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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, 1999
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-26878
GEMSTAR INTERNATIONAL GROUP LIMITED
(Exact name of registrant as specified in its charter)
British Virgin Islands N/A
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
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:
Ordinary Shares, 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. [_]
As of June 14, 1999 there were outstanding 99,938,000 of the registrant's
ordinary shares, par value $.01 per share ("Ordinary Shares") which is the
only Class of Ordinary Shares of the registrant. As of June 14, 1999, the
aggregate market value of Ordinary Shares held by non-affiliates of the
Company was approximately $3.8 billion, based on the closing sale price of $56
per share as reported by Nasdaq National Market System. Ordinary Shares 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 Company's definitive Proxy Statement related to the 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after March 31, 1999, 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+, was introduced in 1990
and is widely accepted as a de facto industry standard for programming VCRs
and is currently incorporated into virtually every major brand of VCR sold
worldwide. VCR Plus+ enables consumers to record a television program by
simply entering a PlusCode Number (a proprietary one to eight digit) 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.
During the Company's fiscal year 1999, the Company executed long-term
renewals of license agreements with key licensees of the VCR Plus+ technology,
including Sony Corporation ("Sony") and Thomson Consumer Electronics, Inc.
("Thomson"). The Company also continued its international expansion by
launching VCR Plus+ in Mexico, the 40th country in which VCR Plus+ is offered.
The Company has also developed and acquired a large portfolio of
technologies and intellectual property necessary to implement interactive
program guides (the "Gemstar Guide Technology") which enable consumers to
navigate through, sort, select and record television programming. The Gemstar
Guide Technology has been licensed for, or incorporated into, televisions,
VCRs, TV-VCR combination units, cable set top boxes, integrated satellite
receiver decoders, personal computers, PCTVs and Internet appliances and
interactive services provided thereon. The Company believes that with the
increase in programming content and number of accessible channels, the Gemstar
Guide Technology will become an increasingly important tool for assisting
consumers in sorting, selecting and recording television programming.
During the fiscal year 1999 and continuing into fiscal year 2000, the
Company has continued to license the Gemstar Guide Technology. In May 1999,
the Company entered into a long-term licensing agreement with America Online
("AOL"), pursuant to which AOL was granted a license to use the Gemstar Guide
Technology to develop its own customized interactive programming guides for
AOL TV. In March 1999, the Company entered into an agreement with US West in
which US West agreed to exclusively deploy the Gemstar Guide Technology in
digital set-top boxes to customers of US West Choice TV(R). In January 1999,
Thomson announced the expansion of the Gemstar Guide Technology into over 50
television models. In November 1998, the Company entered into an agreement
with Sony in which Sony agreed to exclusively incorporate Gemstar's
interactive program guides into its televisions shipped in 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 into all of its satellite and digital terrestrial set
top boxes in the United States, Canada and Japan.
The Company believes that its interactive program guides are an attractive
vehicle for the delivery of advertising and other content to consumers. In
July 1998, the National Broadcasting Corporation ("NBC") became the charter
advertiser on the Company's interactive program guides and a strategic partner
for the delivery of value-added services on the Company's guides. In the
multi-element strategic agreement, NBC and the Company agreed to develop and
promote interactive program guide services. In February 1999, the Company
announced that TDN, Inc. ("TDN"), a joint venture of which the Company is the
majority shareholder, among
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the Company, Thomson and NBC, will be responsible for sales and distribution
of interactive advertising and services on the Company's interactive program
guides.
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 to a lesser extent, 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, one-time, up-front license fees. In
addition, the Company pursues a recurring revenue model for its proprietary
Gemstar Guide Technology wherein the Company receives revenues from the
delivery of advertising and promotion displayed on the guides, from
sponsorship of guide pages and from data services and interactive transactions
accessed through the guide. The Company does not charge consumers set-up or
subscription fees for the use of the guide and encourages its licensed Service
Providers to 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."
The Company believes that successful implementation of its technology into 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. The Company has entered into several strategic relationships to
cover multiple interactive program guide platforms. In November 1997, the
Company signed a multi-year agreement with Thomson, the United States' largest
manufacturer and marketer of television receivers and related video products,
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. 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. In September 1998, the Company
entered into a letter of intent 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 program guides. The Company owns a
majority interest in the joint venture and will additionally receive a
percentage of sales as royalty.
The Company's licensees include: Aiwa Company, Ltd.; Akai Electronics Co.,
Ltd.; AOL; Cox Cable Communications; Daewoo Electronics Company, Ltd.; Funai
Electric Co., Ltd.; GTE Communications Systems; Hitachi Corporation, Ltd.;
Hughes Network Systems; JVC; LG Electronics; Matsushita Electric Industrial
Co., Ltd. (Panasonic); Microsoft; Mitsubishi Electric Corporation; Orion
Electric Company, Ltd.; Philips/Magnavox; Pioneer Electronics Corp.; Samsung
Electronics Company, Ltd.; Sanyo Electric Co., Ltd.; Scientific-Atlanta; Sharp
Corporation; Shintom Co. Ltd.; Sony; SNET Personal Vision, Inc.; Thomson
(Proscan, RCA, GE); Time Warner Cable; Toshiba Corporation; Uniden America
Corporation; and Zenith Electronics Corporation.
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.
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"), the
shareholders of which were the same as the Company's shareholders, and the
Company operated internationally through its various subsidiaries incorporated
outside of the United States. In June 1995, the
2
Company consolidated its U.S. and international licensing operations by
acquiring GDC. In May 1997, the Company acquired StarSight Telecast, Inc., a
California corporation ("StarSight").
In April 1999, the Board of Directors of the Company approved a two-for-one
stock split in the form of a stock dividend to record holders as of April 30,
1999 (the "Record Date"). In connection with the stock split, each stockholder
of the Company received one additional Ordinary Share of the Company for each
outstanding Ordinary Share owned at the close of business on the Record Date.
Stock certificates representing the additional shares of Ordinary Shares
issued in connection with the stock split were mailed to the stockholders of
record as of the Record Date on May 14, 1999.
Industry Overview
Television viewers today are faced with a daunting 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 satellite
broadcast systems now available in most areas of the U.S. can deliver over 200
channels. The 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 or terrestrial digital
broadcast 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 1998, was 73.7%, 56.4%, 59.7%, 82% and 65.7%, respectively.
Consumer Electronics Manufacturers Association, a sector of the Electronics
Industries Alliance estimates that, as of 1998, approximately 90% of the
television households in the U.S. owned VCRs.
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Electronic Industries Alliance estimated that consumer VCR sales in the U.S.
were over 18.1 million in 1998, an increase of 8.6% 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 Electronic
Industry Association, in 1998 consumer portable and table color television
sales in the U.S. were approximately 22.2 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 50 million or
more, and include televisions (26.4 million units per year in the U.S.,
including TV-VCR combination units), VCRs (18.1 million units per year in the
U.S.), set top cable boxes (7.01 million units per year in the U.S.),
integrated satellite receivers and decoders (4.5 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
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, provides an opportunity for
the Gemstar Guide Technology.
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.
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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 to aggressively 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 products 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. 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 is 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 set can become a de facto
industry standard. 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 Standard. 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. 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. The Company has established itself as an
independent licensor that does not directly compete with its 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. For example, the Company believes it can provide
additional value-added services to end users, such as on-screen advertising
and subscription services that can be accessed through its future installed
base of Company-licensed interactive program guides.
VCR Plus+
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 worldwide. VCR Plus+
is incorporated into VCRs and televisions by licensed consumer electronics
5
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 1998 the combined worldwide
circulation of all publications that contained PlusCode Numbers was over 330
million.
During the Company's fiscal year 1999, VCR Plus+ became available in Mexico,
the 40th country in which Gemstar's one-touch recording feature for taping
television programming is offered. Pursuant to an agreement with Groupo
Televisa S.A. ("Televisa"), the largest media company in the Spanish-speaking
world, Gemstar's PlusCode Numbers for Televisa's television listing will be
published in two dozen daily newspapers distributed throughout Mexico. During
the fiscal year, the Company also extended VCR Plus+ license agreements with
key licensees including Sony and Thomson.
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 will become mandatory on at least half of each
manufacturer's TV models with a picture size of 13 inches or greater that are
sold in the United States after July 1, 1999, and the remaining half of each
manufacturer's models by January 1, 2000. 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, some of which are not available in all implementations of
the Company's guides:
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.
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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, jbasketball, 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. In consumer electronics implementations of the Gemstar
Guide Technology, 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 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. AOL has signed a long-term license
agreement with the Company to use the Gemstar Guide Technology to develop
programming guides for AOL TV.
7
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:
Aiwa Company, Ltd. Nokia Technology GmbH Shintom Co., Ltd.
North American Philips
Akai Electric Co., Ltd. Corporation Sony Corporation
Daewoo Electronics Company,
Ltd. Orion Electric Company, Ltd. Thomson Consumer Electronics
Funai Electric Co., Ltd. Philips Electronics N.V. (Proscan, RCA, GE)
Goldstar Co., Ltd. Pioneer Electronics Corp. Toshiba Corporation
Samsung Electronics Company,
Hitachi Corporation, Ltd. Ltd. Victor Company of Japan, Ltd.
Matsushita Electric Industrial
Co., Ltd. Sanyo Electric Co., Ltd. Zenith Electronics Corporation
Mitsubishi Electric
Corporation Sharp Corporation
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:
Philips Consumer Electronics
Hitachi, Ltd. Company Thomson Multimedia S.A.
Matsushita Electric Industrial
Co., Ltd. Sanyo Electric Company, Ltd. (Proscan, RCA, GE)
(Panasonic) Sharp Corporation Victor Company of Japan, Ltd.
Mitsubishi Electric
Corporation Sony Corporation Zenith Electronics Corporation
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 incorporating the licensed
technology. License agreements with such manufacturers have terms which
typically range from three to seven years.
8
The Company licenses the Gemstar Guide Technology to Service Providers and
manufacturers in the cable, satellite and set-top box industries, including
the following:
Cable/Telecommunications Set-Top Box
Operators Satellite Manufacturers
------------------------ --------- -------------
Americast Hitachi Corporation, Ltd. Scientific-Atlanta
Cox Cable Communications Hughes Network Systems Sony Corporation
GTE Communications Systems Matsushita Consumer Electronics Company
Quadravision Sony Corporation
Time Warner Cable Toshiba Corporation
TKR Cable Company Thomson
US West Uniden America Corporation
Quadravision
Advertising
During fiscal year 1999, the Company derived approximately $150,000 of
revenue from the sale of advertising on its interactive program guides. In
July 1998, NBC and Gemstar entered into a multi-element strategic agreement to
develop and promote interactive program guide services and for NBC to acquire
a 5% equity interest, and certain warrants with respect to, TDN, a joint
venture of Gemstar and Thomson that develops advertising, promotion and
content services for Gemstar's interactive program guides. Pursuant to the
agreement, NBC provides data bandwidth in its television signal to support on-
demand interactive program guide data services, with its cable network, MSNBC,
becoming a branded data news channel of the interactive program guide. Gemstar
and NBC also agreed to work together to develop additional branded on-demand
content and transactional services focusing on various topics of interests to
television viewers. Pursuant to the agreement, NBC and its cable networks,
MSNBC and CNBC receive feature placement on the Company's interactive program
guides, with NBC as the charter advertiser of the on-demand service.
Additionally, NBC agreed to support a multi-million dollar national
advertising campaign to promote the Company's interactive program guide and
its services. In February 1999, the interactive advertising capability of the
Company's interactive program guides became activated nationwide with NBC as a
charter advertiser.
In January 1998, the Company entered into a cross-licensing agreement with
Microsoft pursuant to which Microsoft agreed to adopt the Gemstar Guide
Technology as part of its TV Viewer feature in the Windows 98 operating system
and in Microsoft products worldwide that incorporate interactive program
guides.
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 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 typically requires that licensees adhere to a set of
specifications for incorporating Gemstar technology in their products. The
specifications prescribe minimum functionality which must be implemented,
maximum permitted functionality, and certain functionalities or features which
require additional license fees or special licensing terms. The Company's
license agreements typically contain limitations on licensees' ability to
assert that the Company's technology infringes their intellectual property.
The Company intends to require software developer licensees to agree to obtain
such commitments from Service Providers to whom they supply software
incorporating Gemstar technology.
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,
9
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 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.
10
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.
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 guides technologies in consumer
electronics. The first element is a multi-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.
Microsoft. In January 1998, the Company entered into a long-term, worldwide
cross-licensing 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 license from the Company in current and future versions of
its Web TV Plus Internet terminals worldwide.
TDN. TDN is a joint venture, of which the Company is the majority
shareholder, among the Company, Thomson multimedia S.A. and NBC. TDN will be
responsible for sales and distribution of interactive advertising and services
on Gemstar's interactive program guides.
11
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 AOL TV interactive programming guides. 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 of the television experience. These guides are
intended to enable subscribers to sort programs by themes or categories, and
select shows for viewing or recording. Scheduled for launch next year, AOL TV
offers subscribers interactive services on the television platform.
Dentsu and Tokyo New 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.
US West. In March 1999, the Company entered into an agreement with US West
in which US West agreed to exclusively deploy the Gemstar Guide Technology in
digital set-top boxes to customers of US West Choice TV(R).
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 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 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 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 has introduced 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. See "Certain Factors Affecting
Business, Operating Results And Financial Condition."
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. 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.
12
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 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 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.
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 systems will
not expand the products to include interactive access to programming
information that will be competitive with the Company's interactive program
guides. See "--Certain Factors Effecting Business, Operating Results and
Financial Condition--Competition."
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.
Although the Company believes that its interactive program guides are in a
strong competitive position with respect to its known competitors, 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.
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
13
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 local storage and retrieval of television program information to
specific user interface, 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. 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 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.
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+, ShowView and G Code
are marks used in place of the mark VCR Plus+ in certain countries to avoid or
minimize conflicts in those countries), Guide Plus+, ShowGuide, ShowList, V-
Chip Plus+, Index Plus+, PlusCode, CallSet, iPlus+, SpotPlus+, Instant
Programmer, Control Tower and C/3/. The Company has U.S. copyright
registrations for the encoding and decoding 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 VCR- and television-related services and products is subject
to rapid and significant changes in technology and frequent new service and
product introductions. The Company believes that its future success will depend
on its ability to enhance its existing technologies and to introduce new
technologies on a competitive basis. Accordingly, the Company will continue to
engage in significant research and development activities. There can be no
assurance, however, that the Company will successfully complete the development
of any future technology or that such technology will be compatible with,
accepted by or incorporated in the technology or products of third parties. Any
significant delay or failure to develop new or enhanced technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Employees
The Company employed 211 individuals as of March 31, 1999, of whom 50 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.
14
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
Ordinary Shares.
Limited Growth of VCR Plus+ Revenues. While VCR Plus+ license fees have
increased in each year 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,
and the fact that the Company has already expanded into most major markets
worldwide. Any further growth in VCR Plus+ license revenues will come only
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 has only recently begun to develop, is rapidly evolving and is
increasingly competitive. Demand and market acceptance for the Company's
interactive program guides is subject to a high level of uncertainty and risk.
It is difficult for Gemstar to predict whether, or how fast, this market will
grow. Gemstar cannot guarantee either that the market for its interactive
program guides will continue to develop or that demand for such guides will be
sustainable. If the market develops more slowly than expected or becomes
saturated with competitors, or if its interactive program guides do not
sustain 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, and (v) bring technology to
market quickly at cost-effective prices. 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 derives a portion of
its revenues from the sale of advertising on its interactive program guides.
The Company's 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 and
measurement systems. No standards have yet been accepted 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.
In addition, adverse economic conditions can significantly impact advertisers'
ability and willingness to spend additional
15
amounts on advertising generally nor can the Company be certain that the
advertisers will determine that advertising on interactive program guides is
an effective advertising medium. Further, the Company competes with media such
as television, radio and print as well as Web site operators and advertising
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 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.
Anti-Takeover Defense Provisions. The Company's Amended and Restated
Articles of Association and Amended and Restated Memorandum of Association
contain certain provisions that can make it more difficult for a third party
to acquire, or 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 Ordinary Shares are entitled to one preferred share
purchase right for each outstanding Ordinary Share they hold, exercisable
under certain defined circumstances involving a potential change of control.
The foregoing provisions could limit the price that certain investors may be
willing to pay in the future for Ordinary 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. Such fees are
largely assessed based on unit shipment volumes of televisions, VCRs and other
devices incorporating the Company's technologies. Accordingly, the Company's
future operating results are substantially dependent on continued growth in
the video entertainment products category, and any decline in sales of
consumer electronics products employing the Company's technologies would have
an immediate and adverse impact on the Company's operating results. 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 would have a material adverse effect on
the Company's business, operating results and financial condition.
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
16
have incorporated the Company's systems into an increasing numbers of products
and models, the Company's license revenues have displayed a 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 guides, 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 which
incorporate the Company's technology into their products. The Company does not
manufacture such hardware itself. Most 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. Most of
the above-described license agreements may be terminated by the manufacturer
without substantial financial penalty.
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 no
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 a 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.
17
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 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, 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 can
be no assurance that these agreements will not be terminated, and upon
expiration, be renewed on terms acceptable to the Company or at all.
The Company's data broadcast through the vertical blanking interval can be,
and has been in certain markets, deleted or modified by local cable operators,
so that such data is degraded or unavailable to some consumers. The Company
may have to incur additional expense to activate alternative measures to
broadcast and allow end-users to receive such data, or the Company may have to
enter into further agreements with local cable operators to ensure
retransmission of required information. There can be no assurance that
alternative measures of broadcasting and receiving data would be acceptable,
or that agreements with cable operators could be reached or if reached, that
they would be 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, and
there can be no assurances that such system could be so modified in a
commercially acceptable manner.
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. The Company believes that delays
in the availability of set-top boxes incorporating new analog and digital
technology have caused many Service Providers to defer purchases of new set-
top boxes. Deployment of new set-top boxes has also been delayed by the high
cost of such devices 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 be no assurance that
the Company's agreements and arrangements with Service Providers will result
in the successful acceptance of the Gemstar Guide Technology or data services
by Service Providers or end-users.
18
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 a highly competitive and rapidly
evolving market. To compete successfully in this market, 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
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 these
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.
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
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 Prevue Channel and other passive on-screen electronic guides with which
the Company's interactive program guides may 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.
Several entities have announced PC- and Internet-based guide products which
have many features similar to the Company's interactive program guides. Among
others, Intel Corporation currently offers Smart Guide, a PC-based electronic
program guide licensed from Harman Interactive Group. The combination of these
PC- and Internet-based guides and the present and future widespread
availability of Internet-enabled consumer electronics devices (including
Internet-enabled TVs and set-top boxes) and integrated PC-centered home
entertainment systems could pose a significant competitive challenge to the
Company's products. While the Company believes that current PC- and Internet-
based program guides are less attractive to consumers because they lack the
ability to directly control televisions and VCRs, and involve a delay in
responding to user commands, it is possible that the performance and
functionality of PC- and Internet-based guides will be enhanced such that they
are able to compete with the Company's electronic program guides in the
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
19
television viewers 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, several products on
the market offer other simplified VCR programming functions and thus compete
with VCR Plus+. Such products include 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 discussed 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.
Dependence on Key Employees. The Company is dependent on certain key members
of its management, operations and development staff, including Henry C. Yuen,
its Chief Executive Officer, the loss of whose services could have a material
adverse effect on the Company. Although the Company has employment contracts
with such key employees, 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. 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 is currently a PFIC 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 is derived from the active conduct of a
trade or business and because the average value of assets producing passive
income is less than 50% of aggregate asset value. Characterization of royalty
income as active business income is based on the treatment of the Company's
operating subsidiaries, collectively, as the developer and licensor of the
proprietary products for purposes of this test. However, there is little
authority on which to rely in this area, and there can be no assurance that
the Internal Revenue Service will agree with this position. For purposes of
the assets test, the Company values its tangible and intangible assets on a
fair market basis. If the Company were a PFIC, a U.S. holder would be subject
to
20
increased tax liability upon the sale of the Company Ordinary Shares 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 will, 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, 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 depends in part on its ability to protect and maintain the
proprietary nature of its technology through a combination of patents, trade
secrets, trademarks, copyrights, licenses and other intellectual property
arrangements. The Company 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 issue or that a third party will
not violate, or attempt to invalidate, the Company's intellectual property
rights, possibly forcing the Company to expend substantial legal fees. An
adverse determination in any such dispute could result in the loss of the
company's proprietary rights, subject the Company to significant liabilities
and litigation costs or prevent the Company from licensing its technologies,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition. 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 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.
Holding Company Structure; Restrictions on Subsidiary Dividends. The Company
conducts all of its operations through subsidiaries. Accordingly, the primary
source of the Company's income is dividends and other distributions from its
subsidiaries. Some of the Company's subsidiaries were formed under and have
operations in countries other than the British Virgin Islands, the
jurisdiction of the Company's organization. In addition, each of the Company's
subsidiaries receives its revenues in either U.S. dollars or the local
currency of the jurisdictions in which it operates. As a consequence, the
Company's ability to obtain dividends or other distributions is subject to,
among other things, possible restrictions on dividends under applicable local
laws and
21
foreign currency exchange regulations of the jurisdictions in which its
subsidiaries operate. In addition, dividends or distributions from the
Company's U.S. subsidiary are subject to a 30% withholding tax, which makes
such dividends and distributions unattractive. The subsidiaries' ability to
pay dividends or make other distributions to the Company is also subject to
the subsidiaries having sufficient funds from their operations legally
available for the payment of dividends or other distributions which are not
needed to fund their operations, obligations or other business plans. Because
the Company is a shareholder of its subsidiaries, the Company's right to the
assets of such subsidiaries will be subordinated to the rights of all
creditors and claimants against its subsidiaries. Additionally, while the
Company has paid certain cash dividends to shareholders in the past, the
Company has no current plans to pay cash dividends, and there can be no
assurance that current or future laws of the British Virgin Islands will not
restrict or eliminate the ability of the Company to pay dividends to
shareholders.
Volatility of Stock Price. There has been a history of significant
volatility in the market price of the Company's Ordinary Shares on the Nasdaq
National Market, and it is likely that the market price of the Company's
Ordinary Shares 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 Ordinary
Shares to fluctuate substantially in the future. Sales of substantial amounts
of the Company's outstanding Ordinary Shares in the public market could
materially adversely affect the market price of the Ordinary Shares. 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 Ordinary Shares.
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field and
cannot distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated
with compliance.
Although the Company believes that its systems and products are Year 2000
compliant in all material respects, there can be no assurance that the
Company's current systems and products do not contain undetected errors or
defects with Year 2000 date functions that could result in a material adverse
effect on the Company's business, results of operations and financial
condition. Although the Company is not aware of any material operational
issues or costs associated with its internal systems for the Year 2000, there
can be no assurances that the Company will not experience unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems.
The Company's proprietary technologies and systems are licensed and
incorporated by third parties, such as consumer electronics manufacturers,
service providers and software developers into electronics products and
platforms that deliver video, programming information and other data. Failure
of such third party products, software or content to operate properly with
regard to the Year 2000 could require the Company to incur unanticipated
expenses to remedy any problems. There can be no assurance that the systems of
other companies on which the Company's products may rely will be Year 2000
compliant or that such failure by other companies to become Year 2000
compliant would not have an adverse effect on the Company's business, results
of operations and financial condition. In addition, the Company utilizes third
party equipment, software and content that may not be Year 2000 compliant.
Failure of such third party equipment, software or content to operate properly
with regard to the Year 2000 and thereafter, could require the Company to
incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
22
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
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; the Company's belief that it is Year 2000 compliant; 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 office facilities in Pasadena, California (covering
approximately 14,000 square feet); Fremont, California (63,000 square feet);
Bedford, Massachusetts (19,000 square feet); Kanata, Canada (19,000 square
feet) and Hong Kong (3,000 square feet). The leases have various expiration
dates through fiscal year 2003. The Company believes that its facilities are
adequate to meet the Company's needs for the foreseeable
23
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, United Video Satellite Group, Inc. ("United Video") and
its Tracker, Inc. subsidiary 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 United Video 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 interloctory decision finding this
patent enforceable over United Video's claim that this patent was obtained
through inequitable conduct. The Court also ordered the parties to participate
in a settlement conference which was held on March 31, 1999. To date there has
been no settlement reached by the parties. The Court has not yet ruled on the
remaining issues of validity or infringement of this patent.
On May 17, 1997, StarSight filed a Demand for Arbitration with the American
Arbitration Association ("AAA") in San Francisco, California, and by such
action commenced an arbitration action against General Instrument, Inc.
("GI"). The claims in the arbitration center upon GI's alleged delay in
deploying StarSight-capable set-top boxes, and GI's development of a competing
interactive program guide which allegedly uses StarSight patented technology,
confidential information and technical information in violation of a License
and Technical Assistance Agreement executed by the parties on October 1, 1992.
The arbitration is bifurcated into two phases. The first phase generally
covers issues related to GI's manufacture and sale of analog cable set-top
boxes, while the second phase generally covers issues related to GI's
manufacture and sale of digital cable and satellite set-top boxes. The
Arbitration Panel is required to issue a separate decision for each of the two
phases. The parties have completed a hearing with respect to the first phase.
A decision in connection with Phase I is anticipated before the end of August
1999. The hearing on the second phase is scheduled to occur in September 1999.
On August 5, 1997, TV Data Technologies, Inc. ("TV Data") filed a Demand for
Arbitration with the AAA in San Francisco, California, and by such action
commenced an arbitration action against StarSight. The claims in the
arbitration centered on two agreements whereby TV Data was to provide
StarSight with certain television program listing data and television and
cable channel lineup information. Effective August 30, 1998, StarSight and TV
Data settled the dispute. The settlement provides for a continuation of the
business relationship between StarSight and TV Data, but did not require the
payment of any damages.
On July 24, 1998, the Company, together with SuperGuide Corporation and
StarSight, filed an action against Prevue Networks, Inc. and, as amended, TCI
Communications, Inc. in the United States District Court for the Northern
District of California (San Jose Division). The suit seeks damages and
injunctive relief based upon the alleged infringement of two patents by
defendants' interactive program guide known as "Preview Interactive." This
case was subsequently transferred to the United States District Court for the
Northern District of Oklahoma. On December 23, 1998, the Company filed a
motion ("Motion To Consolidate") 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 Prevue Networks, Inc., be transferred to the Northern District of
Georgia for coordinated or consolidated pretrial proceedings with the action
pending in that district (the "MDL Transfer Order"). The initial case
management conference by the district court in Georgia has been set to occur
on June 29, 1999.
24
On November 30, 1998, the Company filed a patent infringement action against
GI in the United States 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 United States District
Court for the Central District of California. The suit seeks damages and
injunctive relief based upon the alleged infringement of two patents by
defendants' interactive program guide. This action is subject to the MDL
Transfer Order.
On December 3, 1998, Scientific Atlanta, Inc. ("SA") filed an action against
the Company in the United States District Court for the Northern District of
Georgia. The action alleges that the Company violated federal anti-trust laws
and misused certain patents. SA seeks damages, injunctive relief and a
declaration that certain patents are unenforceable, not infringed or invalid.
This case is subject to the MDL Transfer Order. The Company filed a motion to
stay the proceedings pending the outcome of the MDL Transfer Order and the
Court granted the Company's motion.
On December 4, 1998, the Company filed a patent infringement action against
SA in the United States 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 United States 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 Gemstar International Group
Limited and Gemstar Development Corporation in the Northern District of
Georgia, alleging infringement of U.S. Patent Nos. 4,885,775, 4,991,011, and
5,477,262, and seeking damages and injunctive relief.
On June 25, 1999, SA filed an action against StarSight, in the Northern
District of Georgia, seeking a declaratory judgement of invalidity and non-
infringement of U.S. Patent Nos. 5,479,268 and 4,706,121.
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.
The Company and its subsidiaries are from time to time also involved in
routine legal matters incidental to their businesses. In the opinion of the
Company, the resolution of such matters will not have a material effect on its
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Nasdaq National Market
The Company's Ordinary Shares began trading on the Nasdaq National Market
("Nasdaq Stock Market") on October 11, 1995, under the symbol GMSTF. After
receiving authorization from the Nasdaq Stock Market for the removal of the
foreign designation "F" from its symbol, effective February 10, 1999, the
Company began trading under the symbol GMST. The sole market for the Company's
Ordinary Shares continues to be the Nasdaq Stock Market in the United States.
The Ordinary Shares of the Company are not currently traded on any non-United
States trading market.
In April 1999, the Board of Directors of the Company approved a two-for-one
stock split in the form of a stock dividend to record holders as of April 30,
1999 (the "Record Date"). In connection with the stock split, each stockholder
of the Company received one additional Ordinary Share of the Company for each
outstanding Ordinary Share owned at the close of business on the Record Date.
Stock certificates representing the additional shares of Ordinary Shares
issued in connection with the stock split were mailed to the stockholders of
record as of the Record Date on May 14, 1999.
The following table sets forth, for the quarterly periods of the previous
two fiscal years, the high and low sales prices per share of Ordinary Shares
on the Nasdaq Stock Market as reported by Nasdaq and as adjusted for the
Company's two-for-one stock split completed in May 1999:
High Low
------ ------
Fiscal Year Ended March 31, 1998
First Quarter............................................... $10.75 $ 5.00
Second Quarter.............................................. 12.75 7.56
Third Quarter............................................... 13.06 9.31
Fourth Quarter.............................................. 18.69 10.38
Fiscal Year Ended March 31, 1999
First Quarter............................................... $22.88 $14.38
Second Quarter.............................................. 24.13 15.50
Third Quarter............................................... 34.59 19.25
Fourth Quarter.............................................. 37.94 27.75
The reported closing sales price of the Company's Ordinary Shares on the
Nasdaq Stock Market on June 14, 1999 was $56. As of June 14, 1999, there were
99,938,000 Ordinary Shares outstanding and approximately 200 holders of
record.
Dividends
The Company has not paid any dividends since its Ordinary Shares 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.
26
ITEM 6. SELECTED FINANCIAL DATA.
The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions 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, 1997 to include the
accounts and results of operations of VideoGuide and StarSight. 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.
Year ended March 31,
----------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues........................ $ 41,814 $ 55,365 $82,997 $126,552 $166,456
Operating costs and expenses:
Selling and marketing......... 24,970 68,923 45,924 30,993 33,588
Research and development...... 16,169 17,462 16,286 13,372 13,832
General and administrative.... 27,827 25,162 25,558 18,693 21,821
Nonrecurring expenses(1)...... -- -- -- 11,713 1,851
-------- -------- ------- -------- --------
Operating income (loss)...... (27,152) (56,182) (4,771) 51,781 95,364
Other income, net............... 2,391 2,650 5,156 7,359 8,740
-------- -------- ------- -------- --------
Income (loss) from continuing
operations before income
taxes.......................... (24,761) (53,532) 385 59,140 104,104
Income taxes.................... 3,681 5,497 8,369 20,433 30,189
-------- -------- ------- -------- --------
Income (loss) from continuing
operations..................... (28,442) (59,029) (7,984) 38,707 73,915
Income from discontinued
operations(2).................. 5,197 -- -- -- --
-------- -------- ------- -------- --------
Net income (loss)............... $(23,245) $(59,029) $(7,984) $ 38,707 $ 73,915
======== ======== ======= ======== ========
Basic earnings (loss) per
share(3):
Income (loss) from continuing
operations................... $ (0.36) $ (0.70) $ (0.09) $ 0.41 $ 0.76
Income from discontinued
operations................... 0.07 -- -- -- --
-------- -------- ------- -------- --------
Net income (loss)............. $ (0.29) $ (0.70) $ (0.09) $ 0.41 $ 0.76
======== ======== ======= ======== ========
Weighted average shares
outstanding(3)................. 79,584 83,857 93,413 95,309 97,548
======== ======== ======= ======== ========
Diluted earnings (loss) per
share(3):
Income (loss) from continuing
operations................... $ (0.36) $ (0.70) $ (0.09) $ 0.38 $ 0.66
Income from discontinued
operations................... 0.07 -- -- -- --
-------- -------- ------- -------- --------
Net income (loss)............. $ (0.29) $ (0.70) $ (0.09) $ 0.38 $ 0.66
======== ======== ======= ======== ========
Weighted average shares
outstanding, assuming
dilution(3).................... 79,584 83,857 93,413 101,526 112,486
======== ======== ======= ======== ========
March 31,
----------------------------------------------
1995 1996 1997 1998 1999
-------- -------- ------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital................. $ 25,700 $ 25,477 $53,976 $110,446 $189,941
Total assets.................... 64,457 96,513 131,276 186,078 253,164
Shareholders' equity(4)......... 39,916 34,246 53,717 103,482 183,971
- --------
(1) Nonrecurring expenses for the year ended March 31, 1998 consisted of
merger related costs incurred as a result of the acquisition of StarSight.
See Note 2 of the Notes to Consolidated Financial Statements for a
discussion of this business combination. Nonrecurring expenses for the
year ended March 31, 1999 consisted of costs incurred in defending the
Company against a hostile takeover.
(2) Discontinued operations for the year ended March 31, 1995 included a
nonrecurring tax benefit of $8.1 million.
(3) All share and per share data has been adjusted for the two-for-one stock
split completed in May 1999.
(4) Cash dividend of $0.06 per Ordinary Share was declared in the year ended
March 31, 1995.
27
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 to a lesser extent, 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, one-time, up-front license fees. In
addition, the Company pursues a recurring revenue model for its proprietary
Gemstar Guide Technology wherein the Company receives revenues from the
delivery of advertising and promotion displayed on the guides, from
sponsorship of guide pages and from data services and interactive transactions
accessed through the guide. To date the Company has not realized significant
revenues from advertising and sponsorship.
Revenues from up front license fees and annual license fees are recognized
ratably over the term of the particular license. Revenues from on-going per
unit license fees are recognized when payments are due, and generally, when
payments are actually received from the licensee. Revenues from advertising
will be recognized generally when delivered on an "impression" based program
or ratably over the term of the agreement, in the case of charter
sponsorships.
The Company acquired VideoGuide, Inc. ("VideoGuide") and StarSight Telecast,
Inc. ("StarSight") in December 1996 and May 1997, respectively. Both
acquisitions 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, 1997 to include the
accounts and results of operations of VideoGuide and StarSight. Both
VideoGuide and StarSight incurred substantial operating losses since their
inception through the date of acquisition by the Company. Due to these losses,
the restated financial results as reported contain significant marketing,
research and development, and general and administrative expenses resulting in
operating losses for all periods through the year ended March 31, 1997.
Recent Developments
In March 1999, the Company entered into a joint venture with Dentsu Inc. and
Tokyo News Service Limited. 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 guides in Japan. The Company owns a majority interest in
Interactive Program Guide Inc. and, additionally, will receive a percentage of
sales as royalty.
In April 1999, the Company entered into a long-term agreement with PageNet
for broadcasting Gemstar's interactive program guides and other data on
PageNet's nationwide wireless communications network. The Company expects one-
way transmission to be available for televisions equipped with the interactive
program guides in the year 2000, and two-way interactive communication to be
available in the year 2001.
In May 1999, the Company entered into a long-term licensing agreement with
AOL to use the Company's technology and intellectual property to develop and
deploy AOL TV electronic programming guides.
In April 1999, the Company's Board of Directors approved a two-for-one stock
split in the form of a stock dividend which was paid on May 14, 1999 to
holders of record as of April 30, 1999. All share, per share, stock option and
warrant amounts herein have been retroactively restated to reflect the effect
of the stock split.
28
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, 1997, 1998
and 1999. The results of operations for the year ended March 31, 1997 have
been restated for the effects of the acquisitions of VideoGuide and StarSight
accounted for under the pooling of interests method.
Statement of Operations Data
(in thousands)
Year ended March 31,
--------------------------
1997 1998 1999
------- -------- --------
Revenues......................................... $82,997 $126,552 $166,456
Operating costs and expenses:
Selling and marketing.......................... 45,924 30,993 33,588
Research and development....................... 16,286 13,372 13,832
General and administrative..................... 25,558 18,693 21,821
Nonrecurring expenses.......................... -- 11,713 1,851
------- -------- --------
Operating income (loss)...................... (4,771) 51,781 95,364
Other income, net................................ 5,156 7,359 8,740
------- -------- --------
Income before income taxes................... 385 59,140 104,104
Income taxes..................................... 8,369 20,433 30,189
------- -------- --------
Net income (loss)............................ $(7,984) $ 38,707 $ 73,915
======= ======== ========
Revenues
Revenues were $166.5 million, $126.6 million and $83.0 million for fiscal
years 1999, 1998 and 1997, respectively. The increase in revenues of 32% in
fiscal year 1999 and 52% in fiscal year 1998 was due primarily to the
continued increase in unit shipments incorporating the VCR Plus+ technology
worldwide and an increase in revenues associated with the expansion of the
Gemstar Guide Technology from the consumer electronics industry into the
cable, telecommunications, satellite and personal computer industries.
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 $33.6 million, $31.0 million and $45.9
million for fiscal years 1999, 1998 and 1997, respectively. The increase of 8%
in fiscal year 1999 was due primarily to marketing and support costs
associated with the Gemstar Guide Technology. The decrease of 33% in fiscal
year 1998 was due primarily to a reduction in marketing, selling and support
costs as well as personnel costs associated with activities related to
StarSight and VideoGuide services.
Research and Development Expenses
Research and development expenses were $13.8 million, $13.4 million and
$16.3 million for fiscal years 1999, 1998 and 1997, respectively. Expenses
increased slightly in fiscal year 1999. The decrease of 18% in fiscal year
1998 was due to lower development costs associated with realized synergies of
the combined companies and cost control measures implemented by the Company
after the acquisitions.
General and Administrative Expenses
General and administrative expenses were $21.8 million, $18.7 million and
$25.6 million for fiscal years 1999, 1998 and 1997, respectively. The increase
of 17% in fiscal year 1999 was due primarily to an increase in
29
personnel cost to support the Company's licensing business as well as legal
expenses associated with various litigation matters. The decrease of 27% in
fiscal year 1998 was attributable to lower personnel and operational costs
associated with realized synergies of the combined companies; a reduction in
legal expenses due to the elimination of the litigation between the Company and
StarSight; and cost control measures implemented by the Company after the
acquisitions.
Nonrecurring Expenses
The Company recorded a nonrecurring charge of $1.9 million in fiscal year
1999 associated with defending the Company against a hostile takeover. As a
result of the acquisition of StarSight, the Company recorded merger related
costs totaling $11.7 million in fiscal year 1998. These costs were comprised of
fees for financial advisors, attorneys, and accountants; severance and other
transaction costs.
Income Taxes
Income taxes were $30.2 million, $20.4 million and $8.4 million for fiscal
years 1999, 1998 and 1997, respectively. The Company's effective tax rate was
29% in fiscal year 1999 and 35% in fiscal year 1998. The overall effective tax
rate reported by the Company in any single period is impacted by, among other
things, the country in which earnings or losses arise, applicable statutory tax
rates and withholding tax requirements for particular countries, and the
availability of tax credits for taxes paid in certain jurisdictions. Because of
these factors, it is expected that the Company's future tax expense as a
percentage of income before income taxes may vary from year to year. Certain
income tax benefits included in income taxes for fiscal year 1997 were limited
due to uncertainty regarding the realization of net operating loss
carryforwards, tax credit carryforwards, and temporary differences between the
tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash and cash equivalents and short-term
marketable securities totaling $214.0 million and working capital of $189.9
million. Net cash provided by operating activities was $65.1 million, $55.5
million and $14.4 million for fiscal years 1999, 1998 and 1997, respectively.
The increases in net cash provided by operating activities in fiscal years 1999
and 1998 were primarily the result of increased earnings and timing of
payments.
Net cash used in investing activities was $33.3 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 $3.9 million. Net
cash provided by investing activities was $33.4 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 $12.7 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 used in investing activities
was $50.1 million for fiscal year 1997, comprised of net purchases of
marketable securities of $47.0 million and additions to property and equipment
and intangible assets of $3.2 million.
Net cash used in financing activities was $0.9 million for fiscal year 1999,
compared to net cash provided by financing activities of $4.7 million and $33.5
million for fiscal years 1998 and 1997, respectively. Proceeds from stock
option exercises were $17.5 million, $17.5 million and $0.9 million in fiscal
years 1999, 1998 and 1997, respectively. Proceeds from a warrant exercise
totaled $10.0 million in fiscal year 1999. The Company received proceeds of
$32.6 million in fiscal year 1997 from private and public sales of the
Company's Ordinary Shares. Purchases of treasury stock totaled $28.4 million in
fiscal year 1999. The Company repurchased a warrant to purchase 1.2 million
Ordinary Shares from the warrant holder for $12.8 million in fiscal year 1998,
as adjusted for the stock split affected in May 1999.
30
In August 1998, the Company's Board of Directors authorized the repurchase by
the Company of up to $100 million of its Ordinary Shares. As of March 31, 1999,
the Company has repurchased 1.4 million Ordinary Shares for $28.4 million, as
adjusted for the stock split affected in May 1999.
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 March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the various types of costs incurred for
computer software developed or obtained for internal use including the
requirement to capitalize specified costs and amortization of such costs. This
statement is effective for fiscal years beginning after December 15, 1998. The
Company believes that adoption of this statement will not have a significant
effect on its consolidated results of operations or financial position.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. This
statement is effective for fiscal years beginning after December 15, 1998. The
Company believes that adoption of this statement will not have a significant
effect on its consolidated results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133") which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 is effective for all fiscal quarters beginning after June 15, 1999. The
Company does not have any derivative instruments or hedging activities and
accordingly, believes that adoption of SFAS No. 133 will not have a significant
effect on its consolidated financial position or results of operations.
ITEM 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.
31
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, 1999.
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, 1999.
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, 1999.
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, 1999.
32
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
Exhibit
Number Document Description
------- --------------------
2.1 Parent Significant Shareholder Agreement, dated as of December 23,
1996, by and among StarSight Telecast, Inc., a California
corporation, and certain significant shareholders of Gemstar
International Group Limited.(2)
2.2 Agreement and Plan of Merger, dated as of December 23, 1996, by and
among Gemstar International Group Limited, a British Virgin Islands
corporation, StarSight Telecast, Inc., a California corporation, and
G/S Acquisition Subsidiary, a California corporation.(2)
3.1 Amended and Restated Memorandum of Association of the Company.(5)
3.2 Amended and Restated Articles of Association of the Company.(5)
10.1 Patent Assignment Agreement, dated as of March 15, 1994, between
Gemstar Development Corporation and Roy J. Mankovitz. (Confidential
treatment requested).(1)
10.2 Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Development Corporation. (Confidential treatment
requested).(1)
10.3 Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Holdings Limited. (Confidential treatment requested).(1)
10.4 Contract Engineering Agreement (undated) between Hilite, Inc. and
Index Systems, Inc. (Confidential treatment requested).(1)
10.5 Form of Option Exercise and Assignment Agreement, dated March 16,
1994, between Gemstar Development Corporation and each of Henry C.
Yuen, Wilson K.C. Cho and Daniel S.W. Kwoh.(1)
10.6(a) Exclusive Representation Agreement, dated July 30, 1990, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).(1)
10.6(b) Exclusive Representation Agreement, dated May 20, 1991, between
Gemstar Development Corporation and United Feature Syndicate, Inc.,
together with First Amendment to Exclusive Representation Agreement,
dated March 4, 1994. (Confidential treatment requested).(1)
10.6(c) Exclusive Representation Agreement, dated March 21, 1994, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).(1)
10.7 Registration Rights Agreement, dated August 16, 1995, between Gemstar
International Group Limited and the Shareholders of E Guide, Inc.(1)
10.8 Company Significant Shareholder Agreement, dated as of December 23,
1996, by and among Gemstar International Group Limited, a British
Virgin Islands corporation, and certain significant shareholders of
StarSight Telecast, Inc.(2)
10.9 Company Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation.(2)
10.10 Parent Option Agreement, dated as of December 23, 1996, by and between
StarSight Telecast, Inc., a California corporation, and Gemstar
International Group Limited, a British Virgin Islands corporation.(2)
33
Exhibit
Number Document Description
------- --------------------
10.11 TDN, Inc., Stockholders Agreement, dated as of October 31, 1997, by
and among TDN, Inc., a Delaware corporation, Gemstar Marketing, Inc.,
a California corporation, and Thomson Consumer Electronics, Inc., a
Delaware corporation.(3)
10.12 Cost and Reimbursement Support Agreement, dated as of October 31,
1997, by and among TDN, Inc., a Delaware corporation, and Gemstar
International Group Limited.(3)
10.13 Definitive Agreement, dated as of January 9, 1998, by and among
Gemstar International Group Limited, StarSight Telecast, Inc., a
California corporation, and Microsoft Corporation, a Washington
corporation.(3)
10.14 Rescission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation, and Microsoft
Corporation, a Washington corporation.(3)
21 Material Subsidiaries of Gemstar.(7)
23.1 Consent of KPMG LLP.(7)
23.2 Consent Deloitte & Touche LLP.(7)
27 Financial Data Schedule.(7)
99.1 1994 Stock Incentive Plan, as amended.(1)
99.2 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Henry C. Yuen, as amended. (Confidential treatment
requested).(1)
99.3 Employment Agreement, dated August 1995, between Gemstar International
Group Limited and Thomas L.H. Lau.(1)
99.4 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Daniel S.W. Kwoh, as amended. (Confidential treatment
requested).(1)
99.5 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Roy J. Mankovitz, as amended. (Confidential treatment
requested).(1)
99.6 Employment Agreement, dated August 16, 1995, between Pros Technology
Limited and Wilson K.C. Cho. (Confidential treatment requested).(1)
99.7 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Elsie Ma Leung, as amended.(1)
99.8 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Larry Goldberg, as amended.(1)
99.9 Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as
amended.(1)
99.10 Amendment to 1994 Stock Incentive Plan, as amended, adopted on March
12, 1998.(4)
99.11 Amended and Restated Employment Agreement, effective as of January 7,
1998 among Gemstar International Group Limited, Gemstar Development
Corporation and Henry C. Yuen.(6)
99.12 Amended and Restated Employment Agreement, dated as of March 31, 1998,
among Gemstar International Group Limited, Gemstar Development
Corporation and Elsie Leung.(6)
- --------
(1) Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016), which was declared effective on October 10, 1995, and
incorporated herein by reference.
(2) Previously filed as part of Form F-4 Registration Statement of the Company
(333-6790). which was declared effective on April 15, 1997, and
incorporated herein by reference.
(3) Previously filed as part of Form 8-K dated January 12, 1998, as amended on
June 11, 1998, and incorporated herein by reference. Certain information
in this exhibit has been omitted pursuant to a request for Confidential
Treatment granted by the Securities and Exchange Commission.
34
(4) Previously filed as part of Form 10-K for the fiscal year ended March 31,
1998, filed on June 29, 1998, and incorporated herein by reference.
(5) Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016), which was declared effective on October 10, 1995, and
incorporated herein by reference. Further amendments were filed in
connection with the Company's report on Form 8-K on July 13, 1998.
(6) Previously filed as part of Form 10-K/A for the fiscal year ended March
31, 1998, filed on November 17, 1998, and incorporated herein by
reference. Certain information in this exhibit has been omitted pursuant
to a request for Confidential Treatment which was filed with the
Securities and Exchange Commission.
(7) Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 1999.
35
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 29, 1999 By: _________________________________
Henry C. Yuen
Chairman of the Board, Chief
Executive Officer,
President and Director
(Principal Executive Officer)
/s/ Elsie Ma Leung
Date: June 29, 1999 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.
Signature Title Date
--------- ----- ----
/s/ Henry C. Yuen Chairman of the Board Chief June 29, 1999
____________________________________ Executive Officer,
Henry C. Yuen President and Director
/s/ Elsie Ma Leung Chief Financial Officer and June 29, 1999
____________________________________ Director
Elsie Ma Leung
Director June 29, 1999
____________________________________
Thomas L. H. Lau
/s/ George F. Carrier Director June 29, 1999
____________________________________
George F. Carrier
/s/ Teruyuki Toyama Director June 29, 1999
____________________________________
Teruyuki Toyama
Director June 29, 1999
____________________________________
James E. Meyer
/s/ Douglas B. Macrae Director June 29, 1999
____________________________________
Douglas B. Macrae
/s/ Perry A. Lerner Director June 29, 1999
____________________________________
Perry A. Lerner
36
GEMSTAR INTERNATIONAL GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports............................................ F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999................ F-4
Consolidated Statements of Operations for each of the years in the three-
year period ended March 31, 1999........................................ F-5
Consolidated Statements of Shareholders' Equity for each of the years in
the three-year period ended March 31, 1999.............................. F-6
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended March 31, 1999........................................ F-7
Notes to Consolidated Financial Statements............................... F-8
F-1
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, 1998 and 1999,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended March 31,
1999. 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 did not audit the financial statements of StarSight Telecast, Inc., a
company acquired by Gemstar International Group Limited in a business
combination accounted for as a pooling of interests on May 8, 1997 as
described in note 2 to the consolidated financial statements, which statements
reflect total revenues of $8,698,000 for the year ended December 31, 1996.
Those statements, before the effects of conforming adjustments that were
applied to restate such financial statements, were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for StarSight Telecast, Inc., is based solely on the
report of the other auditors. As described in note 2 to the consolidated
financial statements, subsequent to the issuance of the report of the other
auditors, the financial statements of StarSight Telecast, Inc. were restated
to conform to the accounting policies and fiscal year of Gemstar International
Group Limited for the year ended March 31, 1997.
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, based on our audits and the report of the other auditors,
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, 1998 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, 1999 in conformity with generally accepted accounting
principles.
We also audited the combination including the conforming adjustments for
accounting policies and fiscal year of the accompanying consolidated
statements of operations and cash flows for the year ended March 31, 1997
after restatement for the pooling of interests on May 8, 1997. In our opinion,
such consolidated financial statements have been properly combined on the
basis described in note 2 to the consolidated financial statements.
/s/ KPMG LLP
Los Angeles, California
May 9, 1999
F-2
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
StarSight Telecast, Inc.:
We have audited the statement of operations of StarSight Telecast, Inc.
("StarSight"), and the related statements of shareholders' equity and cash
flows for the year ended December 31, 1996, not presented separately herein,
prior to restatement to conform StarSight's accounting policies and fiscal
year to those of Gemstar International Group Limited. These financial
statements are the responsibility of StarSight's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements referred to above present fairly,
in all material respects, the results of operations of and cash flows of
StarSight for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche, LLP
San Francisco, California
March 7, 1997
F-3
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31,
------------------
1998 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $153,517 $184,334
Marketable securities.................................... 4,343 29,711
Prepaid expenses and other current assets................ 5,580 12,899
-------- --------
Total current assets................................... 163,440 226,944
Property and equipment, net................................ 3,769 2,719
Intangible assets, net..................................... 16,543 16,978
Marketable securities...................................... -- 4,002
Other assets............................................... 2,326 2,521
-------- --------
$186,078 $253,164
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses.................... $ 29,766 $ 23,527
Current portion of deferred revenue...................... 23,228 13,476
-------- --------
Total current liabilities.............................. 52,994 37,003
Deferred revenue, less current portion..................... 14,877 550
Deferred income taxes...................................... 13,664 30,429
Other liabilities.......................................... 1,061 1,211
Shareholders' equity:
Preference Shares, par value $.01 per share. Authorized
50,000 shares, none issued.............................. -- --
Ordinary Shares, par value $.01 per share. Authorized
500,000 shares; issued 96,822 shares at March 31, 1998
and 100,507 shares at March 31, 1999.................... 968 1,005
Additional paid-in capital............................... 196,727 231,799
Accumulated deficit...................................... (94,081) (20,166)
Accumulated other comprehensive loss..................... (132) (228)
Treasury stock, at cost (none at March 31, 1998 and 1,395
shares at March 31, 1999)............................... -- (28,439)
-------- --------
Net shareholders' equity............................... 103,482 183,971
Commitments and contingencies (note 7).....................
-------- --------
$186,078 $253,164
======== ========
See accompanying Notes to Consolidated Financial Statements.
F-4
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended March 31,
--------------------------
1997 1998 1999
------- -------- --------
Revenues........................................... $82,997 $126,552 $166,456
Operating costs and expenses:
Selling and marketing............................ 45,924 30,993 33,588
Research and development......................... 16,286 13,372 13,832
General and administrative....................... 25,558 18,693 21,821
Nonrecurring expenses............................ -- 11,713 1,851
------- -------- --------
Operating income (loss)........................ (4,771) 51,781 95,364
Other income, net.................................. 5,156 7,359 8,740
------- -------- --------
Income before income taxes..................... 385 59,140 104,104
Income taxes....................................... 8,369 20,433 30,189
------- -------- --------
Net income (loss).............................. $(7,984) $ 38,707 $ 73,915
======= ======== ========
Basic earnings (loss) per share.................... $ (0.09) $ 0.41 $ 0.76
======= ======== ========
Diluted earnings (loss) per share.................. $ (0.09) $ 0.38 $ 0.66
======= ======== ========
Weighted average shares outstanding................ 93,413 95,309 97,548
Dilutive effect of:
Stock options.................................... -- 5,455 14,219
Warrants......................................... -- 762 719
------- -------- --------
Weighted average shares outstanding, assuming
dilution.......................................... 93,413 101,526 112,486
======= ======== ========
See accompanying Notes to Consolidated Financial Statements.
F-5
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Ordinary Accumulated
Shares Additional other Treasury stock Net
-------------- paid-in Accumulated Unearned comprehensive ---------------- shareholders'
Shares Amount capital deficit compensation loss Shares Amount equity
------- ------ ---------- ----------- ------------ ------------- ------ -------- -------------
Balances at March 31,
1996.................. 88,411 $ 884 $151,445 $(117,657) $ (371) $ (55) -- $ -- $ 34,246
Comprehensive income:
Net loss............. -- -- -- (7,984) -- -- -- -- (7,984)
Equity adjustment
from foreign
currency
translation.......... -- -- -- -- -- (35) -- -- (35)
--------
Total comprehensive
income............. (8,019)
--------
Issuance of Ordinary
Shares................ 4,757 48 32,558 -- -- -- -- -- 32,606
Exercise of stock
options............... 434 4 852 -- -- -- -- -- 856
Adjustment for change
in StarSight Telecast,
Inc. year end......... -- -- -- (7,147) -- -- -- -- (7,147)
Compensatory repricing
of stock option
grant................. -- -- 1,027 -- (1,027) -- -- -- --
Compensatory stock
option grants......... -- -- 165 -- (165) -- -- -- --
Amortization of
unearned
compensation.......... -- -- -- -- 1,175 -- -- -- 1,175
------- ------ -------- --------- ------ ----- ------ -------- --------
Balances at March 31,
1997.................. 93,602 936 186,047 (132,788) (388) (90) -- -- 53,717
Comprehensive income:
Net income........... -- -- -- 38,707 -- -- -- -- 38,707
Equity adjustment
from foreign
currency
translation.......... -- -- -- -- -- (42) -- -- (42)
--------
Total comprehensive
income............. 38,665
--------
Exercise of stock
options............... 3,220 32 17,487 -- -- -- -- -- 17,519
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.................. 96,822 968 196,727 (94,081) -- (132) -- -- 103,482
Comprehensive income:
Net income........... -- -- -- 73,915 -- -- -- -- 73,915
Equity adjustment
from foreign
currency
translation.......... -- -- -- -- -- (96) -- -- (96)
--------
Total comprehensive
income............. 73,819
--------
Exercise of stock
options............... 2,473 25 17,484 -- -- -- -- -- 17,509
Tax benefit associated
with stock options.... -- -- 7,600 -- -- -- -- -- 7,600
Exercise of warrant... 1,212 12 9,988 -- -- -- -- -- 10,000
Purchases of treasury
stock................. -- -- -- -- -- -- (1,395) (28,439) (28,439)
------- ------ -------- --------- ------ ----- ------ -------- --------
Balances at March 31,
1999.................. 100,507 $1,005 $231,799 $ (20,166) $ -- $(228) (1,395) $(28,439) $183,971
======= ====== ======== ========= ====== ===== ====== ======== ========
See accompanying Notes to Consolidated Financial Statements.
F-6
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Year ended March 31,
----------------------------
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss).............................. $ (7,984) $ 38,707 $ 73,915
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 3,953 4,389 4,534
Deferred income taxes........................ 2,754 9,365 16,765
Amortization of unearned compensation........ 1,175 388 --
Tax benefit associated with stock options.... -- 6,000 7,600
Changes in assets and liabilities:
Prepaid expenses and other assets.......... 1,952 999 (7,514)
Accounts payable, accrued expenses and
other liabilities......................... (6,654) (13,176) (6,089)
Deferred revenue........................... 19,192 8,848 (24,079)
-------- -------- --------
Net cash provided by operating
activities.............................. 14,388 55,520 65,132
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (71,387) (18,480) (60,833)
Maturities of marketable securities............ 24,425 64,618 31,463
Additions to property and equipment............ (1,910) (781) (527)
Additions to intangible assets................. (1,252) (11,939) (3,392)
-------- -------- --------
Net cash provided by (used in) investing
activities.............................. (50,124) 33,418 (33,289)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Ordinary Shares...... 32,606 -- --
Proceeds from exercise of stock options........ 856 17,519 17,509
Proceeds from exercise of warrant.............. -- -- 10,000
Repurchase of warrant.......................... -- (12,807) --
Purchases of treasury stock.................... -- -- (28,439)
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 33,462 4,712 (930)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... (35) (42) (96)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. (2,309) 93,608 30,817
Cash and cash equivalents at beginning of year... 69,365 59,909 153,517
Adjustment for change in StarSight Telecast, Inc.
year end........................................ (7,147) -- --
-------- -------- --------
Cash and cash equivalents at end of year......... $ 59,909 $153,517 $184,334
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes..................... $ 6,128 $ 4,740 $ 5,734
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
On December 12, 1996, the Company acquired all of the outstanding capital
stock of VideoGuide, Inc. for 933,000 Ordinary Shares of the Company (note 2).
On May 8, 1997, the Company acquired all of the outstanding capital stock of
StarSight Telecast, Inc. for 31.1 million Ordinary Shares of the Company (note
2).
See accompanying Notes to Consolidated Financial Statements.
F-7
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997, 1998 and 1999
(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.
The Company acquired all of the outstanding capital stock of VideoGuide,
Inc. ("VideoGuide") and StarSight Telecast, Inc. ("StarSight") on December 12,
1996 and May 8, 1997, respectively (note 2). Both mergers have been accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements for the year ended March 31, 1997 have been restated to include the
accounts and results of operations of VideoGuide and StarSight.
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 papers, 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 accounts for its investments in marketable securities under the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). Under
SFAS No. 115, the Company must classify its 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 has classified all its
investments in marketable securities as held-to-maturity securities.
Accordingly, the marketable securities are stated at amortized cost.
Investments
Investments with ownership interests of less than 20% are accounted for
under the cost method of accounting. Investments with ownership interests
between 20% and 50% are accounted for under the equity method of accounting.
Investments with ownership interests in excess of 50% are consolidated with
the accounts of the Company.
F-8
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows:
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
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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for its long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future operating
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Accounting for Stock Options
The Company accounts for its stock option plan under the provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("SFAS No. 123") 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.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars. Gains and losses resulting from translation are accumulated in a
separate component of shareholders' equity until the investment in the foreign
entity is sold or liquidated. The Company's transactions predominately occur
in U.S. dollars. Gains and losses on currency transactions were immaterial for
all periods presented.
F-9
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and accrued expenses approximate
their fair value because of their short maturities. The fair values of
marketable securities are based on quoted market prices which approximates
cost (note 6).
Revenue Recognition
Revenues from up front license fees and annual license fees are recognized
ratably over the term of the particular license. Revenues from on-going per
unit license fees are recognized when payments are due, and generally, when
payments are actually received from the licensee.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense
as incurred.
Nonrecurring Expenses
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 the acquisition of 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).
Net Interest Income
Net interest income, included in other income, net, totaled $5,084,000,
$6,983,000 and $9,075,000 for each of the years in the three-year period ended
March 31, 1999.
Income Taxes
The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
SFAS No. 109 requires that deferred income taxes be recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. Changes in tax rates and laws are reflected in income in the
period such changes are enacted.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of Ordinary Shares outstanding during the period. Diluted earnings
(loss) per share includes the dilutive effect of stock options and warrants
using the treasury stock method. Stock options and warrants to purchase
16,416,000 Ordinary Shares were outstanding at March 31, 1997, but were not
included in the computation of diluted earnings (loss) per share for the year
ended March 31, 1997, because the Company had a net loss for the year and
therefore, the effect would be antidilutive.
Stock Split
On April 11, 1999, the Company's Board of Directors approved a two-for-one
stock split in the form of a stock dividend payable on May 14, 1999 to holders
of record as of April 30, 1999. All share, per share, stock option and warrant
amounts herein have been retroactively restated to reflect the effect of this
split.
F-10
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(1) Summary of Significant Accounting Policies and Practices (Continued)
Comprehensive Income
Effective April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting comprehensive
income and its components in financial statements, however it has no impact on
the Company's net income or shareholders' equity. During the years ended March
31, 1997, 1998 and 1999, comprehensive income consisted of net income and the
equity adjustment from foreign currency translation. Accumulated other
comprehensive loss presented on the accompanying consolidated balance sheets
consists of cumulative translation adjustments.
Segment Information
Effective April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company identifies its operating
segments based on business activities, management responsibility and
geographical location. During the years ended March 31, 1997, 1998 and 1999,
the Company operated in a single business segment licensing its proprietary
technologies and systems to customers worldwide.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-
1 provides guidance on accounting for the various types of costs incurred for
computer software developed or obtained for internal use including the
requirement to capitalize specified costs and amortization of such costs. This
statement is effective for fiscal years beginning after December 15, 1998. The
Company believes that adoption of this statement will not have a significant
effect on its consolidated results of operations or financial position.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that adoption of this statement will
not have a significant effect on its consolidated results of operations or
financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133") which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133 is effective for all fiscal quarters beginning after June 15, 1999.
The Company does not have any derivative instruments or hedging activities and
accordingly, believes that adoption of SFAS No. 133 will not have a
significant effect on its consolidated financial position or results of
operations.
Reclassifications
Certain reclassifications have been made to prior years financial
information to conform with the current year presentation.
F-11
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Business Combinations
On May 8, 1997, the Company acquired all of the outstanding capital stock of
StarSight for 31.1 million Ordinary Shares of the Company. In addition, the
Company assumed all outstanding StarSight stock options which were converted
to options to purchase 2.7 million Ordinary Shares of the Company. The Company
also assumed all outstanding StarSight warrants which were converted to
warrants to purchase 3.6 million Ordinary Shares of the Company at exercise
prices ranging from $6.19 to $28.87 per share.
In January 1998, the Company repurchased a warrant to purchase 1.2 million
Ordinary Shares 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 1.2 million Ordinary Shares expired. In
January 1999, a warrant holder exercised a warrant to purchase 1.2 million
Ordinary Shares for $10.0 million in cash. There were no warrants outstanding
at March 31, 1999.
On December 12, 1996, the Company acquired all of the outstanding capital
stock of VideoGuide for 933,000 Ordinary Shares of the Company. In addition,
the Company assumed all outstanding VideoGuide stock options which were
converted to options to purchase 33,000 Ordinary Shares of the Company.
Both mergers have been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements for periods prior to the
combinations have been restated to include the results of operations,
financial position and cash flows of StarSight and VideoGuide. Information
concerning Ordinary Shares, stock options, warrants and per share data has
been restated on an equivalent share basis.
Prior to the combinations, the fiscal year end for both StarSight and
VideoGuide was December 31. In recording the business combinations, the
financial statements of StarSight and VideoGuide were conformed to the
Company's fiscal year end of March 31. As a result, the Company recorded an
accumulated deficit charge of $7,147,000 in fiscal year 1997 for StarSight's
net loss during the three months ended March 31, 1996 which included revenues
of $862,000.
In recording the business combinations, StarSight's revenues for the year
ended March 31, 1997 were adjusted by $404,000 to conform to the Company's
accounting policies. In addition, all significant intercompany balances and
transactions between the Company and VideoGuide and StarSight have been
eliminated.
F-12
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes
Under the current British Virgin Islands law, income generated by entities
incorporated under the International Business Companies Act in the British
Virgin Islands is not subject to taxation. However, certain subsidiaries are
subject to taxation in countries where they operate. Additionally, license
income payments received from licensees in certain tax jurisdictions are
subject to withholding taxes.
The provision for income taxes consists of the following (in thousands):
Year ended March 31,
----------------------
1997 1998 1999
------ ------- -------
Current............................................... $5,615 $11,068 $13,424
Deferred.............................................. 2,754 9,365 16,765
------ ------- -------
Total............................................... $8,369 $20,433 $30,189
====== ======= =======
The significant components of deferred income taxes attributable to income
(loss) before income taxes are as follows (in thousands):
Year ended March 31,
---------------------------
1997 1998 1999
-------- ------- --------
Deferred tax expense (benefit)................ $(11,271) $10,683 $ 27,915
Change in valuation allowance for deferred tax
assets....................................... 14,025 (1,318) (11,150)
-------- ------- --------
Total....................................... $ 2,754 $ 9,365 $ 16,765
======== ======= ========
A reconciliation of the expected U.S. federal income taxes to the provision
for income taxes is as follows (in thousands):
Year ended March 31,
--------------------------
1997 1998 1999
------- ------- --------
Expected U.S. federal
income tax............... $ 135 $20,699 $ 36,436
State taxes, net of
federal benefit.......... -- 987 2,879
Merger costs and other
non-deductible expenses.. -- 995 --
Foreign income taxed at
different rates.......... (5,791) (930) 2,024
Change in valuation
allowance................ 14,025 (1,318) (11,150)
------- ------- --------
Total................... $ 8,369 $20,433 $ 30,189
======= ======= ========
F-13
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes (Continued)
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):
March 31,
------------------
1998 1999
-------- --------
Deferred tax assets:
Deferred revenue..................................... $ 14,555 $ 4,832
Net operating losses available for carryforward to
future periods...................................... 26,424 26,660
Tax credits available for carryforward to future
periods............................................. 6,308 5,007
Accrued expenses..................................... 3,105 4,093
Intangible assets.................................... 6,100 7,026
Other................................................ 463 574
-------- --------
Gross deferred tax assets............................ 56,955 48,192
Valuation allowance.................................... (54,197) (43,047)
-------- --------
Deferred tax assets, net of valuation allowance...... 2,758 5,145
Deferred tax liability taxes provided on intercompany
income................................................ (16,422) (35,574)
-------- --------
Net deferred tax liability........................... $(13,664) $(30,429)
======== ========
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, 1999, net of the valuation allowance established.
As of March 31, 1999, the Company had available net operating loss
carryforwards aggregating approximately $70,000,000 to offset future United
States income taxes expiring through fiscal year 2019. At March 31, 1999, the
Company had available foreign tax credit carryforwards aggregating
approximately $4,000,000 to offset future United States income taxes expiring
through fiscal year 2004. Additionally, at March 31, 1999, the Company had
available alternative minimum tax credit carryforwards aggregating
approximately $1,000,000.
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.
F-14
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes (continued)
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 Ordinary Shares of the Company to employees of the Company (including
executive officers) and certain other persons (including directors and
consultants) who are eligible to participate in the Plan. 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 acquisitions of StarSight and VideoGuide, the Company
assumed all outstanding StarSight and VideoGuide stock options. Information
concerning stock options has been restated on an equivalent share basis.
As of March 31, 1999, the number of Ordinary Shares reserved for issuance
under the Plan was 40,000,000 Ordinary Shares. At March 31, 1999 there were
9,536,000 shares available for future option grants under the Plan.
The following table summarizes information about stock option transactions
(shares in thousands):
Year ended March 31,
-----------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning
of year................ 11,928 $6.05 12,780 $ 6.15 25,685 $ 9.72
Granted............... 1,983 6.90 16,579 11.61 2,608 22.21
Exercised............. (434) 2.54 (3,220) 5.44 (2,473) 7.08
Cancelled............. (697) 8.85 (454) 8.21 (1,046) 11.38
------ ------ ------
Outstanding at end of
year................... 12,780 6.15 25,685 9.72 24,774 11.23
====== ====== ======
Options exercisable at
end of year............ 7,718 5.96 8,911 6.69 11,039 8.50
====== ====== ======
F-15
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Stock Incentive Plan (Continued)
The following table summarizes information about of the Company's stock
options outstanding as of March 31, 1999 (shares in thousands):
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
------------------------ --------- ----------- --------- ------------ ------------
$2.79-$7.50............. 6,756 6.4 $ 5.98 6,573 $ 5.95
$7.51-$10.00............ 2,459 8.0 8.29 1,038 7.99
$10.01-$12.50........... 8,675 8.8 10.99 1,814 11.00
$12.51-$15.00........... 4,276 9.0 15.00 1,380 15.00
$15.01-$31.75........... 2,608 9.3 22.21 234 24.42
------ ------------
Total................. 24,774 8.2 11.23 11,039 8.50
====== ============
The per share weighted-average fair value of stock options granted during
the years ended March 31, 1997, 1998 and 1999, was $7.11, $8.61, and $18.25,
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:
Year ended March 31,
------------------------
1997 1998 1999
------ ------ ------
Expected dividend yield........................... --% --% --%
Risk-free interest rate........................... 5.5% 5.8% 5.4%
Expected volatility............................... 85% 80% 80%
Expected life (years)............................. 7.9 5.0 9.4
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 (loss)
would have been changed to the pro forma amounts indicated below (in
thousands, except per share data):
Year ended March 31,
-------------------------
1997 1998 1999
-------- ------- -------
Net income (loss):
As reported..................................... $ (7,984) $38,707 $73,915
Pro forma....................................... (22,626) 18,127 37,717
Basic earnings (loss) per share:
As reported..................................... (0.09) 0.41 0.76
Pro forma....................................... (0.24) 0.19 0.39
Diluted earnings (loss) per share:
As reported..................................... (0.09) 0.38 0.66
Pro forma....................................... (0.24) 0.18 0.34
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.
F-16
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 $76,000, $50,000 and $82,000 to the 401(k) Plan during each
of the years in the three-year period ended March 31, 1999.
(6) Selected Balance Sheet Accounts
Marketable securities at amortized cost by major security type and class of
security consists of the following (in thousands):
March 31,
--------------
1998 1999
------ -------
Corporate debt securities.................................... $2,817 $29,711
Government securities........................................ 1,526 4,002
------ -------
Total...................................................... $4,343 $33,713
====== =======
The amortized cost of the marketable securities approximated fair value at
March 31, 1998 and 1999. At March 31, 1999, marketable securities totaling
$29,711,000 were due in one year or less and marketable securities totaling
$4,002,000 were due in one to two years.
Property and equipment, at cost, consists of the following (in thousands):
March 31,
-----------------
1998 1999
------- --------
Machinery and equipment................................... $ 5,650 $ 5,501
Office furniture and equipment............................ 6,726 6,568
Property and leasehold improvement........................ 1,212 1,228
------- --------
13,588 13,297
Less accumulated depreciation and amortization............ (9,819) (10,578)
------- --------
Property and equipment, net............................... $ 3,769 $ 2,719
======= ========
Intangible assets consist of the following (in thousands):
March 31,
-----------------
1998 1999
------- --------
Patents and trademarks.................................... $22,750 $ 25,377
Goodwill.................................................. 1,025 1,790
------- --------
23,775 27,167
Less accumulated amortization............................. (7,232) (10,189)
------- --------
Intangible assets, net.................................... $16,543 $ 16,978
======= ========
Amortization expense was $1,490,000, $2,251,000 and $2,957,000 for each of
the years in the three-year period ended March 31, 1999.
F-17
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Selected Balance Sheet Accounts (Continued)
Accounts payable and accrued expenses consist of the following (in
thousands):
March 31,
---------------
1998 1999
------- -------
Accrued payroll and related benefits........................ $ 5,397 $ 6,822
Accrued marketing and promotional expenses.................. 9,397 6,000
Accounts payable and other accrued expenses................. 14,972 10,705
------- -------
Total..................................................... $29,766 $23,527
======= =======
(7) Commitments and Contingencies
The Company leases various facilities under long-term noncancelable
operating leases. The Company also has an agreement to purchase data
transmission services. Future minimum payments under operating leases and the
data transmission services agreement are as follows (in thousands):
Operating Transmission
Leases Services
--------- ------------
Year ended March 31:
2000................................................ $1,761 $1,240
2001................................................ 1,268 1,240
2002................................................ 1,011 930
2003................................................ 298 --
------ ------
Total............................................. $4,338 $3,410
====== ======
Rent expense under operating leases was $1,722,000, $1,630,000 and
$1,609,000, for each of the years in the three-year period ended March 31,
1999. Fees under the data transmission services agreement were $1,170,000,
$1,240,000 and $1,240,000, for each of the years in the three-year period
ended March 31, 1999.
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.
(8) Related Party Transactions
The Company continues to maintain service relationships with certain
subsidiaries of Gemstar Manufacturing Holding Limited, a former wholly owned
subsidiary ("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 $8,300,000,
$8,178,000 and $6,527,000 for each of the years in the three-year period ended
March 31, 1999.
The Company continues to maintain a license agreement with a Holdings
subsidiary that allows for the incorporation of the VCR Plus+ technology in
the manufacture and distribution of handsets. Pursuant to the license
agreement, the Holdings subsidiary pays the Company a per unit royalty fee
based on unit shipments. Royalty fees totaled $1,446,000 for the year ended
March 31, 1997. There were no royalty fees for the years ended March 31, 1998
and 1999.
F-18
GEMSTAR INTERNATIONAL GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Business Segment Reporting
A summary of the Company's revenues and operating income (loss) by
geographic area is as follows (in thousands):
Year ended March 31,
---------------------------
1997 1998 1999
-------- -------- --------
Revenues:
United States................................. $ 37,424 $ 80,708 $ 95,377
Foreign(1).................................... 45,573 45,844 71,079
-------- -------- --------
Total....................................... $ 82,997 $126,552 $166,456
======== ======== ========
Operating income (loss) (2):
United States................................. $(34,266) $ 24,046 $ 46,536
Foreign....................................... 29,495 27,735 48,828
-------- -------- --------
Total....................................... $ (4,771) $ 51,781 $ 95,364
======== ======== ========
- --------
(1) Revenues from license fees included in foreign are principally earned by
entities in the British Virgin Islands.
(2) Operating income (loss) consists of total revenues less operating expenses
and does not include other income.
The Company had revenues attributed to individual customers in excess of 10%
of total revenues as follows:
Year ended
March 31,
---------------
1997 1998 1999
---- ---- ----
Customer A.................................................. -- 12% 17%
Customer B.................................................. -- 21% 10%
Customer C.................................................. -- -- 13%
Customer D.................................................. -- -- 14%
A summary of the Company's identifiable assets used in the Company's
operations by geographic area is as follows (in thousands):
March 31,
--------------------------
1997 1998 1999
-------- -------- --------
Identifiable assets:
United States................................. $ 54,629 $ 69,978 $ 75,490
Foreign(1).................................... 76,647 116,100 177,674
-------- -------- --------
Total....................................... $131,276 $186,078 $253,164
======== ======== ========
- --------
(1) Identifiable assets included in foreign are principally held by entities
in the British Virgin Islands.
F-19
EXHIBIT INDEX
Exhibit
Number Document Description
------- --------------------
2.1 Parent Significant Shareholder Agreement, dated as of December 23,
1996, by and among StarSight Telecast, Inc., a California
corporation, and certain significant shareholders of Gemstar
International Group Limited.(2)
2.2 Agreement and Plan of Merger, dated as of December 23, 1996, by and
among Gemstar International Group Limited, a British Virgin Islands
corporation, StarSight Telecast, Inc., a California corporation, and
G/S Acquisition Subsidiary, a California corporation.(2)
3.1 Amended and Restated Memorandum of Association of the Company.(5)
3.2 Amended and Restated Articles of Association of the Company.(5)
10.1 Patent Assignment Agreement, dated as of March 15, 1994, between
Gemstar Development Corporation and Roy J. Mankovitz. (Confidential
treatment requested).(1)
10.2 Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Development Corporation. (Confidential treatment
requested).(1)
10.3 Contract Engineering Agreement (undated) between Hilite, Inc. and
Gemstar Holdings Limited. (Confidential treatment requested).(1)
10.4 Contract Engineering Agreement (undated) between Hilite, Inc. and
Index Systems, Inc. (Confidential treatment requested).(1)
10.5 Form of Option Exercise and Assignment Agreement, dated March 16,
1994, between Gemstar Development Corporation and each of Henry C.
Yuen, Wilson K.C. Cho and Daniel S.W. Kwoh.(1)
10.6(a) Exclusive Representation Agreement, dated July 30, 1990, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).(1)
10.6(b) Exclusive Representation Agreement, dated May 20, 1991, between
Gemstar Development Corporation and United Feature Syndicate, Inc.,
together with First Amendment to Exclusive Representation Agreement,
dated March 4, 1994. (Confidential treatment requested).(1)
10.6(c) Exclusive Representation Agreement, dated March 21, 1994, between
Gemstar Development Corporation and United Feature Syndicate, Inc.
(Confidential treatment requested).(1)
10.7 Registration Rights Agreement, dated August 16, 1995, between Gemstar
International Group Limited and the Shareholders of E Guide, Inc.(1)
10.8 Company Significant Shareholder Agreement, dated as of December 23,
1996, by and among Gemstar International Group Limited, a British
Virgin Islands corporation, and certain significant shareholders of
StarSight Telecast, Inc.(2)
10.9 Company Option Agreement, dated as of December 23, 1996, by and
between StarSight Telecast, Inc., a California corporation, and
Gemstar International Group Limited, a British Virgin Islands
corporation.(2)
10.10 Parent Option Agreement, dated as of December 23, 1996, by and between
StarSight Telecast, Inc., a California corporation, and Gemstar
International Group Limited, a British Virgin Islands corporation.(2)
10.11 TDN, Inc., Stockholders Agreement, dated as of October 31, 1997, by
and among TDN, Inc., a Delaware corporation, Gemstar Marketing, Inc.,
a California corporation, and Thomson Consumer Electronics, Inc., a
Delaware corporation.(3)
10.12 Cost and Reimbursement Support Agreement, dated as of October 31,
1997, by and among TDN, Inc., a Delaware corporation, and Gemstar
International Group Limited.(3)
10.13 Definitive Agreement, dated as of January 9, 1998, by and among
Gemstar International Group Limited, StarSight Telecast, Inc., a
California corporation, and Microsoft Corporation, a Washington
corporation.(3)
Exhibit
Number Document Description
------- --------------------
10.14 Rescission Agreement, dated as of January 9, 1998, by and between
StarSight Telecast, Inc., a California corporation, and Microsoft
Corporation, a Washington corporation.(3)
21 Material Subsidiaries of Gemstar.(7)
23.1 Consent of KPMG LLP.(7)
23.2 Consent Deloitte & Touche LLP.(7)
27 Financial Data Schedule.(7)
99.1 1994 Stock Incentive Plan, as amended.(1)
99.2 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Henry C. Yuen, as amended. (Confidential treatment
requested).(1)
99.3 Employment Agreement, dated August 1995, between Gemstar International
Group Limited and Thomas L.H. Lau.(1)
99.4 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Daniel S.W. Kwoh, as amended. (Confidential treatment
requested). (1)
99.5 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Roy J. Mankovitz, as amended. (Confidential treatment
requested).(1)
99.6 Employment Agreement, dated August 16, 1995, between Pros Technology
Limited and Wilson K.C. Cho. (Confidential treatment requested). (1)
99.7 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Elsie Ma Leung, as amended.(1)
99.8 Employment Agreement, dated April 1, 1994, between Gemstar Development
Corporation and Larry Goldberg, as amended.(1)
99.9 Amendment to Subsection 1.4(a) of 1994 Stock Incentive Plan, as
amended.(1)
99.10 Amendment to 1994 Stock Incentive Plan, as amended, adopted on March
12, 1998.(4)
99.11 Amended and Restated Employment Agreement, effective as of January 7,
1998 among Gemstar International Group Limited, Gemstar Development
Corporation and Henry C. Yuen.(6)
99.12 Amended and Restated Employment Agreement, dated as of March 31, 1998,
among Gemstar International Group Limited, Gemstar Development
Corporation and Elsie Leung.(6)
- --------
(1) Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016), which was declared effective on October 10, 1995, and
incorporated herein by reference.
(2) Previously filed as part of Form F-4 Registration Statement of the Company
(333-6790), which was declared effective on April 15, 1997, and
incorporated herein by reference.
(3) Previously filed as part of Form 8-K dated January 12, 1998, as amended on
June 11, 1998, and incorporated herein by reference. Certain information
in this exhibit has been omitted pursuant to a request for Confidential
Treatment granted by the Securities and Exchange Commission.
(4) Previously filed as part of Form 10-K for the fiscal year ended March 31,
1998, filed on June 29, 1998, and incorporated herein by reference.
(5) Previously filed as part of Form F-1 Registration Statement of the Company
(33-79016), which was declared effective on October 10, 1995, and
incorporated herein by reference. Further amendments were filed in
connection with the Company's report on Form 8-K on July 13, 1998.
(6) Previously filed as part of Form 10-K/A for the fiscal year ended March
31, 1998, filed on November 17, 1998, and incorporated herein by
reference. Certain information in this exhibit has been omitted pursuant
to a request for Confidential Treatment which was filed with the
Securities and Exchange Commission.
(7) Filed herewith.