides. These guides could pose a significant competitive challenge
to the Company's products. While the Company believes that these guides
generally infringe its patents, litigation against all such companies would be
very expensive and would take a great deal of time and resources. While the
Company will take all necessary steps to protect its patents, it will be
required to do so selectively, seeking to challenge those whose activities
pose the greatest threat and those which present opportunities for victories
with the greatest precedential scope. Meanwhile, it is possible that some
guides will continue to compete with the Company's electronic program guides
in the near future.
Printed television schedule competitors of the Company include TV Guide,
printed guides for satellite customers, local cable television guides and
local newspaper guides, all of which benefit from their familiarity to
television viewers, their broad base of distribution and their presentation of
feature articles and entertainment news. The established market presence of
printed program guides may give them a competitive advantage.
The Company is aware of no product other than VCR Plus+ that allows the user
to program a VCR by entering a numerical code. However, as noted, several
products on the market offer other simplified VCR programming functions and
thus compete with VCR Plus+. Such products include devices containing memory
and related capacity and permit so-called live recording, and on-screen
program guides which incorporate point-and-click recording capability and may
compete with VCR Plus+. Certain of the Company's electronic program guides use
the VCR Plus+ system, such that every unit that licenses the Gemstar Guide
Technology also licenses the Company's VCR Plus+ technology. However, to the
extent that electronic program guides with recording capability offered by
companies other than Gemstar are widely adopted, such guides may reduce the
need for VCR Plus+. All electronic program guides, including those that do not
have a point-and-click recording feature, may compete with the printed
television guides, and may adversely affect the Company's PlusCode Number
coverage and publication license income.
There may be competitors with significant competitive strengths which are
not known to the Company or touched upon herein. Such potential competitors
may include larger, more established companies both within and outside of the
interactive multimedia services and interactive television fields that could
develop, deliver and sell simplified VCR programming products, on-screen
program guides or other devices that meet all or portions of the functionality
provided by the Company's technology. There can be no assurance that the
Company's systems will achieve consumer acceptance or that they will be able
to compete successfully with such known or unknown competitors, some of which
possess substantially greater financial, sales and marketing resources than
those of the Company.
With respect to electronic books, this nascent market has already begun to
attract major competitors such as Microsoft, and ultimately consumers will
choose from a variety of devices and approaches, assuming that consumers
decide to accept electronic books at all. The market is too new to permit
prediction as to the likely competition or any entity's likely competitive
success.
Dependence on Key Employees. The Company is dependent on certain key members
of its management, operations and development staff, including Henry C. Yuen,
its Chief Executive Officer, the loss of whose
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services could have a material adverse effect on the Company. Although the
Company has employment contracts with such key employees, all of which will
remain in place following the TV Guide merger, such employment contracts would
generally not restrict the employee's ability to leave the Company.
Furthermore, recruiting and retaining additional qualified engineering,
marketing, and operations personnel will be critical to the Company's success.
There can be no assurance that the Company will be able to recruit or retain
such personnel on acceptable terms. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
Passive Foreign Investment Company. During fiscal year 2000, the Company
effected a domestication from the British Virgin Islands to the State of
Delaware, and ceased to be a foreign corporation. A foreign corporation is
classified as a "passive foreign investment company" ("PFIC") if (1) 75% or
more of its gross income (including the pro rata gross income of any
subsidiary of which the corporation owns 25% or more of the stock by value) in
a taxable year is passive income or (2) the average percentage of its assets
by value (including the pro rata value of the assets of any subsidiary of
which the corporation owns 25% or more of the stock by value) which produce or
are held for the production of passive income is at least 50% in a taxable
year. (For purposes of these tests, stock of a 25% or more owned U.S.
subsidiary (by value) is a non-passive asset and income from such stock is
non-passive income.) Passive income includes dividends, interest and royalties
but excludes royalties that are derived in the active conduct of a trade or
business (as defined for U.S. federal income tax purposes) and that are
received from an unrelated person.
The Company does not believe that it would have been a PFIC during the
period prior to its domestication because, based on the substantial management
and operational functions of its subsidiaries in connection with the creation
and development of its proprietary products, the royalty income of these
subsidiaries has been derived from the active conduct of a trade or business
and because the average value of assets producing passive income was less than
50% of aggregate asset value. Characterization of royalty income as active
business income is based on the treatment of the Company's operating
subsidiaries, collectively, as the developer and licensor of the proprietary
products for purposes of this test. However, there is little authority on
which to rely in this area, and there can be no assurance that the Internal
Revenue Service will agree with this position. For purposes of the assets
test, the Company values its tangible and intangible assets on a fair market
basis. If the Company were a PFIC during its time as a foreign corporation, a
U.S. holder would be subject to increased tax liability upon the sale of
shares of the Company's Common Stock at a gain or upon the receipt of certain
dividends, unless such U.S. holder makes an election (a "qualifying electing
fund election") to be taxed currently on his pro rata portion of the Company's
income, whether or not such income is distributed in the form of dividends or
otherwise.
A U.S. holder making a qualifying electing fund election is required for
each taxable year to include in income a pro rata share of the ordinary
earnings of the qualifying electing funds as ordinary income and a pro rata
share of the net capital gain of the qualifying electing fund as long-term
capital gain. The Company would, at the request of a shareholder making a
"qualifying electing fund election," comply with the applicable information
reporting requirements. U.S. holders should consult their tax advisors
regarding the consequences of PFIC status for prior years, including certain
reporting requirements applicable to U.S. shareholders of a PFIC, and the
election to treat the Company as a qualifying electing fund.
Patent, Proprietary Information and Related Litigation. The Company's
continuing success has depended in part on its ability to protect and maintain
the proprietary nature of its technology through a combination of patents,
trade secrets, trademarks, copyrights, licenses and other intellectual
property arrangements. The Company has been notified in the past and the
Company may be notified in the future of claims that the Company may be
infringing patents or other intellectual property rights owned by third
parties. In the past the Company has been involved in disputes regarding its
intellectual property rights and believes it may be involved in similar
disputes in the future. While the Company intends to vigorously protect its
intellectual property rights, there can be no assurance that in the future any
patents held by the Company will not be invalidated. Further, there can be no
assurance that the Company's pending patent applications will be granted or
that a third party will not violate, or attempt to invalidate, the Company's
intellectual property rights, possibly forcing the Company to expend
substantial legal fees. An adverse determination in any such dispute could
result in the loss of the company's
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proprietary rights, subject the Company to significant liabilities and
litigation costs or prevent the Company from licensing its technologies, any
of which could have a material adverse effect on the Company's business,
operating results and financial condition. Moreover, the laws of certain
foreign countries in which the Company's technology is or may in the future be
licensed may not protect the Company's intellectual property rights to the
same extent as the laws of the United States, thus increasing the possibility
of infringement of the Company's intellectual property in such countries. In
addition, if any of the Company's licensees determine that any additional
third party licenses are required as a result of any dispute, there can be no
assurance that any such licenses would be available on terms acceptable to
Company, if at all. Additionally, there can be no assurance that certain
aspects of the Company's technology will not be reverse-engineered by third
parties without violating the Company's proprietary rights. The Company's
existing protections also may not preclude competitors from developing
products with features and prices similar to or better than those of the
Company.
To preserve its intellectual property rights, the Company believes it may be
necessary to initiate litigation against one or more third parties. In
addition, one or more of these parties may bring suit against the Company. In
the event of an adverse result in any such litigation, the Company could be
required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. Any litigation, whether as a plaintiff or as defendant,
would likely result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel, whether or not
such litigation is ultimately determined in favor of the Company. In addition,
the results of any litigation matter are inherently uncertain.
Volatility of Stock Price. There has been a history of significant
volatility in the market price of the Company's Common Stock on the Nasdaq
National Market, and it is likely that the market price of the Company's
Common Stock will continue to be subject to significant fluctuations. The
Company believes that future announcements concerning the Company, its
competitors or its principal customers, including technological innovations,
new product introductions, governmental regulations, litigation or changes in
earnings estimated by analysts, may cause the market price of the Common Stock
to fluctuate substantially in the future. Sales of substantial amounts of the
Company's outstanding Common Stock in the public market could materially
adversely affect the market price of the Common Stock. Further, in recent
years the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of equity securities of any
high technology companies and that often have been unrelated to the operating
performance of such companies. These fluctuations as well as general economic,
political and market conditions such as recessions, international currency
fluctuations, potential insolvency of international distributors and
representatives, or tariffs and other trade barriers, may materially adversely
affect the market price of the Common Stock.
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the United States Securities Act of 1933,
as amended, and Section 21E of the United States Securities Exchange Act of
1934, as amended, that are based on the reasonable expectations and beliefs of
the Company's management, as well as assumptions made by and information
currently available to the Company's management. Such forward-looking
statements are subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. When used in this document and in the documents
incorporated herein by reference, the words "may," "will," "continue,"
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify such
forward-looking statements. Such statements reflect the current views of the
Company or its management with respect to future events and are subject to
certain risks, uncertainties and assumptions including, but not limited to the
following: the Company's ability to have its technologies widely licensed,
incorporated and accepted as the technologies of choice; that the Company
considers its employee relations to be good; with an increase in programming
content and number of accessible channels, the Gemstar Guide Technology will
become an increasingly important tool for assisting customers in sorting,
selecting and recording television programming; the Company's ability to enter
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into long-term relationships with a broad range of consumer electronics and
other manufacturers, television broadcasters, cable companies and software
developers; that the Company's interactive program guides will provide an
attractive vehicle for the delivery of advertising to consumers; the
proliferation of television programming choices gives rise to the need for
consumer electronics devices, including televisions and VCRs; the number of
hardware platforms shipped annually which are suitable for Gemstar Guide
Technology may be as many as 50 million or more; the size of the television
and VCR markets and the competitive pressures within the industry present an
opportunity for companies that can provide innovative technologies that both
appeal to consumers and are attractive to, and cost-effective for,
manufacturers; the consumer demand for systems and technologies that help
organize viewing choices provides an opportunity for Gemstar Guide Technology;
the Company's ability to work closely with disparate industry participants
will contribute to the successful adoption of the Gemstar Guide Technology;
the Company's intention to license its technologies for use on other
platforms; the Company's belief it can provide additional value-added services
to end-users; the design and capabilities of the Gemstar Guide Technology will
allow the Company to enter into strategic relationships to target advertisers;
the Company's interactive program guides will provide an attractive vehicle
for the delivery of advertising and other content to consumers; the ability to
enhance existing technologies and introduce new technologies on a competitive
basis; the performance and functionality of the Company's PC- and Internet-
based guides; the timing of market introductions and the acceptance of new
systems; and the Company's belief that it has a reasonable basis for its tax
position with the Internal Revenue Service.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Company's actual results,
performance or achievements could differ materially from those expressed in,
or implied by, any such forward-looking statements. Factors that could cause
or contribute to such material differences include, but are not limited to,
those discussed in Item 1 under "Business" and "Certain Factors Affecting
Business, Operating Results and Financial Conditions" and Item 3, "Legal
Proceedings," as well as those factors discussed elsewhere in this Form 10-K
and in the documents incorporated herein by reference. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to release publicly any updates or revisions to any such forward-
looking statements that may reflect events or circumstances occurring after
the date of this Form 10-K.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases approximately 143,000 square feet of office space in
various locations in the United States. In addition, the Company leases
approximately 26,000 square feet of office space in various locations outside
of the United States. The leases have various expiration dates through fiscal
year 2010. The Company believes that its facilities are adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes that the Company will be able to secure additional
space at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS.
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
25
<PAGE>
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 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 and 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 preliminary
findings of liability and guidelines for estimating royalties earned under the
agreement with GI. The second phase of the arbitration, focusing on digital
set-top boxes, is scheduled to proceed later this year. 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
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 has also moved to
transfer this action to the U.S. District Court for the Northern District of
California.
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.
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.
26
<PAGE>
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 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.
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 the
Company.
27
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following proposals were voted upon at a special meeting of shareholders
held on March 17, 2000:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Abstained
----------- ---------- ---------
<C> <S> <C> <C> <C>
(1) Proposal to approve the issuance of 165,243,169 249,182 116,026
Gemstar Common Stock to TV Guide
stockholders in the merger
contemplated by the Agreement and Plan
of Merger, dated as of October 4,
1999, as amended, among Gemstar
International Group Limited,
G Acquisition Subsidiary Corp., a
wholly owned subsidiary of Gemstar,
and TV Guide, Inc.
(2) Proposal to amend the Gemstar 116,425,919 48,559,085 623,373
International Group Limited 1994 Stock
Incentive Plan to increase the number
of shares of Gemstar Common Stock
available for issuance from
80,000,000 shares to 110,000,000
shares.
</TABLE>
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Nasdaq National Market
The Company's Common Stock is currently traded on the Nasdaq National Market
("Nasdaq Stock Market") under the symbol GMST. The sole market for the
Company's Common Stock continues to be the Nasdaq Stock Market in the United
States.
On May 14, 1999, the Company effected a two-for-one stock split in the form
of a stock dividend to holders of record as of April 30, 1999. On December 13,
1999, the Company effected a two-for-one stock split in the form of a stock
dividend to holders of record as of November 29, 1999.
The following table sets forth the range of high and low sales prices for
the Company's Common Stock for the periods indicated and reflects all stock
splits effected by the Company:
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal Year Ended March 31, 1999
First Quarter.............................................. $ 11.44 $ 7.19
Second Quarter............................................. 12.06 7.75
Third Quarter.............................................. 17.30 9.63
Fourth Quarter............................................. 18.97 13.88
Fiscal Year Ended March 31, 2000
First Quarter.............................................. $ 33.81 $18.00
Second Quarter............................................. 40.56 24.63
Third Quarter.............................................. 79.50 33.31
Fourth Quarter............................................. 107.44 60.94
</TABLE>
The reported closing sales price of the Company's Common Stock on the Nasdaq
Stock Market on May 31, 2000 was $42.44. As of May 31, 2000, there were
208,480,000 shares of the Company's Common Stock outstanding and approximately
500 holders of record.
Dividends
The Company has not paid any dividends since its Common Stock began trading
on the Nasdaq Stock Market. The Company's Board of Directors has no current
plans to pay cash dividends. Future dividend policy will depend on the
Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Company's Board of Directors.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The Company completed mergers with NuvoMedia, Inc. ("NuvoMedia") and
SoftBook Press, Inc. ("SoftBook") in January 2000. Both mergers were accounted
for under the pooling of interests method and accordingly, the Company's
historical consolidated financial statements were restated for all periods
through the year ended March 31, 1999 to include the accounts and results of
operations of NuvoMedia and SoftBook. See Note 2 of the Notes to Consolidated
Financial Statements for a discussion of these business combinations. The
following information should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto, and Management's Discussion
and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------
1996 1997 1998 1999 2000
-------- -------- --------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues...................... $ 55,365 $ 82,997 $ 126,552 $168,166 $241,439
Operating costs and
expenses:
Selling and marketing....... 68,923 45,924 31,467 38,821 58,930
Research and development.... 17,462 16,930 15,495 21,648 24,273
General and administrative.. 25,162 25,701 19,634 24,248 31,416
Nonrecurring expenses(1).... -- -- 11,713 1,851 15,895
-------- -------- --------- -------- --------
Operating income (loss)... (56,182) (5,558) 48,243 81,598 110,925
Other income, net............. 2,650 5,161 7,317 8,736 13,688
Income (loss) before income
taxes........................ (53,532) (397) 55,560 90,334 124,613
Income taxes.................. 5,497 8,369 20,433 30,189 43,296
-------- -------- --------- -------- --------
Net income (loss)............. $(59,029) $ (8,766) $ 35,127 $ 60,145 $ 81,317
======== ======== ========= ======== ========
Basic earnings (loss) per
share(2)..................... $ (0.35) $ (0.05) $ 0.18 $ 0.30 $ 0.40
======== ======== ========= ======== ========
Weighted average shares
outstanding(2)............... 167,715 187,861 193,020 198,568 205,635
Diluted earnings (loss) per
share(2)..................... $ (0.35) $ (0.05) $ 0.17 $ 0.26 $ 0.33
======== ======== ========= ======== ========
Weighted average shares
outstanding, assuming
dilution(2).................. 167,715 187,861 206,191 229,182 247,876
======== ======== ========= ======== ========
<CAPTION>
March 31,
-----------------------------------------------
1996 1997 1998 1999 2000
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............... $ 25,477 $ 53,846 $ 110,395 $190,296 $313,917
Total assets.................. 96,513 131,525 187,200 256,979 467,171
Shareholders' equity.......... 34,246 53,631 103,630 185,160 385,657
</TABLE>
--------
(1) Nonrecurring expenses for the year ended March 31, 1998 consisted of
merger related costs incurred as a result of the merger with StarSight
Telecast, Inc. Nonrecurring expenses for the year ended March 31, 1999
consisted of costs incurred in defending the Company against a hostile
takeover. Nonrecurring expenses for the year ended March 31, 2000
consisted of merger related costs incurred as a result of the mergers with
NuvoMedia and SoftBook.
(2) All share and per share data has been adjusted for the two-for-one stock
splits effected in May 1999 and December 1999.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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's primary source of revenues to date has been license
fees paid by consumer electronics manufacturers and publications for the
licensing of the VCR Plus+ technology and the right to print the PlusCode
Numbers, respectively, and licensing of the Gemstar Guide Technology. 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 and annual 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 on-going per unit license fees are earned based on units
shipped incorporating the Company's patented proprietary technologies and are
recognized in the period when the manufacturers' units shipped information is
available to the Company and collectiblity is reasonably assured. Revenues
from up-front license fees and annual license fees are recognized ratably over
the specified term of the particular license.
The Company actively pursues a licensing program to license its proprietary
and patented technologies for royalty payments. There is no assurance,
however, that the Company will be able to successfully negotiate license
agreements. Royalty revenue may fluctuate widely due to a number of factors
that the Company cannot predict or control such as the extent of use of the
Company's patented technology by third parties, the materiality of any
nonrecurring royalties received as a result of negotiated settlements for
products sold by manufacturers prior to entering into licensing agreements
with the Company, and the ultimate success of its licensing and litigation
activities.
Under certain situations, the Company may have to resort to legal
proceedings to protect its intellectual properties. The costs of patent
litigation can be material, and the institution of patent enforcement
litigation may also increase the risk of counterclaims alleging infringement
by the Company of patents held by third parties or seeking to invalidate
patents held by the Company.
The Company completed mergers with two electronic book companies, NuvoMedia,
Inc. ("NuvoMedia") and SoftBook Press, Inc. ("SoftBook") in January 2000. Both
mergers were accounted for under the pooling of interests method and
accordingly, the Company's historical consolidated financial statements were
restated for all periods through the year ended March 31, 1999 to include the
accounts and results of operations of NuvoMedia and SoftBook.
Prior to its mergers with NuvoMedia and SoftBook, the Company was organized
in a single operating segment for purposes of making operating decisions and
assessing performance, which was the licensing of its proprietary technologies
and systems. NuvoMedia and SoftBook were in the business of manufacturing and
distribution of electronic book hardware and content. Revenues for the
electronic book segment were immaterial for the periods presented. Operating
costs and expenses for the electronic book segment were $3,538,000,
$15,476,000 and $33,301,000 for the years ended March 31, 1998, 1999 and 2000,
respectively. The chief operating decision maker evaluates performance, makes
operating decisions and allocates resources based on financial data consistent
with the presentation in the accompanying consolidated financial statements.
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 the Company's Common Stock for each share of TV Guide
31
<PAGE>
Class A and B common stock. The exchange ratio is not subject to adjustment.
The transaction will be accounted for as a purchase. Shareholders of both
companies approved the merger at their respective shareholder meetings held in
March 2000. The transaction is pending government approval.
On May 14, 1999, the Company effected a two-for-one stock split in the form
of a stock dividend to holders of record as of April 30, 1999. On December 13,
1999, the Company effected a two-for-one stock split in the form of a stock
dividend to holders of record as of November 29, 1999. All share, per share,
stock option and warrant amounts herein have been restated to reflect the
effects of these splits.
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto. The following table presents
the Company's results of operations for the years ended March 31, 1998, 1999
and 2000. The results of operations for the years ended March 31, 1998 and
1999 have been restated for the effects of the mergers with NuvoMedia and
SoftBook accounted for under the pooling of interests method.
Statement of Income Data
(in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $126,552 $168,166 $241,439
Operating costs and expenses:
Selling and marketing.......................... 31,467 38,821 58,930
Research and development....................... 15,495 21,648 24,273
General and administrative..................... 19,634 24,248 31,416
Nonrecurring expenses.......................... 11,713 1,851 15,895
-------- -------- --------
Operating income............................. 48,243 81,598 110,925
Other income, net................................ 7,317 8,736 13,688
-------- -------- --------
Income before income taxes................... 55,560 90,334 124,613
Income taxes..................................... 20,433 30,189 43,296
-------- -------- --------
Net income................................... $ 35,127 $ 60,145 $ 81,317
======== ======== ========
</TABLE>
Revenues
Revenues were $126.6 million, $168.2 million, and $241.4 million for fiscal
years 1998, 1999 and 2000, respectively. The increase in revenues of 33% in
fiscal year 1999 and 44% in fiscal year 2000 was due primarily 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 Gemstar Guide Technology.
In October 1999, the Company received a favorable ruling by an American
Arbitration Association Panel in a breach of contract dispute with General
Instrument Corporation ("GI") and in March 2000, the panel provided the
Company with its preliminary findings of liability and guidelines for
estimating royalties earned for analog set-top boxes shipped by GI containing
the Company's proprietary technology under the subject license agreement with
GI. The second phase of the arbitration will focus on satellite boxes and
digital set-top boxes and is expected to proceed later this year. Based on the
arbitration panel's findings of liability and advice from the Company's
outside counsel, the Company recognized as revenue for the year ended March
31, 2000, earned royalties totaling $40 million, for analog set-top boxes
shipped by GI containing the Company's proprietary technology.
32
<PAGE>
Selling and Marketing Expenses
Selling and marketing expenses consist of advertising and marketing program
costs, contracted services and salaries of marketing personnel, as well as
operational costs required to support the interactive program guide data
broadcast system and content requirements.
Selling and marketing expenses were $31.5 million, $38.8 million, and $58.9
million for fiscal years 1998, 1999 and 2000, respectively. The increase in
selling and marketing expenses of 23% in fiscal year 1999 and 52% in fiscal
year 2000 was due primarily to marketing and support costs associated with the
Gemstar Guide Technology and the electronic book business of NuvoMedia and
SoftBook.
Research and Development Expenses
Research and development expenses were $15.5 million, $21.6 million and
$24.3 million for fiscal years 1998, 1999 and 2000, respectively. The increase
in research and development expenses of 40% in fiscal year 1999 and 12% in
fiscal year 2000 was due primarily to increased development costs associated
with the electronic book business of NuvoMedia and SoftBook, and to a lesser
extent, the Gemstar Guide Technology.
General and Administrative Expenses
General and administrative expenses were $19.6 million, $24.2 million and
$31.4 million for fiscal years 1998, 1999 and 2000, respectively. The increase
in general and administrative expenses of 24% in fiscal year 1999 and 30% in
fiscal year 2000 was due primarily to an increase in personnel cost to support
the Company's licensing business as well as legal expenses associated with
various litigation matters.
Nonrecurring Expenses
In connection with its mergers with NuvoMedia and SoftBook, the Company
recorded merger related costs totaling $15.9 million in the year ended March
31, 2000. These costs were comprised of fees for financial advisors, attorneys
and accountants, charges for inventory write down and purchase commitment
losses and other transaction costs. The Company recorded a nonrecurring charge
of $1.9 million in the year ended March 31, 1999, associated with defending
the Company against a hostile takeover. As a result of its merger with
StarSight, the Company recorded merger related costs totaling $11.7 million in
the year ended March 31, 1998. These costs were comprised of fees for
financial advisors, attorneys and accountants, severance and other transaction
costs.
Income Taxes
Income taxes were $20.4 million, $30.2 million and $43.3 million for fiscal
years 1998, 1999 and 2000, respectively. The Company's effective tax rate was
37%, 33% and 35% in fiscal years 1998, 1999 and 2000, 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, the availability of net operating loss carryforwards 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 March 31, 2000, the Company had cash and cash equivalents and short-term
marketable securities totaling $286.2 million and working capital of $313.9
million. Net cash provided by operating activities was $52.6 million, $51.5
million and $65.2 million for fiscal years 1998, 1999 and 2000, respectively.
The increase in net cash provided by operating activities in fiscal year 2000
was primarily the result of increased earnings, tax benefits associated with
stock options and timing of payments.
33
<PAGE>
Net cash used in investing activities was $62.5 million for fiscal year
2000, comprised of net purchases of marketable securities and other
investments of $52.9 million and additions to property and equipment and
intangible assets of $9.6 million. Net cash used in investing activities was
$34.0 million for fiscal year 1999, comprised of net purchases of marketable
securities of $29.4 million and additions to property and equipment and
intangible assets of $4.6 million. Net cash provided by investing activities
was $33.2 million for fiscal year 1998, comprised of net proceeds from
marketable securities of $46.1 million offset by additions to property and
equipment and intangible assets of $12.9 million. Additions to intangible
assets in fiscal year 1998 consisted primarily of a one-time payment for the
purchase of patents and invention rights related to the interactive program
guide technology.
Net cash provided by financing activities was $8.5 million, $13.9 million
and $50.6 million for fiscal years 1998, 1999 and 2000, respectively. The
Company received proceeds of $3.8 million, $14.8 million and $30.5 million in
fiscal years 1998, 1999 and 2000, respectively, from private sales of the
Company's Common Stock. Proceeds from stock option exercises were $17.6
million, $17.6 million and $19.9 million in fiscal years 1998, 1999 and 2000,
respectively. Proceeds from warrant exercises totaled $10.0 million and $0.1
million in fiscal years 1999 and 2000, respectively. Purchases of treasury
stock totaled $28.4 million in fiscal year 1999. The Company repurchased a
warrant from the warrant holder for $12.8 million in fiscal year 1998.
In August 1998, the Company's Board of Directors authorized the repurchase
by the Company of up to $100 million of its Common Stock. As of August 31,
1999, when the authorization expired, the Company had repurchased 2.8 million
shares of its Common Stock for $28.4 million. In April 2000, the Board
authorized a new repurchase plan to deal with certain elements of the TV Guide
merger agreement, but no shares have been repurchased pursuant to it, and it
is not expected that any shares will be repurchased.
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
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments and hedging activities. In
July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133. As amended by SFAS No. 137, SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
implementation of SAB 101 would be reported as a change in accounting
principle. In June 2000, the SEC issued SAB 101B which delays the
implementation date of SAB 101 until the fourth fiscal quarter of fiscal year
beginning after December 15, 1999.
In March 2000, the FASB issued FASB Interpretation No. 44 ("Interpretation
No. 44"), an interpretation of APB Opinion No. 25, Accounting for Certain
Transactions involving Stock Compensation. Interpretation No. 44 is effective
after July 1, 2000, but certain conclusions in Interpretation No. 44 cover
specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that Interpretation No. 44 covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying Interpretation No. 44
are recognized on a prospective basis from July 1, 2000.
34
<PAGE>
While the Company has not fully assessed the impact of the adoption of these
recently issued accounting pronouncements, the Company believes that adoption
of these accounting pronouncements will not have a significant impact on the
Company.
ITEM 7A. 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. The Company has not used derivative financial instruments in its
investment portfolio. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding this item is incorporated herein by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal
year, March 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding this item is incorporated herein by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal
year, March 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding this item is incorporated herein by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal
year, March 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding this item is incorporated herein by reference from the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the Company's fiscal
year, March 31, 2000.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1.
(a)(2) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
2.1 Parent Significant Shareholder Agreement, dated as of December 23,
1996, by and among StarSight Telecast, Inc., a California
corporation, and certain significant shareholders of Gemstar
International Group Limited (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)
4.3 Rights Amendments (Incorporated by reference to Exhibit 99/15 to
Gemstar's Form 8-K, filed February 8, 2000)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
10.38 Deferred Compensation Plan of Gemstar International Group Limited,
effective as of January 30, 2000. (Filed herewith)
10.39 Trust under the Deferred Compensation Plan (Rabbi Trust) of Gemstar
International Group Limited, effective as of January 30, 2000, by and
between Gemstar International Group Limited and any appointed
Subsidiary and Merrill Lynch Trust Company of California. (Filed
herewith)
21 Material Subsidiaries of Gemstar (Filed herewith)
23 Consent of KPMG LLP (Filed herewith)
27 Financial Data Schedule (Filed herewith)
</TABLE>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended March
31, 2000:
A report was filed on January 25, 2000 regarding a press release relating to
the Company's acquisitions of NuvoMedia, Inc. and SoftBook Press, Inc.
A report was filed on February 8, 2000 regarding the Company's merger with
TV Guide, Inc. Exhibits to this report included the merger agreement, bylaws,
voting agreements, stockholders agreement, amendment to employment agreement,
employment agreements, cross options, amendments to rights agreement, and
amendment to the merger agreement.
A report was filed on February 9, 2000 regarding the Company changing its
place of incorporation from the British Virgin Islands to the State of
Delaware.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GEMSTAR INTERNATIONAL GROUP LIMITED
(Registrant)
/s/ Henry C. Yuen
Date: June 28, 2000 By: _________________________________
Henry C. Yuen
Chairman of the Board, Chief
Executive Officer,
President and Director
(Principal Executive Officer)
/s/ Elsie Ma Leung
Date: June 28, 2000 By: _________________________________
Elsie Ma Leung
Chief Financial Officer and Director
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Henry C. Yuen Chairman of the Board, Chief June 28, 2000
____________________________________ Executive Officer,
Henry C. Yuen President and Director
/s/ Elsie Ma Leung Chief Financial Officer and June 28, 2000
____________________________________ Director
Elsie Ma Leung
/s/ Stephen A. Weiswasser Executive Vice President, June 28, 2000
____________________________________ General Counsel and
Stephen A. Weiswasser Director
Director
____________________________________
Thomas L. H. Lau
/s/ George F. Carrier Director June 28, 2000
____________________________________
George F. Carrier
/s/ Teruyuki Toyama Director June 28, 2000
____________________________________
Teruyuki Toyama
/s/ James E. Meyer Director June 28, 2000
____________________________________
James E. Meyer
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas B. Macrae Director June 28, 2000
____________________________________
Douglas B. Macrae
/s/ Perry A. Lerner Director June 28, 2000
____________________________________
Perry A. Lerner
</TABLE>
43
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000................. F-3
Consolidated Statements of Income for each of the years in the three-year
period ended March 31, 2000.............................................. F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for each of the years in the three-year period ended March 31, 2000...... F-5
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended March 31, 2000......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Gemstar International Group Limited:
We have audited the accompanying consolidated balance sheets of Gemstar
International Group Limited and subsidiaries as of March 31, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended March 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gemstar
International Group Limited and subsidiaries as of March 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 2000 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Los Angeles, California
May 31, 2000
F-2
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $185,723 $237,046
Marketable securities.................................... 29,711 49,145
Receivables, net......................................... 12,215 69,903
Prepaid expenses and other current assets................ 2,276 2,248
-------- --------
Total current assets................................... 229,925 358,342
Property and equipment, net................................ 3,407 5,169
Intangible assets, net..................................... 16,978 18,929
Marketable securities and other investments................ 4,002 74,814
Other assets............................................... 2,667 9,917
-------- --------
$256,979 $467,171
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses.................... $ 25,528 $ 41,004
Current portion of deferred revenue...................... 14,101 3,421
-------- --------
Total current liabilities.............................. 39,629 44,425
Deferred revenue, less current portion..................... 550 268
Deferred income taxes...................................... 30,429 34,801
Other liabilities.......................................... 1,211 2,020
Shareholders' equity:
Preferred Stock, par value $.01 per share. Authorized
150,000 shares, none issued............................. -- --
Common Stock, par value $.01 per share. Authorized
2,400,000 shares; issued 204,724 shares at March 31,
1999 and 210,543 shares at March 31, 2000............... 2,047 2,105
Additional paid-in capital............................... 250,078 333,667
(Accumulated deficit) retained earnings.................. (38,298) 40,857
Accumulated other comprehensive (loss) income............ (228) 37,467
Treasury stock, at cost (2,789 shares at March 31, 1999
and 2000)............................................... (28,439) (28,439)
-------- --------
Net shareholders' equity............................... 185,160 385,657
Commitments and contingencies (note 7).....................
-------- --------
$256,979 $467,171
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $126,552 $168,166 $241,439
Operating costs and expenses:
Selling and marketing............................ 31,467 38,821 58,930
Research and development......................... 15,495 21,648 24,273
General and administrative....................... 19,634 24,248 31,416
Nonrecurring expenses............................ 11,713 1,851 15,895
-------- -------- --------
Operating income............................... 48,243 81,598 110,925
Other income, net.................................. 7,317 8,736 13,688
-------- -------- --------
Income before income taxes..................... 55,560 90,334 124,613
Income taxes....................................... 20,433 30,189 43,296
-------- -------- --------
Net income..................................... $ 35,127 $ 60,145 $ 81,317
======== ======== ========
Basic earnings per share........................... $ 0.18 $ 0.30 $ 0.40
======== ======== ========
Diluted earnings per share......................... $ 0.17 $ 0.26 $ 0.33
======== ======== ========
Weighted average shares outstanding................ 193,020 198,568 205,635
Dilutive effect of:
Stock options.................................... 11,631 29,159 42,193
Warrants......................................... 1,540 1,455 48
-------- -------- --------
Weighted average shares outstanding, assuming
dilution.......................................... 206,191 229,182 247,876
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional earnings other Treasury stock Net
-------------- paid-in (accumulated Unearned comprehensive ---------------- shareholders'
Shares Amount capital deficit) compensation income (loss) Shares Amount equity
------- ------ ---------- ------------ ------------ ------------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1997................. 188,238 $1,882 $185,797 $(133,570) $(388) $ (90) -- $ -- $ 53,631
Comprehensive income:
Net income.......... -- -- -- 35,127 -- -- -- -- 35,127
Equity adjustment
from foreign
currency
translation......... -- -- -- -- -- (42) -- -- (42)
--------
Total
comprehensive
income............ 35,085
--------
Issuance of Common
Stock................ 1,186 12 3,749 -- -- -- -- -- 3,761
Exercise of stock
options.............. 6,623 66 17,506 -- -- -- -- -- 17,572
Tax benefit
associated with stock
options.............. -- -- 6,000 -- -- -- -- -- 6,000
Repurchase of
warrant.............. -- -- (12,807) -- -- -- -- -- (12,807)
Amortization of
unearned
compensation......... -- -- -- -- 388 -- -- -- 388
------- ------ -------- --------- ----- ------- ------ -------- --------
Balances at March 31,
1998................. 196,047 1,960 200,245 (98,443) -- (132) -- -- 103,630
Comprehensive income:
Net income.......... -- -- -- 60,145 -- -- -- -- 60,145
Equity adjustment
from foreign
currency
translation......... -- -- -- -- -- (96) -- -- (96)
--------
Total
comprehensive
income............ 60,049
--------
Issuance of Common
Stock................ 1,259 13 14,755 -- -- -- -- -- 14,768
Exercise of stock
options.............. 4,993 50 17,502 -- -- -- -- -- 17,552
Tax benefit
associated with stock
options.............. -- -- 7,600 -- -- -- -- -- 7,600
Exercise of warrant.. 2,425 24 9,976 -- -- -- -- -- 10,000
Purchases of treasury
stock................ -- -- -- -- -- -- (2,789) (28,439) (28,439)
------- ------ -------- --------- ----- ------- ------ -------- --------
Balances at March 31,
1999................. 204,724 2,047 250,078 (38,298) -- (228) (2,789) (28,439) 185,160
Comprehensive income:
Net income.......... -- -- -- 81,317 -- -- -- -- 81,317
Unrealized gains on
marketable
securities.......... -- -- -- -- -- 37,206 -- -- 37,206
Equity adjustment
from foreign
currency
translation......... -- -- -- -- -- 489 -- -- 489
--------
Total
comprehensive
income............ 119,012
--------
Issuance of Common
Stock................ 1,590 16 30,479 -- -- -- -- -- 30,495
Exercise of stock
options.............. 4,164 41 19,896 -- -- -- -- -- 19,937
Tax benefit
associated with stock
options.............. -- -- 33,090 -- -- -- -- -- 33,090
Exercise of
warrants............. 65 1 124 -- -- -- -- -- 125
Adjustment for change
in SoftBook Press,
Inc. year end........ -- -- -- (2,162) -- -- -- -- (2,162)
------- ------ -------- --------- ----- ------- ------ -------- --------
Balances at March 31,
2000................. 210,543 $2,105 $333,667 $ 40,857 $ -- $37,467 (2,789) $(28,439) $385,657
======= ====== ======== ========= ===== ======= ====== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 35,127 $ 60,145 $ 81,317
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 4,411 4,679 5,863
Deferred income taxes....................... 9,365 16,765 4,372
Amortization of unearned compensation....... 388 -- --
Tax benefit associated with stock options... 6,000 7,600 33,090
Changes in assets and liabilities:
Receivables............................... (71) (7,915) (57,688)
Prepaid expenses and other assets......... 1,057 (1,295) (7,071)
Accounts payable, accrued expenses and
other liabilities........................ (12,537) (5,062) 16,285
Deferred revenue.......................... 8,848 (23,454) (10,962)
-------- -------- ---------
Net cash provided by operating
activities............................. 52,588 51,463 65,206
-------- -------- ---------
Cash flows from investing activities:
Purchases of marketable securities and other
investments.................................. (18,480) (60,833) (157,676)
Maturities of marketable securities........... 64,618 31,463 104,799
Additions to property and equipment........... (951) (1,196) (4,191)
Additions to intangible assets................ (11,939) (3,392) (5,385)
-------- -------- ---------
Net cash provided by (used in) investing
activities............................. 33,248 (33,958) (62,453)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of Common Stock........ 3,761 14,768 30,495
Proceeds from exercise of stock options....... 17,572 17,552 19,937
Proceeds from exercise of warrants............ -- 10,000 125
Repurchase of warrant......................... (12,807) -- --
Purchases of treasury stock................... -- (28,439) --
-------- -------- ---------
Net cash provided by financing
activities............................. 8,526 13,881 50,557
-------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................... (42) (96) 175
-------- -------- ---------
Net increase in cash and cash
equivalents............................ 94,320 31,290 53,485
Cash and cash equivalents at beginning of year.. 60,113 154,433 185,723
Adjustment for change in SoftBook Press, Inc.
year end....................................... -- -- (2,162)
-------- -------- ---------
Cash and cash equivalents at end of year........ $154,433 $185,723 $ 237,046
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes.................... $ 4,740 $ 5,734 $ 4,324
======== ======== =========
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
In January 2000, the Company completed mergers with NuvoMedia, Inc. and
SoftBook Press, Inc. in stock-for-stock transactions accounted for under the
pooling of interests method (note 2).
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1998, 1999 and 2000
(1) Summary of Significant Accounting Policies and Practices
Description of Business
Gemstar International Group Limited ("Gemstar International Group") and its
wholly and majority owned subsidiaries (collectively the "Company") develops,
markets and licenses proprietary technologies and systems that simplify and
enhance consumers' interaction with electronics products and other platforms
that deliver video, programming information and other data.
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.
Domestication
In February 2000, the Company adopted a new certificate of incorporation and
bylaws and effected a domestication from the British Virgin Islands to the
State of Delaware. The number of authorized shares of Common Stock was
increased from 500,000,000 to 2,400,000,000. In addition, the number of
authorized shares of Preferred Stock was increased from 50,000,000 to
150,000,000.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Gemstar International Group and its wholly and majority owned subsidiaries.
For all periods presented the minority interest in majority owned subsidiaries
was immaterial. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include all highly liquid investments, such as certificates of
deposit and commercial paper, with original maturities of three months or
less. Cash and cash equivalents are maintained with several high credit
quality financial institutions. As part of its cash management process, the
Company performs periodic evaluations of the relative credit ratings of these
financial institutions. The Company has established guidelines relative to
diversification and maturities that attempt to maintain safety and liquidity.
These guidelines are reviewed periodically and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
losses on its cash and cash equivalents.
Marketable Securities
The Company classifies its investments in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term. Held-to-
maturity securities are those securities in which the Company has the intent
and ability to hold until maturity. All other securities not included in
trading or held-to-maturity categories are classified as available-for-sale.
The Company's investments in marketable debt securities are classified as
held-to-maturity and are reported at amortized cost. The Company's investments
in marketable equity securities are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses, net of any
applicable taxes, recorded in shareholders' equity.
F-7
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Investments
Investments with ownership interests of less than 20% are accounted for
under the cost method of accounting. Investments with ownership interests
between 20% and 50% are accounted for under the equity method of accounting.
Investments with ownership interests in excess of 50% are consolidated with
the Company.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment..... 3 to 8 years
Office furniture and
equipment.................. 3 to 8 years
Property and leasehold
improvements............... Shorter of estimated useful life or lease term
</TABLE>
Intangible Assets
Intangible assets consist of capitalized patent and trademark costs and
goodwill. Capitalized patent and trademark costs consist of direct costs
associated with obtaining and defending patents and trademarks. Patent and
trademark costs are amortized on a straight line basis over the estimated
useful lives of seven to ten years. Goodwill, which represents the excess of
cost over net assets acquired, is amortized on a straight line basis over five
years.
The Company assesses the recoverability of goodwill by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to undiscounted future operating cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Accounting for Stock Options
The Company accounts for its stock option plan under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation by electing to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and providing pro forma
disclosures regarding net income and earnings per share as if the fair value
method defined in SFAS No. 123 had been applied.
F-8
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars. Gains and losses resulting from translation are accumulated in a
separate component of shareholders' equity until the investment in the foreign
entity is sold or liquidated. The Company's transactions predominately occur
in U.S. dollars. Gains and losses on currency transactions were immaterial for
all periods presented.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and accrued expenses approximate
their fair value because of their short maturities. Held-to-maturity
marketable securities are reported at amortized cost which approximates their
fair value. Available-for-sale marketable securities are reported at their
fair value based on quoted market prices (note 7).
Revenue Recognition
Revenues from on-going per unit license fees are earned based on units
shipped incorporating the Company's patented proprietary technologies and are
recognized in the period when the manufacturers' units shipped information is
available to the Company and collectibility is reasonably assured. Revenues
from up-front license fees and annual license fees are recognized ratably over
the specified term of the particular license.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense
as incurred.
Nonrecurring Expenses
In connection with its mergers with NuvoMedia and SoftBook, the Company
recorded merger related costs totaling $15.9 million in the year ended March
31, 2000. These costs were comprised of fees for financial advisors, attorneys
and accountants, charges for inventory write down and purchase commitment
losses and other transaction costs. The Company recorded a nonrecurring charge
of $1.9 million in the year ended March 31, 1999, associated with defending
the Company against a hostile takeover. As a result of its merger with
StarSight, the Company recorded merger related costs totaling $11.7 million in
the year ended March 31, 1998. These costs were comprised of fees for
financial advisors, attorneys and accountants, severance and other transaction
costs (note 2).
Other Income
Other income is comprised primarily of net interest income totaling
$6,954,000, $9,072,000 and $14,443,000 for the years ended March 31, 1998,
1999 and 2000, respectively.
F-9
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry- forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is recorded to reduce deferred tax
assets to their estimated realizable value.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share
includes the dilutive effect of stock options and warrants using the treasury
stock method.
Stock Splits
On May 14, 1999, the Company effected a two-for-one stock split in the form
of a stock dividend to holders of record as of April 30, 1999. On December 13,
1999, the Company effected a two-for-one stock split in the form of a stock
dividend to holders of record as of November 29, 1999. All share, per share,
stock option and warrant amounts herein have been restated to reflect the
effects of these splits.
Comprehensive Income
During the years ended March 31, 1998, 1999 and 2000, comprehensive income
consisted of net income, unrealized gains on marketable securities and the
equity adjustment from foreign currency translation. Accumulated other
comprehensive (loss) income presented on the accompanying consolidated balance
sheets consists of unrealized gains on marketable securities and cumulative
translation adjustments.
Segment Information
Prior to its mergers with NuvoMedia and SoftBook, the Company was organized
in a single operating segment for purposes of making operating decisions and
assessing performance, which was the licensing of its proprietary technologies
and systems. NuvoMedia and SoftBook were in the business of manufacturing and
distribution of electronic book hardware and content. Revenues for the
electronic book segment were immaterial for the periods presented. Operating
costs and expenses for the electronic book segment were $3,538,000,
$15,476,000 and $33,301,000 for the years ended March 31, 1998, 1999 and 2000,
respectively. The chief operating decision maker evaluates performance, makes
operating decisions and allocates resources based on financial data consistent
with the presentation in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments and hedging activities. In
July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133. As amended by SFAS No. 137, SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000.
F-10
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
implementation of SAB 101 would be reported as a change in accounting
principle. In June 2000, the SEC issued SAB 101B which delays the
implementation date of SAB 101 until the fourth fiscal quarter of fiscal years
beginning after December 15, 1999.
In March 2000, the FASB issued FASB Interpretation No. 44 ("Interpretation
No. 44"), an interpretation of APB Opinion No. 25, Accounting for Certain
Transactions involving Stock Compensation. Interpretation No. 44 is effective
after July 1, 2000, but certain conclusions in Interpretation No. 44 cover
specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that Interpretation No. 44 covers events occurring during
the period after December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying Interpretation No. 44
are recognized on a prospective basis from July 1, 2000.
While the Company has not fully assessed the impact of the adoption of these
recently issued accounting pronouncements, the Company believes that adoption
of these accounting pronouncements will not have a significant impact on the
Company.
Reclassifications
Certain reclassifications have been made to prior years financial
information to conform with the current year presentation.
(2) Business Combinations
In January 2000, the Company completed mergers with NuvoMedia and SoftBook.
The Company exchanged 5.5 million shares of Common Stock for all of the
outstanding capital stock of these companies. In addition, the Company assumed
all outstanding NuvoMedia and SoftBook stock options which were converted to
options to purchase 0.7 million shares of Common Stock. 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. All significant intercompany balances and
transactions between the Company and NuvoMedia and SoftBook have been
eliminated.
Prior to the combinations, the fiscal year end for SoftBook was December 31.
In recording the business combinations, the financial statements of SoftBook
were conformed to the Company's fiscal year end of March 31. As a result, the
Company recorded a retained earnings charge of $2,162,000 in fiscal year 2000
for SoftBook's net loss during the three months ended March 31, 1999 which
included revenues of $171,000.
F-11
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Business Combinations (Continued)
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
<TABLE>
<CAPTION>
Year ended March Nine months
31, ended
------------------ December 31,
1998 1999 1999
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Revenues:
Gemstar International Group............... $126,552 $166,456 $152,123
NuvoMedia and SoftBook.................... -- 1,710 5,323
-------- -------- --------
Combined................................ $126,552 $168,166 $157,446
======== ======== ========
Net income (loss):
Gemstar International Group............... $ 38,707 $ 73,915 $ 73,843
NuvoMedia and SoftBook.................... (3,580) (13,770) (19,857)
-------- -------- --------
Combined................................ $ 35,127 $ 60,145 $ 53,986
======== ======== ========
</TABLE>
In May 1997, the Company completed its merger with StarSight in a business
combination accounted for under the pooling of interests method. The Company
exchanged 62.1 million shares of Common Stock for all of the outstanding
capital stock of StarSight. In addition, the Company assumed all outstanding
StarSight stock options which were converted to options to purchase 5.5
million shares of Common Stock. The Company also assumed all outstanding
StarSight warrants which were converted to warrants to purchase 7.3 million
shares of Common Stock at exercise prices ranging from $3.09 to $14.44 per
share.
In January 1998, the Company repurchased a warrant to purchase 2.4 million
shares of Common Stock for $12.8 million in cash. The Company accounted for
the repurchase of the warrant as a reduction in additional paid-in-capital. In
October 1998, warrants to purchase 2.4 million shares of Common Stock expired.
In January 1999, a warrant holder exercised a warrant to purchase 2.4 million
shares of Common Stock for $10.0 million in cash. There were no warrants
outstanding at March 31, 2000.
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 the Company's 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. Shareholders of both
companies approved the merger at their respective shareholder meetings held in
March 2000. The transaction is pending government approval.
(3) Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Current.............................................. $11,068 $13,424 $38,924
Deferred............................................. 9,365 16,765 4,372
------- ------- -------
Total.............................................. $20,433 $30,189 $43,296
======= ======= =======
</TABLE>
F-12
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes (Continued)
A reconciliation of the expected U.S. federal income taxes to the provision
for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Expected U.S. federal income tax................. $19,446 $31,617 $43,615
State taxes, net of federal benefit.............. 808 2,190 3,025
Merger costs and other non-deductible expenses... 995 -- 3,419
Foreign income taxed at different rates.......... 1,891 1,575 (2,272)
Change in valuation allowance.................... (2,707) (5,193) (4,491)
------- ------- -------
Total.......................................... $20,433 $30,189 $43,296
======= ======= =======
</TABLE>
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated
financial statements. The tax effects of temporary differences that give rise
to significant portions of deferred tax assets and liabilities are presented
below (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue..................................... $ 4,832 $ 5,426
Net operating losses available for carryforward to
future periods...................................... 37,483 72,126
Tax credits available for carryforward to future
periods............................................. 5,007 6,200
Accrued expenses and other reserves.................. 4,177 10,056
Intangible assets.................................... 9,893 8,982
Other................................................ 654 565
-------- --------
Gross deferred tax assets.............................. 62,046 103,355
Valuation allowance.................................... (56,901) (75,828)
-------- --------
Net deferred tax assets................................ 5,145 27,527
Deferred tax liability provided on intercompany
income................................................ (35,574) (62,328)
-------- --------
Net deferred tax liability......................... $(30,429) $(34,801)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income in specific tax
jurisdictions during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections of future taxable income over the periods which the deferred tax
assets are deductible, management has concluded that it is more likely than
not that the Company will realize the benefits of these deductible differences
at March 31, 2000, net of the valuation allowance established.
A valuation allowance has been provided for deferred tax assets of
approximately $28.8 million as of March 31, 2000 pertaining to certain net
operating loss carryforwards primarily resulting from the exercise of employee
stock options. When recognized, the tax benefit for these deferred tax assets
will be accounted for as a credit to additional paid-in-capital rather than a
reduction of the provision for income taxes.
F-13
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes (Continued)
As of March 31, 2000, the Company had available net operating loss
carryforwards aggregating approximately $193 million to offset future United
States income taxes expiring through fiscal year 2020. At March 31, 2000, the
Company had available foreign tax credit carryforwards aggregating
approximately $6 million to offset future United States income taxes expiring
through fiscal year 2005.
As a result of previous transactions which involved an ownership change as
defined in the applicable section of the Internal Revenue Code, the Company
will be subject to limitations on the use of its net operating loss and tax
credit carryforwards. Accordingly, there can be no assurance that a
significant amount of the existing net operating loss and tax credit
carryforwards will ultimately be utilized by the Company.
The United States 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.
(4) Stock Incentive Plan
Pursuant to the Company's 1994 Stock Incentive Plan as amended, (the
"Plan"), the Company's Compensation Committee may grant stock options to
purchase Common Stock of the Company to employees of the Company (including
executive officers) and certain other persons (including directors and
consultants) who are eligible to participate in the Plan. Subject to early
termination or acceleration provisions, a stock option generally will be
exercisable, in whole or in part, from the date specified in the related award
agreement until the expiration date determined by the Compensation Committee.
In no event, however, is a stock option exercisable after ten years from its
date of grant.
In connection with the mergers with NuvoMedia and SoftBook, the Company
assumed all outstanding NuvoMedia and SoftBook stock options. Information
concerning stock options has been restated on an equivalent share basis.
As of March 31, 2000, the number of shares of Common Stock reserved for
issuance under the Plan was 110,000,000 shares. At March 31, 2000, there were
45,323,000 shares available for future option grants under the Plan.
F-14
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Stock Incentive Plan (Continued)
The following table summarizes information about stock option transactions
(shares in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 25,561 $3.07 51,609 $ 4.84 50,097 $ 5.57
Granted................. 33,580 5.73 5,593 10.49 4,835 29.86
Exercised............... (6,623) 2.65 (4,993) 3.52 (4,164) 4.79
Cancelled............... (909) 4.11 (2,112) 5.64 (835) 6.10
------ ------ ------
Outstanding at end of
year................... 51,609 4.84 50,097 5.57 49,933 7.98
====== ====== ======
Options exercisable at
end of year............ 17,970 3.32 22,458 4.19 26,170 4.72
====== ====== ======
</TABLE>
The following table summarizes information about the Company's stock
options outstanding as of March 31, 2000 (shares in thousands):
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------- -------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Years of Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices of Shares Life Price of Shares Price
------------------------ --------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.18-$5.00............. 16,104 5.8 $ 3.19 14,654 $ 3.11
$5.01-$10.00............ 24,326 7.9 6.12 10,711 6.23
$10.01-$15.00........... 4,843 8.3 10.87 719 11.43
$15.01-$30.00........... 4,020 9.2 28.97 29 15.79
$30.01-$69.53........... 640 9.5 45.33 57 45.23
------ ------------
Total................... 49,933 7.4 7.98 26,170 4.72
====== ============
</TABLE>
The per share weighted-average fair value of stock options granted during
the years ended March 31, 1998, 1999 and 2000, was $4.25, $8.54, and $23.93,
respectively. The fair value of each option was estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Year ended
March 31,
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield.................................... --% --% --%
Risk-free interest rate.................................... 5.8% 5.4% 5.8%
Expected volatility........................................ 79% 75% 73%
Expected life (years)...................................... 6.4 9.0 8.9
</TABLE>
F-15
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Stock Incentive Plan (Continued)
The Company applies APB Opinion No. 25, and related interpretations, in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been changed to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Net income:
As reported................... ................... $35,127 $60,145 $81,317
Pro forma......................................... 14,534 23,907 41,092
Basic earnings per share:
As reported....................................... 0.18 0.30 0.40
Pro forma......................................... 0.08 0.12 0.20
Diluted earnings per share:
As reported....................................... 0.17 0.26 0.33
Pro forma......................................... 0.07 0.10 0.17
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not likely to be representative of pro forma
effects on reported net income for future years.
(5) 401(k) Plan
The Company has a 401(k) benefit plan ("401(k) Plan") allowing an employee
to contribute up to a maximum of 15% of gross salary, subject to applicable
IRS limits. The Company will match the employee's contributions based on
certain percentages of the employee's contributions. The Company made
contributions of $50,000, $82,000 and $79,000 to the 401(k) Plan during the
years ended March 31, 1998, 1999 and 2000, respectively.
(6) Deferred Compensation Plan
In January 2000, the Company established a non-qualified deferred
compensation plan to permit eligible key executives to annually elect to defer
up to 100% of their cash compensation on a pre-tax basis. The retirement
benefit to be provided is based on the amount of compensation deferred and
earnings on the deferrals. The expense associated with the deferred
compensation plan was $129,000 for the year ended March 31, 2000.
(7) Selected Balance Sheet Accounts
Marketable securities consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------
1999 2000
------- --------
<S> <C> <C>
Corporate debt securities.................................. $29,711 $ 22,589
U.S. government securities................................. 4,002 41,779
------- --------
Total held-to-maturity securities.......................... 33,713 64,368
Available-for-sale marketable equity securities............ -- 48,500
------- --------
Total.................................................... $33,713 $112,868
======= ========
</TABLE>
F-16
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Selected Balance Sheet Accounts (Continued)
The held-to-maturity securities were reported at amortized cost which
approximated fair value at March 31, 1999 and 2000. At March 31, 2000, debt
securities totaling $49,145,000 were due in one year or less and debt
securities totaling $15,223,000 were due in one to two years. The available-
for-sale securities were reported at fair value and at March 31, 2000 include
unrealized gains of $37,206,000.
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Machinery and equipment.................................. $ 5,769 $ 6,386
Office furniture and equipment........................... 7,160 9,928
Property and leasehold improvement....................... 1,228 1,690
-------- --------
14,157 18,004
Less accumulated depreciation and amortization........... (10,750) (12,835)
-------- --------
Property and equipment, net.............................. $ 3,407 $ 5,169
======== ========
</TABLE>
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Patents and trademarks................................... $ 25,377 $ 30,036
Goodwill................................................. 1,790 2,516
-------- --------
27,167 32,552
Less accumulated amortization............................ (10,189) (13,623)
-------- --------
Intangible assets, net................................... $ 16,978 $ 18,929
======== ========
</TABLE>
Amortization expense was $2,251,000, $2,957,000 and $3,434,000 for the years
ended March 31, 1998, 1999 and 2000, respectively.
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------
1999 2000
------- -------
<S> <C> <C>
Accrued payroll and related benefits........................ $ 6,822 $ 9,033
Accrued marketing and promotional expenses.................. 6,000 3,650
Accrued purchase commitment losses.......................... -- 2,500
Accounts payable and other accrued expenses................. 12,706 25,821
------- -------
Total..................................................... $25,528 $41,004
======= =======
</TABLE>
F-17
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Commitments and Contingencies
The Company leases various facilities under long-term noncancelable
operating leases. Future minimum payments under operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
Year ended March 31:
2001............................................................... $ 4,206
2002............................................................... 4,096
2003............................................................... 3,321
2004............................................................... 3,065
2005............................................................... 2,425
Thereafter......................................................... 12,677
-------
Total............................................................ $29,790
=======
</TABLE>
Rent expense under operating leases was $1,846,000, $1,872,000 and
$2,511,000, for the years ended March 31, 1998, 1999 and 2000, respectively.
The Company has an agreement to purchase data transmission services. Future
minimum payments under the data transmission services agreement, which expires
in December 2001, are $1,240,000 and $930,000 for the years ended March 31,
2001 and 2002, respectively. Fees under the agreement were $1,240,000 for each
of the years in the three-year period ended March 31, 2000.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their businesses. In the opinion of the Company,
the resolution of such matters will not have a material effect on its
financial position, results of operations, or liquidity.
(9) Related Party Transactions
The Company continues to maintain service relationships with certain
subsidiaries of Gemstar Manufacturing Holding Limited, a former wholly owned
subsidiary ("Holdings"). Certain directors of the Company are significant
shareholders of Holdings. Pursuant to the services agreements, the Holdings
subsidiaries provide marketing and promotion services for the Company in their
respective territories in connection with the Company's systems, maintain
relationships with licensees and promote and monitor the publication of the
PlusCode numbers. Service fees paid to these companies totaled $8,178,000,
$6,527,000 and $6,454,000 for the years ended March 31, 1998, 1999 and 2000,
respectively.
F-18
<PAGE>
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Business Segment Reporting
A summary of the Company's revenues, operating income and identifiable
assets by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States................................... $ 80,708 $ 97,087 $144,235
Foreign(1)...................................... 45,844 71,079 97,204
-------- -------- --------
Total......................................... $126,552 $168,166 $241,439
======== ======== ========
Operating income(2):
United States................................... $ 20,508 $ 32,770 $ 42,068
Foreign......................................... 27,735 48,828 68,857
-------- -------- --------
Total......................................... $ 48,243 $ 81,598 $110,925
======== ======== ========
<CAPTION>
March 31,
--------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
United States................................... $ 71,100 $ 79,305 $436,606
Foreign(3)...................................... 116,100 177,674 30,565
-------- -------- --------
Total......................................... $187,200 $256,979 $467,171
======== ======== ========
</TABLE>
--------
(1) Revenues from license fees included in foreign are principally earned by
entities in the British Virgin Islands.
(2) Operating income consists of total revenues less operating expenses and
does not include other income.
(3) Identifiable assets included in foreign are principally held by entities
in the British Virgin Islands.
The Company had revenues attributed to individual customers in excess of 10%
of total revenues as follows:
<TABLE>
<CAPTION>
Year ended
March 31,
----------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Customer A.................................................... 12% 17% 11%
Customer B.................................................... 21% 10% 10%
Customer C.................................................... -- 13% --
Customer D.................................................... -- 14% 10%
Customer E.................................................... -- -- 17%
</TABLE>
F-19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
2.1 Parent Significant Shareholder Agreement, dated as of December 23,
1996, by and among StarSight Telecast, Inc., a California
corporation, and certain significant shareholders of Gemstar
International Group Limited (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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
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)
10.38 Deferred Compensation Plan of Gemstar International Group Limited,
effective as of January 30, 2000. (Filed herewith)
10.39 Trust under the Deferred Compensation Plan (Rabbi Trust) of Gemstar
International Group Limited, effective as of January 30, 2000, by and
between Gemstar International Group Limited and any appointed
Subsidiary and Merrill Lynch Trust Company of California. (Filed
herewith)
21 Material Subsidiaries of Gemstar (Filed herewith)
23 Consent of KPMG LLP (Filed herewith)
27 Financial Data Schedule (Filed herewith)
</TABLE>
