QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934| Delaware | 95-4782077 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
As of April 28, 2005, there were 424,555,853 shares outstanding of the registrant’s Common Stock, par value $0.01 per share.
| PART I. | FINANCIAL INFORMATION | Page |
|---|---|---|
| Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004 | 1 | |
| Condensed Consolidated Statements of Operations--Unaudited for the three months ended March 31, 2005 and 2004 | 2 | |
| Condensed Consolidated Statements of Stockholders' Equity--Unaudited for the three months ended March 31, 2005 and 2004 | 3 | |
| Condensed Consolidated Statements of Cash Flows--Unaudited for the three months ended March 31, 2005 and 2004 | 4 | |
| Notes to Condensed Consolidated Financial Statements--Unaudited | 5 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32 |
| Item 4. | Controls and Procedures | 32 |
| PART II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 33 |
| Item 6. | Exhibits | 33 |
| Signature | 34 |
Items 2, 3, 4 and 5 of PART II are not applicable and have been omitted.
ITEM 1. FINANCIAL STATEMENTS
| March 31, 2005 |
December 31, 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 528,494 | $ | 558,529 | |||||
| Restricted cash | 39,023 | 38,880 | |||||||
| Marketable securities | 16,220 | 11,191 | |||||||
| Receivables, net | 112,108 | 123,981 | |||||||
| Deferred tax assets, net | 6,986 | 3,863 | |||||||
| Current income taxes receivable | 16,670 | 21,333 | |||||||
| Other current assets | 27,991 | 30,950 | |||||||
| Total current assets | 747,492 | 788,727 | |||||||
| Property and equipment, net | 44,547 | 45,483 | |||||||
| Indefinite-lived intangible assets | 66,272 | 66,272 | |||||||
| Finite-lived intangible assets, net | 119,439 | 123,349 | |||||||
| Goodwill | 259,524 | 259,524 | |||||||
| Income taxes receivable | 40,996 | 40,998 | |||||||
| Other assets | 34,367 | 38,020 | |||||||
| $ | 1,312,637 | $ | 1,362,373 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ | 40,743 | $ | 62,284 | |||||
| Accrued liabilities | 154,082 | 171,621 | |||||||
| Current income taxes payable | 11,650 | 232 | |||||||
| Current portion of capital lease obligation | 526 | 515 | |||||||
| Current portion of deferred revenue | 160,923 | 161,687 | |||||||
| Total current liabilities | 367,924 | 396,339 | |||||||
| Deferred tax liabilities, net | 28,274 | 28,274 | |||||||
| Capital lease obligation, less current portion | 13,138 | 13,274 | |||||||
| Deferred revenue, less current portion | 471,513 | 485,941 | |||||||
| Other liabilities | 123,241 | 127,753 | |||||||
| Commitments and contingencies | |||||||||
| Stockholders' equity: | |||||||||
| Preferred stock, par value $0.01 per share | -- | -- | |||||||
| Common stock, par value $0.01 per share | 4,337 | 4,337 | |||||||
| Additional paid-in capital | 8,475,732 | 8,478,540 | |||||||
| Accumulated deficit | (8,081,449 | ) | (8,077,700 | ) | |||||
| Accumulated other comprehensive income, net of tax | 440 | 659 | |||||||
| Treasury stock, at cost | (90,513 | ) | (95,044 | ) | |||||
| Total stockholders' equity | 308,547 | 310,792 | |||||||
| $ | 1,312,637 | $ | 1,362,373 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| Revenues: | ||||||||
| Publishing | $ | 82,334 | $ | 98,362 | ||||
| Cable and satellite | 64,813 | 42,128 | ||||||
| Consumer electronics licensing | 28,250 | 52,689 | ||||||
| 175,397 | 193,179 | |||||||
| Operating expenses: | ||||||||
| Publishing | 90,184 | 90,409 | ||||||
| Cable and satellite | 44,513 | 27,191 | ||||||
| Consumer electronics licensing | 14,719 | 20,345 | ||||||
| Corporate | 15,429 | 19,768 | ||||||
| Operating expenses, exclusive of expenses shown below | 164,845 | 157,713 | ||||||
| Stock compensation | 25 | 203 | ||||||
| Depreciation and amortization | 7,215 | 8,628 | ||||||
| 172,085 | 166,544 | |||||||
| Operating income | 3,312 | 26,635 | ||||||
| Interest income (expense) | 3,304 | (587 | ) | |||||
| Other income, net | 278 | 45 | ||||||
| Income from continuing operations before income taxes | 6,894 | 26,093 | ||||||
| Income tax expense | 10,643 | 39,535 | ||||||
| Loss from continuing operations | (3,749 | ) | (13,442 | ) | ||||
| Discontinued operations: | ||||||||
| Income from discontinued operations | -- | 14,339 | ||||||
| Loss on disposal of discontinued operations | -- | (28,882 | ) | |||||
| Income tax expense | -- | 11,791 | ||||||
| Loss from discontinued operations | -- | (26,334 | ) | |||||
| Net loss | $ | (3,749 | ) | $ | (39,776 | ) | ||
| Basic and diluted loss per share: | ||||||||
| Loss from continuing operations | $ | (0.01 | ) | $ | (0.03 | ) | ||
| Loss from discontinued operations | -- | (0.06 | ) | |||||
| Net loss | $ | (0.01 | ) | $ | (0.09 | ) | ||
| Weighted average shares outstanding - basic and diluted | 424,287 | 420,032 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
2
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| Balance at beginning of period | $ | 310,792 | $ | 375,973 | ||||
| Net loss | (3,749 | ) | (39,776 | ) | ||||
| Other comprehensive loss | (219 | ) | (110 | ) | ||||
| Comprehensive loss | (3,968 | ) | (39,886 | ) | ||||
| Other, principally shares issued pursuant to stock option plans, including tax benefit, and amortization of unearned compensation | 1,723 | 27,345 | ||||||
| Balance at end of period | $ | 308,547 | $ | 363,432 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 |
2004 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (3,749 | ) | $ | (39,776 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 7,215 | 8,628 | ||||||
| Deferred income taxes | (3,123 | ) | (33,152 | ) | ||||
| Loss on disposal of discontinued operations | -- | 28,882 | ||||||
| Transfer to restricted cash | -- | (42,500 | ) | |||||
| Other | 1,008 | 1,330 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | 12,275 | 18,757 | ||||||
| Income taxes receivable | 4,665 | (113 | ) | |||||
| Other assets | 5,528 | (3,972 | ) | |||||
| Accounts payable, accrued liabilities and other liabilities | (43,687 | ) | (25,288 | ) | ||||
| Income taxes payable | 11,418 | 80,860 | ||||||
| Deferred revenue | (15,192 | ) | 216,968 | |||||
| Net cash (used in) provided by operating activities | (23,642 | ) | 210,624 | |||||
| Cash flows from investing activities: | ||||||||
| Investments and acquisitions | -- | (15,000 | ) | |||||
| Purchases of marketable securities | (5,099 | ) | (4,502 | ) | ||||
| Maturities of marketable securities | 7 | 4,775 | ||||||
| Proceeds from sale of assets | 11 | 2,322 | ||||||
| Additions to property and equipment | (2,491 | ) | (3,058 | ) | ||||
| Net cash used in investing activities | (7,572 | ) | (15,463 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of capital lease obligations | (125 | ) | (566 | ) | ||||
| Proceeds from exercise of stock options | 1,403 | 25,883 | ||||||
| Distributions to minority interests | -- | (1,060 | ) | |||||
| Net cash provided by financing activities | 1,278 | 24,257 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (99 | ) | (16 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (30,035 | ) | 219,402 | |||||
| Cash and cash equivalents at beginning of period | 558,529 | 257,360 | ||||||
| Cash and cash equivalents at end of period | $ | 528,494 | $ | 476,762 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
(1) Organization and Basis of Presentation
Gemstar-TV Guide International, Inc., a Delaware corporation (“Gemstar” or the “Company”), is a media, entertainment and technology company that develops, licenses, markets and distributes technologies, products and services targeted at the television guidance and home entertainment needs of television viewers worldwide.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the Company’s 2004 Annual Report on Form 10-K 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 U.S. 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 for the year ended December 31, 2004.
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.
The Company’s Consumer Electronic (“CE”) Licensing Segment revenues tended to be the highest in the first quarter, when CE manufacturers report their fourth quarter sales. The Publishing and Cable and Satellite Segments historically have higher revenues in the second half of the year.
On March 1, 2004, the Company entered into an agreement with EchoStar Communications Corporation and/or certain of its subsidiaries (“EchoStar”) whereby EchoStar acquired substantially all of the operating assets and certain liabilities of the Company’s SuperStar/Netlink Group LLC, UVTV distribution services and SpaceCom Systems businesses (collectively the “SNG Businesses”). Accordingly, the SNG Businesses are shown as discontinued operations in the accompanying condensed consolidated statements of operations.
Certain financial statement items for the prior period have been reclassified to conform to the 2005 presentation.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revised SFAS No. 123, Share-Based Payment (“Statement 123R”), which as amended is effective for the Company’s first quarter of 2006. See footnote 7 for a description of Statement 123R.
Discontinued Operations – SNG Businesses
In connection with the sale of the SNG Businesses, the Company recognized a pre-tax loss on disposal of discontinued operations of $28.9 million during the three months ended March 31, 2004. The loss consisted of a write-down of the net carrying value of the disposal group to fair value less cost to sell. Costs associated with this disposal were estimated at $5.9 million, and consisted principally of the contractual acceleration of certain liabilities, employee-related transfer costs necessitated by the deal structure (asset purchase), and other transaction costs. As of March 31, 2005, $4.9 million of these costs remain unpaid and are included in accrued expenses in the accompanying condensed consolidated balance sheets. These costs are expected to be paid this year.
Revenues of the SNG Businesses were $35.2 million for the three months ended March 31, 2004.
Samsung Transaction
Effective January 1, 2004, the Company agreed to release Samsung Electronic Co., Ltd (“Samsung”) from a claim arising in connection with Samsung’s transfer of set-top boxes to a satellite television service provider prior to January 1, 2004. In exchange, Samsung agreed to pay the Company $4.0 million in cash and transfer a 20% minority interest in a Company subsidiary to the Company at no additional cost. The fair value of Samsung’s minority interest in the subsidiary was estimated to be $1.4 million. The Company recognized revenue of $5.4 million in connection with this transaction in the three months ended March 31, 2004.
5
Pioneer Transaction
In February 2004, the Company and Pioneer Electronic Corp. and its affiliates (collectively “Pioneer”) agreed to settle all pending legal disputes. As a result of the settlement, the Company received a one-time payment of $14.0 million, along with multi-year licensing agreements under which, among other things, Pioneer will pay per-unit license fees for digital products incorporating the Company’s technology. The Company recognized the $14.0 million payment as revenue in the three months ended March 31, 2004.
Except as expressly noted herein, the Company intends to vigorously defend or prosecute all pending legal matters. The following material developments in the Company’s legal proceedings occurred in the quarter ended March 31, 2005.
SEC Matters
As previously reported, on May 9, 2003 the Company was ordered by the court in a proceeding captioned In the Matter of an Application for a Temporary Order Pursuant to Section 1103 of the Sarbanes-Oxley Act, Securities and Exchange Commission v. Gemstar-TV Guide International, Inc., Case No. CV-03-3124 MRP (PLAx), in the United States District Court for the Central District of California, to maintain approximately $37.0 million in segregated, interest-bearing bank accounts established in connection with its November 2002 management and corporate restructuring (“1103 funds”). This order prevents the Company from paying any portion of those funds to its former Chief Executive Officer, Henry C. Yuen, or its former Chief Financial Officer, Elsie Ma Leung. On March 22, 2005, in a proceeding captioned Securities and Exchange Commission v. Henry C. Yuen, et al., Case No. 03-56129, in the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”), the Ninth Circuit issued en banc its decision, affirming the District Court’s May 9, 2003 decision regarding the 1103 funds.
As previously reported, on June 19, 2003, the Securities and Exchange Commission (the “SEC”) filed an action entitled Securities and Exchange Commission v. Henry C. Yuen, et al., in the United States District Court for the Central District of California, Case No. CV 03-4376 NMMRP (MANPLAx), alleging violations of the federal securities laws by Dr. Yuen and Ms. Leung and seeking declaratory and injunctive relief in connection with alleged violations of the federal securities laws, disgorgement of all monies received as a result of their alleged illegal conduct, and civil penalties pursuant to Section 20(d) of the Securities Act of 1933 and Section 21(d)(3) of the Securities Exchange Act of 1934. On January 6, 2004, the SEC amended its action to include three more of the Company’s former employees Peter C. Boylan, Jonathan B. Orlick,, and Craig Waggy. As previously reported, in August 2004, the Court approved a settlement between Peter Boylan and the SEC. On January 20, 2005, the Court approved the settlement between Jonathan Orlick and the SEC. Also in January 2005, defendant Craig Waggy reached a settlement with the Los Angeles office of the SEC, which remains subject to the approval of the Washington, D.C. office of the SEC. On March 4, 2005, Dr. Yuen and Ms. Leung filed an ex parte application for an order to release the 1103 funds and have those funds released to them in connection with a proposed settlement of the SEC action reached with the Los Angeles Office of the SEC. Their proposed settlement is subject to the approval of the Commission in Washington, D.C. On March 29, 2005, the Court denied Yuen and Leung’s application for release of the 1103 funds after a hearing. The trial date for this case has been postponed pending entry of final judgments in accordance with these proposed settlements.
Consolidated Shareholder Class Action
As previously reported, the Company settled the purported class action complaints alleging violations of the federal securities laws by the Company in a matter captioned In re Gemstar-TV Guide International Securities Litigation, Case No. CV 02-2775 MRP (PLAx), in the United States District Court for the Central District of California (the “Consolidated Shareholder Class Action”). As part of the settlement, the Company assigned to the Class certain of its claims against its former auditor, KPMG LLP. On March 14, 2005, the plaintiff Class and KPMG entered into a Stipulation of Settlement resolving the Class’ claims against KPMG, which included the claims assigned to the Class by the Compa