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 MARCH 31, 2001, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-24218
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4782077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 NORTH LOS ROBLES AVENUE, SUITE 800, PASADENA, CALIFORNIA 91101
(Address of principal executive offices, including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of March 31, 2001, there were outstanding 411,319,000 shares of the
registrant's Common Stock, par value $0.01 per share.
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................... 1
Condensed Consolidated Statements of Operations................ 2
Condensed Consolidated Statements of Cash Flows................ 3
Notes to Condensed Consolidated Financial Statements........... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
Signature................................................................ 20
Items 2, 3, 4 and 5 of PART II are not applicable and have been omitted.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except per share amounts)
March 31, December 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 522,127 $ 488,046
Marketable securities 62,061 63,425
Receivables, net 332,830 342,904
Deferred tax asset 15,969 15,969
Other current assets 37,441 36,817
----------- -----------
Total current assets 970,428 947,161
Property, plant and equipment, net 90,674 92,382
Intangible assets, net 9,246,037 9,447,989
Marketable securities and other investments 252,377 273,363
Other assets 29,658 28,582
----------- -----------
Total assets $10,589,174 $10,789,477
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 224,286 $ 221,395
Current portion of long-term debt and
capital lease obligations 62,118 62,674
Current portion of deferred revenue 349,709 276,915
----------- -----------
Total current liabilities 636,113 560,984
Deferred tax liability 1,326,661 1,375,650
Long-term debt and capital lease obligations 565,993 586,485
Deferred revenue, less current portion 117,244 200,217
Other liabilities 7,900 10,178
Stockholders' equity:
Common stock, $.01 par value 4,141 4,137
Additional paid-in capital 8,295,097 8,290,627
Accumulated deficit (295,497) (172,257)
Accumulated other comprehensive
income, net of tax 20,533 31,612
Unearned compensation (60,572) (69,717)
Treasury stock, at cost (28,439) (28,439)
----------- -----------
Total stockholders' equity 7,935,263 8,055,963
----------- -----------
Total liabilities and stockholders' equity $10,589,174 $10,789,477
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share amounts)
Three Months Ended
March 31,
---------------------
2001 2000
--------- ---------
Revenues $ 352,468 $ 83,993
Operating expenses:
Operating expenses, excluding stock
compensation and depreciation
and amortization 232,494 27,028
Stock compensation 9,145 -
Depreciation and amortization 238,568 1,592
Nonrecurring expenses - 15,895
--------- --------
480,207 44,515
--------- --------
Operating (loss) income (127,739) 39,478
Interest expense (11,551) -
Other income, net 1,874 3,840
--------- --------
(Loss) income before income taxes (137,416) 43,318
(Benefit) provision for income taxes (14,176) 15,987
--------- --------
Net (loss) income $(123,240) $ 27,331
========= ========
(Loss) earnings per share:
Basic $ (0.30) $ 0.13
========= ========
Diluted $ (0.30) $ 0.11
========= ========
Weighted average shares outstanding 411,197 207,020
Dilutive effect of stock options - 45,591
--------- --------
Weighted average shares
outstanding, assuming dilution 411,197 252,611
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
Three Months Ended
March 31,
----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net (loss) income $(123,240) $ 27,331
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 238,568 1,592
Deferred income taxes (45,676) 5,385
Tax benefit associated with stock options 2,560 9,200
Stock compensation expense 9,145 -
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Receivables 12,194 (34,427)
Other assets 3,574 (4,179)
Accounts payable, accrued expenses
and other liabilities 4,956 11,998
Deferred revenue (26,097) (11,494)
--------- --------
Net cash provided by operating activities 75,984 5,406
--------- --------
Cash flows from investing activities:
Investments and acquisitions (8,509) -
Purchases of marketable securities (38,084) (21,780)
Sales and maturities of marketable securities 38,661 39,274
Additions to property, plant and equipment (6,087) (1,159)
Additions to intangible assets (4,857) (1,302)
--------- --------
Net cash (used in) provided by investing activities (18,876) 15,033
--------- --------
Cash flows from financing activities:
Repayments of borrowings under bank credit
facilities and capital lease obligations (21,048) -
Issuance of common stock 1,914 4,021
Other (3,670) -
--------- --------
Net cash (used in) provided by financing activities (22,804) 4,021
--------- --------
Effect of exchange rate changes on cash and
cash equivalents (223) (19)
--------- --------
Net increase in cash and cash equivalents 34,081 24,441
Cash and cash equivalents at beginning of period 488,046 212,605
--------- --------
Cash and cash equivalents at end of period $ 522,127 $237,046
========= ========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 16,861 $ 609
Cash paid for interest 13,379 -
Supplemental disclosures of non-cash investing and financing activities:
In January 2000, the Company completed mergers with NuvoMedia, Inc. and
SoftBook Press, Inc. in stock-for-stock transactions accounted for under the
pooling of interests method (note 3).
See accompanying Notes to Condensed Consolidated Financial Statements.
3
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
MARCH 31, 2001
1. Organization and Basis of Presentation
Gemstar-TV Guide International, Inc. ("Gemstar" or the "Company") is a
leading global technology and media company focused on consumer entertainment.
On July 12, 2000, the Company completed its merger with TV Guide, Inc. ("TV
Guide"). The merger was accounted for as a purchase. Accordingly, the
consolidated financial statements include the results of operations of TV Guide
from July 12, 2000. Due to purchase accounting, the results of operations for
the three-month period ended March 31, 2001, reflect significant increases in
amortization of goodwill and other intangible assets. Accordingly, the Company's
business sectors are measured based on EBITDA (operating income before stock
compensation expense, depreciation and amortization and nonrecurring expenses).
The Company has three major business sectors: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technologies; the Interactive Platform
Sector, which owns, operates and derives recurring income from advertising,
interactive services and e-commerce on the Company's proprietary interactive
platforms; and the Media and Services Sector, which operates TV Guide magazines,
TV Guide Channel, the TV Games Network and other television media properties,
provides programming to C-band subscribers and data transmission services, and
operates the media sales group that services all of the Company's media
platforms. The Company's business sectors represent strategic business units
that offer different products and services and compete in different industries.
The accompanying interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
position of the Company and its results of operations and cash flows for such
periods. Operating results for any interim period are not necessarily indicative
of the results that may be expected for the full year.
Certain financial statement items for prior periods have been reclassified
to conform with the 2001 presentation.
These condensed consolidated financial statements should be read in
conjunction with the historical consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2000.
2. Segment Information
The Company has restructured 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 (the Company's technology
includes the VCR Plus+ system, the interactive program guide ("IPG") marketed
under the GUIDE Plus+ and TV Guide Interactive brands and the electronic book
("eBook")); the Interactive Platform Sector, which owns, operates and derives
recurring income from advertising, interactive services and e-commerce on the
Company's proprietary interactive platforms; and the Media and Services Sector,
which operates TV Guide magazines, TV Guide Channel, the TV Games Network and
other television media properties, provides programming to C-band subscribers
and data transmission services, and operates the media sales group that services
all of the Company's media platforms. Segment information reported in prior
years has been reclassified to conform with the current year presentation.
4
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's reportable segments are strategic business units that offer
different products and services and compete in different industries. Due to
purchase accounting, the results of operations for the three months ended March
31, 2001, reflect significant increases in amortization of goodwill and other
intangible assets. Accordingly, the Company's chief operating decision maker
uses EBITDA (operating income before stock compensation expense, depreciation
and amortization and nonrecurring expenses) to evaluate the performance of the
three segments. Eliminations include inter-segment revenues and expenses. The
Company accounts for inter-segment sales as if the sales were made to third
parties at market prices. Assets of the reportable segments are not relevant for
management of the businesses nor for disclosure.
Segment information for the three-month periods ended March 31, 2001 and
2000 is as follows (in thousands):
Three Months Ended
March 31,
----------------------
2001 (1) 2000
---------- ---------
Technology and Licensing Sector:
Revenues $ 81,333 $ 79,806
Expenses (2) 21,274 17,875
---------- ---------
EBITDA (3) $ 60,059 $ 61,931
========== =========
Interactive Platform Sector:
Revenues $ 14,698 $ 1,985
Expenses (2) 24,807 8,715
----------- ---------
EBITDA (3) $ (10,109) $ (6,730)
=========== =========
Media and Services Sector:
Revenues $ 258,017 $ 2,202
Expenses (2) 187,993 438
----------- ---------
EBITDA (3) $ 70,024 $ 1,764
=========== =========
Consolidated (after eliminations)
Revenues $ 352,468 $ 83,993
Expenses (2) 232,494 27,028
----------- ---------
EBITDA (3) 119,974 56,965
Stock compensation (9,145) -
Depreciation and amortization (238,568) (1,592)
Nonrecurring expenses - (15,895)
Interest expense (11,551) -
Other income, net 1,874 3,840
---------- ---------
(Loss) income before income taxes $ (137,416) $ 43,318
========== =========
(1) Effective July 12, 2000, the Company's consolidated operating results
include the operating results of TV Guide. TV Guide was acquired in a
transaction accounted for as a purchase.
(2) Expenses means operating expenses, excluding stock compensation,
depreciation and amortization and nonrecurring expenses.
5
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization and nonrecurring expenses. Due to purchase
accounting related to the Company's merger with TV Guide on July 12, 2000,
the results of operations for the three-month period ended March 31, 2001,
reflect significant increases in amortization of goodwill and other
intangible assets. Accordingly, the Company's business sectors are measured
based on EBITDA. EBITDA is presented supplementally as the Company believes
it is a standard measure commonly reported and widely used by analysts,
investors and others associated with its industry. However, EBITDA does not
take into account substantial costs of doing business, such as income taxes
and interest expense. While many in the financial community consider EBITDA
to be an important measure of comparative operating performance, it should
be considered in addition to, but not as a substitute for, operating
income, net income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with generally
accepted accounting principles that are presented in these condensed
consolidated financial statements. Additionally, the Company's calculation
of EBITDA may be different than the calculation used by other companies
and, therefore, comparability may be affected.
3. Business Combinations
TV Guide Transaction
On July 12, 2000, the Company acquired all of the outstanding common stock
of TV Guide by issuing 0.6573 shares of Gemstar common stock for each share of
TV Guide Class A and B common stock outstanding, or approximately 200 million
shares of Gemstar common stock. The TV Guide Transaction was accounted for as a
purchase. Accordingly, the consolidated financial statements include the results
of operations of TV Guide from July 12, 2000.
The purchase price for the TV Guide Transaction was $7.9 billion,
consisting of the shares of Gemstar common stock issued to the TV Guide
stockholders at $38.21 per share, the average market price of the Company's
common stock for two days before and after the agreement on the TV Guide
Transaction was reached and announced, and certain transaction costs.
The purchase price was allocated to identifiable tangible and intangible
assets and liabilities as follows, with the excess of the purchase price over
such identifiable assets and liabilities allocated to goodwill (in thousands).
Assets:
Current assets $ 452,455
Property, plant and equipment 80,404
Intangible assets 9,833,421
Other assets 157,874
----------
10,524,154
Liabilities:
Current liabilities 527,530
Deferred tax liability 1,445,335
Other long-term liabilities 747,610
----------
7,803,679
Unearned compensation 88,011
----------
Net purchase price $7,891,690
==========
6
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets relating to the TV Guide Transaction are comprised of the
following amounts and lives (in thousands):
Customer lists $ 699,000 3-5 years
Contracts 1,942,000 5-10 years
Trademarks and patents 799,000 5-40 years
Publishing rights 270,000 15 years
Goodwill 6,123,421 5-15 years
The above allocation of purchase price and the lives assigned to the assets
are based on preliminary estimates and are subject to adjustment. The Company
does not expect there to be any significant adjustments to the reported amounts
as a result of the final purchase price allocation and the final lives assigned
to the assets.
The following unaudited pro forma financial information reflects the
Company's results of operations for the three months ended March 31, 2000 as
though the TV Guide Transaction had been completed as of January 1, 2000 (in
thousands, except per share amounts):
Revenues $ 376,812
Net loss (137,978)
Basic and diluted loss per share (0.34)
Pooling Transactions
In January 2000, the Company completed mergers with two electronic-book
companies, NuvoMedia, Inc. ("NuvoMedia") and SoftBook Press, Inc. ("SoftBook").
Both mergers were accounted for under the pooling of interests method and,
accordingly, the consolidated financial statements for periods prior to the
mergers have been restated to include the results of operations, financial
position and cash flows of NuvoMedia and SoftBook.
4. 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 (6.2% at March 31, 2001) 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 facilities. As of March 31, 2001,
TV Guide had available borrowing capacity under the six-year revolving credit
facility of approximately $51.3 million. In addition, TV Guide had outstanding
as of March 31, 2001, $71.4 million in 8 1/8% senior subordinated notes due
2009.
The indenture for the notes and TV Guide's bank credit facilities impose
certain operating and financial restrictions on the Company. These restrictions
include the designation of certain of TV Guide's subsidiaries as "restricted"
for certain financing and operating matters which may significantly limit the
ability of the Company to execute transactions, including the transfer of cash,
between subsidiaries in the restricted group and subsidiaries in the
unrestricted group or to transfer cash upstream to Gemstar. The subsidiaries in
the unrestricted group are not subject to certain covenants in the indenture for
the notes and may incur indebtedness, grant liens on their assets and sell all
or a portion of their assets, among other things, without complying with the
restrictions in the indenture.
The Company intends to commence with an offer to acquire the remaining
outstanding senior subordinated notes of TV Guide during the second quarter of
2001.
7
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Legal Proceedings
On December 1, 1998, the Company filed a patent infringement action against
Pioneer Electronic Corp., Pioneer North America, Inc. and Pioneer New Media
Technologies, Inc. (collectively "Pioneer") in the U.S. District Court for the
Central District of California. The suit seeks damages and injunctive relief
based upon the alleged infringement of two patents by defendants' interactive
program guide. Pioneer has filed a counter-claim in which it alleges the Company
violated federal antitrust laws and misused certain patents. In April 1999, the
Judicial Panel on Multi-District Litigation ordered that the Pioneer and
Scientific-Atlanta federal lawsuits pending outside the Northern District of
Georgia be transferred to the Northern District of Georgia for coordinated or
consolidated pretrial proceedings with the action pending in that district (the
"MDL Transfer Order").
On December 3, 1998, Scientific-Atlanta, Inc. ("SA") filed an action
against the Company in the U.S. District Court for the Northern District of
Georgia. The action alleges the Company violated federal antitrust laws and
misused its patents. SA seeks damages, injunctive relief and a declaration that
certain patents are unenforceable, not infringed or invalid. This case is being
coordinated with the actions subject to the MDL Transfer Order.
On December 4, 1998, the Company filed a patent infringement action against
SA in the U.S. District Court for the Central District of California. The suit
seeks damages and injunctive relief based upon the alleged infringement of two
patents by defendant's interactive program guide. This action is subject to the
MDL Transfer Order.
On April 22, 1999, SA filed an action against the Company in the U.S.
District Court for the Northern District of Georgia, alleging infringement of
three patents and seeking damages and injunctive relief. This case has been
consolidated with the action filed by SA against StarSight Telecast, Inc.
("StarSight") on July 23, 1999, and the parties are currently in pretrial
proceedings.
On June 25, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, seeking a declaratory judgement of
invalidity and non-infringement of two patents. On August 2, 1999, StarSight
answered the complaint as to one of the patents and counterclaimed against SA
for infringement of this patent, seeking damages and injunctive relief. The
parties are currently in pretrial proceedings.
On July 23, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, alleging infringement of three
patents and seeking damages and injunctive relief. This case has been
consolidated with the action filed by SA against the Company on April 22, 1999,
and the parties are currently in pretrial proceedings.
On January 19, 2000, StarSight filed a patent infringement action against
TiVo Inc. ("TiVo") in the U.S. District Court for the Northern District of
California. The suit claims, among other matters, that TiVo willfully infringed
certain StarSight intellectual property by virtue of TiVo's deployment,
marketing, offers to sell and sale of personalized video recorder devices
containing an unlicensed interactive program guide. StarSight is seeking an
injunction and monetary damages. 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. The parties are now in pretrial
proceedings.
8
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 23, 2000, StarSight filed a patent infringement suit against
EchoStar Communications Corp., EchoStar Satellite Corp. and EchoStar
Technologies Corp. (collectively "EchoStar") in the United States District Court
for the Western District of North Carolina. The suit claims, among other
matters, that EchoStar willfully infringed certain StarSight intellectual
property by virtue of EchoStar's deployment, marketing, offers to sell and sale
of direct broadcast satellite receivers containing an unlicensed interactive
program guide and by EchoStar's operation of transmission systems to such
receivers. StarSight, among other relief, is seeking an injunction and monetary
damages. This lawsuit has now been stayed pending completion of the ITC
proceedings discussed below.
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. The suit claims, among other matters, that the Company and certain of its
subsidiaries have violated state antitrust and unfair competition laws. The
parties are now in pretrial proceedings.
On December 5, 2000, EchoStar filed an antitrust action against the Company
and various of its subsidiaries in the U.S. District Court for the District of
Colorado. The action alleges the Company and various of its subsidiaries
violated federal and state antitrust laws. EchoStar seeks, among other relief,
damages and an injunction. StarSight has recently filed a counterclaim against
EchoStar for patent infringement in connection with two patents owned by
StarSight. The parties are now in pretrial proceedings.
On December 29, 2000, Gemstar International Group, Ltd., 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,
is now pending in the United States District Court for the District of New
Hampshire. By agreement of the parties, Gemstar's and Barnes & Noble's responses
to plaintiff's complaint are now due to be filed by June 4, 2001.
On February 9, 2001, the Company filed four separate patent infringement
actions against: (1) Scientific-Atlanta, Inc.; (2) Pioneer Corporation, Pioneer
Digital Technologies, Inc., Pioneer North America, Inc. and Pioneer New Media
Technologies, Inc.; (3) SCI Systems, Inc.; and (4) EchoStar Communications
Corporation in the United States District Court, Northern District of Georgia.
Each of these actions has now been stayed pending completion of the ITC
proceedings discussed immediately below.
In the Matter of Certain Set-Top Boxes and Components Thereof, United
States International Trade Commission, Washington, D.C., Investigation No. 337-
TA-454 was initiated by the Company and StarSight ("Complainants") on February
14, 2001, when they filed a Complaint, requesting that the United States
International Trade Commission ("ITC") commence an investigation pursuant to
Section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. (S) 1337 ("Section
337"), regarding imports of certain set-top boxes and components thereof. The
Complaint alleges that Respondents 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 a sale in the United States after importation, of set-top
boxes and/or components that infringe, directly, contributorily or by
inducement, four 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 March 16,
2001, the ITC instituted the requested investigation. The parties are now
engaged in discovery, and the administrative hearing has been scheduled for
later this year.
9
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 23, 2001, Gemstar Development Corporation, a wholly owned
subsidiary of the Company was added as a defendant in the lawsuit of SuperGuide
Corporation v. DirecTV Enterprises, Inc., et al., which is currently pending in
the United States 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 sued EchoStar for infringing the
SuperGuide Patents. The parties are now in pretrial proceedings, and trial in
this matter is currently scheduled for later this year.
The State of Illinois (the "State") has asserted that certain uplinking
services performed by SpaceCom Systems, Inc. ("SpaceCom"), now a wholly owned
subsidiary of the Company, at its Chicago teleport are subject to the State's
Telecommunications Excise Tax Act. On March 13, 2000, SpaceCom was awarded
complete summary judgment in its favor in this matter. On May 5, 2000, the State
appealed that judgment to the Illinois Appellate Court, First Judicial District,
where the matter is pending. SpaceCom and the State have agreed in principle on
a settlement which would cover the period at issue in the case as well as any
potential (as yet unasserted) liability for the taxes through the present.
Pursuant to the settlement, SpaceCom will receive a refund of certain monies
previously placed on deposit with the State.
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 seeks
an unspecified amount of damages for benefits allegedly due to the plaintiff
under his employment agreement with ODS. ODS currently has pending a motion for
summary judgment to dismiss the lawsuit and the time set by the court to
complete discovery now has expired. Plaintiff has moved to re-open discovery,
which motion the Company is opposing.
On May 3, 2000, a complaint was filed against Murdoch Magazines
Distribution, Inc. (now named TV Guide Distribution, Inc. and a wholly owned
subsidiary of the Company) and other parties by United Magazine Company, Inc.
("Unimag") and its subsidiaries in the U.S. District Court for the Southern
District of New York. The complaint alleges claims against Murdoch Magazines for
violation of the Robinson-Patman Act, breach of implied covenants of good faith
and fair dealing, promissory estoppel, breach of fiduciary duty,
misappropriation of business property and trade secrets, tortious destruction of
business, breach of confidential relationship and violation of federal and state
antitrust laws. The complaint seeks monetary damages, plus treble and punitive
damages, attorneys' fees and costs. On August 31, 2000, Unimag filed an amended
complaint, (i) adding TV Guide Distribution, Inc. as a named defendant, (ii)
adding six other national distributors as defendants, and (iii) adding claims
for unjust enrichment and violation of the New York Franchise Sales Act. The
Company has filed a motion to dismiss all of the claims asserted against it. The
court recently heard oral argument on the Company's motion to dismiss, and a
decision on the motion is expected shortly.
10
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During July and August 2000, TV Guide was served with more than twenty
class action complaints filed primarily in the United States District Court for
the Southern District of New York on behalf of magazine subscribers. These
complaints, which have been consolidated into a single action, allege that TV
Guide, the Magazine Publishers Association ("MPA"), and twelve other publishers
of consumer magazines have violated federal antitrust laws by conspiring to
limit the discounting of magazine subscription prices by means of rules adopted
by the MPA and the Audit Bureau of Circulation. The plaintiffs seek injunctive
relief, unspecified damages (trebled), and attorneys' fees and costs. Plaintiffs
have filed a motion for partial summary judgment which is pending before the
Court.
The Company is also a party to certain other claims, actions and
proceedings incidental to its business, none of which is expected to have a
material adverse effect on the business, financial position or results of
operations of the Company.
6. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in
thousands):
Three Months Ended
March 31,
---------------------
2001 2000
--------- -------
Net (loss) income $(123,240) $27,331
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on marketable securities (10,690) 21,813
Equity adjustment from foreign currency translation (389) (38)
--------- -------
Other comprehensive (loss) income, net of tax (11,079) 21,775
--------- -------
Comprehensive (loss) income $(134,319) $49,106
========= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On July 12, 2000, the Company completed its merger with TV Guide. The merger
was accounted for as a purchase. Accordingly, the consolidated financial
statements include the results of operations of TV Guide from July 12, 2000.
To enhance comparability, certain financial information presented below on the
Company's business sectors is presented on a pro forma basis and reflects the
merger with TV Guide as though it had occurred on January 1, 2000. Due to
purchase accounting, the results of operations for the three-month period ended
March 31, 2001, reflect significant increases in amortization of goodwill and
other intangible assets. Accordingly, the Company's business sectors are
measured based on EBITDA (operating income before stock compensation expense,
depreciation and amortization and nonrecurring expenses).
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 (the Company's technology includes the VCR
Plus+ system, the interactive program guide ("IPG") marketed under the GUIDE
Plus+ and TV Guide Interactive brands and the electronic book ("eBook")); the
Interactive Platform Sector, which owns, operates and derives recurring income
from advertising, interactive services and e-commerce on the Company's
proprietary interactive platforms; and the Media and Services Sector, which
operates TV Guide magazines, TV Guide Channel, TV Games Network and other
television media properties, provides programming to C-band subscribers and data
transmission services, and operates the media sales group that services all of
the Company's media platforms. The Company's business sectors represent
strategic business units that offer different products and services and compete
in different industries.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in this report should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2000.
12
The following table sets forth certain unaudited financial information for the
Company during the three months ended March 31, 2001 and 2000.
Three Months Ended
March 31,
------------------
2001 (1) 2000
--------- -------
(in thousands)
Statement of Operations Data:
Revenues $ 352,468 $83,993
Operating expenses:
Operating expenses, excluding stock
compensation and depreciation
and amortization 232,494 27,028
Stock compensation 9,145 -
Depreciation and amortization 238,568 1,592
Nonrecurring expenses - 15,895
--------- -------
480,207 44,515
--------- -------
Operating (loss) income (127,739) 39,478
Interest expense (11,551) -
Other income, net 1,874 3,840
--------- -------
(Loss) income before income taxes (137,416) 43,318
(Benefit) provision for income taxes (14,176) 15,987
--------- -------
Net (loss) income $(123,240) $27,331
========= =======
Other Financial Data:
Net cash provided by (used in):
Operating activities $ 75,984 $ 5,406
Investing activities (18,876) 15,033
Financing activities (22,804) 4,021
EBITDA (2) 119,974 56,965
(1) Effective July 12, 2000, the Company's consolidated operating results
include the operating results of TV Guide. TV Guide was acquired in a
transaction accounted for as a purchase.
(2) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization and nonrecurring expenses. Due to purchase
accounting related to the Company's merger with TV Guide on July 12, 2000,
the results of operations for the three-month period ended March 31, 2001,
reflect significant increases in amortization of goodwill and other
intangible assets. Accordingly, the Company's business sectors are measured
based on EBITDA. EBITDA is presented supplementally as the Company believes
it is a standard measure commonly reported and widely used by analysts,
investors and others associated with its industry. However, EBITDA does not
take into account substantial costs of doing business, such as income taxes
and interest expense. While many in the financial community consider EBITDA
to be an important measure of comparative operating performance, it should
be considered in addition to, but not as a substitute for, operating
income, net income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with generally
accepted accounting principles that are presented in the financial
statements included in this report. Additionally, the Company's
calculation of EBITDA may be different than the calculation used by other
companies and, therefore, comparability may be affected.
13
Results of Operations
Consolidated
Revenues for the three months ended March 31, 2001 were $352.5 million, an
increase of $268.5 million compared to the same period in 2000. The increase in
revenues for the three-month period was primarily due to $268.7 million of
additional revenues attributable to TV Guide, which was acquired by the Company
on July 12, 2000, coupled with an increase in worldwide licensing income from
the Company's proprietary technologies and intellectual property associated
principally with interactive program guides and an increase in advertising
revenues on the Company's proprietary interactive platforms, partially offset by
nonrecurring revenues in 2000 of $22 million related to a General
Instrument/Motorola arbitration matter.
Operating expenses, excluding stock compensation and depreciation and
amortization, were $232.5 million for the quarter ended March 31, 2001, an
increase of $205.5 million when compared to the same period in 2000. The
increase in operating expenses for the three-month period was primarily due to
increased operating costs of $204.0 million attributable to TV Guide coupled
with increased costs to operate the advertising enabled interactive program
guide platform.
Stock compensation expense reflects amortization of the portion of the
purchase price of TV Guide assigned to unearned compensation expense for
unvested TV Guide stock options assumed by the Company in the TV Guide
transaction. No similar amortization expense existed in periods prior to the
acquisition of TV Guide.
Depreciation and amortization during the first quarter of 2001 was $238.6
million, an increase of $237.0 million compared to the first quarter of 2000.
The increase in depreciation and amortization for the three-month period was
primarily a result of amortization of intangible assets and other depreciation
resulting from the acquisition of TV Guide.
In connection with its mergers with NuvoMedia and SoftBook, the Company
recorded nonrecurring merger related costs totaling $15.9 million in the quarter
ended March 31, 2000. These costs were comprised of fees for financial advisors,
attorneys and accountants, charges for inventory write down and purchase
commitment losses and other transaction costs.
Interest expense was $11.6 million for the three months ended March 31, 2001,
compared to none for the same period in 2000. The increase in interest expense
during the three-month period was attributable to the assumption of debt and
capital lease obligations in the TV Guide transaction. Prior to the acquisition
of TV Guide, the Company had no debt.
Other income, net was $1.9 million for the three months ended March 31, 2001
compared to $3.8 million for the same period in 2000. The decrease in other
income, net was due to lower rates of return in 2001 compared to 2000, offset by
higher invested cash balances, and investment losses.
The provision for income taxes as a percentage of income before income taxes
was 10% for the three-month period ended March 31, 2001, compared to 37% for the
same period in 2000. The decrease in the effective tax rate was primarily due
to the 2001 operating results including amortization of non-deductible goodwill
recorded as a part of the TV Guide acquisition. The overall effective tax rate
reported by the Company in any single period is impacted by, among other things,
the country in which earnings or losses arise, applicable statutory tax rates
and withholding tax requirements for particular countries, the availability of
net operating loss carryforwards and the availability of tax credits for taxes
paid in certain jurisdictions. Because of these factors, it is expected that
the Company's future tax expense as a percentage of income before income taxes
may vary from period to period.
14
Pro Forma Results of Operations
On July 12, 2000, the Company completed its merger with TV Guide. The merger
was accounted for as a purchase. Accordingly, the consolidated financial
statements include the results of operations of TV Guide only for periods after
July 12, 2000. To enhance comparability, certain financial information below on
the Company's business sectors is presented on a pro forma basis and reflects
the merger with TV Guide as though it had occurred on January 1, 2000. The
Company believes pro forma results represent a better comparative standard for
assessing revenues, expenses and EBITDA trends, as the pro forma presentation
includes the results of operations of TV Guide for all periods presented.
The following table sets forth certain unaudited pro forma financial
information for the Company as though the merger with TV Guide had occurred on
January 1, 2000.
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
(in thousands)
Technology and Licensing Sector:
Revenues (1) $ 81,333 $ 59,913
Expenses (2) 21,274 21,302
-------- --------
EBITDA (1)(3) $ 60,059 $ 38,611
======== ========
Interactive Platform Sector:
Revenues $ 14,698 $ 2,354
Expenses (2) 24,807 15,090
-------- --------
EBITDA (3) $(10,109) $(12,736)
======== ========
Media and Services Sector:
Revenues $258,017 $292,545
Expenses (2) 187,993 221,582
-------- --------
EBITDA (3) $ 70,024 $ 70,963
======== ========
Consolidated (after eliminations)
Revenues (1) $352,468 $354,812
Expenses (2) 232,494 257,974
-------- --------
EBITDA (1)(3) $119,974 $ 96,838
======== ========
(1) Amounts for the three months ended March 31, 2000 exclude the impact of $22
million of nonrecurring revenues related to a General Instrument/Motorola
arbitration matter.
(2) Expenses means operating expenses, excluding stock compensation,
depreciation and amortization and nonrecurring expenses.
15
(3) EBITDA means operating income before non-cash stock compensation expense,
depreciation and amortization and nonrecurring expenses. Due to purchase
accounting related to the Company's merger with TV Guide on July 12, 2000,
the results of operations for the three-month period ended March 31, 2000,
reflect significant increases in amortization of goodwill and other
intangible assets. Accordingly, the Company's business sectors are measured
based on EBITDA. EBITDA is presented supplementally as the Company believes
it is a standard measure commonly reported and widely used by analysts,
investors and others associated with its industry. However, EBITDA does not
take into account substantial costs of doing business, such as income taxes
and interest expense. While many in the financial community consider EBITDA
to be an important measure of comparative operating performance, it should
be considered in addition to, but not as a substitute for, operating
income, net income, cash flow provided by operating activities and other
measures of financial performance prepared in accordance with generally
accepted accounting principles that are presented in the financial
statements included in this report. Additionally, the Company's calculation
of EBITDA may be different than the calculation used by other companies
and, therefore, comparability may be affected.
The following discussion of each of the Company's segments is based on the pro
forma financial information provided above.
Technology and Licensing Sector - Pro Forma
The Technology and Licensing Sector is responsible for the development,
licensing and protection of intellectual property and proprietary 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 video recording, interactive program guides 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.
For the three months ended March 31, 2001, revenues for the Technology and
Licensing Sector were $81.3 million, an increase of $21.4 million, or 36%, when
compared to pro forma revenues for the same period in 2000, excluding
nonrecurring revenues of $22 million in the first quarter of 2000 associated
with a General Instrument/Motorola arbitration matter. The increase in revenues
excluding nonrecurring revenue for the three-month period was primarily due to
continued growth in worldwide licensing income derived from the Company's
proprietary technologies and intellectual property associated with interactive
program guides. During 2000 and the first three months of 2001, the Company
entered into agreements with new licensees for its technologies and increased
the distribution base for its proprietary interactive program guide platforms.
Expenses in this sector were $21.3 million for the quarter ended March 31,
2001, unchanged from pro forma expenses for the same period in 2000.
Interactive Platform Sector - Pro Forma
The Interactive Platform Sector owns, operates and derives recurring revenues
from advertising, interactive services and e-commerce on the Company's
proprietary interactive platforms, 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, and trafficking, tracking and billing of advertising.
The Company's rapidly growing interactive program guide ("IPG") platform
currently is comprised of television sets incorporating the Gemstar GUIDE
Plus+(R) IPG and digital cable set top boxes incorporating the TV Guide
Interactive(sm) and StarSight(R) IPGs.
16
For the three months ended March 31, 2001, revenues for the Interactive
Platform Sector were $14.7 million, an increase of $12.3 million, or 524%,
compared to pro forma revenues for the same period in 2000. Currently, revenues
in this sector are comprised primarily of advertising revenues earned on the
Company's proprietary platforms, including the interactive program guides and
the online web site, www.tvguide.com. The increase in revenues in this sector
---------------
was primarily attributable to the launch of advertising enabled interactive
program guides under the TV Guide Interactive brand during 2000 coupled with the
increased penetration of such guides into the market place.
Expenses in this sector were $24.8 million for the quarter ended March 31,
2001, an increase of $9.7 million, or 64%, when compared to pro forma expenses
for the same period in 2000. The increase in expenses for the three-month
period was primarily due to the costs associated with operating an expanding
platform base.
Media and Services Sector - Pro Forma
The Media and Services Sector operates the TV Guide(R) magazines, with a
combined circulation of about 10 million, the TV Guide(R) Channel, which reaches
about 50 million households, the TV Games Network and other television media
properties. This sector also provides programming to C-band subscribers and data
transmission services and operates a media sales group responsible for selling
advertising for the TV Guide magazines, the TV Guide Channel and the IPG
platform. 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. The Company is also currently in active
negotiations for the sale of the remaining distant signal superstation business.
For the three months ended March 31, 2001, revenues for the Media and Services
Sector were $258.0 million compared to pro forma revenues of $292.5 million in
the same period in 2000. Revenues in this sector decreased primarily due to
decreased revenues earned by TV Guide Magazine and Superstar/Netlink Group. TV
Guide Magazine continues to face declines in circulation due to slower new
subscriber growth, lower renewal rates and reduced newsstand sales. The impacts
of the circulation decline on revenues were partially offset by an increase in
the newsstand price of TV Guide Magazine. Superstar/Netlink Group's revenues
decreased due to declines in the C-band industry coupled with acceleration of
those declines resulting from an arrangement with EchoStar to actively convert
subscribers to EchoStar's direct broadcast satellite services, offset by
subscriber acquisition efforts, partially offset by an increase in the price of
programming packages sold to C-band customers coupled with revenues earned from
the subscriber conversion agreement with EchoStar.
Expenses for this sector were $188.0 million for the quarter ended March 31,
2001, a decrease of $33.6 million, or 15%, when compared to pro forma expenses
for the same period in 2000. The decrease in expenses for the three-month period
was primarily due to cost reductions resulting from reduced circulation of the
TV Guide magazines coupled with reduced programming costs and customer
management costs resulting from the decline in the number of C-band subscribers.
Liquidity and Capital Resources
For the three months ended March 31, 2001, net cash flows from operating
activities were $76.0 million. This cash flow, plus existing cash resources, and
proceeds from the exercise of stock options of $1.9 million were used to fund
$21.0 million of repayments of borrowings under TV Guide's revolving bank credit
facilities and capital lease obligations, capital expenditures of $6.1 million
and other investments.
At March 31, 2001, the Company's cash, cash equivalents and marketable
securities classified as current assets aggregated $584.2 million, an increase
of $32.7 million from that as of December 31, 2000.
17
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 (6.2% at March 31, 2001) 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 facilities. As of March 31, 2001, TV
Guide had available borrowing capacity under the six-year revolving credit
facility of $51.3 million. In addition, TV Guide has outstanding as of
March 31, 2001, $71.4 million in 8 1/8% senior subordinated notes due 2009.
Principal payments on the amortizing term loan aggregate $60 million over the
next twelve months. The bank credit facilities and the indenture governing the
notes impose significant operating and financial restrictions on the Company's
TV Guide subsidiary. These restrictions may significantly limit or prohibit TV
Guide and certain of its subsidiaries from engaging in certain transactions,
including the following: borrowing additional money, paying dividends or other
distributions to the Company, allowing TV Guide and its restricted subsidiaries
to guarantee other debt, limiting the ability of TV Guide and its restricted
subsidiaries to make payments to the Company, creating liens on assets, selling
assets, entering into transactions with affiliates, and engaging in certain
mergers or consolidations. In addition, the indenture limits TV Guide's ability
and the ability of restricted subsidiaries to make investments, but only if the
credit ratings on the notes fall below certain levels. Although the Company has
not assumed these obligations or become subject to their provisions, these
restrictions could affect the Company's ability to actively manage its
businesses or limit its ability to obtain financing for working capital, capital
expenditures, acquisitions and other purposes. TV Guide's ability to meet debt
service obligations and specified financial ratios and tests will depend on
future performance. TV Guide's future performance, in turn, will be subject to
general economic conditions and to financial, business and other factors
affecting operations, many of which are beyond its control. In the event of a
default under the bank credit facilities, the lenders could terminate their
commitments and declare all amounts borrowed, together with accrued interest and
other fees, to be due and payable. Borrowings under other debt instruments that
contain cross-acceleration or cross-default provisions may also be accelerated
and become due and payable. If any of these events should occur, TV Guide may
not be able to pay such amounts. The Company intends to commence with an offer
to acquire the remaining outstanding senior subordinated notes of TV Guide
during the second quarter of 2001. The Company anticipates using existing cash
balances to fund the repurchase of these notes.
The Company collects in advance a majority of its TV Guide magazine
subscription fees, Superstar/Netlink Group subscription fees and certain of its
UVTV superstation and TV Guide Channel revenues. In addition, the Company
receives nonrefundable prepaid license fees from certain licensees. As of
March 31, 2001, deferred revenue totaled $467.0 million. 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.
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.
18
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
The foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and other portions of this report on Form 10-Q
contain various "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent the Company's expectations or
beliefs concerning future events. Statements containing expressions such as
"believes," "anticipates," "plans" or "expects" used in the Company's periodic
reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission
are intended to identify forward-looking statements. The Company cautions that
these and similar statements included in this report and in previously filed
periodic reports including reports filed on Forms 10-K and 10-Q are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statement, including, without
limitation, those referred to in the "Certain Factors Affecting Business,
Operating Results and Financial Condition" section of the Company's Annual
Report on Form 10-K for the period ended December 31, 2000. The cautionary
statements contained or referred to in this section should be considered in
connection with any subsequent written or oral forward-looking statements that
the Company or persons acting on the Company's behalf may issue. The Company
undertakes no obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this report or to reflect
the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in
the market values of its investments. The Company's exposure to market rate risk
for changes in interest rates relates primarily to its investment portfolio and
variable rate debt issued under TV Guide's $300 million six-year revolving
credit facility and $300 million 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 March 31, 2001, the Company
had $548.7 million in outstanding borrowings under the credit facilities. If
interest rates were to increase or decrease by 100 basis points, the result,
based upon the existing outstanding debt, would be an annual increase or
decrease of $5.5 million in interest expense and a corresponding decrease or
increase of $5.5 million in the Company's cash flow.
19
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None.
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Gemstar-TV Guide International, Inc.
(Registrant)
Date: May 15, 2001 By: /s/ Elsie Ma Leung
---------------------------------
Elsie Ma Leung
Chief Financial Officer
20