================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24218
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4782077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
-----------------
Indicate by check 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 [_] No [X]
As of August 15, 2002, there were outstanding 408,151,000 shares of the
registrant's Common Stock, par value $0.01 per share.
================================================================================
EXPLANATORY NOTE
On September 26, 2002, the Company filed a Current Report on Form 8-K (the
"Form 8-K"), for the purpose of (i) announcing that the Company would not be
able to timely file its Report on Form 10-Q for the quarter ended June 30,
2002, and (ii) filing preliminary financial information for the quarter. The
preliminary consolidated financial statements included in such report were not
reviewed by an independent accounting firm in accordance with the requirements
of the Securities Exchange Act of 1934, as amended, and the regulations
promulgated thereunder.
This Quarterly Report on Form 10-Q for Gemstar-TV Guide International, Inc.
(the "Company") for the quarter ended June 30, 2002, includes a restatement of
the information contained in Exhibit 99.1 of the Form 8-K.
The amendments and restatements to Exhibit 99.1 of the Form 8-K are included
in this Quarterly Report on Form 10-Q for the following purposes:
. To restate the Company's Unaudited Condensed Consolidated Financial
Statements for the period ended June 30, 2002, to correct the accounting
for the acquisition of certain intellectual property acquired in 2001,
to reverse revenue recognized under an expired license agreement and to
make certain other adjustments, as more fully described in Note 2 to the
Company's Unaudited Condensed Consolidated Financial Statements included
in Part I, Item 1, Financial Statements. The restated Unaudited
Condensed Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q have not been audited or reviewed by an independent
accounting firm and should not be relied upon; and
. To amend Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, to take into account the
effects of the restatement.
The Unaudited Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q have not been reviewed by an independent
accounting firm and should not be relied upon. Additionally, Rule 10-01(d) of
Regulation S-X requires interim financial statements included in quarterly
reports on Form 10-Q to be reviewed by an independent public accountant using
professional standards and procedures for conducting such reviews, as
established by generally accepted auditing standards, as may be modified or
supplemented by the SEC. The accompanying financial statements, as of June 30,
2002 and for the three-month and six-month periods then ended, have not been
reviewed by an independent public accountant in accordance with Statement of
Auditing Standards No. 71, Review of Interim Financial Information ("SAS 71").
Accordingly, the Unaudited Condensed Consolidated Financial Statements included
in this Quarterly Report on Form 10-Q are deficient and do not comply with the
requirements of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder. As a result, the Company's new Chief
Executive Officer and Acting Chief Financial Officer, who were appointed on
November 7, 2002, are unable to make the Certificates required by Section 906
of the Sarbanes-Oxley Act.
The Company recently engaged a new independent accounting firm to audit its
Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements discussed in this report.
In connection with such review, the Company will be reviewing its accounting
policies to ensure compliance with accounting principles generally accepted in
the United States of America. Specifically, the Company will be focusing on the
accounting for licensing and advertising revenues, including but not limited
to, revenues from strategic customers and multi-platform advertisers. The
Company intends to file an amendment to this Quarterly Report on Form 10-Q to
include such reviewed Unaudited Condensed Consolidated Financial Statements as
promptly as practicable after such review has been completed. However, there
can be no assurance as to when such review will be completed. The Company
believes that it is likely that, as a result of such accounting firm's review
of this information and the Company's ongoing review of its accounting policies
and the application of the policies to various types of transactions, the
Company will further restate these Unaudited Condensed Consolidated Financial
Statements presented herein in an amendment to the Quarterly Report on Form
10-Q for the period ended June 30, 2002. Such restatement may be material.
Accordingly, the information presented in or derived from the Unaudited
Condensed Consolidated Financial Statements contained in this report should not
be relied upon.
There are certain recent developments that have occurred between June 30,
2002, the end of the quarter covered in this report and the date of filing of
this report that could have a material impact on the Company's business,
results of operations and financial condition, as described in Note 16,
Subsequent Events, to the Unaudited Condensed Consolidated Financial Statements
included herein.
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets (Restated)........................... 1
Unaudited Condensed Consolidated Statements of Operations (Restated)................. 2
Unaudited Condensed Consolidated Statements of Stockholders' Equity (Restated)....... 3
Unaudited Condensed Consolidated Statements of Cash Flows (Restated)................. 4
Notes to Unaudited Condensed Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 73
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 74
Item 6. Exhibits and Reports on Form 8-K..................................................... 74
Signature..................................................................................... 75
Items 2, 3, 4 and 5 of PART II are not applicable and have been omitted.
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Restated Restated
June 30, December 31,
2002 2001(1)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 400,973 $ 349,250
Marketable securities............................................ 29,248 42,212
Receivables, net................................................. 158,929 285,076
Deferred tax asset, net.......................................... 23,402 14,957
Other current assets............................................. 31,404 38,391
----------- ----------
Total current assets.......................................... 643,956 729,886
Property and equipment, net.......................................... 74,431 87,950
Goodwill............................................................. 345,646 5,485,807
Indefinite-lived intangible assets................................... 568,414 893,425
Finite-lived intangible assets, net.................................. 784,633 2,242,503
Marketable securities and other investments.......................... 79,432 107,569
Other assets......................................................... 24,617 25,888
----------- ----------
$ 2,521,129 $9,573,028
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 225,767 $ 285,761
Current portion of long-term debt and capital lease obligation... 77,273 62,201
Current portion of deferred revenue.............................. 234,394 261,420
----------- ----------
Total current liabilities..................................... 537,434 609,382
Deferred tax liability............................................... 433,384 1,086,724
Long-term debt and capital lease obligation, less current portion.... 224,964 271,029
Deferred revenue, less current portion............................... 86,990 109,507
Other liabilities.................................................... 5,618 6,286
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, par value $.01 per share........................ -- --
Common stock, par value $.01 per share........................... 4,182 4,179
Additional paid-in capital....................................... 8,363,205 8,360,289
Accumulated deficit.............................................. (7,052,249) (838,638)
Accumulated other comprehensive income, net of tax............... 21,826 24,101
Unearned compensation............................................ (5,959) (24,988)
Treasury stock, at cost.......................................... (98,266) (34,843)
----------- ----------
Total stockholders' equity.................................... 1,232,739 7,490,100
----------- ----------
$ 2,521,129 $9,573,028
=========== ==========
- --------
(1) Restated in Amendment No. 2 to Form 10-K/A filed on November 14, 2002.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
1
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
----------- --------- ----------- ---------
Revenues............................................................ $ 271,496 $ 294,662 $ 562,104 $ 617,635
Operating expenses:
Operating expenses, excluding stock compensation, depreciation
and amortization, write-down and impairment charges............ 212,362 212,518 406,856 434,743
Stock compensation............................................... 1,369 8,012 18,294 17,157
Depreciation and amortization.................................... 120,801 235,295 237,276 473,863
Write-down of capitalized patent litigation costs................ 44,424 -- 44,424 --
Impairment of intangible assets.................................. 1,259,147 -- 1,259,147 --
----------- --------- ----------- ---------
1,638,103 455,825 1,965,997 925,763
----------- --------- ----------- ---------
Operating loss...................................................... (1,366,607) (161,163) (1,403,893) (308,128)
Interest expense.................................................... (2,897) (7,551) (5,521) (19,102)
Other (expense) income, net......................................... (9,125) (820) (17,380) 1,054
----------- --------- ----------- ---------
Loss before income taxes, extraordinary loss on debt extinguishment
and cumulative effect of an accounting change..................... (1,378,629) (169,534) (1,426,794) (326,176)
Income tax benefit.................................................. (495,239) (23,740) (516,464) (45,020)
----------- --------- ----------- ---------
Loss before extraordinary loss on debt extinguishment and cumulative
effect of an accounting change.................................... (883,390) (145,794) (910,330) (281,156)
Extraordinary loss on debt extinguishment, net of tax............... -- (2,100) -- (2,100)
Cumulative effect of an accounting change, net of tax............... -- -- (5,303,281) --
----------- --------- ----------- ---------
Net loss............................................................ $ (883,390) $(147,894) $(6,213,611) $(283,256)
=========== ========= =========== =========
Basic and diluted loss per share:
Loss before extraordinary loss on debt extinguishment and
cumulative effect of an accounting change...................... $ (2.15) $ (0.35) $ (2.20) $ (0.68)
Extraordinary loss on debt extinguishment, net of tax............ -- (0.01) -- (0.01)
Cumulative effect of an accounting change, net of tax............ -- -- (12.84) --
----------- --------- ----------- ---------
Net loss......................................................... $ (2.15) $ (0.36) $ (15.04) $ (0.69)
=========== ========= =========== =========
Weighted average shares outstanding................................. 411,348 411,461 413,067 411,329
Weighted average shares outstanding, assuming dilution.............. 411,348 411,461 413,067 411,329
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
2
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Balance at beginning of period.................................. $2,182,134 $7,892,418 $ 7,490,100 $8,025,240
Net loss........................................................ (883,390) (147,894) (6,213,611) (283,256)
Other comprehensive income (loss), net of taxes................. (2,406) (51) (2,275) (11,130)
---------- ---------- ----------- ----------
Comprehensive loss.............................................. (885,796) (147,945) (6,215,886) (294,386)
---------- ---------- ----------- ----------
Purchases of treasury stock..................................... (63,423) -- (63,423) --
Other, principally shares issued pursuant to stock option plans,
including tax benefit, and amortization of unearned
compensation.................................................. (176) 19,309 21,948 32,928
---------- ---------- ----------- ----------
Balance at end of period........................................ $1,232,739 $7,763,782 $ 1,232,739 $7,763,782
========== ========== =========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
3
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Restated
Six Months Ended
June 30,
----------------------
2002 2001
----------- ---------
Cash flows from operating activities:
Net loss............................................................................ $(6,213,611) $(283,256)
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative effect of an accounting change, net of tax.............................. 5,303,281 --
Depreciation and amortization...................................................... 237,276 473,863
Deferred income taxes.............................................................. (551,541) (92,805)
Tax benefit associated with stock options.......................................... 1,651 9,400
Stock compensation expense......................................................... 18,294 17,157
Write-down of capitalized patent litigation costs.................................. 44,424 --
Impairment of intangible assets.................................................... 1,259,147 --
Investment write down.............................................................. 12,216 4,000
Loss on asset dispositions......................................................... 499 282
Changes in operating assets and liabilities:
Receivables....................................................................... 125,351 43,540
Other assets...................................................................... 8,557 8,973
Accounts payable, accrued expenses and other liabilities.......................... (43,314) 234
Deferred revenue.................................................................. (49,150) (58,108)
----------- ---------
Net cash provided by operating activities....................................... 153,080 123,280
----------- ---------
Cash flows from investing activities:
Investments and acquisitions........................................................ -- (8,508)
Purchases of marketable securities.................................................. (22,337) (56,727)
Sales and maturities of marketable securities....................................... 46,279 68,427
Sales of assets..................................................................... 2 106,011
Additions to property and equipment................................................. (4,739) (12,122)
Additions to intangible assets...................................................... (18,221) (17,090)
----------- ---------
Net cash provided by investing activities....................................... 984 79,991
----------- ---------
Cash flows from financing activities:
Repayments of borrowings under bank credit facilities and capital lease obligations. (30,993) (184,014)
Repayment of senior subordinated notes.............................................. -- (71,034)
Purchases of treasury stock......................................................... (63,423) --
Proceeds from exercise of stock options............................................. 1,268 6,371
Distributions to minority interests................................................. (9,857) (8,768)
----------- ---------
Net cash used in financing activities........................................... (103,005) (257,445)
----------- ---------
Effect of exchange rate changes on cash and cash equivalents.......................... 664 86
----------- ---------
Net increase (decrease) in cash and cash equivalents............................ 51,723 (54,088)
Cash and cash equivalents at beginning of period...................................... 349,250 488,046
----------- ---------
Cash and cash equivalents at end of period............................................ $ 400,973 $ 433,958
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for income taxes.......................................................... $ 26,134 $ 64,599
Cash paid for interest.............................................................. 4,851 19,161
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
4
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(1) Organization and Basis of Presentation
Gemstar-TV Guide International, Inc., a Delaware corporation ("Gemstar" or
together with its consolidated subsidiaries, the "Company") is a leading global
technology and media company focused on consumer entertainment.
The accompanying Unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with the accounting policies described in the
Company's 2001 Annual Report Form 10-K Report, as amended, and the interim
period reporting requirements of Form 10-Q. Accordingly, certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These Unaudited Condensed Consolidated Financial Statements should be
read in conjunction with the Company's Annual Report on Form 10-K as amended
for the year ended December 31, 2001.
The accompanying Condensed Consolidated Financial Statements have not been
reviewed by an independent public accountant in accordance with Statement of
Auditing Standards No. 71, Review of Interim Financial Information ("SAS 71"),
and, therefore, should not be relied upon.
The Company's Unaudited Condensed Consolidated Statements of Operations and
Cash Flows for the three and six months ended June 30, 2001 and its Unaudited
Condensed Consolidated Balance Sheets as of December 31, 2001 have been
restated (see Note 2). All related dollar and per share amounts have been
adjusted throughout the notes to the Unaudited Condensed Consolidated Financial
Statements.
Certain financial statement items for prior periods have been reclassified
to conform with the 2002 presentation. See Note 6.
(2) Restatement
Following the recommendation of the Audit Committee of the Company's Board
of Directors, the Company made a determination to restate its previously filed
consolidated financial statements for the year ended December 31, 2001,
including the interim periods within that year and the periods ended March 31,
2002 and June 30, 2002 related to the following transactions:
(a) The Company entered into a transaction comprised of a series of
agreements beginning in the first quarter of 2001 and completed in the second
quarter of 2001, in which the Company (1) acquired the intellectual property of
a private company in exchange for $750,000 cash and advertising with a fair
value of $20 million, and (2) paid $2 million in exchange for an option to
purchase certain assets of the private Company at a price of $3 million (the
"Option"). The sellers of the intellectual property have the right to require
the exercise of the Option if certain performance criteria are met.
Additionally,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
5
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
the Company was conditionally obligated to pay $250,000 upon the successful
transfer of certain patents to the Company. The $250,000 was paid in the third
quarter 2003.
Initially, the Company recorded the intellectual property purchased at an
amount equal to the $750,000 cash paid to the sellers plus advertising with a
fair value of $20 million granted to the sellers. In addition, the Option and
related legal costs were recorded as an investment of $2.5 million. During
2001, the Company recognized $20 million of advertising revenue as it was used
by the sellers and fully amortized the $20.75 million of intellectual property.
Notwithstanding the contractual terms of the transaction, the Company did
not find sufficient contemporaneous evidence to justify the $20.75 million
valuation for the intellectual property received. The intellectual property was
not appraised at the time of the transaction. Given the substance of the
negotiations considered as a whole, the Company concluded that the most
reliable evidence of the valuation of the intellectual property was the cash
component of the transaction negotiated and agreed upon by the parties.
Consequently, the Company determined that the best evidence of the fair value
of the intellectual property was $6 million, which was the total amount of cash
consideration that the sellers had required and could receive under the terms
of the transaction. To date, the Company has paid $2.75 million to the sellers
in connection with this transaction.
Accordingly, the Company determined that the transaction should be recorded
as the acquisition of intellectual property for cash and related expenses
totaling $3.4 million. Consequently, the Company reversed $20 million of
advertising revenue as well as $20.75 million of amortization expense. The $3.4
million recorded as intellectual property is being amortized over its estimated
useful life of eight years.
The effect of the restatement adjustment on the three and six months ended
June 30, 2001 was to reduce revenues by $4.0 million and $5.9 million,
respectively, and to reduce amortization expense by $5 million for both
periods. This restatement reduced revenues of the Interactive Platform Sector
for the three and six months ended June 30, 2001 by approximately 20% and 17%,
respectively, as calculated before restatement.
(b) The Company recognized $113.5 million in licensing revenues from January
1, 2000 through March 31, 2002 under an expired license agreement with
Scientific-Atlanta, Inc. Such revenue had been recognized under Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), as the Company believed there was persuasive evidence that an
arrangement existed, delivery occurred or services had been provided, a portion
of the license fees under the agreement was determinable, and the amount
recognized was deemed to be collectible.
In consultation with its recently engaged independent accounting firm, the
Company determined that it had misapplied the collectibility criteria of SAB
101 as there was insufficient contemporaneous evidence of Scientific-Atlanta's
intent to
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
6
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
pay. Accordingly, the Company has restated its previously filed financial
statements for the periods ended June 30, 2002 and March 31, 2002, the year
ended December 31, 2001, the nine months ended December 31, 2000 and the year
ended March 31, 2000 for the reversal of licensing revenues related to
Scientific-Atlanta. The effect of the restatement adjustment on the three and
six months ended June 30, 2001 was to reduce revenues by $21.8 million and
$39.1 million, respectively, and to reduce revenues by $5.8 million for the six
months ended June 30, 2002. There was no revenue impact in the three months
ended June 30, 2002. However, the Company reversed bad debt expense recorded
during the quarter ended June 30, 2002, totaling $113.5 million.
(c) The Company discovered that a clerical error had been made in the
calculation of the value of warrants that were received in connection with a
licensing transaction in the second quarter of 2001. The effect of correcting
the error was to reduce the value of the warrants and related deferred revenue
by $11.8 million at the date of the transaction. In addition, deferred revenue
accreted into earnings over an 18-year period was reduced by $164,000 and
$328,000 during the three and six month periods ended June 30, 2002,
respectively, as a result of the corrected warrant valuation. During the fourth
quarter 2001, the write-down of the fair value of the investment in the
warrants decreased from $10.4 million as originally recorded to $5.2 million as
adjusted. Lastly, the Company reduced its investment in the warrants by $3.6
million during the three and six months ended June 30, 2002 for other than a
temporary decline in market value.
(d) The Company determined that one of its equity affiliates incorrectly
accounted for warrants of one of its investees. Specifically, the equity
affiliate incorrectly accounted for these warrants under Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, instead of under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The impact of the restatement as
of December 31, 2001, is to increase accumulated deficit and increase
accumulated other comprehensive income by $9.1 million each. The impact of the
restatement for the three months ended June 30, 2002 increased investments $4.6
million, decreased accumulated other comprehensive income $9.1 million and
increased other income $13.7 million. The impact of the restatement for the six
months ended June 30, 2002 increased other expenses $9.1 million.
In recording the above mentioned restatements, the Company also recorded the
applicable tax effects.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
7
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
The Unaudited Condensed Consolidated Financial Statements as of December 31,
2001 and for the three and six months ended June 30, 2002 and 2001 and notes
thereto have been restated to include the effects of the corrections described
above. These Unaudited Condensed Consolidated Financial Statements have not
been audited or reviewed by an independent accounting firm and should not be
relied upon. The following financial statement line items were impacted:
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
As Previously As Previously
Restated Reported Restated Reported
June 30, June 30, December 31, December 31,
2002 2002 2001 2001
----------- ------------- ------------ -------------
Receivables, net.................................. n/a n/a $ 285,076 $ 392,717
Total current assets.............................. n/a n/a 729,886 837,527
Finite-lived intangible assets, net............... $ 784,633 $ 781,667 2,242,503 2,239,312
Marketable securities and other investments....... 79,432 81,962 107,569 116,732
Total assets...................................... 2,521,129 2,520,693 9,573,028 9,686,641
Accounts payable and accrued expenses............. 225,767 222,838 285,761 285,642
Current portion of deferred revenue............... 234,394 233,728 261,420 261,082
Total current liabilities......................... 537,434 533,839 609,382 608,925
Deferred tax liability............................ 433,384 432,803 1,086,724 1,127,933
Deferred revenue, less current portion............ 86,990 87,647 109,507 121,330
Accumulated deficit............................... (7,052,249) (7,049,166) (838,638) (771,879)
Accumulated other comprehensive income, net of tax n/a n/a 24,101 18,380
Total stockholders' equity........................ 1,232,739 1,235,822 7,490,100 7,551,138
Total liabilities and stockholders' equity........ 2,521,129 2,520,693 9,573,028 9,686,641
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
8
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
As Previously As Previously
Restated Reported Restated Reported
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2002 2002 2002
------------ ------------- ----------- -------------
Revenues...................................................... $ 271,496 $ 271,659 $ 562,104 $ 568,246
Operating expenses, excluding stock compensation, depreciation
and amortization, write-down and impairment charges......... 212,362 325,818 406,856 520,312
Depreciation and amortization................................. 120,801 120,688 237,276 237,050
Total operating expenses...................................... 1,638,103 1,751,446 1,965,997 2,079,227
Operating loss................................................ (1,366,607) (1,479,787) (1,403,893) (1,510,981)
Other (expense) income, net................................... (9,125) (18,242) (17,380) (21,920)
Loss before income taxes, extraordinary loss on debt
extinguishment and cumulative effect of an accounting
change...................................................... (1,378,629) (1,500,926) (1,426,794) (1,538,422)
Income tax benefit............................................ (495,239) (547,134) (516,464) (564,416)
Loss before extraordinary loss on debt extinguishment and
cumulative effect of an accounting change................... (883,390) (953,792) (910,330) (974,006)
Net loss...................................................... (883,390) (953,792) (6,213,611) (6,277,287)
Basic and diluted loss per share:.............................
Loss before extraordinary loss on debt extinguishment and
cumulative effect of an accounting change................... (2.15) (2.32) (2.20) (2.36)
Net loss...................................................... (2.15) (2.32) (15.04) (15.20)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
9
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
As Previously As Previously
Restated Reported Restated Six Reported
Three Months Three Months Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- ------------- -------------
Revenues................................................. $ 294,662 $ 320,498 $ 617,635 $ 662,697
Depreciation and amortization............................ 235,295 240,295 473,863 478,863
Total operating expenses................................. 455,825 460,825 925,763 930,763
Operating loss........................................... (161,163) (140,327) (308,128) (268,066)
Loss before income taxes, extraordinary loss on debt
extinguishment and cumulative effect of an accounting
change................................................. (169,534) (148,698) (326,176) (286,114)
Income tax benefit....................................... (23,740) (16,041) (45,020) (30,217)
Loss before extraordinary loss on debt extinguishment and
cumulative effect of an accounting change.............. (145,794) (132,657) (281,156) (255,897)
Net loss................................................. (147,894) (134,757) (283,256) (257,997)
Basic and diluted loss per share:
Loss before extraordinary loss on debt extinguishment and
cumulative effect of an accounting change.............. (0.35) (0.32) (0.68) (0.62)
Net loss................................................. (0.36) (0.33) (0.69) (0.63)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(In thousands)
As Previously As Previously
Restated Reported Restated Reported
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2002 June 30, 2002
------------- ------------- ------------- -------------
Balance at beginning of period................. $2,182,134 $2,249,898 $ 7,490,100 $ 7,551,138
Net loss....................................... (883,390) (953,792) (6,213,611) (6,277,287)
Other comprehensive income (loss), net of taxes (2,406) 3,315 (2,275) 3,446
Total comprehensive loss....................... (885,796) (950,477) (6,215,886) (6,273,841)
Balance at end of period....................... 1,232,739 1,235,822 1,232,739 1,235,822
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
10
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Restatement (continued)
As Previously As Previously
Restated Reported Restated Reported
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- ------------- -------------
Balance at beginning of period.................................... $ 7,892,418 $ 7,935,263 $8,025,240 $8,055,963
Net loss.......................................................... (147,894) (134,757) (283,256) (257,997)
Comprehensive loss................................................ (147,945) (134,808) (294,386) (269,127)
Balance at end of period.......................................... 7,763,782 7,819,764 7,763,782 7,819,764
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
As Previously As Previously
Restated Reported Restated Six Reported
Six Months Six Months Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2001 June 30, 2001
------------- ------------- ------------- -------------
Net loss.......................................................... $(6,213,611) $(6,277,287) $(283,256) $(257,997)
Adjustment to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................. 237,276 237,050 473,863 478,863
Deferred income taxes.......................................... (551,541) (596,683) (92,805) (78,346)
Investment write down.......................................... 12,216 17,672 n/a n/a
Changes in operating assets and liabilities:
Receivables................................................ 125,351 111,891 43,540 648
Other assets............................................... 8,557 7,315 n/a n/a
Accounts payable, accrued expenses and other
liabilities.............................................. (43,314) (46,125) 234 580
Deferred revenue........................................... n/a n/a (58,108) (64,041)
Investments and acquisitions............................... n/a n/a (8,508) (8,642)
Additions to intangible assets............................. n/a n/a (17,090) (16,956)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
11
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Significant Developments
The Company's normal and customary business practice is to assess whether
certain events necessitate a change in assumptions and estimates as they relate
to its established accounting policies on revenue recognition, allowances,
capitalized patent litigation costs, and the carrying value of intangible
assets. The Company has assessed the impact of certain recent events to
determine their effect on the Company's financial results.
On June 21, 2002, an Administrative Law Judge issued a Final Initial
Determination ("ID") in a United States International Trade Commission ("ITC")
proceeding denying the Company's request for an exclusionary order to prevent
further importation of certain set-top boxes containing interactive program
guides ("IPGs") which the Company believes infringe some of its patents. The
ITC determined not to review this decision on August 29, 2002. On July 2, 2002,
the United States District Court for the Western District of North Carolina in
the legal proceeding SuperGuide Corporation v. DirecTV Enterprises, Inc., et al
(the "SuperGuide case") ruled that certain of the defendants' products did not
infringe the SuperGuide Patents, and on July 25, 2002, the court dismissed all
remaining claims in the case. The Company was a third party defendant in this
matter and had joined in SuperGuide's infringement allegations against
EchoStar. The Company has now appealed the SuperGuide and ITC rulings. (See
Note 11.)
The Company assessed the impact of these rulings on its assumptions and
estimates in applying its accounting policies as follows:
. The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect, strengthen and enforce the
Company's intellectual property rights is to capitalize such costs as
intangible assets and to amortize them using the straight-line method
over the remaining lives of the related patents. The Company reviewed
the carrying value of capitalized patent litigation costs related to the
ITC and SuperGuide cases. Although the Company has filed appeals in the
ITC and SuperGuide cases, the Company concluded that these rulings
raised doubts as to whether certain capitalized patent litigation costs
could be reasonably considered to strengthen the value of the patents.
Accordingly, the Company recorded a write-down of $44.4 million to
capitalized patent litigation costs during the quarter ended June 30,
2002 and will expense all of the legal costs of the SuperGuide and ITC
cases on a going forward basis. (See Note 9.)
Under the requirements of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets ("Statement 142"),
goodwill and indefinite-lived intangible assets must be tested on an interim
basis if events or circumstances indicate that the estimated fair value of the
assets has decreased below its carrying value. Also, under the requirements of
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"), the Company is required to record impairment losses on
long-lived assets used in operations when events and circumstances indicate
that long-lived assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. In view of the above-mentioned adverse ruling in the ITC
proceeding and the additional fact that the Company has experienced a sustained
decline in its market capitalization (expressed as its share
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
12
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Significant Developments (continued)
price multiplied by the number of shares outstanding) during 2002 from $11.5
billion at January 1, 2002 to $2.2 billion at June 30, 2002, the Company
performed an interim impairment analysis of its goodwill, indefinite-lived
intangible assets and certain finite-lived intangible assets as of June 30,
2002, with the assistance of a third-party valuation expert, with the following
results:
. Based on an interim impairment analysis under Statement 142, the Company
recorded pre-tax impairment charges to its goodwill and trademark of
$22.8 million and $24.0 million, respectively, during the quarter ended
June 30, 2002. These charges were recorded as operating expenses in the
accompanying Unaudited Condensed Consolidated Statements of Operations.
(See Note 5.)
. Based on an impairment analysis under Statement 144, the Company
recognized a pre-tax impairment loss of $1,212.3 million during the
quarter ended June 30, 2002, after it was determined that the carrying
value of certain finite-lived intangible assets exceeded their fair
value. (See Note 5.)
(4) Accounting Change--Goodwill and Intangible Assets
The Company adopted Statement 142 effective January 1, 2002. Under Statement
142, goodwill and certain other intangible assets are no longer systematically
amortized but instead are reviewed for impairment at least annually and any
excess in carrying value over the estimated fair value is charged to results of
operations. The previous method for determining impairment utilized an
undiscounted cash flow approach for the initial impairment assessment, while
Statement 142 utilizes a fair value approach. The indefinite-lived intangible
asset and goodwill impairment charges discussed below are the result of the
change in the accounting method for determining the impairment of goodwill and
certain intangible assets.
The Company, primarily through the acquisition of TV Guide on July 12, 2000,
has a significant amount of goodwill and indefinite-lived intangible assets,
consisting of trademark and publishing rights.
In connection with the adoption of Statement 142, the Company determined
that the Company's trademark, trade name and publishing rights have indefinite
useful lives. Pursuant to the transitional rules of Statement 142, the Company
performed an impairment test of these assets, which resulted in an impairment
charge of $297.8 million ($187.8 million, net of tax, or $(0.45) per basic and
diluted share) as of January 1, 2002. The impairment charge represents the
excess of the carrying amount of a trademark over its estimated fair value as
determined by the Company, with the assistance of third party valuation
experts, utilizing the relief from royalty valuation method. This method
estimates the benefit to the Company resulting from owning rather than
licensing the trademark. The pre-tax charge impacted the Company's segments as
follows: Technology and Licensing, $133.9 million; Interactive Platform, $129.8
million; and Media and Services, $34.1 million.
Also in connection with the adoption of Statement 142, the Company completed
the transitional goodwill impairment test during the second quarter of 2002 and
recorded an impairment charge of $5,115.5 million, or $(12.39) per basic and
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
13
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Accounting Change--Goodwill and Intangible Assets (continued)
diluted share, as of January 1, 2002. A third party valuation expert,
considering both income and market approaches, estimated the enterprise values
of certain reporting units. The impaired goodwill is not deductible for tax
purposes, and as a result, no tax benefit was recorded in relation to the
impairment charge. The charge impacted the Company's segments as follows:
Technology and Licensing, $1,821.3 million; Interactive Platform, $2,890.2
million; and Media and Services, $404.0 million.
In total, the charges to goodwill and indefinite-lived intangible assets
have been recorded as the cumulative effect of an accounting change in the
amount of $5,303.3 million, net of tax, or $(12.84) per basic and diluted share
as of January 1, 2002 in the accompanying Unaudited Condensed Consolidated
Statements of Operations.
Prior to the adoption of Statement 142, the Company amortized goodwill and
indefinite-lived intangible assets over their estimated useful lives ranging
from 5 to 40 years. Had the Company not amortized goodwill and indefinite-lived
intangible assets consistent with the provisions of Statement 142 in prior
periods, the Company's net loss would have been affected as follows (in
thousands, except per share data):
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported loss before cumulative effect of an accounting change.................... $(883,390) $(147,894) $(910,330) $(283,256)
Add back: Goodwill amortization................................................... -- 110,118 -- 223,243
Add back: Indefinite-lived intangible assets amortization, net of tax............. -- 5,461 -- 11,712
--------- --------- --------- ---------
Adjusted loss before cumulative effect of an accounting change.................... $(883,390) $ (32,315) $(910,330) $ (48,301)
========= ========= ========= =========
Basic and diluted loss per share before cumulative effect of an accounting change:
Reported...................................................................... $ (2.15) $ (0.36) $ (2.20) $ (0.69)
Add back: Goodwill amortization............................................... -- 0.27 -- 0.54
Add back: Indefinite-lived intangible assets amortization, net of tax......... -- 0.01 -- 0.03
--------- --------- --------- ---------
Adjusted basic and diluted loss per share before cumulative effect of an
accounting change............................................................ $ (2.15) $ (0.08) $ (2.20) $ (0.12)
========= ========= ========= =========
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
14
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Accounting Change--Goodwill and Intangible Assets (continued)
Changes in the carrying amount of goodwill and intangible assets with
indefinite lives for the six months ended June 30, 2002 and 2001 are as follows
(in thousands):
2002 2001
---------------------------------- -------------------------------
Trademark Trademark
and Trade Publishing and Trade Publishing
Goodwill Name Rights Goodwill Name Rights
----------- --------- ---------- ---------- --------- ----------
Balance at December 31,............................. $ 5,485,807 $ 653,018 $240,407 $5,901,967 $662,613 $259,398
Current period additions and adjustments to purchase
price allocation................................... (1,814) (3,200) -- (51,499) 34 --
Amortization expense................................ -- -- -- (223,243) (8,468) (10,108)
Transitional impairment charge...................... (5,115,514) (297,807) -- -- -- --
Interim impairment charge (Note 5).................. (22,833) (24,004) -- -- -- --
----------- --------- -------- ---------- -------- --------
Balance at June 30,................................. $ 345,646 $ 328,007 $240,407 $5,627,225 $654,179 $249,290
=========== ========= ======== ========== ======== ========
In conjunction with the adoption of Statement 142, the Company reassessed
the useful lives and residual values of its finite-lived intangible assets
acquired in purchase business combinations and determined that no revisions
were necessary. Intangible assets with finite lives at June 30, 2002 and
December 31, 2001 are as follows (in thousands):
Impairment Amortization
Accumulated Charge/Write Net Period
Cost Amortization down Balance (Years)
---------- ------------ ------------ ---------- ------------
June 30, 2002--Restated
- -----------------------
Intangible assets with finite lives:
Contracts (Note 5)................... $1,932,000 $(381,742) $(1,210,799) $ 339,459 5-10
Customer lists....................... 722,781 (424,113) -- 298,668 3-5
Patents (Note 9)..................... 239,597 (48,369) (45,122) 146,106 5-15
Other................................ 2,100 (887) (813) 400 5
---------- --------- ----------- ----------
Total finite-lived intangible assets.... $2,896,478 $(855,111) $(1,256,734) $ 784,633
========== ========= =========== ==========
December 31, 2001--Restated
- ---------------------------
Intangible assets with finite lives:
Contracts............................ $1,932,000 $(284,742) $ -- $1,647,258 5-10
Customer lists....................... 722,781 (315,004) -- 407,777 3-5
Patents.............................. 221,364 (35,348) -- 186,016 5-15
Other................................ 2,041 (589) -- 1,452 5
---------- --------- ----------- ----------
Total finite-lived intangible assets.... $2,878,186 $(635,683) $ -- $2,242,503
========== ========= =========== ==========
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
15
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) Accounting Change--Goodwill and Intangible Assets (continued)
Amortization expense (restated) was $219.4 million and $457.2 million for
the six months ended June 30, 2002 and 2001, respectively. Estimated
amortization expense (restated) for the remainder of 2002 and the succeeding
five years is expected to be as follows: $137.5 million--2002 (remainder);
$190.1 million--2003; $93.5 million--2004; $75.2 million--2005;
$54.3 million--2006; and $53.5 million--2007.
(5) Impairment Charges
In accordance with Statement 144, the Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate
that long-lived assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. During the second quarter of 2002, the ID of the Administrative
Law Judge in the ITC proceeding and a sustained decline in the Company's market
capitalization triggered an interim assessment by the Company to determine
whether certain of its finite-lived intangible assets may be impaired.
Accordingly, the Company estimated the undiscounted future net cash flows to be
generated by these finite-lived intangible assets to be less than their
carrying amount of $1,463.0 million. The cash flow projections related to these
finite-lived intangible assets as of June 30, 2002 reflect certain anticipated
changes in the Company's advertising delivery mechanism on TV Guide Interactive
and anticipated consolidation in the cable television industry. The Company,
with the assistance of a third party valuation expert, then estimated the fair
value of these finite-lived intangible assets at $250.7 million using the
traditional approach under Statement 144 as a measure of fair value. This
resulted in a pre-tax impairment loss of $1,212.3 million.
Under Statement 142, in addition to an annual test, goodwill and
indefinite-lived intangible assets must be tested on an interim basis if events
or circumstances indicate that the estimated fair value of the asset has
decreased below its carrying value. During the second quarter of 2002, the
Initial Determination of the Administrative Law Judge in the ITC proceeding and
the sustained decline in the Company's market capitalization triggered an
interim assessment by the Company to determine whether the fair value of
goodwill and indefinite-lived intangible assets may be less than their carrying
values as of June 30, 2002. The Company, with the assistance of a third-party
valuation expert, estimated the fair values of the Company's indefinite-lived
intangible assets and certain reporting units as of June 30, 2002. As a result,
the Company determined that impairment charges of $22.8 million and $24.0
million should be recorded to goodwill and trademark, respectively.
In total, interim impairment charges of $1,259.1 million were recorded as
operating expenses in the accompanying Unaudited Condensed Consolidated
Statements of Operations. Their impacts on the Company's segments were $(147.0)
million to the Technology and Licensing sector, $(1,104.0) million to the
Interactive Platform sector, and $(8.1) million to the Media and Services
sector.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
16
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Reclassification--Cooperative Advertising and Product Placement Costs
In November 2001, the Financial Accounting Standards Board's ("FASB's")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No.
01-09, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products). EITF No. 01-09, which is effective for
periods commencing after December 31, 2001, clarifies the income statement
classification of costs incurred by a vendor for certain cooperative
advertising and product placement paid to a vendor's customers. As a result of
the Company's adoption of the EITF consensus, certain of the Company's
cooperative advertising and product placement costs previously classified as
operating expenses have been reflected as a reduction of revenues earned from
that activity. Where applicable, amounts presented in prior periods have been
reclassified to comply with the income statement classifications for the
current period. Approximately $13.7 million and $24.0 million of cooperative
advertising and product placement costs previously classified as expenses have
been reflected as a reduction of revenues in the income statement for the three
and six-month periods ended June 30, 2001, respectively.
(7) Acquisitions and Sales
TV Guide--Purchase Reserves
For the six months ended June 30, 2002, approximately $9.1 million ($7.3
million in third-party contract termination costs and $1.8 million in
separation costs) has been charged against the reserve for third-party contract
termination and separation costs included in the purchase price allocation from
the acquisition of TV Guide. Additionally, for the same period, the reserve was
reduced by approximately $2.4 million and credited against goodwill. The
reserve had an outstanding balance of $14.9 million at December 31, 2001. See
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
for a description of the transaction. The Company expects that the remaining
reserve for third-party contract termination and separation costs of $3.4
million will be expended during 2002.
WGN Superstation Transaction
In April 2001, the Company sold the business that distributes the WGN
Superstation signal. No gain or loss was recognized as a result of the
transaction. Concurrent with this transaction, the Company received a $100
million advertising commitment over a six year period from the acquirer.
SkyMall Transaction
On July 18, 2001, the Company acquired all of the outstanding common stock
of SkyMall. Under the terms of the agreement, SkyMall's stockholders received
0.03759 shares of Gemstar common stock and $1.50 for each share of SkyMall
common stock outstanding. The Unaudited Condensed Consolidated Financial
Statements include the results of operations of SkyMall from July 18, 2001.
SkyMall is a specialty retailer that provides a large selection of
premium-quality products and services to consumers from a wide variety of
merchants and partners.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
17
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Acquisitions and Sales (continued)
SkyMall Transaction (continued)
The aggregate purchase price of the SkyMall Transaction was $50.1 million,
which included cash of $22.2 million and approximately 741,000 shares of
Gemstar common stock issued to SkyMall stockholders at $36.58 per share, the
average price of the Company's common stock over the two-day period before and
after the SkyMall Transaction was agreed to and announced.
The purchase price also included $742,000, representing the fair value of
unexercised SkyMall options and warrants assumed by Gemstar and certain
transaction costs.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands). The
Company finalized the allocation of the purchase price as of June 30, 2002.
Assets
Current assets........................................ $ 8,464
Property and equipment................................ 7,207
Intangible assets..................................... 4,500
Other assets.......................................... 23
Goodwill.............................................. 61,707
-------
81,901
Liabilities
Current liabilities................................... 31,813
-------
Net purchase price....................................... $50,088
=======
The Company finalized its allocation of the purchase price to the fair value
of the acquired trade name at $4.5 million. The trade name is considered an
indefinite-lived intangible asset and is not subject to amortization.
The Company finalized its allocation of goodwill ($61.7 million) to its
applicable reporting unit in accordance with Statement 142. Goodwill generated
in this transaction is not subject to amortization in accordance with Statement
142 and is not deductible for tax purposes. In connection with the adoption of
Statement 142, the Company recorded an impairment charge of $37.7 million as of
January 1, 2002 related to the goodwill from the acquisition of SkyMall. The
goodwill balance at September 30, 2002 from this acquisition was $24.0 million
(see Note 4).
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
18
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Acquisitions and Sales (continued)
SkyMall Transaction (continued)
The following unaudited pro forma Financial Information reflects the
Company's results of operations for the three and six-month periods ended June
30, 2001 as though the SkyMall transaction had been completed as of January 1,
2001 (in thousands, except per share amounts):
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
2002 2001 2002 2001
--------- --------- ----------- ---------
Revenues.......................... $ 271,496 $ 305,059 $ 562,104 $ 639,042
Net loss.......................... (883,390) (148,287) (6,213,611) (284,122)
Basic and diluted loss per share.. (2.15) (0.36) (15.04) (0.69)
Magazine Distribution Business
In June 2002, the Company exited from its magazine distribution business by
assigning its existing distribution contracts to a third party and contracting
with the same party for distribution of TV Guide Magazine. The Company
recognized approximately $3.3 million in exit costs, which are included as
operating expenses in the accompanying Unaudited Condensed Consolidated
Statements of Operations. No gain or loss was recognized as a result of this
transaction.
(8) Receivables, net
At June 30, 2002, approximately $65.6 million, or 41%, of the Company's net
receivables are due from five entities.
(9) Capitalized Patent Costs
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect, strengthen and enforce the Company's
intellectual property rights is to defer such costs as intangible assets and to
amortize them using the straight-line method over the remaining lives of the
related patents. The Company reviews capitalized patent litigation costs
whenever events or changes in circumstances, such as adverse administrative or
judicial rulings, indicate that certain deferred costs should be expensed. The
propriety of such characterizations is determined by the Company based, in
part, on the advice of outside counsel. In June 2002, the Company received an
unfavorable ruling in a proceeding before the ITC involving three patents. The
ITC determined not to review this decision on August 29, 2002. The Company also
received an unfavorable ruling in the SuperGuide case. (See Note 11.) Although
the Company has appealed the ITC and SuperGuide rulings, the Company concluded
that as a result of the rulings, certain capitalized patent litigation costs
could no longer be
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
19
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) Capitalized Patent Costs (continued)
considered to strengthen the value of the patents. Accordingly, the Company
recorded a write-down of approximately $44.4 million to capitalized patent
litigation costs during the three months ended June 30, 2002, and will expense
all future legal costs associated with the SuperGuide and ITC cases. The
Company continues to capitalize patent prosecution and litigation costs which
the Company believes will protect, strengthen and enforce the Company's
intellectual property rights.
(10) Credit Arrangements
The Company's wholly owned subsidiary, TV Guide, has a $300 million six-year
revolving credit facility and a $300 million four-year amortizing term loan,
both expiring in February, 2005 with a group of banks. Borrowings under the
credit facilities bear interest (2.84% at June 30, 2002) either at the banks'
prime rate or LIBOR, both plus a margin based on a sliding scale tied to TV
Guide's leverage ratio, as defined in the facility. The credit facilities are
guaranteed by certain subsidiaries of TV Guide and the stock of TV Guide's
subsidiaries is pledged as collateral. The credit facilities impose
restrictions on TV Guide's ability to pay dividends to Gemstar tied to TV
Guide's leverage ratio. This restriction does not apply to Gemstar's ability to
pay dividends. As of June 30, 2002, TV Guide had available borrowing capacity
under the six-year revolving credit facility of $160.6 million. Principal
payments of $45 million in the remainder of 2002, $90 million in 2003 and $23
million in 2004 are due under the $300 million amortizing term loan.
Outstanding borrowings at June 30, 2002 were $138.4 million under the revolving
credit facility and $158.0 million under the term loan. At June 30, 2002, the
Company had an outstanding letter of credit issued under the revolving credit
facility for $1.0 million. The Company has determined that there is a
reasonable likelihood that TV Guide will be unable to maintain compliance with
a financial covenant in its term loan agreement during the coming twelve
months. The Company is currently evaluating options to maintain compliance or
mitigate the effects of any noncompliance.
The Company is a party to a loan guaranty to assist a printing services
supplier in obtaining a line of credit and term loans with a bank. The maximum
exposure to the Company created by this guaranty is $10.0 million.
(11) Legal Proceedings
The following is a description of material legal proceedings known to the
Company that have been filed subsequent to the Company's Form 10-K for the year
ended December 31, 2001 and Form 10-Q for the period ended March 31, 2002 or
material proceedings previously described in such filings that have undergone
significant changes.
On April 26, 1999, the Judicial Panel on Multi-District Litigation ("MDL
Panel") ordered that certain patent infringement lawsuits be coordinated or
consolidated for pretrial proceedings in the Northern District of Georgia (the
"MDL Transfer Order"). These lawsuits are more fully described in the Company's
Form 10-K filing, as amended, for the year ended December 31, 2001. These cases
involve Scientific-Atlanta and Pioneer Corporation, among other parties and
involve several patents. On August 30, 2002, the Company received an Order from
that court finding that two of the patents involved
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
20
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
in these cases were not infringed by certain digital set-top box products
produced by Scientific-Atlanta and Pioneer. On November 4, 2002, the court
ruled that the remaining Scientific-Atlanta and Pioneer products at issue in
this proceeding were not infringed by the two patents that were the subject of
the August 30/th/ ruling. The Company intends to seek review of these decisions
in the most expedited manner possible.
The MDL proceedings also involve three patents which were involved in a case
in the United States District Court for the Western District of North Carolina
entitled SuperGuide Corporation v. DirecTV Enterprises, Inc. et al. (the
"SuperGuide case"), described more fully herein. The Company is a third-party
defendant in the SuperGuide case and has joined in SuperGuide's infringement
allegations against EchoStar. In two orders dated July 2, 2002 and July 25,
2002, the North Carolina court ruled that the products of the defendants in the
SuperGuide case, including EchoStar's did not infringe the patents at issue.
This ruling was based in part on a previous ruling of that court interpreting
the scope of the patents at issue.
On October 25, 2002, the Georgia court hearing the MDL cases ruled that it
was obligated to accept the North Carolina court's previous ruling interpreting
the scope of the patents at issue without deciding whether the underlying
ruling was correct as a matter of law. The Georgia court has not ruled on
Scientific-Atlanta's infringement of these three patents under this
interpretation. The Company has previously announced that it is appealing the
SuperGuide case to the United States Court of Appeals for the Federal Circuit.
On October 18, 1999, a former employee of ODS Technologies, L.P. ("ODS"),
now a majority owned subsidiary of the Company, filed a complaint against ODS
and TV Guide in a Florida federal court, which complaint was amended on
November 12, 1999, asserting causes of action for violations of certain federal
statutes governing pension plans and for equitable estoppel. The amended
complaint sought an unspecified amount of damages for benefits allegedly due to
the plaintiff under his employment agreement with ODS. On April 22, 2002, the
court granted ODS and TV Guide summary judgment dismissing the case. The former
employee appealed the grant of summary judgment, but the appeal subsequently
was dismissed. The plaintiff has filed a motion for reinstatement and this case
is currently pending on appeal.
On January 18, 2000, the Company's StarSight subsidiary filed a patent
infringement action against TiVo Inc. ("TiVo") in the U.S. District Court for
the Northern District of California. The suit claims, among other matters, that
TiVo willfully infringed certain StarSight intellectual property by virtue of
TiVo's deployment, marketing, offers to sell and sale of personalized video
recorder devices containing an unlicensed interactive program guide ("IPG").
StarSight is seeking an injunction and monetary damages. On February 25, 2000,
TiVo answered StarSight's Complaint, and also filed counterclaims against the
Company and StarSight alleging, among others, that the Company has violated
federal antirust law and the California unfair business practices act. In its
counterclaims, TiVo seeks, among other relief, damages and an injunction. On
August 5, 2002, the court entered a stipulation at the parties' request to stay
the proceeding pending resolution
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
21
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
of the investigation before the ITC, described below, and the court has
accepted that agreement. After the resolution of any and all appeals stemming
from the ITC investigations (including any appeal to the United States Court of
Appeals for the Federal Circuit), we expect the court will be notified of this
fact and expect the case to be re-activated at that point.
During July and August 2000, TV Guide was served with more than 20 class
action complaints filed primarily in the U.S. District Court for the Southern
District of New York on behalf of magazine subscribers. These complaints, which
have been consolidated into a single action, allege that TV Guide, the Magazine
Publishers Association ("MPA"), and 12 other publishers of consumer magazines
have violated federal antitrust laws by conspiring to limit the discounting of
magazine subscription prices by means of rules adopted by the MPA and the Audit
Bureau of Circulation. The plaintiffs seek injunctive relief, unspecified
damages (trebled), and attorneys' fees and costs. Plaintiffs filed a motion for
partial summary judgment. After oral argument was heard on January 10, 2001,
the parties entered into settlement discussions. Settlement negotiations
continued over the next several months and in April 2002, the defendants
submitted final settlement documents to plaintiffs for their approval.
Subsequently, the parties signed a settlement agreement, and on July 3, 2002,
plaintiffs filed a motion for preliminary approval of the settlement. On August
29, 2002, the court held a hearing at which the pending motion was discussed.
The court entered an order on September 20, 2002, granting the motion for
preliminary approval.
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. On January 12, 2001, Pioneer Digital Technologies filed its first
amended complaint which claims, among other matters, that the Company and
certain of its subsidiaries have violated state antitrust and unfair
competition laws. Pioneer Digital Technologies is seeking damages and
injunctive relief against the Company. The parties are in pretrial proceedings.
In May 2002, the court set trial for September 2003.
On December 29, 2000, Gemstar International Group Limited, Barnes & Noble,
Inc. and Thomson Consumer Electronics were named as defendants in an action for
patent infringement by Jennifer Landau, an individual, that relates to e-book
technology. The Company was served with this action in May 2001. This action,
captioned Jennifer Landau v. Barnes & Noble, et al., USDC Case No. C-00-593-B,
was pending in the U.S. District Court for the District of New Hampshire. In
May 2002, Ms. Landau voluntarily dismissed this action with prejudice, and
there are no longer any claims pending against the Company or any other parties
to this litigation.
On February 14, 2001, the Company and its StarSight subsidiary filed a
complaint requesting that the ITC commence an investigation pursuant to Section
337 of the Tariff Act of 1930, as amended, 19 U.S.C. Section 1337 ("Section
337"), regarding imports of certain set-top boxes and components thereof. The
complaint alleges that Pioneer Corporation, Pioneer Digital Technologies, Inc.,
Pioneer North America, Inc., Pioneer New Media Technologies, Inc.,
Scientific-Atlanta, Inc., EchoStar Communications Corporation and SCI Systems,
Inc. (collectively "Respondents"), are violating Section 337 by their unlawful
importation into the United States, sale for importation into the United
States, and/or sale in the United States after importation, of set-top boxes
and/or components that infringe, directly, contributorily or by inducement, of
certain
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
22
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
patents owned by the Company. The complaint requests an order excluding from
entry into the United States all imported set-top boxes and components that
infringe, directly, contributorily or by inducement, any claims of the patents
in suit, and directing Respondents to cease and desist from importing,
marketing, advertising, demonstrating, warehousing, distributing, selling
and/or using set-top boxes or components that so infringe. On or about March
16, 2001, the ITC instituted the requested investigation referred to as "In the
Matter of Certain Set-Top Boxes and Components Thereof, Investigation
No. 337-TA-454 (ITC)". An administrative hearing was held during December 2001.
On June 21, 2002, the Administrative Law Judge issued his initial determination
("ID"), finding that all of the patents were valid, that none of the patents at
issue had been infringed by any of the Respondents, that one of the patents at
issue was unenforceable both because it had been misused by the Company and
also because a co-inventor had not been named on the patent, and that the
Company failed to establish the technical prong of the ITC's domestic industry
requirement, which requires the Company to practice its inventions covered by
the patents in suit. The Company believes the ID is erroneous in many respects
and that the proper application of the law does not support it. On July 5,
2002, the Company and StarSight filed their Petition for Review by the ITC of
the ID. Respondents and ITC Staff also filed Petitions for Review of certain
aspects of the ID. On August 29, 2002, the ITC determined not to review the ID
and entered an additional finding with regard to the technical prong of the
domestic industry requirement on one claim of one of the patents. The
Commission took no position on the patent misuse findings of the Administrative
Law Judge. The Company filed a notice of appeal of the ITC determination to the
the United States Court of Appeals for the Federal Circuit on October 25, 2002.
On March 23, 2001, Gemstar Development Corporation, a wholly owned
subsidiary of the Company, was added as a third-party defendant in the lawsuit
of SuperGuide Corporation v. DirecTV Enterprises, Inc., et al., in the U.S.
District Court for the Western District of North Carolina. The original claims
brought by SuperGuide Corporation against the defendants in this lawsuit are
for patent infringement with respect to three patents (the "SuperGuide
Patents"). In 1993, Gemstar Development Corporation received a license to the
SuperGuide Patents from SuperGuide Corporation within certain defined fields of
use. Defendants asked the court to join Gemstar Development Corporation to
these proceedings as a necessary party. After it was added as a party, Gemstar
Development Corporation brought claims for declaratory relief and breach of
contract against SuperGuide in this lawsuit relating to the 1993 license
agreement between SuperGuide and Gemstar Development Corporation. In addition,
Gemstar Development Corporation has asserted claims against EchoStar for
infringing the SuperGuide Patents within Gemstar's defined fields of use. By
orders dated July 2, 2002 and July 25, 2002, the District Court granted
defendants' motion for summary judgment finding that defendants do not infringe
the SuperGuide Patents based upon the manner in which the court previously
construed the SuperGuide Patents and dismissed all remaining claims in the case
without prejudice. The Company has filed a notice of appeal to the United
States Court of Appeals for the Federal Circuit.
On November 2, 2001, Thomson multimedia, Inc. ("Thomson") sought leave to
add the Company and certain subsidiaries into a case captioned Pegasus
Development Corporation and Personalized Media Communications, L.L.C. v.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
23
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
DirecTV, Inc., Hughes Electronics Corporation, Thomson Consumer Electronics,
Inc. and Philips Electronics North America Corporation; Thomson multimedia,
Inc. v. Pegasus Development Corporation, Personalized Media Communications,
L.L.C., TVG-PMC, Inc., StarSight Telecast, Inc., and Gemstar-TV Guide
International, Inc., United States District Court for the District of Delaware,
Case No. 00-1020 (GMS). At that time, Thomson asserted a declaratory judgment
claim against the Gemstar parties seeking a declaration of noninfringement and
invalidity of certain patents as to which the Company is a licensee. In
addition to its claim for declaratory relief (discussed above), Thomson has now
also added a claim for antitrust violations under federal and state law. On
April 22, 2002, Thomson also filed a tag-along notice with the Judicial Panel
for Multi-District Litigation (the "MDL Panel") requesting that this entire
action be transferred to Georgia for coordinated pretrial proceedings with the
MDL proceedings discussed in the Company's Form 10-K, as amended, for the
period ended December 31, 2001. On June 3, 2002, the MDL Panel issued a
Conditional Transfer Order and Simultaneous Separation and Remand of Certain
Claims conditionally transferring Thomson's antitrust claims to Georgia, but
separating and remanding the balance of the claims in this case to Delaware. In
response, Thomson filed a motion with the MDL Panel to transfer the entire case
to Georgia. On October 16, 2002, the MDL Panel issued an Order of Transfer and
Simultaneous Separation and Remand of Certain Claims in which it denied
Thomson's motion to transfer the entire case to Georgia. In so ruling, the MDL
Panel adopted its decision in the June 3, 2002 Conditional Transfer Order and
transferred Thomson's antitrust claims to Georgia, but separated and remanded
the balance of the claims in this case to Delaware. Now that the MDL Panel has
issued its final order, the Company understands that the Delaware litigation
will be reactivated, and Thomson's antitrust claims will be transferred and
coordinated for pretrial purposes with the Georgia MDL Proceedings.
On November 30, 2001, Thomson initiated an arbitration with the American
Arbitration Association against the Company. The Statement of Claims filed by
Thomson alleges that the Company has breached certain obligations under a group
of agreements signed by the parties as of December 31, 1999 relating to a joint
venture between the parties for revenue sharing of advertising on electronic
programming guides. On January 7, 2002, the Company filed an Answering
Statement and Counterclaim denying all allegations of the claims filed by
Thomson and asserting counterclaims against Thomson and Thomson multimedia,
S.A. ("Thomson S.A.") alleging, among other things, that Thomson S.A. had
breached certain of its obligations under one of the agreements signed by the
parties as of December 31, 1999 relating to the introduction of electronic
programming guides in Europe. In May 2002, the Company settled this dispute and
entered into a binding Letter of Intent with Thomson, and the arbitration has
been stayed pending the execution of a definitive agreement.
In April and May 2002, the Company and its principal executive officers and
directors were served with a number of complaints, filed in the United States
District Court for the Central District of California, alleging violations of
the Securities Exchange Act of 1934 (the "1934 Act") and the Securities Act of
1933 (the "1933 Act"). Also named in several of the complaints is The News
Corporation Limited ("News Corp."), a shareholder of the Company. The
complaints name some or all of the same parties as defendants, and purport to
state claims on behalf of all persons who purchased the Company's common stock
during various periods, the broadest of which is August 11, 1999 through April
4, 2002. More particularly, the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
24
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
alleged claims are brought under Sections 10(b) and 20(a) of the 1934 Act,
Section 11 of the 1933 Act and SEC Rule 10b-5. The essence of the allegations
is that the defendants allegedly intentionally failed to properly account for
revenue accrued from Scientific-Atlanta; failed to properly account for a
non-monetary transaction, pursuant to which intellectual property rights were
obtained, in exchange for cash and advertising credits; and failed to properly
record the fair value of technology investments and marketable securities
acquired in connection with the Company's acquisition of TV Guide, Inc.
Plaintiffs allege that this had the effect of materially overstating the
Company's reported financial results. Pursuant to the parties' stipulation, the
District Court has consolidated all of the lawsuits (and any subsequently filed
lawsuits) into one case known as In re Gemstar-TV Guide International
Securities Litigation, Master File No. 02-2775, NM (PLAx) (C.D. Cal.) Several
groups of plaintiffs and their counsel filed motions to be appointed lead
plaintiff and lead plaintiff's counsel. Pursuant to an amended order dated
August 9, 2002, the Court appointed the Teachers Retirement System of Louisiana
and the General Retirement System of the City of Detroit as co-lead plaintiffs,
and appointed Bernstein, Litowitz, Berger & Grossman, L.L.P., as lead
plaintiffs' counsel. Plaintiff Georgica Advisors has requested that the court
reconsider that decision and appoint it as lead plaintiff. The motion is
scheduled to be heard on November 18, 2002. Lead plaintiffs are expected to
file their consolidated complaint on or before December 12, 2002. Defendants'
response to the consolidated complaint is expected to be due on or before
February 14, 2003. In addition, an Oklahoma limited partnership filed a lawsuit
in the United States District Court for the Northern District of Oklahoma on
October 7, 2002 against some of the same defendants, including the Company,
based on the same core allegations and purported causes of action alleged in
the consolidated class action. Also, the Company learned on or about November
1, 2002 that, based on these same core allegations, a separate lawsuit was
filed in the federal district court for the Central District of California
against the Company and some of the same defendants. The lawsuit alleges state
law based derivative claims, including those based on various breaches of
fiduciary duty. The Company believes the allegations are without merit and
intends to defend these actions vigorously.
In April and May 2002, the Company, along with several of its principal
executive officers and directors, were also sued in four purported shareholder
derivative actions. Three of these actions were filed in the Superior Court of
the State of California for the County of Los Angeles and one action was filed
in the Count of Chancery of the State of Delaware, County of New Castle. These
purported derivative lawsuits allege various breaches of fiduciary duty and
violations of the California Corporations Code based upon the same general set
of alleged facts and circumstances as the federal shareholder suits. Pursuant
to the parties' stipulation, the California actions have been consolidated into
one case before a single judge. Plaintiffs are required to file their
consolidated amended complaint by late December 2002. On October 31, 2002, the
Company was served with another purported shareholder derivative action, this
one in the United States District Court for the Central District of California,
based upon the same general set of alleged facts and circumstances. The Company
believes the allegations are without merit and intends to defend the actions
vigorously.
On August 22, 2002, Scientific-Atlanta filed an adversary complaint in the
United States Bankruptcy Court for the Northern District of California. The
Complaint alleged that by seeking to acquire certain assets (including certain
patents)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
25
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
owned by DIVA Systems Corporation ("DIVA"), the Company would be in violation
of a federal antitrust statute, Clayton Act (S)7, 15 U.S.C. (S) 18. DIVA
currently is a debtor-in-possession pursuant to Chapter 11 of the bankruptcy
code. Also on August 22, 2002, Scientific-Atlanta filed a tag along notice with
the MDL Panel, seeking to have its complaint concerning the acquisition of DIVA
assets transferred to the U.S. District Court for the Northern District of
Georgia, the court overseeing the cases subject to the MDL Transfer Order
described above. On October 2, 2002, the Bankruptcy Court dismissed
Scientific-Atlanta's adversary complaint. Shortly thereafter,
Scientific-Atlanta notified the MDL Panel that the Bankruptcy Court had
dismissed its adversary complaint.
On September 6, 2002, TV Guide Distribution, Inc. ("TVGD"), together with
six other plaintiffs comprising national distributors of magazines, filed an
action entitled TV Guide Distribution, et al. v. Ronald E. Scherer et al., in
the Court of Common Pleas, Franklin County, Ohio (Case No. 02CVH09 9891). The
complaint named more than thirty defendants, made up of principals and
shareholders of United Magazine Company, Inc. ("Unimag") and their affiliates,
regional wholesalers of magazines that went out of business in September 1999,
leaving more than $100 million of outstanding receivables due and owing to the
national distributor plaintiffs. The complaint alleges that defendants engaged
in a course of conduct that violated Ohio statutes prohibiting fraudulent
conveyances and other unlawful payments designed to hinder, delay or defraud
TVGD and the other plaintiffs, Unimag's creditors. An initial status conference
has been scheduled for November 21, 2002. See the Company's Form 10-Q, as
amended, for the quarter ended March 31, 2002 for a discussion of other ongoing
litigation involving Unimag and TVGD.
On September 25, 2002, the Company notified DIVA that it had elected not to
proceed with the purchase of DIVA's assets. In response, on September 30, 2002,
DIVA filed an adversary complaint against the Company for breach of contract
and other claims purportedly based upon the Company's decision not to acquire
DIVA's assets. After DIVA filed its complaint, at DIVA's request, the
Bankruptcy Court ordered an expedited trial on DIVA's claims against the
Company for breach of contract and specific performance. Trial of these claims
was scheduled to begin in late October 2002. However, on October 17, 2002, DIVA
withdrew its request for an expedited trial, and agreed to dismiss its specific
performance claim. On October 17, 2002, the Company responded to certain of
DIVA's claims denying liability to DIVA, including any liability purportedly
based upon the Company's decision to terminate the asset purchase agreement. At
the same time, the Company filed counterclaims against DIVA and
Scientific-Atlanta for declaratory relief relating to the Company's decision
not to purchase DIVA's assets. Now that the Bankruptcy Court has vacated the
expedited trial date, the parties are in pretrial proceedings. On November 1,
2002, DIVA filed a First Amended Complaint against the Company and certain of
its senior executives. This First Amended Complaint adds additional claims
purportedly based upon the DIVA purchase agreement, as well as the Company's
decision not to acquire DIVA's assets. The Company believes that DIVA's
allegations are without merit and intends to defend this action vigorously.
On November 6, 2002, Scientific-Atlanta and PowerTV, Inc. ("S-A") filed a
counterclaim against the Company and certain of its subsidiaries in a case
captioned Personalized Media Communications, L.L.C. v. Scientific-Atlanta,
Inc., and PowerTV,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
26
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Legal Proceedings (continued)
Inc., United States District Court for the Northern District of Georgia,
Atlanta Division, Civil Action No. 02-CV-824 (CAP). At that time, S-A asserted
declaratory relief claims against the Gemstar parties seeking a declaration of
noninfringement, invalidity and unenforceability of certain patents as to which
the Company is a licensee. On November 6, 2002, S-A also filed a motion with
the MDL Panel to transfer this action to Delaware for consolidation of pretrial
proceedings with the Pegasus Development Corporation, et al. v. DirecTV, Inc.,
et al. matter discussed above. The Company has not yet been served with S-A's
counterclaims or motion to transfer, and has therefore not had the opportunity
to fully evaluate this matter.
On November 7, 2002, the Company received a letter from the United States
Department of Justice ("DOJ"). The DOJ has indicated they believe that Gemstar
International Group Limited and TV Guide, Inc. engaged in unlawful coordination
of activities prior to their merger on July 12, 2000. The Company has reason to
believe that the DOJ may initiate an action against the Company under federal
antitrust laws in the near future. The DOJ has also indicated that it would be
willing to enter into negotiated agreement with the Company and has provided
the Company with a possible settlement structure, including the imposition of a
fine and certain other conditions and restrictions. The Company believes that
its conduct prior to the merger was lawful, but will evaluate whether there are
acceptable terms for a negotiated resolution of this matter.
(12) Related Party Transactions
In connection with the acquisition of TV Guide in 2000, News Corp. became a
stockholder of the Company. As of June 30, 2002, News Corp. directly and
indirectly owns approximately 43% of the Company's outstanding common stock and
has the right to designate six directors on the Company's board. The Company
earned advertising revenues of $3.9 million and $5.3 million for the three
months ended June 30, 2002 and 2001, respectively, and $8.5 million and
$12.8 million for the six months ended June 30, 2002 and 2001, respectively,
from entities controlled by News Corp. In addition, the Company acquired
programming from News Corp. controlled entities of $1.1 million and $2.9
million for the three months ended June 30, 2002 and 2001, respectively, and
$2.8 million and $5.5 million for the six months ended June 30, 2002 and 2001,
respectively. Prior to its acquisition of TV Guide, the Company did not have
any significant transactions with News Corp. As of June 30, 2002 and December
31, 2001, the Company had receivables due from News Corp. controlled entities
totaling $1.9 million and $4.6 million, respectively, and payables due to News
Corp. controlled entities totaling $149,000 and $302,000, respectively. The
Company reimburses News Corp. for facilities and other general and
administrative costs incurred on the Company's behalf. Expenses associated with
these costs approximated $927,000 and $(83,000) for the three months ended June
30, 2002 and 2001, respectively, and $2.0 million and $1.2 million for the
six months ended June 30, 2002 and 2001, respectively. Expenses for the three
and six month periods ended June 30, 2001 included a rent and facilities credit
of $345,000 from News Corp. In addition, the Company purchases paper through a
paper procurement arrangement with News Corp. at negotiated prices with paper
suppliers based on the combined paper requirements of the two organizations.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
27
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) Related Party Transactions (continued)
Liberty Media Corporation ("Liberty Media"), formerly an indirect wholly
owned subsidiary of AT&T Corp., directly or indirectly owned approximately 21%
of the issued and outstanding common stock of the Company from the date of the
acquisition of TV Guide in 2000 until May 2, 2001, the date Liberty Media sold
its interest in the Company to News Corp. For the period April 1, 2001 to May
2, 2001, the date Liberty Media ceased to be considered a related party of the
Company, and the period from January 1, 2001 to May 2, 2001, the Company
purchased programming from Liberty Media controlled affiliates of $1.2 million
and $4.5 million, respectively. During the same periods, the Company also sold
video, program promotion and guide services of $1.7 million and $6.7 million,
respectively, to AT&T Broadband and Internet Services ("BIS") and its
consolidated affiliates. In addition, during the same periods, the Company
purchased production services and was provided satellite transponder facilities
and uplink services from BIS consolidated affiliates of $642,000 and
$2.4 million, respectively. BIS is also wholly owned by AT&T Corp. Prior to its
acquisition of TV Guide, the Company did not have any significant transactions
with Liberty Media or BIS.
The Company has included in the amounts discussed above transactions with
News Corp., BIS, and Liberty Media and all known entities in which BIS, Liberty
Media and News Corp. have an interest greater than 50%. In addition, the
Company has transactions with entities in which BIS, Liberty Media and News
Corp. own, directly or indirectly, 50% or less.
(13) Segment Information
The Company categorizes its businesses into three groups which also
represent its reportable business segments: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technologies (including the IPGs
currently marketed under brands such as GUIDE Plus+(R) and TV Guide(R)
Interactive, the VCR Plus+(R) system and electronic book technology marketed
under brands such as the Gemstar eBook(TM)); the Interactive Platform Sector,
which derives recurring income from advertising, interactive services and
e-commerce on the Company's proprietary interactive platforms, including
advertising on the Company's IPGs and TV Guide Online, interactive services,
and e-commerce on tvguide.com, skymall.com and other affiliated websites; and
the Media and Services Sector, which operates TV Guide Magazine, TV Guide
Channel, TVG Network/SM/ ("TVG"), SkyMall catalog sales, Superstar/Netlink
Group ("SNG") and other non-interactive platforms and media properties.
The Company's reportable segments are strategic business units that offer
different products and services and compete in different industries. The
Company's chief operating decision maker uses EBITDA (operating income before
stock compensation expense, depreciation and amortization, write-down and
impairment charges) to evaluate the performance of the three segments. Assets
of the reportable segments are not relevant for management of the businesses.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
28
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Segment Information (continued)
Segment information for the three and six-month periods ended June 30, 2002
and 2001 is as follows (in thousands):
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Technology and Licensing Sector
Revenues (4)......................... $ 51,266 $ 45,758 $107,073 $100,467
Operating expenses (1)(3)(4)......... 21,591 22,010 33,219 37,775
-------- -------- -------- --------
EBITDA (2)........................... $ 29,675 $ 23,748 $ 73,854 $ 62,692
======== ======== ======== ========
Interactive Platform Sector
Revenues (4)......................... $ 22,418 $ 16,484 $ 44,426 $ 29,261
Operating expenses (1)(3)(4)......... 19,631 20,939 39,930 41,936
-------- -------- -------- --------
EBITDA (2)........................... $ 2,787 $ (4,455) $ 4,496 $(12,675)
======== ======== ======== ========
Media and Services Sector
Revenues (3)(4)...................... $197,812 $232,420 $410,605 $487,907
Operating expenses (1)(3)(4)......... 171,140 169,569 333,707 355,032
-------- -------- -------- --------
EBITDA (2)........................... $ 26,672 $ 62,851 $ 76,898 $132,875
======== ======== ======== ========
Consolidated
Revenues (3)(4)...................... $271,496 $294,662 $562,104 $617,635
Operating expenses (1)(3)(4)......... 212,362 212,518 406,856 434,743
-------- -------- -------- --------
EBITDA (2)........................... $ 59,134 $ 82,144 $155,248 $182,892
======== ======== ======== ========
- --------
(1) Operating expenses means operating expenses excluding provision for bad
debts, stock compensation expense, depreciation and amortization,
write-down and impairment charges.
(2) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization, write-down and impairment charges.
Commencing January 1, 2002, goodwill and certain other intangible assets
are no longer subject to amortization. However, other intangible assets
acquired in transactions accounted for as purchases are still amortized and
such amortization is significant. Accordingly, the Company's business
sectors are measured based on EBITDA. EBITDA is presented supplementally as
the Company believes it is a standard measure commonly reported and widely
used by analysts, investors and others associated with its industry.
However, EBITDA does not take into account substantial costs of doing
business, such as income taxes, interest expense and depreciation and
amortization. While many in the financial community consider EBITDA to be
an important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
29
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Segment Information (continued)
provided by operating activities and other measures of financial performance
prepared in accordance with accounting principles generally accepted in the
United States of America that are presented in the Unaudited Condensed
Consolidated Financial Statements included in this report. Additionally, the
Company's calculation of EBITDA may be different than the calculation used
by other companies and, therefore, comparability may be affected.
(3) Commencing January 1, 2002, the operating costs of the media sales group
have been allocated to the various business units based on advertising
revenue dollars earned. Prior period results, which included media sales
group commissions reported as revenues by the Media and Services Sector
have been reclassified to reflect such commission revenues as a reduction
of expenses in the Media and Services Sector. Effective January 1, 2002,
the Company revised its method of allocating corporate expenses to the
business sectors concurrent with a reorganization of certain corporate
functions. Had the new methodology been in effect in 2001, operating
expenses for each of the sectors for the three and six-month periods ended
June 30, 2001 would have increased (decreased) approximately as follows:
Technology and Licensing Sector--$(1.4) million and $(2.2) million,
respectively, Interactive Platform Sector--$(4.5) million and $(5.7)
million, respectively, and Media and Services Sector--$5.9 million and $7.9
million, respectively.
(4) The Company's financial statements are presented in accordance with the
guidance provided by EITF No. 01-09. Where applicable, amounts presented in
the prior period have been reclassified to conform with the income
statement classifications for the current period. Such reclassifications
resulted in decreases in revenues for the three and six-month periods ended
June 30, 2001 as follows: Technology and Licensing Sector - $12.7 million
and $22.0 million, respectively, and Media and Services Sector--$1.0
million and $2.0 million, respectively, and decreases in expenses for the
three and six-month periods ended June 30, 2001 as follows: Technology and
Licensing Sector--$5.1 million and $10.6 million, respectively, Interactive
Platform Sector--$7.6 million and $11.4 million, respectively, and Media
and Services Sector--$1.0 million and $2.0 million, respectively, resulting
in a total reduction of $13.7 million and $24.0 million in both
consolidated revenues and expenses for the three and six-month periods
ended June 30, 2001.
(14) Income Taxes (Restated)
The income tax benefit for the three and six-month periods ended June 30,
2002 was $495.2 million and $516.5 million, respectively, which reflects an
effective tax rate of 36% for both periods. The income tax benefit for the
three and six-month periods ended June 30, 2001 was $23.7 million and $45.0
million, respectively, which reflects an effective tax rate of 14% for both
periods. The increase in the effective tax rate was due in large part to
non-taxable goodwill, which is no longer amortized effective January 1, 2002 as
a result of adopting Statement 142.
(15) Stock Repurchase Program
In April 2002, the Company's Board of Directors authorized an extension of
its authorization granted in September 2001 to repurchase up to $300.0 million
of the Company's outstanding shares of common stock. The authorization
permitted the Company to purchase shares in the open market at prevailing
prices, or in privately negotiated transactions at then
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
30
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) Stock Repurchase Program (continued)
prevailing prices, provided that the Company complied with SEC regulations
regarding such purchases. During the three months ended June 30, 2002, the
Company repurchased 6.9 million shares for an aggregate price of $63.4 million.
The extension expired on September 18, 2002 with no additional share
repurchases. Since September 2001, the Company has repurchased a total of 7.2
million shares for an aggregate price of $69.8 million.
(16) Subsequent Events
Management Restructuring
On August 14, 2002, the Company announced that the News Corporation Limited
and Dr. Henry Yuen, Chief Executive Officer, and Elsie Leung, Chief Financial
Officer, submitted a joint proposal to the Company's Board of Directors to
restructure the Company's management and to settle disputes among the parties.
The Board of Directors formed a committee of independent directors to consider
the proposal and to make a recommendation to the Board concerning the proposal.
The Special Committee, with the assistance of its independent legal advisors,
evaluated the proposal. On November 7, 2002, the Board of Directors approved
and the Company executed definitive documentation related to this
restructuring. Dr. Yuen resigned as Chief Executive Officer of the Company. Dr.
Yuen will continue as Chairman of the Board in a non-executive capacity and,
under a new five-year employment agreement, will lead a business unit formed to
pursue international business development opportunities. In that role, Dr. Yuen
will also strive to enhance and improve the Company's interactive program
guides and interactive technologies. As part of the agreement, Dr. Yuen
assigned to the Company all intellectual property relating to the Company's
business that he has developed and develops in the future in his new role. In
addition, he has granted the Company the right of first refusal to certain
future inventions related to interactive television and interactive programming
guides for a period of time. Jeff Shell has been named Chief Executive Officer
succeeding Dr. Yuen. Additionally, the Company appointed Paul Haggerty as
Acting Chief Financial Officer. Mr. Haggerty, currently Executive Vice
President for Finance at News Corp., which owns approximately 42 percent of the
outstanding stock of the Company, succeeds Elsie Leung. Ms. Leung will remain
as a member of the Board and, under a new three-year agreement, will work with
Dr. Yuen to pursue international opportunities for the Company. The Company
will be conducting a search for a permanent Chief Financial Officer.
Dr. Yuen will receive approximately $22 million and Ms. Leung approximately
$7 million as termination payments for their existing contracts. The cash
payable to Dr. Yuen and Ms. Leung under this settlement, as well as other
accrued but unpaid amounts due under their employment agreements totaling $8
million, will be held by the Company in a segregated account for up to six
months pending possible deposit of all or a portion of such cash into an escrow
account pursuant to the Sarbanes-Oxley Act. In addition, approximately 20
million outstanding options held by Dr. Yuen and Ms. Leung were cancelled. The
Company currently intends to grant Dr. Yuen and Ms. Leung approximately 8
million shares of restricted stock and approximately 9 million new stock
options in connection with their termination, employment and other future
agreements.
The Company expects to record a charge related to this settlement agreement
in the fourth quarter of 2002.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
31
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
SEC Formal Investigation
On October 17, 2002, the U.S. Securities and Exchange Commission ("SEC")
issued a formal order of investigation to determine whether there have been
violations of the federal securities laws. The Company previously disclosed
that it has been in discussions with the SEC regarding this internal review. By
formalizing this previously informal discussion, the SEC will have the ability
to subpoena individuals and entities in order to gather more information. The
Company intends to continue to fully cooperate with the SEC as it moves forward
in its process.
Significant Patent Litigation Rulings
On June 21, 2002, an Administrative Law Judge issued a Final Initial
Determination ("ID") in a United States International Trade Commission ("ITC")
proceeding denying the Company's request for an exclusionary order to prevent
further importation of certain set-top boxes containing IPGs which the Company
believes infringe some of its patents. The ITC determined not to review this
decision on August 29, 2002. On October 25, 2002, the Company filed a notice of
appeal of the ITC determination to the United States Court of Appeals for the
Federal Circuit.
On July 2, 2002, the United States District Court for the Western District
of North Carolina in the legal proceeding SuperGuide Corporation v. DirecTV
Enterprises, Inc. et al. (the "SuperGuide case") ruled that certain of the
defendants' products did not infringe the SuperGuide Patents, and on July 25,
2002, the court dismissed all remaining claims in the case. The Company was a
third-party defendant in this matter and had joined in SuperGuide's
infringement allegations against one of the defendants, EchoStar Communications
Corporation. The Company has filed a notice of appeal of this decision to the
United States Court of Appeals for the Federal Circuit.
The Company is a party to certain proceedings consolidated in the United
States District Court for the Northern District of Georgia by the Judicial
Panel on Multi-District Litigation against Scientific-Atlanta and Pioneer,
among other parties and involving several patents, as described in Note 11
(Legal Proceedings). On August 30, 2002, the Company received an order from
that Court finding that two of the patents involved in these cases were not
infringed by certain digital set-top box products produced by
Scientific-Atlanta and Pioneer. On November 4, 2002, the Court ruled that the
remaining Scientific-Atlanta and Pioneer products at issue in this proceeding
were not infringed by the two patents that were the subject of the August
30/th/ ruling. The Company intends to seek review of these decisions in the
most expedited manner possible.
The MDL proceedings also involve three patents which were involved in the
SuperGuide case. The non-infringement rulings on July 2, 2002 and July 25, 2002
were based in part on a previous ruling of that Court interpreting the scope of
the patents at issue. On October 25, 2002, the Georgia Court hearing the MDL
cases ruled that it was obligated to accept the North Carolina Court's ruling
on the scope of the patents at issue without deciding whether the underlying
ruling was correct
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
32
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Significant Patent Litigation Rulings (continued)
as a matter of law. The Georgia Court has not ruled on Scientific-Atlanta's
infringement of these three patents under this interpretation.
The Company assessed the impact of these rulings on its assumptions and
estimates in applying its accounting policies as follows:
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect, strengthen and enforce the Company's
intellectual property rights is to defer such costs as intangible assets and to
amortize them using the straight-line method over the remaining lives of the
related patents. The Company reviewed the carrying value of capitalized patent
litigation costs as a result of the rulings in the MDL, ITC and SuperGuide
case. Although the Company has filed appeals in the SuperGuide and ITC cases
and intends to seek review when possible in the MDL case, the Company concluded
that these rulings raised doubts as to whether certain capitalized patent
litigation costs could be reasonably considered to strengthen the value of the
patent. Accordingly, the Company recorded a write-down of $44.4 million to
capitalized patent litigation costs during the quarter ended June 30, 2002 and
will expense all future legal costs of the SuperGuide and ITC cases. On the
basis of the October 25, 2002 ruling in the MDL case, the Company will write
off approximately $9.5 million of litigation costs that were previously
capitalized as intangible assets in accordance with the Company's accounting
policy during the three months ended December 31, 2002.
Other Legal Proceedings
In addition to the significant patent rulings described above, there have
been certain other material developments in legal proceedings to which the
Company is a party:
On October 18, 1999, a former employee of ODS Technologies, L.P. ("ODS"),
now a majority owned subsidiary of the Company, filed a complaint against ODS
and TV Guide in a Florida federal court, which complaint was amended on
November 12, 1999, asserting causes of action for violations of certain federal
statutes governing pension plan and for equitable estoppel. The amended
complaint sought an unspecified amount of damages for benefits allegedly due to
the plaintiff under his employment agreement with ODS. On April 22, 2002, the
Court granted ODS and TV Guide summary judgment dismissing the case. The former
employee appealed the grant of summary judgment, but the appeal subsequently
was dismissed. The plaintiff has filed a motion for reinstatement and this case
is currently pending on appeal.
On January 18, 2000, the Company's StarSight subsidiary filed a patent
infringement action against TiVo Inc. ("TiVo") in the U.S. District Court for
the Northern District of California. The suit claims, among other matters, that
TiVo willfully infringed certain StarSight intellectual property by virtue of
TiVo's deployment marketing, offers to sell and sale of personalized video
recorder devices containing an unlicensed IPG. StarSight is seeking an
injunction and monetary damages.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
33
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
On February 25, 2000, TiVo answered StarSight's Complaint, and also filed
counterclaims against the Company and StarSight alleging, among others, that
the Company has violated federal antitrust law and the California unfair
business practices act. In its counterclaims, TiVo seeks, among other relief,
damages and an injunction. On August 5, 2002, the Court entered a stipulation
at the parties' request to stay the proceeding pending resolution of the
investigation before the ITC, described above, and the Court has accepted that
agreement. After the resolution of any and all appeals stemming from the ITC
investigation (including any appeal to the United States Court of Appeals for
the Federal Circuit), we expect the Court will be notified of this fact and
expect the case to be re-activated at that point.
During July and August 2000, TV Guide was served with more than 20 class
action complaints filed primarily in the U.S. District Court for the Southern
District of New York on behalf of magazine subscribers. These complaints, which
have been consolidated into a single action, allege that TV Guide, the Magazine
Publishers Association ("MPA"), and 12 other publishers of consumer magazines
have violated federal antitrust laws by conspiring to limit the discounting of
magazine subscription prices by means of rules adopted by the MPA and the Audit
Bureau of Circulation. The plaintiffs seek injunctive relief, unspecified
damages (trebled), and attorneys' fees and costs. Plaintiffs filed a motion for
partial summary judgment. After oral argument was heard on January 10, 2001,
the parties entered into settlement discussions. Settlement negotiations
continued over the next several months and in April 2002, the defendants
submitted final settlement documents to plaintiffs for their approval.
Subsequently, the parties signed a settlement agreement, and on July 3, 2002,
plaintiffs filed a motion for preliminary approval of the settlement. On August
29, 2002, the court held a hearing at which the pending motion was discussed.
The Court entered an order on September 20, 2002, granting the motion for
preliminary approval.
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. On January 12, 2001, Pioneer Digital Technologies filed its first
amended complaint which claims, among other matters, that the Company and
certain of its subsidiaries have violated state antitrust and unfair
competition laws. Pioneer Digital Technologies is seeking damages and
injunctive relief against the Company. The parties are in pretrial proceedings.
In May 2002, the Court set trial for September 2003.
On December 29, 2000, Gemstar International Group Limited., Barnes & Noble,
Inc. and Thomson Consumer Electronics were named as defendants in an action for
patent infringement by Jennifer Landau, an individual, that relates to e-book
technology. The Company was served with this action in May 2001. This action,
captioned Jennifer Landau v. Barnes & Noble, et al., USDC Case No. C-00-563-B,
was pending in the U.S. District Court for the District of New Hamsphire. In
May 2002, Ms. Landau voluntarily dismissed this action with prejudice, and
there are no longer any claims pending against the Company or any other parties
to this litigation.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
34
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
On November 2, 2001, Thomas multimedia, Inc. ("Thomson") sought leave to add
the Company and certain subsidiaries into a case captioned Pegasus Development
Corporation and Personalized Media Communications, L.L.C. v. DirecTV, Inc.,
Hughes Electronics Corporation, Thomson Consumer Electronics, Inc. and Philips
Electronics North America Corporation; Thomson multimedia, Inc. v. Pegasus
Development Corporation, Personalized Media Communications, L.L.C., TVG-PMC,
Inc., StarSight Telecast, Inc. and Gemstar-TV Guide International, Inc., United
States District Court for the District of Delaware, Case No. 00-1020 (GMS). At
that time, Thomas asserted a declaratory judgment claim against the Gemstar
parties seeking a declaration of noninfringement and invalidity of certain
patents as to which the Company is a licensee. In addition to its claim for
declaratory relief (discussed above), Thomson has now also added a claim for
antitrust violations under federal and state law. On April 22, 2002, Thomson
also filed a tag-along notice with the Judicial Panel for Multi-District
Litigation (the "MDL Panel") requesting that this entire action be transferred
to Georgia for coordinated pretrial proceedings with the MDL proceedings
discussed in the Company's Form 10-K for the period ended December 31, 2001. On
June 3, 2002, the MDL Panel issued a Conditional Transfer Order and
Simultaneous Separation and Remand of Certain Claims conditionally transferring
Thomson's antitrust claims to Georgia, but separating and remanding the balance
of the claims in this case to Delaware. In response, Thomson filed a motion
with the MDL Panel to transfer the entire case to Georgia. On October 16, 2002,
the MDL Panel issued an Order of Transfer and Simultaneous Separation and
Remand of Certain Claims in which it denied Thomson's motion to transfer the
entire case to Georgia. In so ruling, the MDL Panel adopted its decision in the
June 3, 2002 Conditional Transfer Order and transferred Thomson's antitrust
claims to Georgia, but separated and remanded the balance of the claims in this
case to Delaware. Now that the MDL Panel has issued its final order, the
Company understands that the Delaware litigation will be reactivated, and
Thomson antitrust claims will be transferred and coordinated for pretrial
purposes with the Georgia MDL Proceedings.
On November 30, 2001, Thomson initiated an arbitration with the American
Arbitration Association against the Company. The Statement of Claims filed by
Thomson alleges that the Company has breached certain obligations under a group
of agreements signed by the parties as of December 31, 1999 relating to a joint
venture between the parties for revenue sharing of advertising on electronic
programming guides. On January 7, 2002, the Company filed an Answering
Statement and Counterclaim denying all allegations of the claims filed by
Thomson and asserting counterclaims against Thomson and Thomson multimedia,
S.A. ("Thomson S.A.") alleging, among other things, that Thomson S.A. had
breached certain of its obligations under one of the agreements signed by the
parties as of December 31, 1999 relating to the introduction of electronic
programming guides in Europe. In May 2002, the Company settled this dispute and
entered into a binding Letter of Intent with Thomson, and the arbitration has
been stayed pending the execution of a definitive agreement.
In April and May 2002, the Company and its principal executive officers and
directors were served with a number of complaints, filed in the United States
District Court for the Central District of California, alleging violations of
the Securities Exchange Act of 1934 (the "1934 Act") and the Securities Act of
1933 (the "1933 Act"). Also named in several of the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
35
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
complaints is The News Corporation Limited ("News Corp."), a shareholder of the
Company. The complaints name some or all of the same parties as defendants, and
purport to state claims on behalf of all persons who purchased the Company's
common stock during various periods, the broadest of which is August 11, 1999
through April 4, 2002. More particularly, the alleged claims are brought under
Sections 10(b) and 20(a) of the 1934 Act, Section 11 of the 1933 Act and SEC
Rule 10b-5. The essence of the allegations is that the defendants allegedly
intentionally failed to properly account for revenue accrued from
Scientific-Atlanta; failed to properly account for a non-monetary transaction,
pursuant to which intellectual property rights were obtained, in exchange for
cash and advertising credits; and failed to properly record the fair value of
technology investments and marketable securities acquired in connection with
the Company's acquisition of TV Guide, Inc. Plaintiffs allege that this had the
effect of materially overstating the Company's reported financial results.
Pursuant to the parties' stipulation, the District Court has consolidated all
of the lawsuits (and any subsequently filed lawsuits) into one case known as In
re Gemstar-TV Guide International Securities Litigation, Master File No.
02-2775. NM (PLAx)(C.D. Cal.) Several groups of plaintiffs and their counsel
filed motions to be appointed lead plaintiff and lead plaintiff's counsel.
Pursuant to an amended order dated August 9, 2002, the Court appointed the
Teachers Retirement System of Louisiana and the General Retirement System of
the City of Detroit as co-lead plaintiffs, and appointed Bernstein, Litowitz,
Berger & Grossman, L.L.P., as lead plaintiffs' counsel. Plaintiff Georgica
Advisors has requested that the court reconsider that decision and point it as
lead plaintiff. The motion is scheduled to be heard on November 18, 2002. Lead
plaintiffs are expected to file their consolidated complaint on or before
December 12, 2002. Defendants' response to the consolidated complaint is
expected to be due on or before February 14, 2003. In addition, an Oklahoma
limited partnership filed a lawsuit in the United States District Court for the
Northern District of Oklahoma on October 7, 2002 against some of the same
defendants, including the Company, based on the same core allegations and
purported causes of action alleged in the consolidated class action Also, the
Company learned on or about November 1, 2002 that, based on the these same core
allegations, a separate lawsuit was filed in the federal district court for the
Central District of California against the Company and some of the same
defendants. The lawsuit alleges state law based derivative claims, including
those based on various breached of fiduciary duty. The Company believes the
allegations are without merit and intends to defend these actions vigorously.
In April and May 2002, the Company, along with several of its principal
executive officers and directors, were also sued in four purported shareholder
derivative actions. Three of these actions were filed in the Superior Court of
the State of California for the County of Los Angeles and one action was filed
in the Court of Chancery of the State of Delaware, County of New Castle. These
purported derivative lawsuits allege various breaches of fiduciary duty and
violations of the California Corporations Code based upon the same general set
of alleged facts and circumstances as the federal shareholder suits. Pursuant
to the parties' stipulation, the California actions have been consolidated into
one case before a single judge. Plaintiffs are required to file their
consolidated amended complaint by late December 2002. On October 31, 2002, the
Company was served with another purported shareholder derivative action, this
one in the United States District Court for the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
36
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
Central District of California, based upon the same general set of alleged
facts and circumstances. The Company believes the allegations are without merit
and intends to defend the actions vigorously.
On August 22, 2002, Scientific-Atlanta filed an adversary complaint in the
United States Bankruptcy Court for the Northern District of California. The
Complaint alleged that by seeking to acquire certain assets (including certain
patents) owned by DIVA Systems Corporation ("DIVA"), the Company would be in
violation of a federal antitrust statute, Clayton Act (S)7, 15 U.S.C. (S) 18.
DIVA currently is a debtor-in-possession pursuant to Chapter 11 of the
bankruptcy code. Also on August 22, 2002, Scientific-Atlanta filed a tag along
notice with the MDL Panel, seeking to have its complaint concerning the
acquisition of DIVA assets transferred to the U.S. District Court for the
Northern District of Georgia, the Court overseeing the cases subject to the MDL
Transfer Order described above. On October 2, 2002, the Bankruptcy Court
dismissed Scientific-Atlanta's adversary complaint. Shortly thereafter,
Scientific-Atlanta notified the MDL Panel that the Bankruptcy Court had
dismissed its adversary complaint.
On September 6, 2002, TV Guide Distribution, Inc. ("TVGD"), together with
six other plaintiffs comprising national distributors of magazines, filed an
action entitled TV Guide Distribution, Inc. et al. v. Ronald E. Scherer et al.,
in the Court of Common Pleas, Franklin County, Ohio (Case No. 02CVH099891). The
complaint named more than thirty defendants, made up of principals and
shareholders of United Magazine Company, Inc. ("Unimag") and their affiliates,
regional wholesalers of magazines that went out of business in September 1999,
leaving more than $100 million of outstanding receivables due and owing to the
national distributor plaintiffs. The complaint alleges that defendants engaged
in a course of conduct that violated Ohio statutes prohibiting fraudulent
conveyances and other unlawful payments designed to hinder, delay or defraud
TVGD and the other plaintiffs, Unimag's creditors. An initial status conference
has been scheduled for November 21, 2002. See the Company's Form 10-Q for the
quarter ended March 31, 2002 for a discussion of other ongoing litigation
involving Unimag and TVGD.
On September 25, 2002, the Company notified DIVA that it had elected not to
proceed with the purchase of DIVA's assets. In response, on September 30, 2002,
DIVA filed an adversary complaint against the Company for breach of contract
and other claims purportedly based upon the Company's decision not to acquire
DIVA's assets. After DIVA filed its complaint, at DIVA's request, the
Bankruptcy Court ordered an expedited trial on DIVA's claims against the
Company for breach of contract and specific performance. Trial of these claims
was scheduled to begin in late October 2002. However, on October 17, 2002, DIVA
withdrew its request for an expedited trial, and agreed to dismiss its specific
performance claim. On October 17, 2002, the Company responded to certain of
DIVA's claims denying liability to DIVA, including any liability purportedly
based upon the Company's decision to terminate the asset purchase agreement. At
the same time, the Company filed counterclaims against DIVA and
Scientific-Atlanta for declaratory relief relating to the Company's decision
not to purchase DIVA's assets. Now that the Bankruptcy Court has vacated the
expedited trial date, the parties are in pretrial
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
37
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
proceedings. On November 1, 2002, DIVA filed a First Amended Complaint against
the Company and certain of its senior executives. This First Amended Complaint
adds additional claims purportedly based upon the DIVA purchase agreement, as
well as the Company's decision not to acquire DIVA's assets. The Company
believes that DIVA's allegations are without merit and intends to defend this
action vigorously.
On November 6, 2002, Scientific-Atlanta, Inc. and PowerTV, Inc. ("S-A")
filed a counterclaim against the Company and certain of its subsidiaries in a
case captioned Personalized Media Communications, L.L.C. v. Scientific-Atlanta,
Inc., and PowerTV, Inc., United States District Court for the Northern District
of Georgia, Atlanta Division, Civil Action No. 02-CV-824 (CAP). At that time,
S-A asserted declaratory relief claims against the Gemstar parties seeking a
declaration of noninfringement, invalidity and unenforceability of certain
patents as to which the Company is a licensee. On November 6, 2002, S-A also
filed a motion with the MDL Panel to transfer this action to Delaware for
consolidation of pretrial proceedings with the Pegasus Development Corporation,
et. al. v. DirecTV, Inc., et al. matter discussed above. The Company has not
yet been served with S-A's counterclaims or motion to transfer, and has
therefore not had the opportunity to fully evaluate this matter.
On November 7, 2002, the Company received a letter from the United States
Department of Justice ("DOJ"). The DOJ has indicated they believe that Gemstar
International Group Limited and TV Guide, Inc. engaged in unlawful coordination
of activities prior to their merger on July 12, 2000. The Company has reason to
believe that the DOJ may initiate an action against the Company under federal
antitrust laws in the near future. The DOJ has also indicated that it would be
willing to enter into negotiated agreement with the Company and has provided
the Company with a possible settlement structure, including the imposition of a
fine and certain other conditions and restrictions. The Company believes that
its conduct prior to the merger was lawful, but will evaluate whether there are
acceptable terms for a negotiated resolution of this matter.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
38
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Unaudited Condensed Consolidated Financial Statements as of and for the
three and six month periods ended June 30, 2002 and 2001 and notes thereto
included in this Quarterly Report on Form 10-Q have been restated, but have not
been reviewed or audited by an independent accounting firm and should not be
relied upon. For additional information regarding the restatement, please refer
to Note 2 to the Unaudited Condensed Consolidated Financial Statements included
in Item 1.
Throughout the following Management's Discussion and Analysis of Financial
Condition and Results of Operations, all amounts have been restated to include
the effects of the restatements described in Note 2 to the Unaudited Condensed
Consolidated Financial Statements referred to above.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results
of operations are based upon our Unaudited Condensed Consolidated Financial
Statements. The preparation of such financial statements requires the Company
to make estimates and assumptions in applying certain critical accounting
policies. Certain accounting estimates are particularly sensitive because of
their significance to our Financial Information and because of the possibility
that future events affecting the estimates could differ materially from our
current expectations. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
affect our Unaudited Condensed Consolidated Financial Statements.
Revenue Recognition--License Fees
We recognize revenues from per unit license fees based on units shipped
incorporating the Company's patented or proprietary technologies in the period
when the manufacturers' units shipped information is available to the Company.
Revenues from per subscriber fees from service providers are earned in the
month services are provided by a licensee using the Company's patented or
proprietary technologies. Revenues from annual and other license fees generally
are recognized based on the specific terms of the license agreements. From time
to time, the license agreement between the Company and a licensee may expire,
or for one reason or another, the licensee fails to remit license fees on a
timely basis, yet the same units continue to be shipped and the same services
continue to be deployed containing the Company's patented or proprietary
technologies. The Company looks to the four conditions under SAB 101, Revenue
Recognition in Financial Statements, to determine whether or not revenue should
be recognized: whether there is persuasive evidence that an arrangement exists,
whether delivery has occurred or service has been rendered, whether the price
is fixed or determinable and whether collection is reasonably assured.
Additionally, the Company may consider opinions of outside counsel when
appropriate. These decisions involve significant judgment by the Company.
The Company, in consultation with its recently engaged independent
accounting firm, anticipates reviewing the application of SAB 101 to certain
licensing transactions, particularly those which involve recognition of
revenues after the expiration of license agreements and lump sum settlements or
prepayments. As a result, the Company may determine that the accounting for
certain of these transactions did not comply with SAB 101.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
39
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Further discussion of the application of revenue recognition policies for
license fees is contained under the heading Technology and Licensing Sector.
Patent Prosecution and Litigation Costs
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect, strengthen and enforce the Company's
intellectual property rights is to defer such costs as intangible assets and to
amortize them using the straight-line method over the remaining lives of the
related patents. The Company reviews its capitalized patent prosecution and
litigation costs whenever events or changes in circumstances, such as adverse
administrative or judicial rulings, indicate that certain capitalized costs do
not increase the value of the related patents and, consequently, should be
expensed. These determinations are made by the Company based, in part, on the
advice of outside counsel.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company has a significant amount of property and equipment and
finite-lived intangible assets, primarily through the acquisition of TV Guide.
In accordance with Statement 144, the Company reviews its long-lived assets and
finite-lived intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may exceed its fair
value. This is measured by a comparison of the carrying amount of an asset to
the 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
exceeds the fair value of the assets, which is the amount at which that asset
could be bought or sold in a current transaction between willing parties.
Quoted market prices in active markets are the best evidence of fair value and
are used as the basis for the measurement, if available. In most instances,
quoted market prices in active markets will not be available for the Company's
long-lived assets and finite-lived intangibles. In those instances, the
estimate of fair value is based on the best information available, including
prices for similar assets and the results of using other valuation techniques.
Discounted future operating cash flows are commonly used by the Company as an
acceptable valuation technique and proxy for fair value. Valuation techniques
are inherently subjective.
The determination as to whether events or changes in circumstances indicate
that the carrying amount of an asset may exceed its fair value involves the
Company's judgment. In addition, should the Company conclude that an asset may
be impaired, the estimate of undiscounted future operating cash flows and the
final determination of the fair value of the asset are also based on the
judgment of the Company, assisted by third-party valuation experts. These
judgments can be impacted by a variety of underlying assumptions, such as the
general business climate, effectiveness of competition and supply and cost of
resources. Accordingly, actual results can differ significantly from the
assumptions made by the Company in making its estimates. Future changes in the
Company's estimates could result in indicators of impairment and future
impairment charges.
Assets to be disposed of by sale are reported at the lower of the carrying
amount or fair value less costs to sell.
Impairment of Goodwill and Other Intangible Assets
The Company has a significant amount of goodwill and other indefinite-lived
intangible assets, primarily through the acquisition of TV Guide. In accordance
with Statement 142, an intangible asset that is not subject to amortization
must be tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. The
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
40
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
impairment test consists of a comparison of the fair value of an intangible
asset with its carrying amount. If the carrying amount of an intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess.
Goodwill of a reporting unit must be tested for impairment between annual,
required tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying
amount. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of reporting unit
goodwill with the carrying amount of that goodwill. If the carrying amount of
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
Pursuant to Statement 142, an entity's assets and liabilities, including
corporate assets and liabilities, should be assigned or allocated to one or
more reporting units if certain conditions are met. Questions have arisen
regarding the consideration of deferred income taxes in applying the goodwill
impairment test. As a result, diversity in practice is developing in the
treatment of deferred taxes for purposes of goodwill impairment testing. The
Emerging Issues Task Force has included this issue on its agenda. No conclusion
has been reached on this matter. Until a conclusion is reached, deferred taxes
can be either allocated to reporting units or not allocated to reporting units.
The Company has elected not to allocate deferred taxes to reporting units.
As discussed above, the determination of fair value involves significant
judgments and estimates when quoted market prices do not exist. Accordingly,
future changes in the Company's estimates could result in further impairment
charges of goodwill and indefinite-lived intangible assets. A discussion of
impairment losses recognized in 2002 is contained under Notes 4 and 5 to the
Unaudited Condensed Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company records a valuation allowance, if necessary, to
reduce deferred tax assets to an amount it believes is more likely than not to
be realized.
The Company has income both from foreign and domestic sources. In the
preparation of our financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate, including estimating
both our actual current tax exposure and assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
Assessment of our actual current tax exposure includes assessing tax
strategies, the status of tax audits and open audit periods with the taxing
authorities. To the extent that we have deferred tax assets, we must assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent that we believe that recovery is not likely, we must
establish a valuation allowance. As of June 30, 2002, we have established a
valuation allowance of $78.2 million
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
41
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
against our deferred tax assets. In the future, we may adjust our estimates of
the amount of valuation allowance needed and such adjustment would impact our
provision for income taxes in the period of such change.
Allowance for Doubtful Accounts
We have significant amounts due to us from our customers. We continuously
evaluate our outstanding accounts receivable for collectibility. This
evaluation involves the Company's judgment in assessing the aging of the
amounts due to us and in reviewing the credit-worthiness of each customer.
Should a customer's financial condition deteriorate in a manner that could
decrease the customer's ability to pay amounts due to us, or should significant
adverse events cause a change in the Company's ability to collect amounts due
to us, we might be required to provide an additional allowance for doubtful
accounts which would reduce our earnings.
Multi-Platform Advertising Sales
The Company believes that a potential competitive advantage in advertising
is the combined reach of its various advertising platforms--TV Guide Magazine
with a circulation of 9 million copies, IPG with a combined platform of more
than 17 million, TV Guide Channel with more than 50 million subscribers, and
tvguide.com with 4.1 million unique visitors per month, all targeted at
consumers who are interested in television guidance. In order to maximize the
effectiveness of such a competitive advantage, the Company offers customers the
opportunity to simultaneously advertise on two or more of its various delivery
platforms ("multi-platform" advertising). To encourage advertisers to increase
the amount of total advertising they purchase from the Company, in late 2001,
the Company established a Multi-Platform Advertising Program ("MPA Program") to
provide incentives in the form of discounts to advertisers who agree to use
multiple platforms.
In the fourth quarter of 2001, the Securities and Exchange Commission
provided additional guidance regarding multiple-element transactions in SAB
101, Frequently Asked Questions and Answers, Question 4. This guidance directed
that revenue in multiple-element transactions should be allocated based upon
the relative fair value of the elements involved in the transaction, provided
that each element represents a separate earnings process. The Company, in
consultation with its recently engaged independent accounting firm, is
continuing to review the applicability of the referenced guidance to the
multi-platform advertising transactions and, as a result, may determine that
additional revenue should be reclassified from the Interactive Platform Sector
to the Media and Services Sector.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
42
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Results of Operations
The Company completed several transactions during 2001 that affect the
comparability of the results of operations.
. In April 2001, the Company sold the business that distributes the WGN
superstation signal. Accordingly, the Unaudited Condensed Consolidated
Financial Statements does not include the results of operations of WGN
subsequent to that date.
. In July 2001, the Company acquired 100% of the outstanding common stock
of SkyMall. The acquisition was accounted for as a purchase.
Accordingly, the Unaudited Condensed Consolidated Financial Statements
include the results of operations of SkyMall from July 2001.
The following table sets forth certain unaudited Financial Information for
the Company for the three and six-month periods ended June 30, 2002 and 2001
(in thousands).
Restated Three Months Restated Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001(1)(3) 2002 2001(1)(3)
----------- ---------- ----------- ----------
Statement of Operations Data:
Revenues........................................................... $ 271,496 $ 294,662 $ 562,104 $ 617,635
Operating expenses, excluding stock compensation, depreciation
and amortization, write-down and impairment charges............ 212,362 212,518 406,856 434,743
Stock compensation............................................... 1,369 8,012 18,294 17,157
Depreciation and amortization.................................... 120,801 235,295 237,276 473,863
Write-down of capitalized patent litigation costs (4)............ 44,424 -- 44,424 --
Impairment of intangible assets (5).............................. 1,259,147 -- 1,259,147 --
----------- --------- ----------- ---------
1,638,103 455,825 1,965,997 925,763
----------- --------- ----------- ---------
Operating loss...................................................... (1,366,607) (161,163) (1,403,893) (308,128)
Interest expense.................................................... (2,897) (7,551) (5,521) (19,102)
Other (expense) income, net......................................... (9,125) (820) (17,380) 1,054
----------- --------- ----------- ---------
Loss before income taxes, extraordinary loss on debt extinguishment
and cumulative effect of an accounting change..................... (1,378,629) (169,534) (1,426,794) (326,176)
Income tax benefit.................................................. (495,239) (23,740) (516,464) (45,020)
----------- --------- ----------- ---------
Loss before extraordinary loss on debt extinguishment and cumulative
effect of an accounting change.................................... (883,390) (145,794) (910,330) (281,156)
Extraordinary loss on debt extinguishment, net of tax............... -- (2,100) -- (2,100)
Cumulative effect of an accounting change, net of tax............... -- -- (5,303,281) --
----------- --------- ----------- ---------
Net loss............................................................ $ (883,390) $(147,894) $(6,213,611) $(283,256)
----------- --------- ----------- ---------
Other Financial Data:
Net cash provided by (used in):
Operating activities............................................. $ 61,323 $ 47,296 $ 153,080 $ 123,280
Investing activities............................................. (6,318) 98,867 984 79,991
Financing activities............................................. (68,417) (234,641) (103,005) (257,445)
EBITDA(2)........................................................ 59,134 82,144 155,248 182,892
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
43
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
- --------
(1) Effective July 18, 2001, the Company's consolidated operating results
include the operating results of SkyMall. SkyMall was acquired in a
transaction accounted for as a purchase. Effective April 2001, the
consolidated operating results exclude the operating results of the
business that distributed the WGN superstation signal, which was sold.
(2) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization, write-down and impairment charges.
Commencing January 1, 2002, goodwill and certain other intangible assets
are no longer subject to amortization. However, other intangible assets
acquired in transactions accounted for as purchases are still amortized and
such amortization is significant. Accordingly, the Company's business
sectors are measured based on EBITDA. EBITDA is presented supplementally as
the Company believes it is a standard measure commonly reported and widely
used by analysts, investors and others associated with its industry.
However, EBITDA does not take into account substantial costs of doing
business, such as income taxes, interest expense and depreciation and
amortization. While many in the financial community consider EBITDA to be
an important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow provided by operating activities and other measures
of financial performance prepared in accordance with accounting principles
generally accepted in the United States of America that are presented in
the Unaudited Condensed Consolidated Financial Statements included in this
report. Additionally, the Company's calculation of EBITDA may be different
than the calculation used by other companies and, therefore, comparability
may be affected.
(3) The Company's financial statements are presented in accordance with the
guidance provided by EITF No. 01-09. Where applicable, amounts presented in
the prior period have been reclassified to conform with the income
statement classifications for the current period. Such reclassifications
resulted in a reduction of $13.7 million and $24.0 million in both
consolidated revenues and expenses for the three and six-month periods
ended June 30, 2001, respectively.
(4) Write-down of capitalized patent litigation costs resulted from adverse
rulings in the ITC and SuperGuide cases.
(5) Impairment of intangible assets represents a write-down of the carrying
value of goodwill, finite-lived intangible assets and trademarks.
Overview of Significant Events
The Company's normal and customary business practice is to assess whether
certain events necessitate a change in assumptions and estimates as they relate
to its established accounting policies on revenue recognition, allowances,
capitalized patent litigation costs, and the carrying value of intangible
assets. The Company has assessed the impact of certain significant events that
occurred during the six months ended June 30, 2002 to determine their effect on
the Company's financial results.
On June 21, 2002, an Administrative Law Judge issued an ID in a United
States International Trade Commission ("ITC") proceeding denying the Company's
request for an exclusionary order to prevent further importation of certain
set-top boxes containing IPGs which the Company believes infringe some of its
patents. The ITC determined not to review this decision on August 29, 2002. On
July 2, 2002, the United States District Court for the Western District of
North Carolina in the legal proceeding SuperGuide Corporation v. DirecTV
Enterprises, Inc., et al (the "SuperGuide case") ruled that certain of the
defendants' products did not infringe the SuperGuide Patents, and on July 25,
2002, the court dismissed all remaining claims in the case. The Company was a
third party defendant in this matter and had joined in SuperGuide's infringement
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
44
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
allegations against EchoStar. The Company has now appealed the ITC and
SuperGuide rulings. (See Note 11 to the Unaudited Condensed Consolidated
Financial Statements.)
The Company assessed the impact of these rulings on its assumptions and
estimates in applying its accounting policy with respect to patent prosecution
and litigation costs incurred to protect, strengthen and enforce the Company's
intellectual property rights. Under its policy, the Company defers such costs
as intangible assets and amortizes them using the straight-line method over the
remaining lives of the related patents. The Company reviewed the carrying value
of capitalized patent litigation costs as a result of the rulings in the ITC
and SuperGuide cases. Although the Company has filed an appeal in the ITC and
SuperGuide cases, the Company concluded that these rulings raised doubts as to
whether certain capitalized patent litigation costs could be reasonably
considered to strengthen the value of the patents. Accordingly, the Company
recorded a write-down of $44.4 million to capitalized patent litigation costs
during the quarter ended June 30, 2002 and will expense all of the legal costs
of the SuperGuide and ITC cases on a going forward basis. (See Note 9 to the
Unaudited Condensed Consolidated Financial Statements.)
Under the requirements of Statement 142, goodwill and indefinite-lived
intangible assets must be tested on an interim basis if events or circumstances
indicate that the estimated fair value of the assets has decreased below their
carrying value. Also, under the requirements of Statement 144, the Company is
required to record impairment losses on long-lived assets used in operations
when events and circumstances indicate that long-lived assets might be impaired
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. In view of the above-mentioned
adverse ruling in the ITC proceeding and the additional fact that the Company
has experienced a sustained decline in its market capitalization (expressed as
its share price multiplied by the number of shares outstanding) during 2002
from $11.5 billion at January 1, 2002 to $2.2 billion at June 30, 2002, the
Company performed an interim impairment analysis of its goodwill,
indefinite-lived intangible assets and certain finite-lived intangible assets
as of June 30, 2002, with the assistance of a third-party valuation expert,
with the following results:
. Based on an interim impairment analysis under Statement 142, the Company
recorded pre-tax impairment charges to its goodwill and trademark of
$22.8 million and $24.0 million, respectively, during the quarter ended
June 30, 2002. These charges were recorded as operating expenses in the
accompanying Unaudited Condensed Consolidated Statements of Operations.
. Based on an impairment analysis under Statement 144, the Company
recognized a pre-tax impairment loss of $1,212.3 million during the
quarter ended June 30, 2002, after it was determined that the carrying
value of certain finite-lived intangible assets exceeded their fair
value.
Transitional Intangible Asset Impairment
The Company completed its transitional indefinite-lived intangible asset and
goodwill impairment tests during the three-month periods ended March 31, 2002
and June 30, 2002, respectively. The Company recorded an impairment charge of
$187.8 million, net of tax, to its indefinite-lived intangible assets and
$5,115.5 million to goodwill, resulting in a total transitional impairment
charge of $5,303.3 million, net of tax. The charge has been recorded as the
cumulative effect of an accounting change as of January 1, 2002 in the
accompanying Unaudited Condensed Consolidated Statements of Operations.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
45
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Consolidated Results of Operations
Revenues for the three months ended June 30, 2002 were $271.5 million, a
decrease of $23.2 million, or 8%, compared to the same period in 2001. The
decrease for the three months ended June 30, 2002 was attributable to a $19.8
million decrease in TV Guide Magazine's revenues and an $18.5 million decrease
in SNG C-band subscriber revenues, partially offset by an increase in revenues
of $10.9 million associated with the July 2001 acquisition of SkyMall.
For the six-month period ended June 30, 2002, revenues were $562.1 million,
a decrease of $55.5 million, or 9%, compared to the same period in 2001. The
decrease for the six months ended June 30, 2002 was attributable to a
$47.9 million decline in TV Guide Magazine revenues, and a $30.4 million
decline in SNG's subscriber revenues, partially offset by an increase of $21.5
million in revenues attributable to the July 2001 acquisition of SkyMall.
The Company's total advertising revenues for the three months ended June 30,
2002 were $63.2 million, a decrease of $6.0 million, or 9%, compared to the
same period in 2001. For the six-month period ended June 30, 2002, advertising
revenues were $129.3 million, a decrease of $12.6 million, or 9%, compared to
the same period in 2001. The Company is desirous of attracting customers to
simultaneously advertise on two or more of its various delivery platforms
("multi-platform" advertising) in order to maximize the effectiveness of all of
its media. Consistent with its practice for selling advertising on a single
platform, in late 2001, the Company established the MPA Program to provide
incentives in the form of discounts for multi-platform advertisers. At times,
such discounts may be significant, and frequently equal and occasionally exceed
the pre-discounted value of the advertising on one of the platforms in the
Program. Total MPA Program sales, net of discounts, included in the advertising
revenues for the three and six-month periods ended June 30, 2002 were $7.2
million and $9.6 million, respectively, of which 34% and 38% of such sales have
been allocated to the Interactive Platform Sector, and 66% and 62%,
respectively, have been allocated to the Media and Services Sector. The general
weakness in the advertising market continues to impact the Company's
advertising revenues. In particular, the Company's ability to increase
advertising sales on its IPG is affected by a lack of verifiable third party
metrics to demonstrate IPG advertising effectiveness. The Company expects that
the sale of advertising on all of its media will continue to face significant
pressure until general advertising conditions improve, and for IPG advertising,
when accepted buying practice and measurement metrics have been established
(see further discussion in Interactive Platform Sector).
Operating expenses, excluding stock compensation, depreciation and
amortization, write-down and impairment charges, were $212.4 million for the
quarter ended June 30, 2002, relatively unchanged when compared to the same
period in the prior year. For the six months ended June 30, 2002, operating
expenses were $406.9 million, a decrease of $27.9 million, or 6%, compared to
the same period in the prior year. The decrease in operating expenses was a
result of the general cost controls in effect throughout the Company. The
decreases were also attributable to reductions in TV Guide Magazine production
expenses for paper, printing, and postage and reduced programming costs for
SNG, partially offset by the additional expenses attributable to SkyMall.
Stock compensation expense reflects amortization of the portion of the
purchase price of acquired businesses assigned to unearned compensation for
unvested stock options assumed by the Company. The unearned compensation is
being amortized over the remaining vesting period of the options. Stock
compensation expense for the quarter ended June 30, 2002 was $1.4 million, a
decrease of $6.6 million primarily due to the separation of four senior
officers and two executive officers
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
46
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
from the Company. For the six-month period ended June 30, 2002, stock
compensation expense was $18.3 million which also included $12.9 million of
accelerated unearned compensation amortization resulting from an executive
officer who separated from the Company during the period.
Depreciation and amortization during the quarter ended June 30, 2002 was
$120.8 million, a decrease of $114.5 million compared to the same period in
2001. For the six-month period ended June 30, 2002, depreciation and
amortization was $237.3 million, a decrease of $236.6 million compared to the
same period in the prior year. The decrease in depreciation and amortization
for the three and six-month periods was primarily a result of the adoption of
the provisions of Statement 142, which became effective January 1, 2002.
Statement 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of Statement 142. See Notes 4
and 5 to the Unaudited Condensed Consolidated Financial Statements. Other
intangible assets acquired in transactions accounted for as purchases are still
amortized and such amortization is significant.
The write-down of capitalized patent litigation costs of $44.4 million in
the second quarter of 2002 resulted from the ITC and SuperGuide rulings. (See
Overview of Significant Events.)
Impairment of intangible assets represents a write-down of the carrying
amount of finite-lived intangible assets ($1,212.3 million), goodwill ($22.8
million) and trademark ($24.0 million) to their fair values based on analyses
performed as of June 30, 2002.
Interest expense was $2.9 million for the three months ended June 30, 2002
and $5.5 million for the six-month period ended June 30, 2002, compared to $7.6
million and $19.1 million, respectively, for the same periods in the prior
year. The decrease in interest expense during the three and six-month periods
were attributable to lower debt levels coupled with lower interest rates.
Other expense, net increased to $9.1 million for the three months ended June
30, 2002 from $0.8 million for the same period in 2001. For the six months
ended June 30, 2002, other (expense) income, net was $(17.4) million as
compared to $1.1 million for the prior year period. The increase in other
expense, net for the three-month period was primarily due to a write-down of
certain marketable securities held by one of the Company's equity-method
investees. The decline in the fair value of such securities was determined to
be other than temporary. Accordingly, the Company recorded a write-down
totaling $8.6 million. The increase in other expense (income), net for the
six-month period was primarily due to a $9.5 million decrease in interest
income coupled with a write-down of certain marketable securities held by the
Company and one of the Company's equity-method investees that was determined to
be other than temporary.
The provision for income tax benefit as a percentage of loss before income
taxes, extraordinary loss on debt extinguishments and cumulative effect of an
accounting change for the three and six-month period ended June 30, 2002 was
36%, compared to 14% for the same periods in 2001. The income tax benefit for
the three and six-month periods ended June 30, 2002 were $495.2 million and
$516.5 million, respectively. The income tax benefit for the three and
six-month periods ended June 30, 2001 were $23.7 million and $45.0 million,
respectively. The net increase in the effective tax rate is primarily due to
the change in the treatment of amortization of goodwill in accordance with
Statement 142, which has no
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
47
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
associated impact on the provision for income taxes. In addition, the overall
effective tax rate reported by the Company in any single period is impacted by,
among other things, the country in which earnings or losses arise, applicable
statutory tax rates and withholding tax requirements for particular countries,
the availability of net operating loss carry forwards 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 period to period.
The cumulative effect of an accounting change relates to the Company's
adoption of Statement 142 effective January 1, 2002. The Company is required to
test goodwill and any intangible assets identified as having an indefinite
useful life for impairment in accordance with the provisions of Statement 142
and report any transitional impairment loss as the cumulative effect of a
change in accounting principle as of January 1, 2002 in the Unaudited Condensed
Consolidated Statement of Operations. The transitional impairment loss for
goodwill and indefinite-lived intangible assets from application of these new
rules was $5,303.3 million, net of tax.
Sector Results of Operations
The Company categorizes its businesses into three groups which also
represent its reportable business segments: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technologies (including the IPGs
currently marketed under brands such as GUIDE Plus+(R) and TV Guide(R)
Interactive, the VCR Plus+(R) system and electronic book ("eBook") technology
marketed under brands such as the Gemstar eBook(TM)); the Interactive Platform
Sector, which derives recurring income from advertising, interactive services
and e-commerce on the Company's proprietary interactive platforms, including
advertising on the Company's IPGs and TV Guide Online, interactive services,
and e-commerce on tvguide.com, skymall.com and other affiliated websites; and
the Media and Services Sector, which operates TV Guide Magazine, TV Guide
Channel, TVG Network/SM/ ("TVG"), SkyMall catalog sales, Superstar/Netlink
Group ("SNG") and other non-interactive platforms and media properties.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
48
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
The following table sets forth certain financial information for the
Company's business sectors for the three and six-month periods ended June 30,
2002 and 2001 (in thousands). The Company's business sectors are measured based
on EBITDA (operating income before stock compensation expense, depreciation and
amortization, write-down and impairment charges).
Restated Restated
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
-------- -------- -------- --------
Technology and Licensing Sector
Revenues (4)................. $ 51,266 $ 45,758 $107,073 $100,467
Operating expenses (1)(3)(4). 21,591 22,010 33,219 37,775
-------- -------- -------- --------
EBITDA (2)................... $ 29,675 $ 23,748 $ 73,854 $ 62,692
======== ======== ======== ========
Interactive Platform Sector
Revenues (4)................. $ 22,418 $ 16,484 $ 44,426 $ 29,261
Operating expenses (1)(3)(4). 19,631 20,939 39,930 41,936
-------- -------- -------- --------
EBITDA (2)................... $ 2,787 $ (4,455) $ 4,496 $(12,675)
======== ======== ======== ========
Media and Services Sector
Revenues (3)(4).............. $197,812 $232,420 $410,605 $487,907
Operating expenses (1)(3)(4). 171,140 169,569 333,707 355,032
-------- -------- -------- --------
EBITDA (2)................... $ 26,672 $ 62,851 $ 76,898 $132,875
======== ======== ======== ========
Consolidated
Revenues (3)(4).............. $271,496 $294,662 $562,104 $617,635
Operating expenses (1)(3)(4). 212,362 212,518 406,856 434,743
-------- -------- -------- --------
EBITDA (2)................... $ 59,134 $ 82,144 $155,248 $182,892
======== ======== ======== ========
- --------
(1) Operating expenses means operating expenses excluding provision for bad
debts, stock compensation expense, depreciation and amortization,
write-down and impairment charges.
(2) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization, write-down and impairment charges.
Commencing January 1, 2002, goodwill and certain other intangible assets
are no longer subject to amortization. However, other intangible assets
acquired in transactions accounted for as purchases are still amortized and
such amortization is significant. Accordingly, the Company's business
sectors are measured based on EBITDA. EBITDA is presented supplementally as
the Company believes it is a standard measure commonly reported and widely
used by analysts, investors and others associated with its industry.
However, EBITDA does not take into account substantial costs of doing
business, such as income taxes, interest expense and depreciation and
amortization. While many in the financial community consider EBITDA to be
an important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow provided by operating activities and other measures
of financial performance prepared in accordance with accounting principles
generally accepted in the United States of America that are presented in
the Unaudited Condensed Consolidated Financial Statements included in this
report. Additionally, the Company's calculation of EBITDA may be different
than the calculation used by other companies and, therefore, comparability
may be affected.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
49
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
(3) Commencing January 1, 2002, the operating costs of the media sales group
have been allocated to the various business units based on advertising
revenue dollars earned. Prior period results, which included media sales
group commissions reported as revenues by the Media and Services Sector
have been reclassified to reflect such commission revenues as a reduction
of expenses in the Media and Services Sector. Effective January 1, 2002,
the Company revised its method of allocating corporate expenses to the
business sectors concurrent with a reorganization of certain corporate
functions. Had the new methodology been in effect in 2001, operating
expenses for each of the sectors for the three and six-month periods ended
June 30, 2001 would have increased (decreased) approximately as follows:
Technology and Licensing Sector--$(1.4) million and $(2.2) million,
respectively, Interactive Platform Sector--$(4.5) million and $(5.7)
million, respectively, and Media and Services Sector - $5.9 million and
$7.9 million, respectively.
(4) The Company's financing statements are presented in accordance with the
guidance provided by EITF No. 01-09. Where applicable, amounts presented in
the prior period have been reclassified to conform with the income
statement classifications for the current period. Such reclassifications
resulted in decreases in revenues for the three and six-month periods ended
June 30, 2001 as follows: Technology and Licensing Sector--$12.7 million
and $22.0 million, respectively, and Media and Services Sector--$1.0
million and $2.0 million, respectively, and decreases in expenses for the
three and six-month periods ended June 30, 2001 as follows: Technology and
Licensing Sector--$5.1 million and $10.6 million, respectively, Interactive
Platform Sector--$7.6 million and $11.4 million, respectively, and Media
and Services Sector--$1.0 million and $2.0 million, respectively, resulting
in a total reduction of $13.7 million and $24.0 million in both
consolidated revenues and expenses for the three and six-month periods
ended June 30, 2001
The following discussion of each of the Company's segments is based on the
Unaudited Condensed Consolidated Financial Statements provided above.
Technology and Licensing Sector
The Technology and Licensing Sector is responsible for the development,
licensing and protection of intellectual property and proprietary technologies.
Revenues in this sector are comprised of license fees paid by third-party
licensees for the Company's proprietary technologies and patents primarily
related to IPGs, video recording and electronic books. The Company's licensing
activities cover multiple industries including consumer electronics, cable,
satellite, Internet appliances, personal computers, and publications worldwide,
with major licensees such as Microsoft, AOL Time Warner, Motorola, AT&T,
Charter Communications, Comcast, Shaw, Thomson multimedia, Sony, Matsushita
(Panasonic) and others. Sector operations include research and development, and
the creation, protection and licensing of patents and proprietary technologies.
The Company's accounting policy related to recognition of licensing revenues
provides that revenues from per unit license fees typically charged to hardware
manufacturers are earned based on units shipped incorporating the Company's
proprietary technologies and are recognized in the period when manufacturers'
units shipped information is available to the Company. Revenues from per
subscriber license fees typically charged to video service providers, such as
MSOs, are earned and recognized in the month service is provided by such
service provider using the Company's patented proprietary technologies.
Revenues from annual and other licenses generally are recognized based on the
specified terms of the license agreements. In the cable and satellite sectors,
the Company has adopted a general policy that the per subscriber license fees
charged to an MSO with a make, sell and use license include the cost of
licenses that would otherwise be required of
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
50
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
manufacturers which incorporate the Company's technologies into the set-top
boxes shipped to the licensed MSO. For this reason, as more and more direct
agreements are concluded with MSOs for the Company's IPG technologies and
services, per subscriber revenues are expected to increase, while per unit
license fees from set-top box suppliers are expected to decrease.
The Company and Scientific-Atlanta initially entered into an agreement in
1992 for the incorporation of IPGs into Scientific-Atlanta set-top boxes.
Scientific-Atlanta breached this agreement and an arbitration ensued, which was
decided in the Company's favor in 1996. From 1997 through 1999,
Scientific-Atlanta was under a license agreement with the Company for the
incorporation of IPGs into Scientific-Atlanta set-top boxes. The agreement
expired on July 23, 1999; however, Scientific-Atlanta continued to ship set-top
boxes incorporating IPGs which are the same or similar to the products shipped
during the term of the agreement.
In 1998, the Company entered into a license agreement with America Online
("AOL"), predecessor of AOL Time Warner. Following the acquisition of Time
Warner by AOL in January 2001, the Company informed AOL Time Warner that the
Company believed the AOL agreement applied to Time Warner cable subscribers
based on language in the agreement which required AOL to use its best efforts
to extend the agreement to AOL affiliates. AOL Time Warner responded that the
agreement did not apply to Time Warner cable subscribers for several specified
reasons. After meeting with AOL Time Warner, in the second quarter of 2001 and
based on the status of negotiations to extend the agreement to Time Warner
cable subscribers, the Company concluded that the AOL agreement applied to Time
Warner Cable subscribers and recorded revenues based on the agreement starting
with the third quarter of 2001. The total receivable from AOL Time Warner under
this license agreement at June 30, 2002 is $18.1 million of which $6.8 million
was earned in the three months ended March 31, 2002. Starting in the second
quarter of 2002, the Company suspended recognition of revenues from AOL Time
Warner pending resolution of negotiations with AOL Time Warner on an amended
license agreement. The Company continues to believe that the outstanding
receivable from AOL Time Warner is collectible.
In October 2000, the Company received $188 million in cash from a set-top
box manufacturer to settle outstanding arbitration and litigation proceedings.
Of the $188 million cash received, approximately $120 million was in prepayment
of a 10-year technology licensing agreement. This prepayment is being amortized
into income based on the number of set-top boxes that such manufacturer ships,
with a differentiation made for shipments to MSOs having licensing agreements
with the Company and uncontracted MSOs. Revenues in the Technology and
Licensing sector for the three-month periods ended June 30, 2002 and 2001
include $7.3 million and $14.2 million, respectively, recognized in connection
with the agreement, while the corresponding six-month periods included $16.2
million and $31.1 million, respectively. At June 30, 2002, $50.3 million
remained to be recognized over the remaining term of the agreement.
Beginning in June 2002, one of the Company's significant licensees in the
Technology and Licensing Sector stopped making payments required under its
license agreement. That licensee, which is in the process of being acquired,
has informed the Company that it will make no payments going forward based upon
a dispute over certain provisions of the agreement.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
51
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
This dispute does not affect any payments previously received by the Company
under the agreement. At the time the payments were terminated, revenues under
this agreement were approximately $800,000 per month. The Company has not
recognized any revenue under this agreement after May 31, 2002. The Company is
presently evaluating its options with regard to this dispute and plans to
address this matter with the licensee's acquiring entity upon the completion of
the acquisition.
For the three months ended June 30, 2002, revenues for the Technology and
Licensing Sector were $51.3 million, an increase of $5.5 million, or 12%, when
compared to revenues for the same period in 2001. For the six-month period
ended June 30, 2002, revenues for this sector were $107.1 million, an increase
of $6.6 million, or 7%, when compared to revenues for the same period in 2001.
The increase in sector revenue was due to growth in the number of TV Guide
Interactive subscribers and by reductions in cooperative advertising and
product placement costs. Cooperative advertising and product placement expenses
recorded in the three and six months ended June 30, 2002 were more than offset
by the reversal of $8.3 million of accruals for cooperative advertising. Under
EITF No. 01-09, these expenses are recorded as a reduction to revenues. As a
result, the reversal of such expenses is reflected as an increase to sector
revenues of $5.9 million and $0.8 million for the three and six-month periods
ended June 30, 2002, respectively. The increase in sector revenue was partially
offset as the Company did not recognize revenues from AOL Time Warner on a
going forward basis beginning with the quarter ended June 30, 2002. The Company
continues to believe that the outstanding receivable from AOL Time Warner is
collectible.
The increase in revenues is partially offset by declines in per unit license
fees from set-top manufacturers, which is due in part to an increasing number
of units being shipped to MSOs who are already licensing the Company's services
and technologies for their subscribers, which the Company has a policy of
waiving or greatly reducing the per unit fee, and in part due to a decline in
the shipment of DirecTV satellite receivers and other devices sold in the
consumer electronics sector.
Operating expenses in the sector decreased by $419,000 or 2% and $4.6
million or 12% for the three and six month periods ended June 30, 2002,
respectively, as compared with the same periods in the prior year, due to
reduced general and administrative expense.
Interactive Platform Sector
The Interactive Platform Sector derives recurring revenues from advertising,
interactive services and e-commerce on the Company's proprietary interactive
platforms, which include advertising on the various IPGs controlled by the
Company, interactive wagering on TVG, e-commerce on the Company's websites and
the eBook devices, and through revenue sharing under license agreements. Sector
activities include the construction and operation of the infrastructure for the
delivery of services and advertising to the interactive platforms, media
research, wagering operations and trafficking, tracking and billing of
advertising. The Company's IPG platform currently is comprised primarily of
television sets incorporating the Gemstar GUIDE Plus+ IPG and digital cable
set-top boxes incorporating the TV Guide Interactive and StarSight(R) IPGs.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
52
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
The most significant source of revenues in this sector is advertising on the
IPG. Such advertising is generated in three different ways: strategic
advertising commitments, the multi-platform sales program and sales to other
advertisers who may or may not advertise on the Company's other advertising
platforms ("Stand-Alone Advertisers"). A summary of the IPG advertising
revenues from each of these initiatives is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ---------------
2002 2001 2002 2001
------- ------- ------- -------
Strategic Advertisers..... $ 9,031 $ 9,100 $21,001 $15,551
Multi-Platform Advertisers 2,340 -- 3,208 --
Stand-Alone Advertisers... 2,535 1,988 5,500 3,654
------- ------- ------- -------
Total................ $13,906 $11,088 $29,709 $19,205
======= ======= ======= =======
Strategic advertising revenues are primarily derived from long-term
commitments with three significant customers. In April 2001, the Company
secured a long term commitment in conjunction with the sale of the WGN
Superstation distribution business. The commitment is for $100 million over six
years for advertising on the company's platforms. IPG advertising revenues
recognized from this contract in the three-month periods ended June 30, 2002
and 2001 were $4.5 million and $4.0 million, respectively, while revenues for
the corresponding six-month periods were $9.5 million and $4.0 million,
respectively.
The second significant strategic advertising commitment is from Thomson
multimedia, Inc. ("Thomson"), a consumer electronics manufacturer with which
the Company has multiple licensing and advertising transactions. In May 2002, a
binding letter of intent was signed which reaffirms Thomson's commitment to
spend $10 million in IPG advertising for each year in 2002 and 2003 and to
purchase IPG advertising during the next five years in an amount equal to a
per-box fee multiplied by the number of satellite set-top boxes shipped.
Thomson also committed to spend $3 million in general advertising on any of the
Company's various delivery platforms within a five-year period and the Company
is required to provide an equivalent amount of advertising at no additional
cost to Thomson. IPG advertising revenues recognized from this commitment in
the three months ended June 30, 2002 and 2001 were $4.3 million and $600,000,
respectively, while revenues for the corresponding six-month periods were $8.0
million and $2.8 million, respectively.
The third strategic advertising commitment is from a set-top box
manufacturer. As part of a long-term licensing and settlement agreement this
manufacturer prepaid $17.5 million in IPG advertising which was recognized as
revenue over an 18-month period, ending March 2002, as the advertising was
aired. No advertising revenues from such manufacturer were recognized in the
three months ended June 30, 2002. IPG advertising revenues recognized from this
commitment for the three months ended June 30, 2001 included $4.5 million,
while revenues for the six-month periods ended June 30, 2002 and 2001 included
$3.1 million and $7.4 million, respectively.
For the three months ended June 30, 2002, revenues for the Interactive
Platform Sector were $22.4 million, an increase of $5.9 million, or 36%,
compared to revenues for the same period in 2001. The increase in revenues is
primarily attributable to an increase in interactive wagering and e-commerce
activities, offset primarily by a decrease in advertising revenues on
tvguide.com, due in part to general weakness in the Internet advertising
market. General advertising sales (non-contract sales) increased by $2.9
million, or 145%, compared with the same period last year.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
53
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
In an effort to attract customers to simultaneously advertise on two or more
of its various delivery platforms, in late 2001, the Company established the
MPA Program to provide incentives in the form of discounts for multi-platform
advertisers. Often such discounts are significant, and frequently equal and
occasionally exceed the pre-discounted value of the advertising on the IPG
platforms. See Critical Accounting Policies and Estimates--Multi-Platform
Advertising Sales. Revenues are allocated among the sectors based on the
relative fair value of the advertising inventory, as measured by the
advertiser-specific rates or market rates of similar advertisers for each
medium. The IPG platform is frequently involved in sales under the MPA Program,
which contributed $2.3 million and $3.2 million to the sector revenues for the
three and six months ended June 30, 2002.
Included in Stand-Alone advertising revenues for the six months ended June
30, 2001 is $2.1 million relating to advertising purchased by SkyMall, Inc.
prior to the Company's acquisition of SkyMall.
For the six-month period ended June 30, 2002, revenues for this sector were
$44.4 million, an increase of $15.2 million, or 52%, when compared to revenues
for the same period in 2001. The increase in revenues is primarily attributable
to increased e-commerce and interactive wagering activities, offset primarily
by a decrease in advertising revenues on tvguide.com. IPG advertising increased
by $4.5 million or 18%. The increase is primarily attributable to an increase
of cash advertising revenues of 54% or $10.4 million. Cash IPG advertising
revenues generated from contracted commitments increased by 38% or $5.8
million, while general IPG advertising sales increased 121% or $4.6 million.
Expenses for this sector, were $19.6 million for the three months ended June
30, 2002, relatively unchanged compared to $20.9 million for the same period in
2001. For the six-month period ended June 30, 2002, expenses for this sector,
were $39.9 million, a decrease of $2.0 million, or 5%, when compared to
expenses for the same period in 2001. Expenses in this sector include amounts
paid to licensees as marketing and advertising expenses and other amounts paid
to licensees under revenue sharing arrangements. A significant portion of these
payments to licensees under marketing and advertising arrangements is incurred
to promote the Company's products on those cable systems that carry TV Guide
Interactive. Amounts expensed under these arrangements were $8.1 million and
$3.6 million for the three months ended June 30, 2002 and 2001, respectively,
and $11.1 million and $7.4 million for the six months ended June 30, 2002 and
2001, respectively. The increased marketing and advertising expenses and the
expenses associated with skymall.com (acquired July 2001) were favorably offset
by decreases in general and administrative expenses.
Media and Services Sector
The Media and Services Sector operates TV Guide Magazine, TV Guide Channel,
TVG, SkyMall catalog sales, SNG and other non-interactive platforms and media
properties. Revenues in this sector are principally composed of subscription
fees and advertising revenues of the TV Guide magazines and the TV Guide
Channel and programming package revenues from C-band households. The Company
sold the business that distributes the WGN superstation signal in April 2001
for approximately its net book value and acquired SkyMall in July 2001.
For the three and six-month periods ended June 30, 2002, revenues for the
Media and Services Sector were $197.8 million and $410.6 million, respectively,
compared to $232.4 million and $487.9 million, respectively, for the same
periods in 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
54
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Revenues in this sector decreased by $34.6 million and $77.3 million for
those periods, respectively, primarily due to decreased revenues earned by TV
Guide Magazine and SNG.
The following table shows the breakdown of the revenues in the Media and
Services Sector by revenue source (in thousands):
Three Three
Months Months Six Months Six Months
Ended Ended Increase Ended Ended Increase
June 30, 2002 June 30, 2001 (Decrease) June 30, 2002 June 30, 2001 (Decrease)
------------- ------------- ---------- ------------- ------------- ----------
TV Guide Magazine $101,258 $121,102 $(19,844) $210,917 $258,863 $(47,946)
SNG.............. 56,946 75,420 (18,474) 120,299 150,656 (30,357)
TV Guide Channel. 24,800 23,074 1,726 49,051 45,300 3,751
SkyMall.......... 6,701 -- 6,701 13,419 -- 13,419
Other............ 8,107 12,824 (4,717) 16,919 33,088 (16,169)
-------- -------- -------- -------- -------- --------
Total......... $197,812 $232,420 $(34,608) $410,605 $487,907 $(77,302)
======== ======== ======== ======== ======== ========
TV Guide Magazine continues to face declines in paid circulation due to
difficulty in attracting new subscribers and reduced newsstand sales, offset in
part by slightly improved renewal rates. At June 30, 2002, TV Guide Magazine
had a total circulation of 9.0 million copies, relatively unchanged from the
same point in time in 2001, but 9% lower than at December 31, 2000. The
circulation figures include "waiting room" and hotel copies, which do not
generate subscription revenues but contribute to advertising revenues.
Circulation of these copies has increased to 2.0 million copies at June 30,
2002 from 945,000 copies at June 30, 2001.
The C-band direct-to-home satellite market, in which SNG operates, continues
to decline due to the growth of the newer generation direct broadcast satellite
systems and continued cable system expansions. During the six-month period
ended June 30, 2002, the number of C-band subscribers in the industry decreased
by 15% to approximately 701,000 subscribers. At June 30, 2002, SNG provided
service to 436,000 of these subscribers, a decrease of 21% from the subscribers
served by SNG as of December 31, 2001.
On November 2, 1999, SNG signed an agreement with EchoStar whereby SNG
promotes and solicits orders for EchoStar's direct broadcast subscription
service, the DISH Network. In exchange, SNG receives an initial commission for
each current or past SNG subscriber who subscribes to the DISH Network and a
monthly residual commission over the life of the agreement. Revenues recognized
from this arrangement totaled $8.3 million and $19.7 million for the three and
six months ended June 30, 2002, respectively, as compared to $9.7 million and
$19.3 million in the corresponding periods of 2001. This agreement has resulted
in an acceleration of the decline in the number of SNG subscribers and this
effect is expected to continue.
Expenses for this sector were $171.1 million for the three months ended June
30, 2002, an increase of $1.6 million, or 1%, when compared to expenses for the
same period in 2001. For the six-month period ended June 30, 2002, expenses for
this sector were $333.7 million, a decrease of $21.3 million, or 6%, when
compared to expenses for the same period in 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
55
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
The increase for the quarter was primarily the result of $15.6 million of
expenses attributable to SkyMall, which was acquired in July 2001, largely
offset by cost reductions at SNG due to declining numbers of subscribers. The
decrease for the six-month period was primarily due to a $34.8 million
reduction in costs at SNG and a decrease of $14.8 million at TV Guide Magazine
as a result of ongoing production cost reduction efforts for paper, printing
and postage. The decrease for the six-month period was partially offset by
$25.1 million of expenses attributable to SkyMall, which did not impact the
comparable period in 2001.
The Company has traditionally operated a magazine distribution business,
which was responsible for distributing approximately 90 titles with a combined
circulation of approximately 410 million copies per year in addition to the TV
Guide Magazine. These magazines were distributed through magazine wholesalers,
who in turn sold them to retailers. The magazine wholesaler segment of this
distribution chain, reacting to increased competition and demands by retailers,
experienced significant consolidation over the last several years. As such, the
credit risk and credit concentration increased dramatically for distributors,
effectively reducing the risk-adjusted returns for TV Guide's distribution
business. Due to this change in business environment, and following the general
approach of discontinuing non-core activities in order to focus on its core
business, the Company contracted with a third party for distribution of TV
Guide Magazine and assigned the existing distribution contracts to that same
party. The distribution business generated approximately $12.6 million in
annual revenue during 2001 with no significant impact on EBITDA. The Company
recognized approximately $3.3 million in costs related to its exit from the
distribution business. Such costs are included in operating expenses in the
Sector Results of Operations.
Related Parties and Other Significant Relationships
In connection with the acquisition of TV Guide in 2000, News Corp. became a
stockholder of the Company. As of June 30, 2002, News Corp. directly and
indirectly owns approximately 43% of the Company's outstanding common stock and
has the right to designate six directors on the Company's board. The Company
earned advertising revenues of $3.9 million and $5.3 million for the three
months ended June 30, 2002 and 2001, respectively, and $8.5 million and
$12.8 million for the six months ended June 30, 2002 and 2001, respectively,
from entities controlled by News Corp. In addition, the Company acquired
programming from News Corp. controlled entities of $1.1 million and $2.9
million for the three months ended June 30, 2002 and 2001, respectively, and
$2.8 million and $5.5 million for the six months ended June 30, 2002 and 2001,
respectively. Prior to its acquisition of TV Guide, the Company did not have
any significant transactions with News Corp. As of June 30, 2002 and December
31, 2001, the Company had receivables due from News Corp. controlled entities
totaling $1.9 million and $4.6 million, respectively, and payables due to News
Corp. controlled entities totaling $149,000 and $302,000, respectively. The
Company reimburses News Corp. for facilities and other general and
administrative costs incurred on the Company's behalf. Expenses associated with
these costs approximated $927,000 and $(83,000) for the three months ended June
30, 2002 and 2001, respectively, and $2.0 million and $1.2 million for the
six months ended June 30, 2002 and 2001, respectively. Expenses for the three
and six month periods ended June 30, 2001 included a rent and facilities credit
of $345,000 from News Corp. In addition, the Company purchases paper through a
paper procurement arrangement with News Corp. at negotiated prices with paper
suppliers based on the combined paper requirements of the two organizations.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
56
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Liberty Media Corporation ("Liberty Media"), formerly an indirect wholly
owned subsidiary of AT&T Corp., directly or indirectly owned approximately 21%
of the issued and outstanding common stock of the Company from the date of the
acquisition of TV Guide in 2000 until May 2, 2001, the date Liberty Media sold
its interest in the Company to News Corp. For the period April 1, 2001 to May
2, 2001, the date Liberty Media ceased to be considered a related party of the
Company, and the period from January 1, 2001 to May 2, 2001, the Company
purchased programming from Liberty Media controlled affiliates of $1.2 million
and $4.5 million, respectively. During the same periods, the Company also sold
video, program promotion and guide services of $1.7 million and $6.7 million,
respectively, to AT&T Broadband and Internet Services ("BIS") and its
consolidated affiliates. In addition, during the same periods, the Company
purchased production services and was provided satellite transponder facilities
and uplink services from BIS consolidated affiliates of $642,000 and
$2.4 million, respectively. BIS is also wholly owned by AT&T Corp. Prior to its
acquisition of TV Guide, the Company did not have any significant transactions
with Liberty Media or BIS.
The Company has included in the amounts discussed above, transactions with
News Corp., BIS, and Liberty Media and all known entities in which BIS, Liberty
Media and News Corp. have an interest greater than 50%. In addition, the
Company has transactions with entities in which BIS, Liberty Media and News
Corp. own, directly or indirectly, 50% or less.
The Company has multiple transactions with Thomson multimedia, Inc.,
including Thomson's licensing of the Company's VCR Plus+, GUIDE Plus+ and eBook
technologies, Thomson's advertising on the Company's platforms, primarily the
IPG platforms, the Company's participation in marketing and promotion campaigns
on Thomson products carrying the Company's technology, and a joint venture for
the sale of advertising on electronic program guides on televisions. During the
three months ended June 30, 2002 and 2001, revenues earned from the
relationship with Thomson were $14.7 million and $12.8 million, respectively,
and expenses incurred were $2.8 million and $10.4 million, respectively. During
the six-month period ended June 30, 2002 and 2001, revenues earned from the
relationship with Thomson were $27.6 million and $27.8 million, respectively,
and expenses incurred were $6.4 million and $15.1 million, respectively. As of
June 30, 2002, the Company had receivables due from and a payable due to
Thomson totaling $21.8 million and $10.8 million, respectively.
In May 2002, the Company signed a binding Letter of Intent with Thomson to
broaden areas included in their strategic partnership and to also settle all
issues raised in an arbitration between the parties (See Note 11 to the
Unaudited Condensed Consolidated Financial Statements). The Letter of Intent
renews the commercial relationship in which the Company's GUIDE Plus+ IPG is
incorporated in Thomson's televisions. The Letter of Intent also reaffirms
Thomson's commitment to spend $10 million in IPG advertising for each year in
2002 and 2003 and to purchase IPG advertising during the next five years in an
amount equal to a per-box fee multiplied by the number of satellite set-top
boxes shipped. Thomson also committed to spend $3 million in general
advertising on any of the Company's various delivery platforms within a
five-year period and the Company is required to provide an equivalent amount of
advertising at no additional cost to Thomson. A component of the overall
revenue from Thomson described above is IPG advertising revenue. IPG
advertising revenues recognized from this relationship in the three months
ended June 30, 2002 and 2001 were $4.3 million and $600,000, respectively,
while revenues for the corresponding six-month periods were $8.0 million and
$2.8 million, respectively.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
57
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
This cooperation provides for Thomson to share in guide revenues generated
by GUIDE Plus+ IPGs incorporated in Thomson's consumer electronic products. The
licensing of Gemstar's IPG technology for incorporation into Thomson devices
will focus on the next generation digital products including digital
televisions, digital-ready televisions and digital recorders such as hard disc
recorders and DVD-recordables, in addition to analog televisions. The companies
also propose cooperation to strengthen their respective intellectual property
positions and develop interactive services and two-way response networks with
Gemstar using Thomson as a preferred supplier for broadcast and response
networks for both video and data in its interactive services.
Liquidity and Capital Resources
For the six months ended June 30, 2002, net cash flows from operating
activities were $153.1 million. This cash flow, plus existing cash resources
and proceeds from the exercise of stock options of $1.3 million, was used to
fund $31.0 million for repayment of long-term debt and capital lease
obligations, $4.7 million for capital expenditures, $18.2 million for additions
to intangible assets, primarily patent prosecution and litigation costs, $9.9
million for distributions to minority interests, primarily in SNG, and $63.4
million to repurchase outstanding shares of the Company's common stock.
At June 30, 2002, the Company's cash, cash equivalents and marketable
securities classified as current assets aggregated $430.2 million, which
includes cash and cash equivalents of $185.0 million domiciled outside the
United States.
At June 30, 2002, approximately $65.6 million, or 41%, of the Company's
receivables are due from five entities. The Company currently believes these
receivables to be realizable; however, events may occur in the future which
could cause the Company to change its assessment of the amount of
recoverability. As of June 30, 2002, net receivables totaled $158.9 million, a
decrease of $126.1 million when compared to the balance at December 31, 2001.
The decrease is primarily due to a $57.7 million decrease in receivables
related to the magazine distribution business, and a $50.2 million decrease in
balances due from various other customers including Thomson multimedia.
The Company's wholly owned subsidiary, TV Guide, has a $300 million six-year
revolving credit facility and a $300 million four-year amortizing term loan,
both expiring in February 2005 with a group of banks. Borrowings under the
credit facilities bear interest (2.84% at June 30, 2002) either at the banks'
prime rate or LIBOR, both plus a margin based on a sliding scale tied to TV
Guide's leverage ratio, as defined in the facility. The credit facilities are
guaranteed by certain subsidiaries of TV Guide and the stock of TV Guide's
subsidiaries is pledged as collateral. The credit facilities impose
restrictions on TV Guide's ability to pay dividends to Gemstar tied to TV
Guide's leverage ratio. This restriction does not apply to Gemstar's ability to
pay dividends. As of June 30, 2002, TV Guide had available borrowing capacity
under the six-year revolving credit facility of $160.6 million. Principal
payments of $45 million in the remainder of 2002, $90 million in 2003 and $23
million in 2004 are due under the $300 million amortizing term loan.
Outstanding borrowings at June 30, 2002 were $138.4 million under the revolving
credit facility and $158.0 million under the term loan. At June 30, 2002, the
Company had an outstanding letter of credit issued under the revolving credit
facility for $1.0 million. The Company has determined that there is a
reasonable likelihood that TV Guide will be unable to maintain compliance with
a financial covenant in its term loan agreement during the coming twelve
months. The Company is currently evaluating options to maintain compliance or
mitigate the effects of any noncompliance.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
58
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
The Company is a party to a loan guaranty to assist a printing services
supplier in obtaining a line of credit and term loans with a bank. The maximum
exposure to the Company created by this guaranty is $10.0 million.
The Company collects in advance a majority of its TV Guide magazine
subscription fees, SNG subscription fees and certain of its UVTV superstation
revenues. In addition, the Company receives nonrefundable prepaid license fees
from certain licensees. The Company's liability for prepaid magazine
subscriptions is limited to the unearned prepayments in the event customers
cancel their subscriptions. The Company's liability for other prepayments is
limited to a refund of unearned prepayments in the event that the Company is
unable to provide service. No material refunds have been paid to date.
As of June 30, 2002, deferred revenue totaled $321.4 million, a decrease of
$49.5 million when compared to $370.9 million at December 31, 2001. The
decrease in deferred revenue was attributable to declines in circulation of TV
Guide Magazine coupled with the decline in the subscriber base of the C-band
industry and the recognition of nonrefundable prepaid license fees.
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, capital expenditure
and debt requirements in the foreseeable future.
In April 2002, the Company's Board of Directors authorized an extension of
its authorization granted in September 2001 to repurchase up to $300 million of
the Company's outstanding shares of common stock. The authorization permitted
the Company to purchase shares in the open market at prevailing prices, or in
privately negotiated transactions at then prevailing prices, provided that the
Company complied with SEC regulations regarding such purchases. During the
period subsequent to the date the extension was authorized through June 30,
2002, the Company repurchased 6.9 million shares for an aggregate price of
$63.4 million. The extension expired on September 18, 2002 with no additional
share repurchases. Since September 2001, the Company has repurchased a total of
7.2 million shares for an aggregate price of $69.8 million.
The terms of an option agreement entered into in connection with the
Company's acquisition of the intellectual property of a privately held company
require the Company to exercise an option to acquire substantially all of the
assets of such company for $3.0 million if it achieves certain financial and
operating goals. The Company received notice that such goals have been met and
is exercising the option.
On May 22, 2002, the Company entered into an agreement with DIVA Systems
Corporation ("DIVA"), a provider of server-based technology and software
systems for cable television, to acquire substantially all of its assets as
part of a bankruptcy proceeding for approximately $40.0 million, payable
primarily in shares of the Company's common stock. The transaction has not been
completed. On September 25, 2002, the Company notified DIVA that as a result of
certain conditions that had not been satisfied by DIVA prior to closing, the
Company was not obligated to close the transaction and did not intend to close
the transaction.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
59
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Subsequent Events
Management Restructuring
On August 14, 2002, the Company announced that News Corp. and Dr. Henry
Yuen, Chief Executive Officer, and Elsie Leung, Chief Financial Officer,
submitted a joint proposal to the Company's Board of Directors to restructure
the Company's management and to settle disputes among the parties. The Board of
Directors formed a committee of independent directors to consider the proposal
and to make a recommendation to the Board concerning the proposal. The Special
Committee, with the assistance of its independent legal advisors, evaluated the
proposal. On November 7, 2002, the Board of Directors approved and the Company
executed definitive documentation related to this restructuring. Dr. Yuen
resigned as Chief Executive Officer of the Company. Dr. Yuen will continue as
Chairman of the Board in a non-executive capacity and, under a new five-year
employment agreement, will lead a business unit formed to pursue international
business development opportunities. In that role, Dr. Yuen will also strive to
enhance and improve the Company's interactive program guides and interactive
technologies. As part of the agreement, Dr. Yuen assigned to the Company all
intellectual property relating to the Company's business that he has developed
and develops in the future in his new role. In addition, he has granted the
Company the right of first refusal to certain future inventions related to
interactive television and interactive programming guides for a period of time.
Jeff Shell has been named Chief Executive Officer succeeding Dr. Yuen.
Additionally, the Company appointed Paul Haggerty as acting Chief Financial
Officer. Mr. Haggerty, currently Executive Vice President for Finance at News
Corp., which owns approximately 43 percent of the outstanding stock of the
Company, succeeds Elsie Leung. Ms. Leung will remain as a member of the Board
and, under a new three-year agreement, will work with Dr. Yuen to pursue
international opportunities for the Company. The Company will be conducting a
search for a permanent Chief Financial Officer.
Dr. Yuen will receive approximately $22 million and Ms. Leung approximately
$7 million as termination payments for their existing contracts. The cash
payable to Dr. Yuen and Ms. Leung under this settlement, as well as other
accrued but unpaid amounts due under their employment agreements totaling $8
million, will be held by the Company in a segregated account for up to six
months pending possible deposit of all or a portion of such cash into an escrow
account pursuant to the Sarbanes-Oxley Act. In addition, approximately 20
million outstanding options held by Dr. Yuen and Ms. Leung were cancelled. The
Company currently intends to grant Dr. Yuen and Ms. Leung approximately
8 million shares of restricted stock and approximately 9 million new stock
options in connection with their termination, employment and other future
agreements.
The Company expects to record a charge related to this settlement agreement
in the fourth quarter of 2002.
Nasdaq Delisting Proceeding
On August 19, 2002, the Company received a Nasdaq Staff Determination that
its securities are subject to delisting from the Nasdaq National Market because
the Company failed to file its Form 10-Q for the quarter ended June 30, 2002 on
a timely basis. On November 9, 2002, the Nasdaq Listing Qualifications Panel
granted the Company's request for an exception to continue its listing on the
Nasdaq National Market based on the following conditions:
. On or before November 19, 2002, the Company must file with the SEC and
Nasdaq the Form 10-Q for the quarter ended September 30, 2002,
notwithstanding the absence of the requisite SAS 71 accountant review.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
60
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
. On or before March 3, 2003, the Company must file with the SEC and
Nasdaq all necessary amended filings for fiscal 2000, 2001 and 2002,
including affirmative statements that the filings have been reviewed
and/or audited in accordance with SEC requirements.
. On or before March 31, 2003, the Company must file with the SEC and
Nasdaq the Form 10-K for the year ended December 31, 2002; and
. On or before June 30, 2003, the Company must solicit proxies and hold an
annual meeting for fiscal 2001.
To fully comply with the terms of this exception, the Company must be able
to demonstrate compliance with all requirements for continued listing on the
Nasdaq National Market. The Nasdaq Panel also reserved its right to modify,
alter or extend the terms of this exception upon a review of the Company's
reported financial results.
SEC Formal Investigation
On October 17, 2002, the U.S. Securities and Exchange Commission issued a
formal order of investigation to determine whether there have been violations
of the federal securities laws by the Company and/or others. The Company
previously disclosed that it has been in discussions with the Commission
regarding the Company's recently completed internal accounting review. The
Company intends to continue to fully cooperate with the Commission as it moves
forward in its process.
DOJ Correspondence
On November 7, 2002, the Company received a letter from the United States
Department of Justice ("DOJ"). The DOJ has indicated they believe that Gemstar
International Group Limited and TV Guide, Inc. engaged in unlawful coordination
of activities prior to their merger on July 12, 2000. The Company has reason to
believe that the DOJ may initiate an action against the Company under federal
antitrust laws in the near future. The DOJ has also indicated that it would be
willing to enter into negotiated agreement with the Company and has provided
the Company with a possible settlement structure, including the imposition of a
fine and certain other conditions and restrictions. The Company believes that
its conduct prior to the merger was lawful, but will evaluate whether there are
acceptable terms for a negotiated resolution of this matter.
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board's ("FASB's")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No.
01-09, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products). EITF No. 01-09, which is effective for
periods commencing after December 31, 2001, clarifies the income statement
classification of costs incurred by a vendor for certain cooperative
advertising and product placement paid to a vendor's customers. As a result of
the EITF consensus, certain of the Company's cooperative advertising and
product placement costs previously classified as operating expenses have been
reflected as a reduction of revenues earned from that activity. Where
applicable, amounts presented in prior periods have been reclassified to comply
with the income statement classifications for the current period. Approximately
$13.7 million and $24.0 million of cooperative advertising and product
placement costs previously classified as expenses have been reflected as a
reduction of revenues in the Unaudited Condensed Consolidated Statements of
Operations for the three and six-month periods ended June 30, 2001,
respectively.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
61
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
In July 2001, the FASB issued Statement 142, Goodwill and Other Intangible
Assets. Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of Statement
142. The Company adopted the provisions of Statement 142 effective January 1,
2002. In connection with the adoption of Statement 142, the Company evaluated
its existing intangible assets that were acquired in prior purchase business
combinations, and made any necessary reclassifications in order to conform with
the criteria outlined in SFAS No. 141, Business Combinations, for recognition
apart from goodwill. In addition, the Company reassessed the useful lives and
residual values of all intangible assets acquired in purchase business
combinations, and made any necessary amortization period adjustments. Finally,
the Company tested goodwill and any intangible assets identified as having an
indefinite useful life for impairment in accordance with the provisions of
Statement 142. As a result of the application of these new rules, the Company
reported a transitional impairment charge for goodwill and indefinite-lived
intangible assets as the cumulative effect of an accounting change of $5,303.3
million, net of tax as of January 1, 2002 in the accompanying Unaudited
Condensed Consolidated Statements of Operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement replaces Statement No. 121.
However, it retains the fundamental provisions of Statement No. 121 for
recognition and measurement of the impairment of long-lived assets to be held
and used and for measurement of long-lived assets to be disposed of by sale.
This statement applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, for the disposal of segments of a business. This statement requires
that those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. The Company adopted this statement effective January
1, 2002. Adoption of this statement did not have a material impact on the
Unaudited Condensed Consolidated Financial Statements at January 1, 2002.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections
("Statement 145"). In addition to amending or rescinding other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions, Statement
145 precludes companies from recording gains and losses from the extinguishment
of debt as an extraordinary item. The Company must implement Statement 145 in
the first quarter of 2003 and all comparative financial statements will be
reclassified to conform to the 2003 presentation. The anticipated effect of the
statement includes the reclassification of an extraordinary loss on debt
extinguishment, net of tax, to net loss of $2.1 million ($0.01 per share) in
the three and six month periods ended June 30, 2001. There will be no effect on
net loss or net loss per share.
On June 30, 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("Statement 146"). Statement 146
nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). It requires that a liability be recognized
for those costs only when the liability is incurred, that is, when it meets the
definition of a liability in the FASB's conceptual framework. Statement 146
also establishes fair value as the objective for initial measurement of
liabilities related to exit or disposal activities. Statement 146 is effective
for exit or disposal activities that are initiated after December 31, 2002,
with earlier adoption encouraged. The Company does not expect that the adoption
of Statement 146 will have a material impact on its financial position or
results of operations.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
62
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
In September 2002, the EITF reached a consensus on EITF Issue No. 02-13,
Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in
FASB Statement No. 142, Goodwill and Other Intangible Assets ("EITF 02-13").
EITF 02-13, which is effective for goodwill impairment tests performed after
September 12, 2002, requires that deferred income taxes, if any, be included in
the carrying amount of a reporting unit for the purposes of the first step of
the SFAS 142 goodwill impairment test. It also provides guidance for
determining whether to estimate the fair value of a reporting unit by assuming
that the unit could be bought or sold in a non-taxable transaction versus a
taxable transaction and the income tax bases to use based on this
determination. The Company does not expect that the adoption of EITF 02-13 will
have a material impact on its financial position or results of operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The foregoing "Management's Discussion and Analysis of Financial
Information" section and other portions of this Form 10-Q contain various
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which represent the Company's expectations or beliefs
concerning future events. Statements containing expressions such as "may,"
"will," "continues," "believes," "anticipates," "estimates", "plans" or
"expects" used in the Company's periodic reports on Forms 10-K, 10-K/A, 10-Q,
and 8-K filed with the SEC are intended to identify forward-looking statements.
The Company cautions that these and similar statements included in this report
and in previously filed periodic reports including reports filed on Forms 10-K,
10-K/A, 10-Q, and 8-K are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statement, including, without limitation, those referred to below in "Certain
Factors Affecting Business, Operating Results and Financial Condition" and
elsewhere in this Form 10-Q. 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
those discussed below. Such factors, together with the other information in
this Form 10-Q, should be considered carefully in evaluating an investment in
the Company's common stock. The cautionary statements contained or referred to
in this section should be considered in connection with any subsequent written
or oral forward-looking statements that the Company or persons acting on the
Company's behalf may issue. The Company undertakes no obligation to review or
confirm analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events.
Certain Factors Affecting Business, Operating Results and Financial Condition
Our financial statements have been restated and have not been audited or
reviewed.
On November 14, 2002, the Company filed Amendment No. 2 to its Annual Report
on Form 10-K/A for the year ended December 31, 2001 (the "Annual Report"),
Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002, its Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 and its Quarterly Report on Form 10-Q for the quarter ended September
30, 2002, each of which restated certain historical financial statements and
other information contained in reports previously filed with the SEC. None of
the financial statements contained in such reports has been audited or reviewed
by an independent accounting firm and therefore should not be relied upon. In
addition, the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
63
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Company recently dismissed its independent accounting firm and engaged a new
independent accounting firm to audit the Company's financial statements
contained in the Annual Report and to conduct a review of the financial
statements contained in such Quarterly Reports on Form 10-Q. There can be no
assurance as to when such audit and reviews will be completed or that at the
conclusion of such audit, the independent accounting firm will issue an
unqualified opinion, or any opinion, on the financial statements contained in
the Annual Report. The Company is also reviewing its accounting policies and
transactions to ensure compliance with accounting principles generally accepted
in the United States of America. Specifically, the Company will be focusing on
the accounting for licensing and advertising revenues, including but not
limited to, revenues from strategic customers and multi-platform advertisers.
The Company believes that it is likely that, as a result of such accounting
firm's audit and review and the Company's ongoing review of its accounting
policies and the application of the policies to various types of transactions,
the Company will further restate the financial statements contained in its
Annual Report and such Quarterly Reports on Form 10-Q in amendments to such
reports. Such restatements may be material. Any further restatement of such
financial statements may adversely affect the Company's business and results of
operations.
We face risks related to an SEC investigation and securities litigation
The SEC has issued a formal order of investigation to determine whether the
Company has violated the federal securities laws. Although the Company intends
to fully cooperate with the SEC in this matter, the SEC may determine that the
Company has violated federal securities laws. If the SEC so determines, the
Company may face criminal sanctions and/or have to pay significant fines or pay
restitution to certain stockholders. In addition, the Company has been named a
defendant in a number of class-action lawsuits. As a result, management's
attention will be diverted to the defense of such lawsuits and the Company will
have to expend significant monetary and human resources on such defense. These
lawsuits could also result in significant monetary judgments against the
Company.
We may be delisted from the Nasdaq National Market.
On August 19, 2002, the Company received a Nasdaq Staff Determination that
its securities are subject to delisting from the Nasdaq National Market because
the Company failed to file its Form 10-Q for the quarter ended June 30, 2002 on
or before August 14, 2002. On November 8, 2002, the Nasdaq Listing
Qualifications Panel granted the Company's request for an exception to continue
its listing on the Nasdaq National Market based on the following conditions:
. On or before November 19, 2002, the Company must file with the SEC and
Nasdaq the Form 10-Q for the quarter ended September 30, 2002,
notwithstanding the absence of the requisite SAS 71 accountant review;
. On or before March 3, 2003, the Company must file with the SEC and
Nasdaq all necessary amended filings for fiscal years 2000, 2001 and
2002, including the affirmative statements that the filings have been
reviewed and/or audited in accordance with SEC requirements;
. On or before March 31, 2003, the Company must file with the SEC and
Nasdaq the Form 10-K for the year ended December 31, 2002; and
. On or before June 30, 2003, the Company must solicit proxies and hold an
annual meeting for fiscal 2001.
To fully comply with the terms of this exception, the Company must be able to
demonstrate compliance with all requirements for continued listing on the
Nasdaq National Market. If the Company fails to meet any of these conditions,
our
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
64
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
securities may be delisted from the Nasdaq National Market. In addition, the
Nasdaq Panel reserved the right to modify, alter or extend the terms of this
exception. If the Nasdaq Panel altered or modified the terms of this exception
and the Company was unable to meet the modified terms, our securities may be
delisted from the Nasdaq National Market.
We may experience slower growth and decreased profit margins.
Prior to the acquisition of TV Guide, Gemstar experienced significant
revenue growth and produced substantial profit margins. Subsequent to the
acquisition, while consolidated revenues have been greater due to the addition
of TV Guide, our profit margins are lower on a consolidated basis as a result
of the lower margins contributed by the TV Guide businesses. We do not expect
to experience, in percentage terms, the rapid revenue growth that we
experienced before the merger. In fact, as certain of our significant
businesses are in declining markets, we may experience a decrease in revenues
as the revenue growth produced by our emerging businesses may not be
significant enough to offset the revenue decreases of our businesses operating
in declining markets. Also, in keeping with our philosophy of focusing on core
business activities, we may decide to divest or discontinue certain non-core
businesses, which may result in further reductions of revenues and profits.
We face competition in many areas and the competition could negatively impact
our operating results.
We face competition from a wide range of other companies in the
communications, advertising, media, entertainment, information, Internet
services, software and technology fields. The competitive environment could,
among other results, require price reductions for our products, require
increased spending on marketing and product development, limit our ability to
develop new products and services, limit our ability to expand our customer
base or even result in attrition in our customer base. Any of these occurrences
could negatively impact our operating results.
New products and rapid technological change may adversely affect our
operations.
The emergence of new consumer entertainment products and technologies,
changes in consumer preferences and other factors may limit the life cycle of
our technologies and any future products we might develop. Our future
operations could be adversely impacted by our ability to identify emerging
trends in our markets and to develop and market new products and services that
respond to competitive offerings, technological changes and changing consumer
preferences in a timely manner and at competitive costs.
The marketing and market acceptance of our interactive program guides may not
be as rapid as we expected.
The market for our IPGs has only recently begun to develop, is rapidly
evolving and is increasingly competitive. Demand and market acceptance for our
IPGs are subject to uncertainty and risk. We cannot predict whether, or how
fast, this market will grow or how long it can be sustained. For GUIDE Plus+,
which is incorporated in consumer electronics products, the deployment rate
will be dependent on the strength or weakness of the consumer electronics
industry, and in particular, the sale of television sets. For TV Guide
Interactive, which is incorporated into digital set-top boxes, the deployment
rate will be dependent on the growth of digital cable television subscribers.
Purchases of consumer electronics products and digital cable television
subscriptions are largely discretionary and may be affected by general economic
trends in the countries or regions
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
65
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
in which such products or subscriptions are offered. If the market for our IPGs
develops more slowly than expected or becomes saturated with competitors, our
operating results could be adversely impacted.
The composition of IPG license revenue may change.
The Company historically has charged a per-unit license fee for the
incorporation of our IPG technology into hardware devices, including
televisions, VCRs, digital cable set-top boxes, digital satellite receivers,
and others. We have begun to enter into direct agreements with cable MSOs and
other service providers to provide IPG services based on a per-subscriber
per-month fee, such fee being inclusive of the per-unit license fee otherwise
chargeable to the supplier of the set-top box to the licensed MSO. The impact
of signing such agreements with service providers is that the Company will
recognize less license fees at the time of shipment of the set-top box, but
will establish a revenue stream with potentially much greater net present value
when cable subscribers activate their digital service. During the past two
years, we have entered into over 210 long-term license agreements with cable
MSOs and other service providers, including Comcast, Charter and Adelphia, in
the U.S and abroad. The effect of the Company's success in entering into these
new per-subscriber per-month agreements may act to reduce license fees
recognized in 2002, and depending on the timing of certain events, also in
2003. Digital cable television subscriptions are generally priced at a premium
to analog cable television service and represent discretionary expenditures for
consumers. Consequently, general economic trends may result in fluctuations in
the amount of revenue received by the Company under this recurring revenue
model.
Continued consolidation of the cable and satellite broadcasting industry
could change the terms of existing agreements; the impact of these changes is
not certain.
We have entered into agreements with a large number of cable MSOs for
distribution of our IPGs. If, as expected, consolidation of the cable and
satellite broadcasting industry continues, some of these agreements may be
affected by mergers, acquisitions or system swaps. Although the Company has
sought to protect itself against any negative consequences resulting from such
transactions with provisions in our agreements with cable MSOs, it is
conceivable that certain combinations of events could change the terms of the
agreements and such changes could negatively affect our results of operations.
Advertising revenues are impacted by technology, consumer acceptance of our
products, competition, adverse economic conditions and seasonality.
We expect to derive a significant portion of our revenues from the sale of
advertising. To generate sustained growth in advertising revenues, our IPGs
must have the technology to effectively deliver advertising, consumers must
accept our products to create a broad advertising base and advertisers must
accept our IPGs as an effective medium for advertising delivery. As a new
medium, we must be able to demonstrate its effectiveness with quantitative
research. The rate for advertising on the IPG platform, and hence its value,
will depend on the availability, quality and results of this research. If we
are unable to produce verifiable third-party metrics for IPG advertising
effectiveness, or if such metrics demonstrate a lack of effectiveness relative
to other media, our revenues from the sale of IPG advertising could be
adversely affected. We compete with other media for advertising placements,
which can result in lower prices and reductions in advertising revenues. Recent
adverse economic conditions have significantly impacted our advertisers'
ability and willingness to spend additional amounts
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
66
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
on advertising generally and may continue to have such an impact in the future.
Additionally, our advertising revenues are subject to seasonal fluctuations.
Our business may be adversely affected by changes in the consumer electronics
market.
We derive significant revenues from manufacturer license fees for our VCR
Plus+ and IPG technologies. We do not manufacture hardware, but rather depend
on the cooperation of third-party consumer electronics manufacturers to
incorporate our technology into their products. Many of our license agreements
do not require the inclusion of our 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 over their term. Accordingly, we
cannot control or predict the number of models or units shipped by any
manufacturer employing our technology. Demand for new consumer electronics
devices, such as television sets, VCRs, integrated satellite receiver decoders,
personal computers and Internet appliances, may be adversely impacted by
increasing market saturation, durability of products in the marketplace, new
competing products and alternate consumer entertainment options. Our future
operating results are dependent on continued growth in consumer electronics
employing our technologies and any decline in sales of consumer electronics
products employing our technologies could have an adverse impact on our
operating results.
Dependence on the cooperation of cable systems, television broadcasters,
publications and data providers could adversely affect our revenues.
Program guide and advertising data is delivered to network headends, cable
headends, and broadcast stations for inclusion in the vertical blanking
interval of television signals and to local affiliate cable systems for
delivery to set-top boxes in subscribers homes via the out-of-band frequencies
of local cable systems. There can be no assurance that these delivery
mechanisms will distribute the data without error or that the agreements
governing certain of these relationships can be maintained on economical terms.
Our data broadcast through the vertical blanking interval can be, and has been
in the past in certain markets, deleted or modified by some of the local cable
systems. Widespread deletion or modification of such data could have a material
adverse impact on the Company's GUIDE Plus+ business. In addition, we purchase
some of our program guide information from commercial vendors. The quality,
accuracy or timeliness of such data may not continue to meet our standards or
be acceptable to consumers. Our VCR Plus+ system relies on consumer access to
PlusCode numbers through licensed publications. We are dependent on the
maintenance and renewal of agreements governing the PlusCode publications to
ensure the distribution of the PlusCodes.
The majority of TV Guide Channel's customers are not under long-term license
agreements, which could result in cable MSOs terminating the service at anytime
with minimal prior notice of such discontinuation. A significant decline in
distribution of the TV Guide Channel could have a material adverse effect on
the amount of licensing and advertising revenue received by the Company.
Seasonality and variability of consumer electronic product shipments and
newsstand sales of our print products may affect our revenues and results of
operations on a quarterly or annual basis.
Shipments of consumer electronics products tend to be higher in the third
and fourth calendar quarters. General advertising also tends to be higher in
the fourth quarter. In addition, manufacturer shipments vary from quarter to
quarter
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
67
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
depending on a number of factors, including retail inventory levels and retail
promotional activities. Newsstand sales of our print products tend to be higher
in the first and fourth calendar quarters. As a result, we may experience
variability in our licensing and advertising revenues.
VCR Plus+ revenues may decline due to full penetration of the product in a
declining market.
Future revenues derived from VCR Plus+ may decline due to the fact that
virtually all major VCR manufacturers have licensed the VCR Plus+ technology
and the fact that we have already expanded into most major markets worldwide.
The worldwide shipment of VCRs has been declining and this decline is expected
to accelerate as they are replaced by digital recording devices. Although VCR
Plus+ is now being incorporated into some digital recording devices, there is
no assurance that this practice will become widespread. In addition, our IPG
technology may be more relevant than our VCR Plus+ technology for these digital
recording devices.
TV Guide Magazine, which is a significant business, has experienced
significant declines in circulation and EBITDA and such declines may continue.
We provide TV Guide Magazine to households and newsstands and customized
monthly program guides to customers of cable and satellite service providers.
TV Guide Magazine has seen circulation decline significantly over the past
several years. The primary cause of this decline is increased competition from
free television listings included in local newspapers, electronic program
guides incorporated into digital cable and satellite services, and other
sources. Declines in TV Guide Magazine's circulation and EBITDA may to
continue, and the declines could be significant.
Paper and postal price increases can materially raise our costs associated
with the production and delivery of the TV Guide print products, including TV
Guide Magazine.
The price of paper can be a significant factor affecting TV Guide Magazine's
operating performance. We do not hedge against increases in paper costs. If
paper prices do increase and we cannot pass these costs on to our customers,
the increases may have a material adverse effect on us. Postage for product
distribution and direct mail solicitations is also a significant,
uncontrollable expense to us. Postal rates increased in February 2001, July
2001 and again in June 2002 and are likely to increase in the future.
Digital recapture could adversely affect carriage of our analog products.
Cable television is transmitted on a limited frequency spectrum that must be
allocated between multiple analog and digital channels. As digital penetration
increases, MSOs are reclaiming analog bandwidth to launch more digital networks
and interactive television services, and are likely to continue this recapture
until such time as they rebuild their plants to increase bandwidth or there is
stability in the mix of analog and digital carriage. As with all analog
networks, digital recapture is an ongoing issue that can result in a
significant decline in the distribution of TV Guide Channel. As a result, we
may not be able to maintain our current analog distribution levels if digital
recapture continues, which could negatively impact our operating results.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
68
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Our C-band business, which is a significant business, is declining. These
declines may accelerate due to competing technologies and the subscriber
conversion arrangement with EchoStar.
We market entertainment services to C-band satellite dish owners in the
United States through our approximately 80% owned subsidiary, SNG. The C-band
satellite industry is shrinking generally due to the continued expansion of
cable systems and direct broadcast satellite ("DBS") services. C-band satellite
dishes are substantially larger and less attractive than direct broadcast
satellite dishes, which are small and less obtrusive. Recently enacted
legislation may permit direct broadcast satellite programmers to offer more
attractive programming than SNG. We expect the decline in the C-band industry
to continue.
In November 1999, SNG announced an exclusive DBS marketing alliance
agreement with EchoStar to convert existing and inactive C-band customers of
SNG to EchoStar's high power (small satellite dish) DISH Network service. Under
the conversion process, EchoStar compensates SNG on a per subscriber basis,
both upon successful conversion and with residual payments over time. We
anticipate that this agreement will continue to accelerate the subscriber
decline in our C-band business.
Leverage associated with the debt assumed in the TV Guide acquisition may
adversely impact our financial operations.
As of September 20, 2002, we had outstanding approximately $281.4 million of
TV Guide long-term debt, which we acquired in the TV Guide merger. During the
remainder of 2002, scheduled debt retirements aggregate $30.0 million. This
debt is significant and could limit our ability to obtain any necessary
financing in the future for working capital, capital expenditures,
acquisitions, debt service requirements and other purposes. A significant
amount of our earnings may be dedicated to the payment of principal and
interest on debt and therefore would be unavailable for financing operations
and other business activities. The debt level and the covenants contained in
the debt instruments could limit flexibility in planning for, or reacting to,
changes in business because certain financing options may be limited or
prohibited. In particular, the Company has determined that there is a
reasonable likelihood that TV Guide will be unable to maintain compliance with
a financial covenant in its term loan agreement during the coming twelve
months. While the Company is currently evaluating options to maintain
compliance or mitigate the effects of any noncompliance, there can be no
assurance that any measures taken will be successful. In addition, the degree
of leverage may be more than that of our competitors, placing us at a
competitive disadvantage, and the debt level may make us more vulnerable in the
event of a downturn in our business or the economy in general.
Our stock price has been volatile.
The market price of our common stock has historically been volatile. The
volatility of our stock price has increased after the announcement of our
restatement of certain historical financial information. It is likely that the
market price of our common stock will continue to be subject to significant
fluctuations. We believe that future announcements concerning us, our
competitors or our principal customers, including technological innovations,
new product introductions, governmental regulations, litigation or changes in
earnings estimated by analysts, or any future decision to restate any of our
financial statements may cause the market price of our common stock to
fluctuate substantially in the future. Sales of substantial amounts of
outstanding common stock in the public market could materially adversely affect
the market price of our common stock. Further, in recent years the stock market
has experienced extreme price fluctuation in equity securities of technology
and media companies. Such price and volume fluctuations often have been
unrelated to the operating performance of those companies. These fluctuations,
as well as general economic, political and market conditions, such as
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
69
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
recessions, international currency fluctuations, or tariffs and other trade
barriers, may materially and adversely affect the market price of our common
stock.
We have a significant amount of receivables due from five entities.
At June 30, 2002, approximately $65.6 million, or 41%, of the Company's
receivables are due from five entities as described in Liquidity and Capital
Resources above. We currently believe these receivables to be realizable;
however, events, including the final resolution of litigation and other
disputes, may occur in the future which could cause the Company to change its
assessment of recoverability. (See "Management's Discussion and Analysis of
Financial Information -- Overview of Significant Events.")
We have significant intangible assets on our balance sheet that may be
subject to impairment.
In July 2000, we acquired TV Guide in a transaction accounted for as a
purchase. In that transaction, close to $10 billion of the purchase price was
allocated to intangible assets. We were required under accounting principles
generally accepted in the United States of America in place through December
31, 2001 to review our intangible assets periodically for impairment when
circumstances indicate the carrying value of the intangible assets may exceed
their fair value. New accounting standards effective January 1, 2002 eliminated
the recoverability test for certain intangible assets and require that such
assets be reported at the lower of cost or fair value. At December 31, 2001,
our goodwill and intangible assets approximated $8,621.7 million. The Company
recorded a transitional impairment charge for goodwill and indefinite-lived
intangible assets of $5,303.3 million, net of tax as of January 1, 2002 in the
accompanying Unaudited Condensed Consolidated Statements of Operations. The
Company also recorded an interim impairment charge as of June 30, 2002 for
goodwill of $22.8 million, indefinite-lived intangible assets of $24.0 million
and for finite-lived intangible assets of $1,212.3 million in the accompanying
Unaudited Condensed Consolidated Statements of Operations. Should adverse
economic conditions continue, or should other events impacting the value of
certain of our businesses occur, we may be required to record an additional
significant charge to earnings in our financial statements in the period any
impairment of our goodwill or other intangible assets is determined.
We invest in securities of technology companies, many of which have
experienced a decrease in value.
We hold investments in technology companies. Due to the recent price
volatility in the general stock market, and in particular the price volatility
of securities of technology companies, we realized other than temporary
decreases in the market value of our investments in technology companies and
wrote down their carrying value during 2001. We may realize further other than
temporary decreases in the market value of certain investments in future
periods.
Any infringement by us on patent rights of others could result in litigation.
Patents of third parties may have an important bearing on our ability to
offer certain of our products and services. Many of our competitors as well as
other companies and individuals have obtained, and may be expected to obtain in
the future, patents that concern products or services related to the types of
products and services we plan to offer. We cannot provide assurance that we
will be aware of all patents containing claims that may pose a risk of
infringement by our products and
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
70
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
services. In addition, patent applications in the United States are generally
confidential until a patent is issued, so we cannot evaluate the extent to
which our products and services may be covered or asserted to be covered by
claims contained in pending patent applications. If one or more of our products
or services is found to infringe patents held by others, we may be required to
stop developing or marketing the products or services, to obtain licenses to
develop and market the products or services from the holders of the patents or
to redesign the products or services in such a way as to avoid infringing the
patent claims. We cannot assess the extent to which we may be required in the
future to obtain licenses with respect to patents held by others, whether the
licenses would be available or, if available, whether we would be able to
obtain the licenses on commercially reasonable terms. If we were unable to
obtain the licenses, we might not be able to redesign our products or services
to avoid infringement.
An unfavorable outcome of certain legal proceedings may adversely affect our
business and operating results.
Our results may be affected by the outcome of pending and future litigation
and the protection and validity of patents and other intellectual property
rights. Our patent and other intellectual property rights are important
competitive tools and many generate income under license agreements. There can
be no assurance that our intellectual property rights will not be challenged,
invalidated or circumvented in the United States or abroad. Unfavorable rulings
in the Company's legal proceedings, including those described in Note 11 to the
Unaudited Condensed Consolidated Financial Statements, may have a negative
impact on the Company that may be greater or smaller depending on the nature of
the rulings.
Our management restructuring could affect our future success.
The operating results of any company are heavily dependent upon the efforts
and success of its senior management team. Recently, our senior management team
has undergone major changes, with the addition of a new Chief Executive Officer
and Acting Chief Financial Officer. We are currently conducting a search for a
permanent Chief Financial Officer. We are subject to certain risks associated
with a new management structure, including, among others, risks relating to
employee and business relations, managerial efficiency and effectiveness and
overall familiarity with our business and operations.
Dependence on key employees could affect our future success.
We are dependent on certain key members of our management, operations and
development staff, the loss of whose services could have a material adverse
effect on the Company. Although we have employment contracts with certain 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 our success. In addition, we may not 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 our business, operating results and
financial condition.
Our interests may diverge from those of substantial stockholders.
News Corp. has significant influence over our business because of its
beneficial ownership of our common stock. There can be no assurance that its
interests are aligned with that of the Company's other shareholders. Investor
interests can differ from
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
71
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
each other and from other corporate interests and it is possible that this
significant stockholders with a stake in corporate management may have
interests that differ from those of other stockholders and of the Company
itself. Furthermore, the management restructuring may result in an increase of
the influence of News Corp. over our business and affairs.
Government regulations may adversely affect our business.
The satellite transmission, cable and telecommunications industries are
subject to federal regulatory conditions, including Federal Communications
Commission ("FCC") licensing and other requirements. These industries are also
often subject to extensive regulation by local and state authorities. While
most cable and telecommunications industry regulations do not apply directly to
the Company, they affect programming distributors, a primary customer for our
products and services. Certain programming sold by our SNG subsidiary is
subject to the Satellite Home Viewer Improvement Act of 1999. In 2001, the FCC
issued a Notice of Inquiry concerning interactive television services, which
may indicate that the FCC intends to promulgate rules that could affect our IPG
business. In addition, our TVG network is subject to certain state and federal
laws and regulations applicable to pari-mutuel wagering on horse races and its
growth may be significantly affected by such laws and regulations. Future
developments relating to any of these regulatory matters may adversely affect
our business.
Terrorist attacks, war or other civil disturbances could lead to further
economic instability and depress our stock price or adversely affect our
business.
On September 11, 2001, the United States was the target of terrorist attacks
of unprecedented scope. These attacks caused instability in the global
financial markets, contributed to volatility in the stock prices of publicly
traded companies located in the United States and created a major disruption in
travel on commercial airlines. These attacks have led and may continue to lead
to armed hostilities or may lead to further acts of terrorism and civil
disturbances in the United States or elsewhere, which may further contribute to
economic instability. Further disruptions in air travel or the threatened
bankruptcies of one or more commercial airlines may have a significant impact
on the operations of our SkyMall subsidiary. Any of the foregoing occurrences
could have a material adverse effect on our business, financial condition and
operating results.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
72
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in
the market values of its investments. The Company's exposure to market rate
risk for changes in interest rates relates primarily to its investment
portfolio and variable rate debt issued under TV Guide's $300 million six-year
revolving credit facility and $300 million amortizing term loan. The Company
has not used derivative financial instruments in its investment portfolio or to
hedge for interest rate fluctuations on its debt. The Company invests its
excess cash in debt instruments of the U.S. Government and its agencies, and in
high-quality corporate issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company protects and preserves its invested
funds by limiting default, market and reinvestment risk. Investments in both
fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, the Company's future investment income may fall short of
expectations due to changes in interest rates or the Company may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates. Because the interest rates on the credit
facilities are variable, based upon the banks' prime rate or LIBOR, the
Company's interest expense and cash flow are impacted by interest rate
fluctuations. At June 30, 2002, the Company had $296.4 million in outstanding
borrowings under the credit facilities. If interest rates were to increase or
decrease by 100 basis points, the result, based upon the existing outstanding
debt, would be an annual increase or decrease of $3.0 million in interest
expense and a corresponding decrease or increase of $3.0 million in the
Company's operating cash flow.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
73
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11, Legal Proceedings, in the Unaudited Condensed Consolidated
Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended June 30, 2002.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
74
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(Registrant)
By: November 14, 2002 By: /s/ PAUL HAGGERTY
----------------------------------
Paul Haggerty
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
75
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been audited or reviewed by an independent
accounting firm and should not be relied upon.
- --------------------------------------------------------------------------------
Gemstar-TV Guide International, Inc.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
I, Jeff Shell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gemstar-TV Guide
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: 11/14/02 /s/ JEFF SHELL
----------------------------------
Jeff Shell
Chief Executive Officer
(Principal Executive Officer)
I, Paul Haggerty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gemstar-TV Guide
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: 11/14/02 /s/ PAUL HAGGERTY
----------------------------------
Paul Haggerty
Co-President, Co-Chief Operating
Officer
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Condensed Consolidated Financial
Statements included herein has not been reviewed by an independent accounting
firm. The Company recently engaged a new independent accounting firm to audit
its Consolidated Financial Statements and to conduct a SAS 71 review of its
Unaudited Condensed Consolidated Financial Statements. The Company believes
that it is likely that, as a result of such accounting firm's review of this
information and the Company's ongoing review of its accounting policies and the
application of these policies to various types of transactions, the Company
will further restate the Unaudited Condensed Consolidated Financial Statements.
Such restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Condensed Consolidated Financial Statements
contained in this report should not be relied upon.
76